Sunday, February 28, 2010
(Fortune Magazine) -- When the Senate grudgingly reconfirmed Ben Bernanke as Fed chairman two days before his term expired, he was only a stand-in for the man 30 senators were really mad at. "I knew that he would continue the legacy of Alan Greenspan, and I was right," said an angry Jim Bunning, a conservative Republican from Kentucky who voted no. Fumed Bernie Sanders of Vermont, the Senate's only (admitted) socialist: "He said it publicly -- I want to follow in the footsteps of Alan Greenspan. Alan Greenspan's philosophy is a disaster." Jeff Merkley (D-Ore.) said Bernanke "helped set the fire that destroyed our economy." Only helped, that is -- and we all know whom he helped.
Seldom has conventional wisdom on so recondite a topic -- Federal Reserve interest rate and regulatory policy from 2002 through 2005 -- converged so thunderously on one person. Greenspan, in his final four years as Fed chairman, kept rates too low and regulation too light, goes the argument. The result was the housing bubble.
The bubble's inevitable bursting caused the worst financial crisis in 80 years, bank failures across the land, the longest recession since the Great Depression, towering unemployment, and economic misery for millions.
People and institutions normally at each other's throat all seem to agree: Editorial pages from the Boston Globe on the left to the Wall Street Journal on the right, think tanks from the liberal Institute for Policy Studies to the beyond-conservative Cato Institute, Nobel Prize--winning economists including Keynesian Paul Krugman and rationalist Gary Becker -- they all know who's to blame for the mess we're in. Four years after leaving the Fed as the Greatest Central Banker Ever, the longest-serving chairman, the Maestro, Alan Greenspan is the designated goat.
Seemingly the only person in America who hasn't weighed in on this matter lately is Greenspan. In the past year or so, as unemployment climbed and criticism of him became broadly accepted, he has written little and rarely spoken publicly on this topic, though he occasionally comments on the economy's current state.
So what does he think about his reversal of fortune? No surprise: He believes the case against him is wrong. What is surprising is how deeply he analyzes the debate. He studies the data and is confident it will exonerate him. He is marshaling his facts and will present his data-driven analysis in a 12,000-word article, but hasn't said when.
Of course he doesn't like what's happening to his reputation, yet he seems sure that when this recession is past and informed people can look at the whole picture dispassionately, they'll agree that he didn't cause the crisis and couldn't have prevented it. Could he be right?
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"My actual business life hasn't changed since 1948," says Greenspan, referring to the year he became a Conference Board economist -- having previously worked as a saxophonist in the Henry Jerome jazz band. "The only thing that has changed is my employer."
His employer now is himself. He's sitting in his expansive, oval-shaped office overlooking Washington. It's a cold winter day, and over his white shirt and quiet tie he's wearing a hunter-green zip-up fleece with "G-20" embroidered on it in gold thread. His title is president of his consulting company, Greenspan Associates, the associates being three young assistants.
The "business life" he mentions is easily described: "studying data and trying to figure out how the world works." He did it long ago at the Conference Board, then at his consulting firm, Townsend-Greenspan, and on President Ford's Council of Economic Advisors. For 18 years he did it as Fed chairman, and he's still doing it.
In understanding how he's bearing up against the assault on his reputation, it's important to realize that studying data is his passion. As a boy in New York City, he became a statistical encyclopedia of the Yankees and claims that today, at age 83, he can tell you the batting average of every player on the team's 1936 starting lineup (DiMaggio: .323). As Fed chairman, with a staff of 200 Ph.D. economists, he still reserved half his time for what he calls personal research, poring over data by himself.
Today, he says, "I have fewer meetings and spend less time on uninspiring matters," like preparing congressional testimony. Which means, happily, that he can spend even more time on personal research, seated at his desk in front of three extra-large computer screens. That is what revs his engine. Much of his research now focuses on what he did from 2002 through 2005, a small fraction of his time leading the Fed but the crux of his reputation, at least now.
The heftiest version of the case against him comes from a friend, John Taylor of Stanford University. Taylor once worked for Townsend-Greenspan and served with Greenspan on Ford's Council of Economic Advisors.
The two men still talk, and Taylor sometimes drops by Greenspan's office. But he has written scholarly papers intended to show that badly misguided Fed actions under Greenspan created the disastrous housing bubble.
Taylor's case, which has been cribbed shamelessly by many Greenspan critics, is a short chain of logic: First, Fed policy from 2002 through 2005 deviated wildly from the highly successful policy of the previous 20 years. During that golden age of low inflation, strong growth, and rare, mild recessions, Fed rate decisions had mostly followed a formula that Taylor identified in 1993 and that others named the Taylor rule. (Its inputs are the inflation rate, the target inflation rate, economic growth, and the economy's production capacity.)
Taylor showed that, starting in 2002, the Fed veered from the formula, keeping rates too low by Taylor-rule standards. Second link in the chain: The Fed funds rate is correlated with housing starts. Taylor showed that when the rate is low, housing starts go up, and vice versa.
Third link: If the Fed had stuck to the Taylor rule, the housing boom wouldn't have happened. Taylor plugged the Taylor-rule Fed funds rates into his model of housing starts and showed that under those rates, starts would barely have exceeded their level in the late '90s. No boom, no bust, no financial crisis. Other factors may have contributed to the crisis, Taylor says, but Fed rate policy was "at the top."
Greenspan likes Taylor but not his analysis: "He is a very good friend. But his evidence doesn't show what he says it shows." Greenspan and his defenders counter Taylor in several ways. They don't dispute that Fed policy in the critical period deviated from the Taylor rule, though less than Taylor claims.
They insist that the second link in the chain, the correlation between the Fed funds rate and the housing boom, just doesn't hold in today's global economy. Robert Shiller of Yale University, an authority on housing prices, says the housing boom began in 1998, four years before the Fed went off the Taylor rule.
For many years the Fed funds rate and mortgage rates did move up and down almost in lockstep, but starting in 2002 that correlation evaporated. Says Greenspan: "Mortgage rates started moving down six months before we lowered the Fed funds rate."
Mortgage rates seemed to be floating off on their own. Why? The answer brings us to a key element of Greenspan's case for why he isn't this story's villain: The Fed was setting U.S. rates, but the housing bubble was global.
An International Monetary Fund study shows that 20 countries experienced housing bubbles during the critical period, and 11 of them were worse than America's (the worst: Ireland, the Netherlands, and Britain). It obviously makes no sense, Greenspan reasons, to think that the Fed's rate decisions inflated housing bubbles around the world from Sweden to New Zealand.
Instead, a more logical thesis explains what happened: the global saving glut. It holds that when China and other countries switched to market-oriented economies in the early '90s, they became more productive and unleashed a tsunami of capital onto world markets.
All that new capital naturally pushed interest rates down globally -- thus the decoupling of mortgage rates from the Fed funds rate, and the global nature of the housing boom.
John Taylor doesn't like the global-saving-glut explanation for a simple reason: "There is actually no evidence for a global saving glut." Global saving and investment as a percentage of world GDP have been in long-term decline since the early '70s, he points out.
Greenspan's riposte? You have to look at intended saving and intended capital investment, not actual saving and investment. After all, saving and investment by definition will always balance.
So if, let's say, the world's businesses decide not to invest much, perhaps because they're strengthening their balance sheets by paying down debt, then global investment will be low, and by definition actual global saving will be low as well; they have to match. But if intended saving was high -- if a ton of capital was out there looking for a home -- then interest rates would fall.
That's what happened during the housing boom, says the IMF. There was an "excess supply of saving." Combine low mortgage interest rates caused by that flood of capital with other factors -- the incredible complexity of mortgage securitization, which no one fully understood, plus clueless rating agencies and the euphoric atmosphere of boom times -- and that's how you get a housing bubble. Or so argues Greenspan. And the Fed is blameless.
But, but, but, say his critics -- the bubble was so obvious! And you did nothing to stop it! To which Greenspan responds, in essence, yes. The Fed can do little to stop a bubble, or at least to stop it responsibly.
As the Financial Times' Martin Wolf, a Greenspan defender and former World Bank economist, has written, "The Fed could only have halted the U.S. bubble if it had been willing to put the economy into permanent recession." That's because strangling the boom would have required short-term rates as high as 10%, Wolf argues.
What happens if China's 'bubble' pops?
The reality of bubbles cannot be escaped, Greenspan believes. A central element of his worldview is that "bubbles are built into human nature." But why were the effects of this bubble so much more devastating than almost any other? The reason strikes at the heart of Greenspan's beliefs.
Indeed, if you're wondering how he's doing through all this, we've reached a part of the answer that's profound for a man whose life is largely the intellectual life. This bubble was catastrophic because self-interest failed. At Bear Stearns, Lehman Brothers, AIG (AIG, Fortune 500), Citigroup (C, Fortune 500), Merrill Lynch, and others, the firm's interest in its own profits should have stopped the housing bubble insanity. That's how the system is supposed to work. It didn't.
For America's most famous libertarian, an Ayn Rand acolyte, that is more than troubling. It's foundation-shaking. It put him into "shocked disbelief," he told Henry Waxman's House Energy and Commerce Committee in October 2008.
"I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works." David Henderson, an economist (and fellow libertarian) at the Hoover Institution, says, "Bartlett's Quotations, if it exists in 20 years, will have that quote in it."
Self-interest failed, Greenspan believes, mainly because no one, including himself, understood the costs of the extremely unlikely risks the big banks faced. "This is a once-in-a-century event," he says.
It may seem unsurprising that in those rare circumstances the banks disastrously misjudged their counterparties, mainly other institutions that owed them payments. But a central element of Greenspan's belief system was that such things don't happen. "Counterparty surveillance failed to protect the system this time," he says. "I always thought it would. I held that belief for 60 years."
Yet he doesn't believe tougher regulation by the Fed could have saved the banks. The problem in his view is that regulators would be much worse than the banks themselves at judging banks' counterparty risk. "I was on the board of J.P. Morgan (JPM, Fortune 500) prior to becoming Fed chairman," he says. "I knew what J.P. Morgan knew about Citi, Bank of America (BAC, Fortune 500), Wells, and others. When I arrived at the Fed, I quickly learned that J.P. Morgan's knowledge of those organizations was far greater than what the Fed knew."
Greenspan isn't opposed to more regulation, mostly fine-tuning. But on the central issue of self-interest, the safeguard that failed, he isn't giving up. He wants banks more exposed to market discipline by making sure that the "too big to fail" doctrine disappears. "Counterparty surveillance will remain the regulators' first line of defense," he says. The banks may have blown it, but now they've learned how to do it better, and that's what they must do.
As endless as the controversy is, it doesn't consume him. He has consulting clients -- Pimco, Deutsche Bank (DB), and Paulson & Co., the hedge fund that made billions betting on the housing bust. He still gives speeches (list price: $180,000). Conference organizers who have booked him believe his appeal has held up through the financial crisis. "Has he been tarnished? Maybe," says one from a major accounting firm. "But it really doesn't matter. People still want to see him in person. They want to go back to the office and say, 'Well, Alan Greenspan says ...'"
And Greenspan does have a life beyond the office. He and his wife, NBC News chief foreign-affairs correspondent Andrea Mitchell, do the Washington dinner circuit. He plays tennis.
Standing just behind the tumult of today's controversy is the matter of his legacy. What is the consensus view of him likely to be, say, 40 years from now? The best answer comes from Allan Meltzer of Carnegie Mellon University. The 1,300-page second volume of his history of the Fed has just been published (the 800-page first volume appeared in 2003).
His take: "Greenspan will be remembered for maintaining a long period of low inflation and stable growth punctuated by short recessions and followed by the error of believing that deflation was a problem. That caused him to keep policy too easy too long. But he did not force bankers to buy subprime. That was their decision, encouraged by a mistaken government housing policy that he testified against and the 'too big to fail' doctrine that he did not try to end. So if truth prevails, the deep crisis will be blamed on housing policy, 'too big to fail,' and the mistake by [Hank] Paulson, [Tim] Geithner, and Bernanke of letting Lehman fail without much warning after 30 years of bailing out large failures."
As an assessment, that isn't the king-of-the-world adulation Greenspan was getting four years ago, but it's not bad. It fits with his own often-quoted view that as Fed chairman, "I was praised for things I didn't do, and I'm now being blamed for things I didn't do."
The multifamily investment market in Phoenix chugged along during 2009’s Great Recession. The number of sales transactions increased from 60 transactions in 2008 to 68 in 2009, according to Scottsdale-based Orion Investment Real Estate Solutions. Total volume increased from $557 million to $611 million.
But here’s the bad news: In 2007, by comparison, there were 193 transactions adding up to almost $3.5 billion.
Orion’s 2009 summary reports are sobering for other property types, too.
There were 42 office transactions in 2009 totaling $195 million. There were 81 sales totaling $962 million in 2008, and 190 sales totaling $3 billion in 2007.
On the industrial front, there were 14 sales in 2009 amounting to $105 million. That compares with 51 sales totaling $619 million in 2008, and 78 sales topping $939 million in 2007.
As for retail properties, 22 were sold in 2009 for an aggregate of $139 million. In 2008, there were 44 sales totaling nearly $440 million, and in 2007 there were 68 sales totaling $531 million.
For more: www.orionires.com.
Residential brokerages expand
Two residential real estate brands have expanded in the Valley. Long Realty Co., based in Tucson, opened two new franchises, including one at Central Avenue and Camelback Road. Formerly associated with Windermere Real Estate, that office will be called Long Realty–The Marsh Partners Central Phoenix.
The other new franchise is located at Fifth Avenue and Goldwater Boulevard in Scottsdale. It will be known as Long Realty –The Marsh Partners.
Re/Max Professionals also has opened a shop in Phoenix, at Central Avenue and Camelback Road. The designated broker and co-owner is Frank Russo.
For more: www.longrealty.com and www.remax.com.
Two California-based real estate investment firms are putting out the message that they are shopping for commercial properties in Phoenix. Los Angeles-based BH Properties said it is seeking retail and industrial acquisitions.
“We are contacting our favored brokers with as much information as possible to assist us in our search for acquisitions in the Southwestern U.S.,” said Steve Jaffe, BH’s executive vice president. “BH is now particularly interested in the Phoenix region with its fast-growing businesses.”
BH research concludes that retail sales will increase by 25 percent in Phoenix during the next five years, compared with an increase of 20 percent in other large markets. Despite the tough economic conditions locally, BH also believes the local population will grow by more than 500,000 in the next five years.
According to its news release, BH has a portfolio of 75 properties in 16 states.
Meanwhile, KBS Realty Acquisitions, based in Newport Beach, Calif., recently announced the hiring of Christopher Aust as senior vice president of acquisitions for Arizona.
“Arizona and the Southwest are increasingly important acquisition markets for KBS, so it is absolutely vital that we have someone on the ground with significant
local experience and relationships to maximize that potential,” said William Milligan, the company’s Western U.S. regional president.
For more: www.bhinvestments.com and www.kbsrealty.com.
Finding work down south
Several Valley companies are working on projects in Tucson.
Commercial real estate values in Phoenix have plummeted along with home values. Vacancy rates are high and falling rental rates are taking their toll on office, retail and industrial property owners.
Real estate experts say the commercial recovery will be slow, as values have dropped 25 percent to 50 percent since the end of 2007, when the recession started.
“We’ve definitely seen values come down significantly,” said Bob Young, senior vice president of the CB Richard Ellis real estate brokerage firm in Phoenix.
Young said hotel, retail, office and industrial properties in metro Phoenix have depreciated by as much as half of their prerecession values. Apartments have seen the smallest declines among the commercial segments, he said, while shopping centers in outlying cities and some central areas have been hit the hardest.
Young estimates downtown Phoenix office buildings have lost 20 percent to 30 percent of their value since the economic recession began.
Like their residential counterparts, a significant number of commercial mortgages are underwater, biting into landlords’ and building owners’ bottom lines and ability to sell.
Phil Steffen, managing director of the Phoenix office of FirstService PGP Valuation, pegs local commercial value declines at 30 percent to 40 percent. He said a commercial real estate recovery will be spurred by the same things needed for a housing rebound: improved consumer and investor confidence.
Steffen said most of the commercial appraisals being done now are related to distressed properties and financing, as in the housing market.
“Most of the valuation services we have been performing have been related to distressed asset management,” he said. “However, traditional underwriting for new financing has become far more restrictive in terms of equity requirements and debt coverage, and values are subject to increased scrutiny.”
Still, Young said some financing is available for the right transactions and right purchasers.
Appraisal experts contacted for this story wouldn’t comment on specific properties, but Young said stalled, unfinished development projects — such as the Centerpoint Condominiums in Tempe and Hotel Monroe in downtown Phoenix — are not dragging down values of neighboring buildings.
Depressed commercial values have made it tougher to close sales. Less demand for space and more tenants going out of business are squeezing landlords’ bottom lines.
Tenants that might be looking for space could see some benefit, however, as lower values and other economic fallout give commercial landlords very little leverage.
“It’s a great time to be an office tenant in metro Phoenix. Overall rental rates have declined severely from the peak of the expansion period in 2006, 2007,” said Patrick Wilson, an analyst with FirstService PGP, the valuation arm of the Colliers International real estate brokerage firm.
“Rapid development during the expansion period, coupled with increasing unemployment in the area, has crippled the office market and led to vacancy rates between 18 percent and 25 percent throughout Valley submarkets,” he said. “These high vacancy rates have left owners little negotiating power.”
Wilson also said retail has been hit hard by the recession and the lack of housing and population growth in the Valley. He pegs retail vacancy rates at between 8 percent and 13.5 percent, compared with prerecession rates as low as 3 percent. Shopping centers face vacancies, with bankruptcies and store closings ranging from restaurants and bars to big-box stores.
Wilson said there could be some improvement on the retail front this year and next. He said space is not being added, but some retailers are looking at expanding.
“National retailers are beginning to indicate an appetite for expansion within 2010 and 2011. Dollar General, Walgreens, Target, Chipotle and Burger King are among several retailers that have announced 2010 store openings,” Wilson said.
FirstService PGP Valuation: www.pgpinc.com
CB Richard Ellis: www.cbre.com
Falling from grace
Average commercial value declines in Maricopa County overall, 2007-09:
-50% Industrial properties, 50,000-plus square feet
-46% Retail properties, 10,000-plus square feet
-44% Office buildings, 10,000-plus square feet
-20-30% Downtown Phoenix office buildings
-38% Apartments, 20-plus units
Source: Orion Investment Real Estate Solutions, www.orionires.com
Distressed commercial loans — whether for office, industrial, retail or even multifamily housing — have a better chance of getting a mortgage modification than underwater homeowners, local real estate experts say, because those lenders have more at stake.
Commercial property owners often have a greater ability to turn around a distressed financial situation than individual borrowers. They can bring in new tenants, they have more access to capital and credit, and they can find investors and business partners, said Craig Hannay, president of Phoenix-based Hannay Investment Properties.
Lenders are taking a more flexible and active approach when it comes to troubled commercial mortgages, said Bob Young, first vice president of investment properties for CB Richard Ellis in Phoenix. Like their residential brethren, an increasing number of Phoenix commercial real estate loans are underwater because of the market and economic slides, he said. Banks have been criticized for not modifying distressed home loans.
David Larcher, executive vice president of Vestar Development Co., said at a real estate forum in Phoenix this month that as many as half of the commercial mortgages in the Valley are underwater.
Banks will become increasingly willing to rework commercial loans as the sector continues to struggle, said Beth Jo Zeitzer, president of ROI Properties in Phoenix. The changes that are made, she said, likely will come in the form of interest rate reductions and term extensions.
John Randolph, a real estate and finance attorney with Phoenix law firm Sherman & Howard LLC, cited two recent cases in which lenders started to foreclose on commercial buildings, but delayed those proceedings to give the borrowers more time to restructure loans. He would not provide specifics, citing client confidentiality.
Azim Hameed, another real estate and banking attorney with Sherman & Howard, said banks will try to extend mortgage terms for commercial borrowers who might be able to offer some cash in exchange.
“The loan modification usually includes a partial repayment of principal by the borrower to the bank. In exchange, the borrower gets an extension of the term of the loan for six months or a year,” he said.
Such deals can be worked out, Hameed said, because a partial principal repayment increases the bank’s liquidity. Extending the term of a loan gives the borrower time for the economy to turn around and the opportunity to find new sources of cash to repay the loan, such as new equity investors, a new loan or a perhaps a property buyer.
Arizona’s three dominant banks — Bank of America, Well Fargo Bank and JPMorgan Chase & Co. — say they want to work with both commercial and residential borrowers.
“Wells Fargo is working with commercial borrowers to restructure their loans and provide an opportunity for them to weather the current economic downturn,” said Dean Rennell, president of Wells Fargo Arizona Business Banking.
Rennell said Wells looks at tenants and vacancy rates when considering modifying commercial loans on rental properties, and the owner’s financial viability for owner-occupied properties.
He said lenders have more flexibility in adjusting commercial mortgages than home loans because home mortgages are highly regulated consumer transactions that frequently are owned by investors who dictate the terms. The banks are servicers of those mortgages, so they may not be able to rework or restructure the loans.
In contrast, he said, a commercial real estate loan usually is owned by the bank, so it can renegotiate terms.
Other real estate experts agree that because home loans were securitized and have been sold among banks and investors, lenders currently holding home mortgage notes are less willing to agree to modifications.
Zeitzer said that’s because lenders have more to lose when a large office building or shopping center goes into foreclosure than a single home in Peoria or Buckeye. She said short sales seem to be a more efficient means of working through distressed home loans.
Hannay Investment Properties: www.hannayproperties.com
ROI Properties: roipropertiesaz.com
If you're wondering about the accuracy of online home-valuation site Zillow .com's estimates, a study published by the Appraisal Institute says your guess is as good as Zillow's.
The Washington, D.C.-based institute's quarterly publication, The Appraisal Journal, includes results of a study by University of Texas-San Antonio business professors Daniel Hollas, Ronald Rutherford and Thomas Thomson that compared actual sale prices with both homeowners' estimates and Zillow's valuations, called "Zestimates."
However, the way the Institute presents its findings is misleading.
An Appraisal Institute news release about the study says the three professors found "40 percent of the homes ... were overvalued by Zillow by more than 10 percent," whereas "on average, homeowners overestimate the values of their homes by 5.1 percent."
So it's 10 percent vs. 5.1 percent. That looks bad for Zillow, right?
But wait a second. The statistic "40 percent .. overvalued ... by more than 10 percent" isn't comparable to "on average ... overestimate ... by 5.1 percent."
Reading through the study, it turns out that the professors found Zillow's Zestimates to be accurate within 10 percent of the home's actual sale price 59 percent of the time, whereas homeowners' estimates were within that range 37 percent of the time.
With those success rates, neither method is going to take the world by storm, but 59 percent is better than 37 percent.
Zillow spokeswoman Jill Simmons said there are problems with the study, which uses three-year-old data from a single city.
She said the biggest problem is that it compares sales closed in 2006 to Zestimates generated in early 2007, "apples and oranges, since it's two separate periods of time."
Zillow.com is one of several Web sites that use automated home-valuation models. Others include Trulia.com, eAppraisal .com and Cyberhomes.com.
Appraisers, on the other hand, actually visit the home and inspect it personally. Many of them are getting paid less these days because of changes in the way they are hired. Meanwhile, they're getting yelled at more because sellers are often shocked to learn how much value their homes have lost.
But no one is trying to pick on Zillow, according to Appraisal Institute spokesman Ken Chitester, who said the study's authors did the work on their own and were not commissioned by the trade group.
WASHINGTON - New signs emerged Wednesday that the economic rebound is sputtering. Sales of new homes hit a record low last month and mortgage giant Freddie Mac said it will need more federal aid and might never repay it.
Against that backdrop, the government is trying to prop up the housing and job markets. Federal Reserve Chairman Ben Bernanke reiterated the need to continue record-low interest rates for "an extended period." And the Senate passed a bill to give tax breaks to companies that hire the jobless.
Bernanke told Congress that low rates will help ensure that the recovery will last and help ease the sting of high unemployment. Asked what else Congress could do to stimulate job creation, he hesitated to say.
"I'm sure you know the menu of things that you could do which could create jobs," he said. "Unfortunately there's no - there's no silver bullet here."
Investors seemed buoyed by Bernanke's commitment to low rates, despite the news on home sales and Freddie Mac.
The Dow Jones industrial average gained about 91 points, roughly 0.9 percent.
Yet economists cautioned that the government's ability to help is limited.
Bernanke, in his twice-a-year report to the House Financial Services Committee, said the rebound would endure. But he also said the Fed sees moderate growth that will cause only a slow decline in the nearly double-digit jobless rate.
He offered no clues about when the Fed would raise interest rates, but economists think it's months away.
Bernanke faces more pressure than usual from lawmakers in an election year. Their constituents are struggling, while bailed-out Wall Street banks are profitable again. Unemployment stands at 9.7 percent, foreclosures are at record highs and loans are harder to secure.
Underscoring the fragility of the housing market, the government said new-home sales dropped 11 percent to its lowest level in the nearly 50 years records have been kept.
Economists worry about how the housing market would respond once government aid programs are withdrawn. One such program has lowered mortgage rates and bolstered housing but it ends March 31. Under the program, the Fed committed $1.25 trillion to buying mortgage securities and debt from Freddie Mac and its sister mortgage finance firm Fannie Mae.
Economic recovery is a ways off for Arizona's beleaguered banking industry. Stung by more bad loans, Arizona-based banks continue to suffer from rising delinquencies, declining capital and poor earnings.
About 84 percent of the state's mostly small banks ended 2009 with a loss, up from 74 percent in 2008 and 39 percent in 2007, according to the latest progress report issued this week by the Federal Deposit Insurance Corp.
"It just shows that more recovery needs to happen here," said Tanya Wheeless, president and chief executive officer of the Arizona Bankers Association in Phoenix.
In contrast, the FDIC report painted a picture of improvement for some of the biggest national banks.
Industry net income for 2009 rose to $12.5 billion from $4.5 billion in 2008, with much of the rebound concentrated in larger banks, the FDIC said. Loan-loss provisions showed their first year-over-year improvement in three years.
"Consistent with a recovering economy, we saw signs of improvement in industry performance," said FDIC Chairwoman Sheila Bair in a statement. "But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets."
About 30 percent of banks nationally were unprofitable in 2009, the highest figure since 1984.
Big national banks benefit from operations in multiple states, many of which have economies that are faring better than Arizona.
"If you're an Arizona-chartered institution, you're living or dying by the economy here," Wheeless said.
She predicted the aggregate performance of Arizona banks will improve this year as the local economy picks up steam.
With most Arizona banks reducing capital to reflect loan problems, the combined equity capital of the 44 Arizona banks included in the FDIC report slid to $1.7 billion at the end of 2009 from $2.1 billion last year and $2.3 billion in 2007. The ongoing bad-loan trend has put pressure on banks to raise additional capital, which hasn't been easy.
"It's a challenging time to raise capital because investors aren't sure about the long-term viability of certain banks or about the long-term investment returns they can expect," said Ryan Suchala, president of Bank of Arizona in Phoenix.
Even with the economy slowly recovering, banks face a difficult outlook, especially with problems mounting in commercial real estate.
"Commercial real estate will be the biggest problem facing banks over the next year, without a doubt," Suchala said.
On the bright side, banks have been able to maintain a healthy deposit base, with Arizona banks counting year-end deposits of $12.4 billion, virtually unchanged from the end of 2008.
Higher savings rates, continuation of the FDIC guarantee and lingering uncertainty about stock-market returns have helped banks retain deposits, Suchala said.
The federal tax credit for homebuyers boosted new-home sales in metro Phoenix last year. But the expiration of the credit looms, and new-home sales and building have slowed again.
In January, new-home closings in the Phoenix area fell to 479, the lowest level in decades, reports the "Phoenix Housing Market Letter." In November, Valley new-home sales surged to 1,312 as builders offered deals to rival foreclosure prices, and buyers rushed to take advantage of the tax credit. In December, there were 956 new-home sales.
Home building also slowed in January. There were 678 permits issued last month, compared with 799 in December. But building is up significantly from a year ago, when only 301 new-home permits were issued.
"Phoenix Housing Market Letter" analysts RL Brown and Greg Burger are projecting 8,500 new-home permits this year, an increase of a few hundred from 2009's permit level.
Metro Phoenix home values inched up in the latest S&P/Case-Shiller 20-city home-price index.
Overall, the 20-city index climbed 0.3 percent between December and January. Phoenix was one of only five cities to post an increase in home prices. Los Angeles posted the largest increase, 1.4 percent.
Between November and December, home prices ticked up 1.2 percent in the Valley, on a seasonally adjusted basis.
Year over year, the Valley saw home values drop 9.2 percent on the index. While the data lag, Case-Shiller is considered the best national index tracking the market.
Arizona Democrats have introduced legislation to tackle the state's foreclosure crisis and to protect homeowners.
• HB 2715 would give homeowners facing foreclosure another 60 days to work out a loan modification.
• HB 2740 calls for allowing renters in homes that are in foreclosure to stay in the house and continue to pay affordable rents, and for homeowners who lose homes to foreclosure to remain as renters.
• HB 2766 requires a landlord to give a renter at least 30 days' notice if they have to move out of a foreclosure home.
• HB 2321 requires homes be maintained during foreclosure.
• HB 2739 creates a mandatory mediation program for those facing foreclosure that would be supervised by the Arizona Supreme Court.
While it is rarely a big market mover, this week's Consumer Confidence report shocked investors. The index declined to 46.0, far below the consensus forecast of 55.0, and the lowest level in nine months. Consumers are clearly worried about the labor market, and an increase in Jobless Claims in recent weeks has amplified the issue. The decline in confidence has potentially negative consequences for the economy. Consumer spending accounts for about 70% of economic activity, and this data raises concerns about the level of future spending. Also, home sales suffer during periods of low consumer confidence, and the housing data released this week reflected consumer insecurity. Of course, slower economic growth is favorable for mortgage rates, which fell after the report came out.
In contrast to the weakness seen in many of the consumer-driven economic reports, the manufacturing sector has been demonstrating strong performance in recent months. Fourth quarter Gross Domestic Product (GDP), the broadest measure of economic activity, rose at a brisk 5.9% annual rate, largely due to a pickup in manufacturing. The added boost from manufacturing may be temporary, however. During the financial crisis, companies drew down inventories as much as possible to conserve capital. As the economy has shown improvement, companies have been increasing inventories closer to pre-crisis levels. When the inventory rebuilding is complete, manufacturing is expected to return to more normal levels.
The biggest economic event next week will be the important Employment report on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Early estimates are for a decrease of about -20K jobs in February. Before the employment data, Personal Income and the ISM manufacturing index will be released on Monday. ISM Services and the Fed's Beige Book will be released on Wednesday. Pending Home Sales, a leading indicator for the housing market, will come out on Thursday. Productivity, Construction Spending and Factory Orders will round out the schedule. In addition, the Treasury will announce the size of upcoming auctions on Thursday.
Friday, February 26, 2010
Saturday, February 20, 2010
by Alan Zibel Associated Press Feb. 20, 2010 12:00 AM
WASHINGTON - The number of borrowers falling behind on their mortgage payments dropped sharply at the end of last year, a sign the foreclosure crisis is beginning to ebb.
The Mortgage Bankers Association said Friday that the percentage of borrowers who missed just one payment on their home loans fell to 3.6 percent in the October-to-December quarter, down from 3.8 percent in the third quarter. The decline was surprising because delinquencies usually rise in the quarter due to higher heating bills and holiday spending.
The new trend in late payments is significant because it means the number of people going into foreclosure will continue to decline this year. And that is important for all homeowners in areas where cheaply priced foreclosures are bringing down neighboring values.
In high-foreclosure cities such as Miami, Fla., Las Vegas and Phoenix, for example, homes have lost roughly half their values from their peaks.
But Friday's report showed Nevada, Arizona and Florida had some of the biggest declines in new delinquencies.
Jay Brinkmann, the trade group's chief economist, said the report likely marks "the beginning of the end" of the wave of mortgage delinquencies and foreclosures that started more than three years ago.
Still, more than 15 percent of homeowners with a mortgage have missed a payment or are in foreclosure, a record for the 10th straight quarter.
"The bad news is that we still have a big problem," Brinkmann said. "The good news is it looks like it may not get much bigger."
There will be, however, more short-term pain. Nearly half of all delinquent borrowers were at least three months behind on their payments, up from a typical level of under 20 percent.
Banks have prolonged the foreclosure process, traditionally between four and six months, as they evaluate borrowers for help under the under the Obama administration's $75 billion mortgage-relief effort. It lowers borrowers' payments to as low as 2 percent for five years.
So far, only 116,300 borrowers out of about 1 million who enrolled have seen the terms of their mortgages changed permanently.
by Catherine Reagor The Arizona Republic Feb. 20, 2010 12:00 AM
Arizona is one of five states that will split $1.5 billion from a new federal program aimed at helping regions hardest hit by home foreclosures.
President Barack Obama announced the new funds Friday in Las Vegas as part of a government push to reduce the number of homes falling into foreclosure by assisting unemployed homeowners and other struggling borrowers.Because foreclosures damage home values and have been a critical factor in the collapse of the housing market, any recovery will have to be preceded by a slowdown in repossessed homes.
Almost a year ago in Mesa, Obama announced the $75 billion Home Affordable Modification Program, intended to help homeowners facing foreclosure. For a variety of reasons, that nationwide program has not helped as many homeowners as expected.
Money from the new program, called Help for the Hardest-Hit Housing Markets, will go only to Arizona, California, Florida, Michigan and Nevada, all states that have experienced at least a 20 percent drop in housing prices. Arizona's home prices have plummeted 50 percent.
Under the first program, lenders were paid to modify loans of struggling homeowners to lower payments so they could afford to stay in their homes.
In the new program, states can develop their own plans and then submit them for funding. The plans would be administered locally, most likely by state housing departments.
Details on how states can qualify for the federal money have not been released. But the new effort is intended to help unemployed homeowners, borrowers who owe more than their house is worth (which can prevent them from selling) and people with second mortgages on their homes.
"What we can do is help families that have done everything right to stay in their homes," Obama said during a Las Vegas town-hall meeting.
The $1.5 billion will come from money set aside for housing under the $700 billion Troubled Assets Relief Program, known as TARP.
To receive their share of the money, state housing officials must submit proposals to the Treasury Department. Money will be awarded based on a state's unemployment and foreclosure rates and should be available by summer.
Michael Trailor, director of the Arizona Housing Department, said, "Several million dollars will be coming to Arizona to invest in ways to keep people in their homes. The loan-modification program isn't working here as it should, and the president sees that. I am confident this money will help a lot more people in Arizona."
The old program
The first program, intended to help homeowners modify their mortgages to avoid foreclosure, has fallen far short of the government's expectations.
The Treasury Department reported Wednesday that the year-old program has helped only 116,000 U.S. homeowners permanently modify mortgages for more affordable loans. An additional 947,000 homeowners have gotten temporary reductions in mortgage payments, meaning they're in trial periods for loan modifications that lenders are not required to make permanent. The program's $75 billion is supposed to help 4 million homeowners within a few years. About $36 billion has already been allocated to the federal program.
Critics of the current loan-modification plan say lenders aren't acting fast enough or doing enough to help struggling homeowners.
In Arizona, many of the temporary loan modifications aren't being made permanent or aren't reducing payments enough to help homeowners.
The new program
The new program could do more to help Arizona homeowners. The Treasury will establish broad goals and supply the money. But Arizona and the other four states will have more input on how best to spend the money to stem foreclosures.
One of Arizona's first priorities will be to maintain its foreclosure hotline, which provides free housing counseling. National grant money for the hotline ran out in December, and the Arizona Housing Department has been digging into its depleted budget to keep it operating.
Trailor said there are more creative solutions to loan modifications, including giving U.S. grants to homeowners that lenders might match to reduce the loan principal and cut the monthly payment.
The Arizona Foreclosure Prevention Taskforce, made up of state and local government officials, non-profit housing advocates, regulators and real-estate business leaders, is expected to meet soon to start working on a plan for the federal money.
by Alan Zibel Associated Press Feb. 18, 2010 12:00 AM
WASHINGTON - The government's mortgage relief plan has helped only about 12 percent of borrowers who signed up since President Barack Obama announced the program a year ago.
The Treasury Department said Wednesday that as of last month, about 116,000 homeowners had completed the application process and had their loan payments reduced permanently. That compares with more than 1 million homeowners who started the process.
More than 61,000 homeowners have dropped out so far, either because they failed to make payments or didn't return the necessary paperwork. And hundreds of thousands more are likely to fall out soon, predicts Alan White, a law professor at Valparaiso University.
"I would say it's a complete failure at this point," White said.
Treasury officials, however, say the program is on track. The plan "is doing the job it was designed to do," Phyllis Caldwell, chief of the Treasury's homeownership preservation office, said in a statement. "Struggling families are receiving payment relief, and the housing market is showing signs of stabilization."
However, large banks continue to struggle with a huge volume of borrowers needing help. As of last month, Bank of America Corp. had completed modifications for just over 5 percent of the roughly 240,000 borrowers who started the process. JPMorgan Chase & Co. and Citigroup Inc. also were below 10 percent.
The government "massively overestimated the ability of the (mortgage) industry to roll out a new program with a lot of paperwork," said Thomas Lawler, an independent housing economist in Virginia.
By contrast, companies that are trying to process tens of thousands - rather than hundreds of thousands - of loans are faring better. Ocwen Financial Corp. had completed modifications for nearly half of the 14,000 borrowers it signed up. GMAC Mortgage completed the process for a third.
There have been growing calls in recent weeks for a major overhaul of the program, particularly for the government to do more to encourage banks to cut borrowers' principal balances on their primary loans. Nearly one in every three homeowners with a mortgage owes more to the bank than his or her property is worth, according to Moody's Economy.com.
But administration officials are wary of subsidizing such reductions with taxpayer money. Such a move could spark a backlash from critics who claim it's unfair to people who are still paying their mortgages on time.
Supporters, however, say the administration should get credit for trying to light a fire under an industry that wasn't accustomed to assisting defaulted borrowers in huge numbers and resisted change.
The administration "had a Herculean task," said Sheila Bair, chairman of the Federal Deposit Insurance Corp. "People need to give it time."
Friday, February 19, 2010
Monday, February 15, 2010
A surprise announcement Thursday night that China raised bank reserve requirements helped mortgage markets and hurt the stock market. The increase is a form of monetary tightening which is intended to slow economic growth in China. This likely means that China will buy fewer exports from other countries, slowing economic growth globally. Slower expected economic growth reduces inflationary pressures, which is positive for mortgage yields.
In recent weeks, large fiscal deficits in Greece have caused speculation that the country will default on its government debt, which resulted in an investor flight to the relative safety of US bonds. This week, the news that Greece will receive economic aid from other European Union nations prompted investors to reverse this flight to safety by selling US bonds, moving yields higher.
While it caused little immediate reaction, on Wednesday Fed Chief Bernanke revealed monetary policy strategies which may have important long-term implications for mortgage markets. Bernanke released the text of a speech which provided more details about the Fed's planned methods to tighten monetary policy when the economy has gained enough strength. One of the things the Fed intends to do is sell its portfolio of mortgage-backed securities (MBS). Due to concerns about disrupting mortgage markets, however, Bernanke suggested that this will be one of the last measures taken to tighten policy, and it will be done very gradually.
The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Thu rsday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Industrial Production, an important indicator of economic activity, will be released on Wednesday. The FOMC Minutes from the January 27 Fed meeting and Housing Starts are also scheduled for Wednesday. Import Prices, Leading Indicators, and Philly Fed will round out a busy week. In addition, the Treasury will announce the size of upcoming auctions on Thursday. Mortgage markets will be closed on Monday for Presidents Day.
by Catherine Reagor The Arizona Republic Feb. 14, 2010 12:00 AM
Most Maricopa County homeowners will see another significant decline in their homes' value when they open their 2011 property-assessment notices in the next few days. But property taxes for the coming year still may go up as the state, cities and school districts struggle to close huge budget deficits.
Less money coming in from lower property taxes would mean less money in state and local coffers and less money for education. Faced with growing operational deficits, municipalities and schools could be forced to raise property taxes by 10 percent or more to pay salaries and provide basic services, government officials and real-estate experts say.
During 2009, the overall median value of homes in the county fell 15.2 percent, from $155,300 to $131,700, according to the latest report by the Maricopa County Assessor's Office. This decline follows a 23 percent drop in home values during 2008.
A drop in values usually leads to a drop in property taxes.
But Arizona homeowners are taxed through a formula based on two main factors: property valuations set by the county assessor and tax rates set by cities and school districts. Tax rates set by cities and schools fluctuate each year based on funding needed for maintaining services and facilities.
Annual home valuations come out in February. Tax rates are set in the summer, then property-tax bills are mailed out in September. Property-tax rates are based on valuations from 18 months earlier. That means the bill homeowners receive this September will be based on 2008's 23 percent decline in values.
"Now that home values are nose-diving, we expect to reap the benefits of lower taxes," said Jay Butler, director of realty studies at Arizona State University. "But with all the state money drying up, local governments and schools can increase their taxes so they don't have to deal with such severe shortfalls. It won't be popular, but it's likely to happen."
Tax jurisdictions in any community can include elementary schools, community colleges and fire, water and library districts. The more than 1,000 jurisdictions in Maricopa County that rely on property taxes for funding must hold meetings open to the public to discuss all proposed rate hikes. Local decisions on tax rates are then handed over to the Maricopa County Board of Supervisors, which must approve them.
Arizona's property taxes have been low compared with property taxes in the rest of the country. Any increases have been small and raised little opposition. But this summer, the proposed increases predicted by economists and government leaders are bound to draw more attention from homeowners.
"Most jurisdictions will have little choice and will have to raise property taxes this year," said Keith Russell, Maricopa County assessor. "Residents will have to decide how many potholes they are willing to live with in their community and whether they want to get back the music class cut at their local school. Some jurisdictions will be sensitive to people's pocketbooks, and some jurisdictions will be sensitive to keep important services."
About 75 percent of Arizona's property taxes are earmarked for K-12 education. State schools are guaranteed certain funding, even if property taxes don't cover it all. The law requires any shortfalls from property-tax collection to be covered by the state's general fund. Some state leaders already are pressuring school districts to raise property taxes to reduce their dependence on the general fund.
"School districts don't lose spending authority because of losses in assessed values from property taxes," said Chuck Essigs of the Arizona Association of School Business Officials.
Arizona is still facing a huge budget deficit this year. The statewide school sales tax generated $150 million less in 2009 than it did in 2008. That means there already is a large gap in school funding without the drop in property taxes.
If a sales-tax increase proposed by Gov. Jan Brewer is approved by voters, K-12 education is still facing a $300 million to $500 million budget cut this year. If the sales-tax measure fails, the shortfall in funding to education could be much more.
Arizona's relatively low property taxes have long been a draw to businesses and residents.
The state's property-tax rate averaged about 0.60 percent of a home's value in 2009. That makes Arizona's property tax the 39th lowest in the nation, according to the Tax Foundation, a Washington, D.C.-based non-profit. Texas has the highest rate at 1.76 percent.
As more people moved to Arizona and bought houses, home values climbed steadily and so did property-tax revenues. Arizona was able to use money from property taxes, as well as sales and income taxes, to pay for the infrastructure and services needed to sustain growth.
But now most homeowners are seeing their third straight drop in property valuations, consumer spending and wages are down, and Arizona's government coffers are depleted. Raising property taxes is the only option for most municipalities to maintain the education and public services necessary to attract future growth.
In an effort to collect more property taxes, an Arizona lawmaker last month introduced a bill that would eliminate the 50 percent tax break that owners of historic homes receive. The tax break was enacted in the 1970s to entice people to buy homes in older neighborhoods and revitalize those areas. Only about 5,000 homes in the state are designated as historic, so the increase in property-tax revenue from those homes won't be enough.
Because of budget shortfalls the past three years, almost every city in Maricopa County has laid off employees, closed library branches and cut services. Now, the cuts are getting deeper. Phoenix recently announced it would lay off hundreds of police officers and firefighters, though their unions tentatively agreed Wednesday to a pay cut to save jobs. Phoenix also is implementing a 2 percent tax on food sales for five years to try to save some public-safety jobs.
"Arizona's future growth is at stake," Butler said. "Who wants to move to a city without enough firefighters and police officers, even if the property taxes are low?"
Raising property taxes would help narrow government budget gaps and save some services. But higher taxes would hurt homeowners, especially those already struggling to afford their mortgage payments. Most homeowners pay their property taxes through their mortgage payment to their lender. But a record number of Arizona homeowners are behind on their mortgage payments and in foreclosure. Already, it has become more difficult to collect property taxes in Maricopa County, according to the county treasurer.
Property-tax hikes for homeowners will be decided this summer as the many taxing jurisdictions balance their budgets for 2010-11.
"Schools and cities really have no choice but to raise property taxes," said Arizona real-estate analyst RL Brown. "Low property taxes do play a role in attracting new residents, particularly retirees.
"But the entire tax structure of the state must now be reviewed and revised," he said. "Now, we can't provide a satisfactory level of services to promote job growth."
Legislation has been introduced to research ways to improve Arizona's complex property-tax formula.
Some jurisdictions are now limited in how much they can raise property taxes each year. So even if a fire district, for example, raises property taxes this year as much as the law allows, the increase might not be enough to keep open all the fire stations in an area.
Although 2009's decline in valuations was smaller than 2008's drop, the state's property-tax system works on a formula that lags, so cities will likely have to raise taxes even more next year. One state official said Valley homeowners could see a 25 percent increase in the property-tax rate on their 2011 bill.
Understanding property taxes
Property-tax calculations and the terms used to discuss them can be confusing. Here are some basics:
Full-cash value (FCV) is the figure that reflects a property's current market value. This number is used to calculate secondary taxes such as bonds, budget overrides and special districts such as fire and flood control.
Limited-property value (LPV) is used to assess taxes for school districts, cities, community colleges and the county. It's calculated using a complex formula set by the state Legislature and can't be higher than a property's FCV. The FCV and various LPVs from your assessment determine your share of taxes.
Property taxes are determined through a formula based primarily on (a) property valuations set by the county assessor and (b) tax rates set by municipalities and school districts.
Formulas vary from city to city. But here is an average breakdown of how much different kinds of taxing districts factor into property taxes: special districts, 7 percent; community college, 10 percent; county, 11 percent; cities, 11 percent; and schools, 61 percent. Financial decisions those groups make this summer will determine what property-tax bills look like this fall.
by Russ Wiles The Arizona Republic Feb. 14, 2010 12:00 AM
Hold it or fold it?
It's one thing to throw back lousy cards in a poker game and quite another to walk away from a money-losing home that you can still afford.Yet, more people are doing just that as they find themselves "underwater," with mortgage debts that exceed the worth of their properties.
The government, financial industry, media and other "social-control agents" have fomented a culture of fear and shame about foreclosures that's preventing many people from abandoning properties, contends Brent White, an associate law professor at the University of Arizona.
Rather, homeowners should take a cue from corporate America and cut losses, treating underwater homes like any other investments gone sour, he suggests.
But the prospect of mass "strategic defaults," where homeowners who can afford their payments nevertheless walk away, has sparked sharp words from both sides. That's partly because these actions don't just affect borrowers and their lenders, but other parties, too.
"If everyone thought that way, what would it do to our whole economy?" asked Gina Gallegos, an entrepreneur and Ahwatukee homeowner who worries about foreclosures in her area.
People who walk away drive down the value of home prices in neighborhoods, undermine homeowner-association finances and cause other damage.
"All in all, it's the wrong approach to take," Gallegos said.
In a December research paper, White didn't delve much into the broader impact, but in an interview he took a shot at homeowners who criticize neighbors who walk away.
"They're really concerned about the value of their homes," he said of the critics. "It's all self-interest."
But abandoned properties aren't just eyesores and don't merely hurt local home values. They also can generate problems ranging from abandoned pets to heightened public-safety hazards.
Abandoned homes often aren't well maintained, and that can translate to various losses. Insurers might pass along those costs to other customers in the form of higher premiums, he said.
The cost and availability of mortgage credit also could be affected if more underwater owners abandoned their properties.
"We're learning as an industry that the ethics is changing," said Tanya Wheeless, president and chief executive officer of the Arizona Bankers Association. "You used to be able to count on people sticking with a mortgage."
Although interest rates on conventional home loans remain low, that's due largely to government intervention that may not last long. Wheeless pointed to credit costs in the jumbo-loan market - which are much higher - as a better reflection of the impact from defaults.
White counters that reduced credit availability might not be so harmful since lax credit kindled the crisis in the first place by allowing poorly qualified individuals to buy homes, often with little or no down payments.
"It's not necessarily a bad thing in the long term if people have to put more money down to buy a house," he said.
What about the impact on banks themselves?
White blames financial institutions for bringing on these problems with easy-money policies during the height of the market several years ago.
"It's unfair to make homeowners responsible for the state of banks," he said.
That may be, but past lending practices don't change the risks posed by future bank failures. According to Wheeless, those banks facing a disproportionate share of the fallout are small community banks that didn't receive any federal bailout assistance.
Each foreclosure reduces a bank's capital, which directly crimps its ability to make loans and undermines its solvency.
"That's money coming out of the community that we can't replace," she said.
In 2009, seven Arizona banks failed, up from one over the prior six years.
Bank failures, in turn, could imperil some depositors and may show up as a cost to taxpayers. Those factors, plus any general curb on lending, would take a toll on the economy.
But White argues the economic impact isn't so negative as it might seem. He predicts underwater consumers would start spending more money once they throw off the yoke of high, unsustainable mortgage payments.
"A lot of these people aren't spending because they feel poor from being mired with perhaps $200,000 in negative equity," he said. "They just don't have much discretionary income."
White said he disagrees that more strategic defaults would seriously hurt the economy or even home prices.
"I don't think prices in Phoenix would fall that much more, since they already have fallen so much," he said.
White also said he hoped any uptick in defaults would make banks more willing to modify mortgages and write down debt amounts - a notion that Wheeless considers unlikely.
"We would have seen that already," she said.
And what of the impact on borrowers themselves?
People who walk away from a mortgage will suffer a hit on their credit scores, but this impact is hard to quantify.
FICO, which operates the industry-standard scoring system, recently reported that the damage largely depends on a person's initial score and ongoing credit behavior.
As examples, someone with a good initial score of 780 (on FICO's scale of 300 to 850) could expect a foreclosure to shave 140 to 160 points, while another person with a weak score of 680 would likely suffer a drop of 85 to 105 points.
At any rate, White said he believes the credit-score damage would dissipate within a couple of years. More to the point, he argues borrowers shouldn't feel shame, guilt or similar emotions from walking away.
"It's not appropriate to prop up the market on their backs," he said.
Defaulting on mortgages: Who views it as wrong
A study last year by researchers at Northwestern University and the University of Chicago highlighted certain trends:
Price declines: Homeowners generally refrain from defaulting as long as their negative equity doesn't exceed 10 percent of a dwelling's value, researchers said. But once it hits 15 percent, they walk away "massively."
Age: People under 35 and over 65 are less likely to say defaulting is morally wrong compared with those in the middle.
Education, race, income: People with higher education and Blacks are less likely to view defaults as morally wrong, according to the researchers. Those with higher incomes are more likely to view it as wrong.
Politics: The researchers didn't spot a difference in the views of Republicans and Democrats, but independents were less likely to say defaults are immoral. Also, people who support government efforts to help homeowners are less likely to view defaults as wrong.
Sources: Researchers Paola Sapienza, Luigi Zingales and Luigi Guiso
by Joe McDonald Associated Press Feb. 13, 2010 12:00 AM
BEIJING - China moved to curtail bank lending Friday for the second time in a month in the latest effort to cool its supercharged economy.
Chinese leaders worry that a stimulus-driven torrent of lending is fueling a dangerous bubble in stock and real-estate prices. They also are concerned that the flood of money surging through the economy is adding to inflation.Beijing declared China had emerged from the global crisis after economic growth rebounded to 10.7 percent in the final quarter of 2009. But authorities say the global outlook is still uncertain, and analysts expect them to try to avoid rate hikes even as they start winding down their stimulus.
Banks were ordered Friday to increase reserves by half a percentage point - to 16.5 percent for large lenders and to 14.5 percent for smaller institutions.
Rural lenders that serve farmers were exempted to guarantee adequate credit for agriculture.
The move was in line with expectations that Chinese authorities were trying to control credit and keep the recovery on track, analysts said. But it still sent European bourses and Wall Street stock futures into the red.
"The message coming out of China in recent weeks has been quite clear - policymakers are becoming more concerned about containing inflationary expectations and managing the risk of asset price bubbles as a result of last year's aggressive expansion of credit," Jing Ulrich, JP Morgan's chairwoman for China equities, said in a report.
"We have already seen some scaling back of incentives that have spurred record sales in the domestic property sector and authorities have made clear that they will step up scrutiny of property lending to curb 'overly rapid' price gains in some cities."
The government reported Thursday that January bank lending rocketed to 1.4 trillion yuan, or about $200 billion - nearly one-fifth of the planned 2010 total. That was despite a Jan. 12 order to banks to raise reserves, also by 0.5 percent, and repeated commands to keep lending at sensible levels.
Also Thursday, the government said the rise in housing costs in 70 Chinese cities accelerated in January, jumping 9.5 percent from a year earlier, up 1.3 percentage points from December's growth rate.
Land prices surged by 106 percent last year, according to Standard Chartered Bank, and Chinese newspapers are filled with reports of well-heeled investors paying record prices for luxury apartments and villas.
Commercial banks have said they will tighten controls on lending.
Analysts say Beijing's move in raising reserves while leaving the total loan target for the year unchanged indicates it will let banks lend the full amount but is trying to force them to smooth out lending over the year instead of making the bulk of loans in the first few months as they usually do.
by Catherine Reagor The Arizona Republic Feb. 12, 2010 12:00 AM
Maricopa County homeowners will begin to receive their latest property valuations in the mail today. Most will see a third straight annual drop in home values.
Residential property values fell an average of 15.2 percent in 2009, according to the latest report from the Maricopa County Assessor's Office.
Values fell 23 percent in 2008, following a 13 percent drop in 2007.
"It's still bad but not as bad," county Assessor Keith Russell said.
Last year, the overall median value of homes in the county fell to $131,700 from $155,300.
Some Valley cities fared better than others. For example, home values in Tempe declined 13.4 percent in 2009, while they dropped 27.3 percent in Tolleson.
County homeowners have yet to see declines in property taxes similar to the drops in property valuations, and they won't again this year.
Many Phoenix-area municipalities and school districts are facing budget gaps and will likely have to raise property taxes this fall.
Property-tax bills lag valuations by 18 months in Arizona and are based on a complex formula that includes funding for multiple municipalities and school districts. Most property-tax money goes to education.
The tax bill homeowners receive this September will be based on 2008's valuation. Assessments going out now will be reflected in 2011 tax bills.
To save money, the Assessor's Office is now printing property valuations on a single sheet of paper that is folded to postcard size for mailing.
County property valuations were previously sent in standard business envelopes that also contained several public-information inserts.
The Assessor's Office saved 40 percent in printing costs by switching to the single-sheet valuation report.
"We want people to know about the new format for their valuations so they don't mistake them for something else and throw them away," Russell said.
If property owners think their valuations are too high or low, they must lodge an appeal with the Assessor's Office by April 13.
Last year, 20,000 people appealed their real-estate valuations in Maricopa County, double the number of appeals from 2005. About 1.5 million properties were valued by the Maricopa County assessor during 2009.
Saturday, February 13, 2010
by Connie Prater
Friday, February 12, 2010
APR Shocks Many, but Issuer Says They Are Pricing for the Risk
If you have bad credit in the new era of credit card regulation, be prepared to pay -- dearly -- for the privilege of using credit. That's the message underlying recent credit card offers that feature jaw-dropping interest rates of up to 79.9 percent.
The sky-high rates may be a sign of things to come in the market for so-called subprime credit cards as issuers who lend to the riskiest of borrowers try to figure out how to stay in business and comply with the new credit card reform law.
"We need to price our product based on the risk associated with this market and allow the customer to make the decision whether they want the product or not," according to a statement issued by Miles Beacom, CEO of Premier Bankcard, the South Dakota credit card marketer that mailed test offers in September and October featuring 79.9 percent and 59.9 percent annual percentage rates (APRs) on cards with $300 credit limits. Premier markets credit cards issued by First Premier Bank.
Yes, It's Legal
A national bank charging 79.9 percent interest on a credit card is legal -- as long as the issuer fully discloses the terms as required by the federal Truth in Lending Act. Still, the high rate has been met with shock across the country because it is so much higher than prevailing APRs and penatly interest rates. The CreditCards.com Weekly Rate report national average for bad credit credit cards was 14.15 percent on Feb. 12.
The high interest rate offers may add urgency to an ongoing debate on Capitol Hill over reinstituting nationwide usury rates that cap credit card interest rates. On Dec. 11, a lawmaker introduced a bill in the U.S. House of Representatives to cap credit card rates at 16 percent -- the latest attempt among several in recent years to limit rates. The powerful and well-financed banking lobby has successfully quashed those efforts.
Credit counselors warn consumers to be sure they read the fine print of these new offers and seek advice about other options before signing up for the cards.
"Anyone who feels they have no choice but to get one of these should get help from a credit counselor," advises Sandy Shore, a counselor with Novadebt, a New Jersey-based consumer credit counseling agency. "There are other alternatives, like a debit card or even a secured card. The counselor can give the consumer other ways to reestablish their credit, depending on their circumstances."
Law Limits Upfront Fees
New restrictions in the Credit CARD Act of 2009 limit the upfront fees credit card issuers can charge on subprime accounts. The low-credit, high-cost cards, known as fee harvesting credit cards, are issued to people with bad credit or no credit history and feature credit limits of $500 or less. Issuers typically charge a slew of fees at the outset to compensate for the risk of lending to people with poor repayment histories. Starting Feb. 22, 2010, the law will limit upfront fees to no more than 25 percent of the available credit on the account.
As a result, subprime credit card marketers are testing the waters with offers that essentially shift the pricing on their products from upfront fees to high interest rates.
The First Premier card's test offer featured a $75 upfront fee -- exactly 25 percent of the card's credit limit, as the new law mandates. "Because of the new regulations that limit the fees on a credit card to 25 percent of a credit card's line, we will need to shift the premium from upfront fees on risk to the interest rate," Beacom says. "We have to be able to price the product to offset the risk."
In December, the bank's regular Gold card, as advertised on its Web site, include a 9.9 percent APR and the following upfront fees: $29 account setup fee, $95 one-time program fee, $48 annual fee and a $7 monthly servicing fee.
"There's 70 million people out there who have been identified with problem credit," says Beacom, adding those are people with FICO scores lower than 640. "These are people who have had problems with their credit in the past."
He likened people with bad credit to bad automobile drivers who must pay higher auto insurance premiums if they want to continue driving. "These are people who have had those same accidents or speeding tickets with their credit."
He adds: "It's going to be very difficult for these individuals to obtain credit after February."
Prior to the credit crunch, a subprime borrower might take eight to 16 months to build a good enough credit record to qualify for lower interest rates on prime cards. Today, however, because the prime lenders have dramatically tightenend their credit standards, it could take 16 to 24 months or longer to build their credit.
Competitive Market Changes
In addition to Premier, the Nevada-based Credit One Bank has also mailed out offers featuring different fee structures, according to Andrew Davidson, senior vice president of Mintel Comperemedia, a Chicago direct-mail research consulting firm. Mintel is tracking how credit card offers are changing in light of the credit card law restrictions. "The indication here is that the subprime issuers are looking at ways to work within the new law," Davidson says. "Some suggest they will stop operating in that space, but the reality is there are always going to be people who need to establish credit and rebuild their credit."
He notes that while many credit card issuers scaled back direct mail card offers during the recession, "First Premier has consistently been mailing during the downturn." The reason: Demand is high among people with bad credit. "If they can work around these laws so that they can have a business model that works, they can continue to have a successful operation," Davidson adds.
One of First Premier's competitors in the subprime credit card market, CompuCredit, apparently could not find a model that worked for them while complying with the new law. Under fire from consumer advocates, facing lawsuits and mounting losses, CompuCredit decided to stop marketing the high-fee cards to bad-credit consumers.
Credit One's Platinum Visa card offer mailed in August 2009 featured a 23.9 percent APR and a range of annual fees that were card law compliant, that is, no more than 25 percent of the credit limit on the card, according to Mintel.
An spokeswoman for HSBC, another marketer of subprime cards, said it has no plans for testing. Premier's Beacom says the new regulations may make it impossible for subprime issuers to continue to make money in that high-risk niche market.
"The cost of funding for these products is very difficult these days," he says, noting that his competitors are also testing different product offerings. "One, many or maybe all" of the subprime issuers could go out of business, he says.
Beacom says it's too early to tell if the 79.9 percent card offers will last. It normally takes them nine to 12 months to analyze the results of a test product.
Customers who sign up for the high-interest card and want to back out can get full refunds and close the accounts, Beacom says.
"From our initial research we know that 83 percent of the people who accepted the offer are fully aware of the interest rate they are receiving and the purpose of the credit card to help re-establish credit. If anyone accepts the offer and didn't fully understand it or no longer wants it they can take advantage of our full refund of fees policy."
Response to 79.9% Offer 'Phenomenal'
Has First Premier gotten any takers on the 79.9 percent cards? Beacom called the response "phenomenal," adding 2 percent of people receiving the offers have applied for the cards. Their normal response rates is 1 percent to 1.2 percent, he says. "It's double what our normal product was."
Shore, the New Jersey credit counselor, urged consumers not to jump at the first high-interest offer they receive. "I would caution anyone who is considering a card like this to wait. Other credit card issuers will be adjusting their products and there may be better alternatives coming out," Shore says.
"No one should be shocked at the interest rate on [the First Premier] card," Shore notes. "These cards are being marketed to consumers with very poor credit. The APR is actually much lower than the old subprime cards because the fees are much less."
In other words, when you added up all the fees on the old cards, they're the dollar equivalent of a huge interest rate on the amount borrowed. (For example, $250 in fees on a $300 credit limit would amount to an 83 percent interest rate.)
"If someone wants to take a chance on a card like this, they should use it only as a convenience and pay the whole thing off when the bill comes," Shore adds. "Many consumers who have credit that poor do not have good credit habits and are likely to carry balances."
Beacom from Premier says the astronomic interest rate will only affect revolvers -- people who do not pay their entire balances off each month. "People pay it off every month, they pay no interest," he adds.
Those getting the offer have a choice, Beacom says.
"If everything is fully disclosed, if they want it fine, if they don't want it fine," he adds."People should be able to make that decision rather than the government cutting off access and saying they know best."
"Our goal is really to keep these lines controlled because these are people who have had problems in the past," Beacom says. "It's really to help build up the discipline without them getting into credit trouble again."
"Whether it works or not, time will tell," he adds.
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