Today's Economic News of Interest

Modified Indymac Mortgages Delinquent Again

Sheila Bair, chairman of the Federal Deposit Insurance Corp., has proposed modifying millions of mortgages to prevent foreclosure. However, changing home loans like this doesn't always prevent problems

Under the IndyMac program, eligible homeowners have been offered more affordable monthly payments through reduced interest rates on the loans, extended amortization and deferred principal payments.

Lender Processing Services told analysts at Keefe, Bruyette & Woods that the results of such modification are often uninspiring.

"Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don't prevent them from taking place," Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday.

For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments, Lender Processing Services told the analysts.

The FDIC's broader modification proposal assumes a re-default rate of roughly 33% -- about 2.22 million mortgages would be altered to avoid 1.5 million foreclosures, according to the plan. The government would share up to half of the losses from re-defaults with lenders and investors.

Under the FDIC, IndyMac has mailed more than 23,000 loan modification proposals to borrowers, and will mail over 7,000 more soon, Bair added. That's in addition to more than 5,000 mortgages that have already been modified.

"Over the next two years, an estimated 4 [million] to 5 million mortgage loans will enter foreclosure if nothing is done," she said. "The stakes are too high to rely exclusively on industry commitments to apply more streamlined loan modification protocols."

The internal models of Lender Processing Services suggest that the number of foreclosures will continue to rise through 2010 before peaking in 2011, the KBW analysts reported.

Foreclosures six months ago were mostly associated with bad loans, but now job losses are increasingly the cause in newer foreclosure notifications.


Homebuilder sentiment index plunges to record low - NINE

November 18, 2008 - Builder confidence in the market for newly built single-family homes plunged in November as worsening problems in the financial markets, job market weakness and overwhelming uncertainty about the economy continued to negatively impact consumer behavior, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI sank five points to 9, the lowest level recorded since the series was created in January of 1985.

“Today’s report shows that we are in a crisis situation. If there’s any hope of turning this economy around, Congress and the Administration need to focus on stabilizing housing,” said NAHB Chairman Sandy Dunn, a home builder from Point Pleasant, W.Va.. “Tremendous economic uncertainties have driven consumers from the housing market, and it’s going to take some major incentives to bring them back. Beyond the work that is being done to help reduce foreclosures, Congress must immediately incorporate such incentives for qualified buyers in a new economic recovery package.”

“The housing downturn has already cost America three million jobs in construction and related industries, and this downward momentum cannot be stemmed without substantive government intervention,” agreed NAHB’s new Chief Economist, David Crowe. “Congress should consider significant consumer incentives such as expanding the first-time home buyer tax credit and providing a government buy-down of mortgage interest rates for home purchasers. Both policies were successfully combined in the ‘70s to stimulate home buyer demand, and could get housing and the national economy moving again.” See chart below for Historical Perspective:




Lawmakers, Treasury lock horns on foreclosures

Treasury Secretary Henry Paulson and members of Congress clashed on Tuesday over the best use for the $700-billion financial bailout fund, with lawmakers demanding money to stem a national wave of mortgage foreclosures.

At a House of Representatives Financial Services Committee hearing where he was grilled over his handling of the program, Paulson said the bailout plan wasn't "a panacea for all our economic difficulties" and would be more effectively used by investing in financial companies to shore up the system.

"The rescue package was not intended to be an economic stimulus or an economic recovery package. It was intended to shore up the foundation of our economy by stabilizing the financial system," the Treasury chief insisted.

Under stiff questioning from lawmakers who charged Treasury was making up strategy as it went along, Paulson conceded he hadn't totally ruled out using bailout funds to help homeowners, but said he had "reservations" about a proposal put forward by the Federal Deposit Insurance Corp.

Rep. Barney Frank, the Massachusetts Democrat who chairs the panel, lectured Paulson, telling him mortgage relief was spelled out as an option under the bailout passed by Congress.

"The fundamental policy issue is our disappointment that funds are not being used out of the $700 billion to supplement mortgage foreclosure reduction," Frank said. "There, I believe, is an overwhelmingly ... powerful set of reasons why some of the ... money must be used for mortgage foreclosure."

Democratic Rep. Gary Ackerman of New York said Congress was caught by surprise by what "seems to be the second-largest bait-and-switch scheme that history has ever seen, second only to the reasons given us to vote for the invasion of Iraq."

Even the banking industry seemed puzzled. "It's been very confusing and very difficult," Edward Yingling, president of the American Bankers Association, told the committee. "It's confusing for bankers ... customers don't know how to react."

"This financial crisis is unpredictable and difficult to counteract," Paulson said. "So early last week, we concluded it was only prudent to reserve our ... capacity, maintaining not only our flexibility, but that of the next administration."





Ford, Trying to Raise Cash, Sells Stake in Mazda

The Ford Motor Company, scrambling for cash as it struggles to stay alive, has agreed to sell about two-thirds of its stake in the Japanese carmaker, Mazda Motor, for about $538 million.

Ford first took a stake in Mazda in 1979 and raised it to a controlling interest of 33.4 percent in 1996. It will remain Mazda’s top shareholder at 13 percent after selling the shares to Mazda and to some Mazda business partners.

Reeling from slowing sales, Detroit’s General Motors, Ford and Chrysler, which is owned by the private equity firm Cerberus Capital Management, are trying to raise cash to come through the worst economic crisis since the Great Depression.

Slowing auto sales and the global financial crisis have sent shares of Ford plunging and led to a worse-than-expected $2.98 billion operating loss in the latest quarter.


Heated debate over auto bailout

The case for a bailout of U.S. automakers came under sharp scrutiny on Tuesday at a congressional hearing that portrayed the Big Three as both short-sighted in their business strategies and central to the economy.

"Their board rooms in my view have been devoid of vision," said Sen. Christopher Dodd, D-Conn. "They have promoted and often driven the demand of inefficient, gas guzzling vehicles, and dismissed the threat of global warming."

The head of the powerful United Auto Workers union, testifying side by side with the industry's top CEOs, said the failure of one automaker would shatter consumer confidence in the other two.

"If one of these companies goes into bankruptcy, I'd be willing to bet it takes two, or possibly all three, with them," said Ron Gettelfinger , president of the autoworkers' union, said during questioning.

The industry, already struggling because of high labor costs and weak sales, is being stung as car buying grinds to a halt amid credit difficulties, job losses and fears of a recession. The industry has been lobbying hard for a $25 billion loan from the $700 billion bailout slated for the finance sector.

One Republican lawmaker, Sen. Michael Enzi of Wyoming, said he was uncertain a bailout would work.

"We have little evidence this $25 billion will do anything to promote long-term success," Enzi said.

But the industry and its advocates, as well as many experts, say that without federal help, General Motors (GM, Fortune 500) will likely go bankrupt within months, and that Ford (F, Fortune 500) and Chrysler LLC could soon follow.

Supporters of a bailout say that a bankruptcy could prove devastating to the economy. They say nearly 2 million jobs are either directly or indirectly tied to the auto sector, and that Detroit is a pillar of American manufacturing.

"We can't afford to lose thousands of jobs," said Sen. Robert Casey, D-Pa. "What is a recession could become a depression if these companies fail in the next couple of months."

But critics say problems with the U.S. auto industry are systemic, and giving it $25 billion would only delay the inevitable. They also say it would encourage other mismanaged businesses to seek government rescues.

They say bankruptcy would be the best option and allow automakers to shed expensive labor contracts and reorganize as smaller, more efficient firms.

So far, it appears unlikely the current Congress will let the industry borrow $25 billion under the bailout program. While many Democrats support the move, most Republicans and some Democrats are against it.

Rather than grant $25 billion in new loans from the bailout, the Bush administration wants to modify $25 billion in loans originally targeted for automakers to use to make more fuel-efficient vehicles.

Some think the White House proposal stands a better chance of passing Congress.

One of the sharpest critics of an auto bailout, Republican Sen. Richard Shelby of Alabama, drilled into the CEOs about the outlook for their businesses and how they would use bailout funding.

"Why should we believe your firms are capable of restructuring now when you weren't able to do it under more begin conditions?" Shelby asked. "What would you do with the money if you were able to get $25 billion, and how would you pay this money back?"

GM's Wagoner said the company's current business model can work. GM would continue with the Volt program and would use bailout funds to pay suppliers, he added.

Ford's Mulally said his company has focused on building higher quality cars that get better gas mileage. "We'll come out the other side - we'll be a turbo machine," said Mulally.

For his part, Chrysler's Nardelli said his company will soon be able to build cars as fast as Toyota. "We will generate a profit," Nardelli said.

Others weren't so sure a bailout was a good use of taxpayer dollars.

"I'm skeptical you'll get it back," said Peter Morici, a business professor at the University of Maryland.


GE Capital to Pare Jobs, Assets to Save $2 Billion

GE Capital, the lending arm of General Electric Co., will cut $2 billion in costs next year as it pares jobs, forms regional units and marks assets such as overseas home mortgages for possible sale amid a global financial crisis.

The changes include a newly created chief operating officer post and take effect Jan. 1. GE Capital will shed an unspecified number of its 75,000 jobs as the unit consolidates back offices and curbs lending in areas such as residential mortgages, Vice Chairman Michael Neal said in an interview.

“In a world where we think liquidity is an issue and is likely to remain an issue for a while, we’re de-emphasizing in general product lines that attract a lot of debt for the amount of earnings,” said Neal, who oversees GE Capital.

Chief Executive Officer Jeffrey Immelt is shrinking the finance units to 40 percent of the parent’s profit from about half last year as he reduces debt issued and focuses on more profitable areas.

General Electric lost 57 percent of its market value this year after the global financial crisis prompted Immelt to lower his 2008 profit target twice. GE fell 5 cents to $16.06 at 4:15 p.m. in New York Stock Exchange composite trading.

The company is currently using two federal programs that help it sell debt, its main funding source. The first is the Federal Reserve’s commercial paper funding facility, and the second is use of debt insurance through a Federal Deposit Insurance Corp. program.