Migrant cotton picker's child who lives in a tent in the government camp instead of along the highway or in a ditch bank. Shafter Camp, California
Ilargi: You would expect the Obama administration to make a lot of happy green shoot noise if and when one of their economic programs shows signs of success, or can be made to look as if it does. So it’s a bit strange at first glance that it's been pretty much silent in the media regarding the fact that the $75 billion Making Home Affordable Program managed, three weeks earlier than expected, to modify 500,000 mortgages out of a total of 4 million envisioned.
But that's only at first glance, though. A second one reveals why the government and its spin team are not all that eager to shout this particular one from the rooftops. On Friday, one day after the "success" was announced, Elizabeth Warren's Congressional Oversight Panel issued a report that is as polite as it is highly critical about the program and its numbers, and states that the plan won't even be able to slow foreclosures, let alone halt them.. In the words of the New York Times:
- On Thursday, Treasury announced that 500,000 homeowners had since had their payments lowered on a trial basis, celebrating this as a milestone. But the report from the oversight panel directly challenged the administration’s characterizations. Most prominently, the panel had grave uncertainty about whether large numbers of the trial loan modifications — which typically run for three months — would successfully be converted to permanent terms.
- As of the beginning of September, only 1.26 percent of trial modifications that had made it through the three-month trial period had become permanent [..]
- As of Sept. 1, the Obama plan had produced 1,711 permanent loan modifications.
1711 out of 500,00, and even some of those are guaranteed to re-default. Obviously, there's not much of a success to report. At all. That is, not for the government. The lenders, who have probably already been paid fees for all 500,000 modifications, have more reason for joy. On the other hand, the homeowners who have allegedly been "helped" have much less to be happy about, though most may have to wait a while before they find that out. The program, like everything other "help" the government is involved in, all the guarantees, the securities purchases and other support programs, depends for the difference between success and failure on one simple assumption. Home prices need to be kept from falling, at least by more a few percentage points.
And that is a goal that will not be achieved. Nor is all that desirable to start with. Higher real estate prices may be a boon for banks, they are a burden for buyers and, because of government-issues guarantees, for taxpayers. The stake the Federal Reserve and the Treasury now hold in the US housing market means that every American owns a substantial stake in everybody else's home.
Now imagine that prices will fall another 25%, and you can start calculating some losses. They will run in the trillions of dollars. The Fed and the feds put another $1.2 trillion into the housing market in FY 2009 alone. The most important point is that none of these exorbitantly expensive initiatives manages to halt the increase in foreclosures; in fact, the rate is still accelerating. America has an inventory that could satisfy all demand for more than two years, but builders come knocking for government support.
Obviously, this madness has to stop somewhere. Fannie and Freddie take their share of the $1.2 trillion (the Fed now buys up their securities as soon as they are issued) and use part of it to sell foreclosed homes under a program that requires a mere 3% downpayment and for which no private mortgage insurance is needed. The argumentation, for what I understand of it, is that the GSEs own the whole risk already anyway, so why bother with something as petty as prudence? Why indeed, since in the end the ownership of course lies not with Fannie and Freddie, but with you, the citizen and taxpayer.
So when will it stop? When the mess has become too large to oversee, when the inventory glut and foreclosure waves cause prices to decrease so much, defying the flood of subsidies, that just about every single mortgage must be modified and over two-thirds are deeply underwater. Or it could stop now. Congress might decline any additional demands for bail-out funds that are sure to come before the year is over, and wrap up Fannie and Freddie before they can cause any more damage. Or maybe it will stop here:
Writedowns on Mortgage-Collection Servicing Make Even JPMorgan VulnerableThe four biggest U.S. banks by assets may have to take writedowns on $55 billion of mortgage- collection contracts after marking them up by $11 billion in the second quarter, casting a shadow over earnings. Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. wrote up the value of the contracts, known as mortgage-servicing rights or MSRs, by 26 percent in the quarter as mortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.
Losses of $55 billion just on mortgage servicing. In just the 4 biggest banks. Sounds promising, doesn't it? But they'll survive, no matter what their losses. Too big to fail and all that. Sorry, Joe Blow, but the peace prize winner deems it necessary that you, who can't afford a home anymore or get a loan to buy one, fork over for those who can.
As for the banks who are not that big, the picture, as it is revealed through the media, is becoming clearer at a pretty rapid clip. 1000 bank failures over the next few years has turned into a widely accepted number, never mind that the FDIC didn't close a single on this week for the first time in months. The 2009 total stands at 98, and for some reason we can only guess at, the decision was made to go over 100 only next Friday. Nice try, but commercial real estate is bursting at the seams, and scores of smaller banks have no chance of surviving that.
Look, the core of America's economic problems lies in real estate. The only answer the government manages to come up with is throwing your money at it. That's the only answer it has for any economic problem it's faced with. The answer is sure to fail, because home prices are still much too high; all you need to do is look at the fast increasing numbers of foreclosures and job losses.
And Congress has the key. Obama, Summers, Geithner and Bernanke have made it crystal clear that they have no intention of taking a break in their practice of throwing your money away to keep housing finance fees flowing in order to keep Wall Street satisfied.
Auditing the Fed is a useless initiative that only serves to divert attention away from what is really sinking the economy and putting you into debt faster and deeper than you can say "No Mas". Even if Congress has the legal authority to audit the Fed, which I very much doubt they have, it'll take many years to reach any sort of conclusion or even have any relevant books -fully- opened. What would be useful, however, is for Congress to demand (by refusing provide further funding) that the White House withdraw its support for Fannie Mae, Freddie Mac, Ginnie Mae, the FHA and all other channels that could potentially be used to prop up a dead market.
Cutting off all government support for the real estate market can be done in a manner of weeks or months. Yes, the effects will be devastating. But not nearly as bad as letting this multi-trillion dollar circus continue its mind-boggling contortionist act. Supporting homeowners is of course not a bad thing in itself, But if you pay attention, you can see that's not what the government is doing. It's supporting the banks on Tim Geithner's speed-dial instead, under the guise of homeowner support, and all the losses will be transferred to you, while most owners will lose their property and/or equity regardless. The whole call for that Fed audit is just an ill-guided attempt to make you look the other way, away from what really hurts. You, and your representatives can simply make it impossible for the Fed to keep buying mortgage securities, by making sure none are issued.
Don't audit the Fed, pull the rug right from under its feet.
Ilargi: On a bit of a side note, you may have seen our new Fall Fund Drive as it appears these days in the left hand column. We are not very comfortable at all asking you for money, but at the same time we realize, and we think you should too, that without your donations there can and will be no Automatic Earth. Clicking the ads our pages display, on a regular basis, helps as well. I have always been, and remain, confident that you, our readers, have a pretty good understanding of the value The Automatic Earth represents to you. Still, evidently, you may have to be reminded from time to time of the role you yourself play in the continued existence of this site.
We're not talking about, nor asking for, large amounts of money. There are many thousands of people who read us every single day. It's easy to see that if every single one of them would donate a dime for every time they read us, and what's a dime these days, we'd be doing just fine, thank you. It’s, however, not just about the continuation of the present situation here that I think about. I would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Which also is not in the cards right now.
As you probably know, Stoneleigh and I are convinced that all of us are moving into a crucial phase in the development of our financial systems, our economy and indeed our societies. Which of course means we are about to enter a time when The Automatic Earth, in order to do what we set out to do, will be busier than ever. What we've done so far was just a dress rehearsal compared to what lies ahead. Inevitably that will take more from us, and we hope you will do more as well.
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October surprise from bank earnings?
Some experts worry results may be much more negative than investors expect
Bank stocks surged during the third quarter, but as companies prepare to report results from the period, several industry experts remain concerned. "We are very early on in this credit cycle," Timothy Long, chief national bank examiner at the Office of the Comptroller of the Currency, said at a recent conference. "That statement caught everyone by surprise," said Nancy Bush, a veteran bank analyst who attended the conference. J.P. Morgan Chase kicks off the bank-reporting season on Wednesday. The KBW Bank Index , which tracks shares of lenders, including Bank of America, Citigroup and Chase, jumped 30% in the third quarter, as investors bet that huge increases in bad loans from the mortgage meltdown and broader financial crisis were easing.
Thinking the worst is behind the industry, investors began looking to 2010 and 2011 when banks should be a lot healthier, according to Richard Bove, an analyst at Rochdale Securities. Third-quarter results will make that leap of faith harder to maintain, he said. "Third-quarter earnings for most banks, particularly the regional lenders, will be extraordinarily negative," Bove said. He estimates that about 60% of banks will report losses in the period as nonperforming assets continue to grow and charge-offs remain very high. Lenders will also have to increase reserves because they didn't bolster them enough during the second quarter, Bove added.
Loan growth will likely remain sluggish and net interest margins won't increase much, partly because funding costs have already dropped so much that they can't fall much further, the analyst explained. "None of this bodes well for the third quarter," Bove said. "Once the market is faced with the reality of how bad the earnings are, it will be interesting to see whether investors will be able to hold on to these stocks at these price levels." Bush is concerned that commercial real estate problems may begin to escalate, while consumer credit losses linger.
At the end of September, K.C. Conway, a real-estate expert at the Federal Reserve Bank of Atlanta, warned of big commercial real-estate losses and said banks will be slow to recognize the severity of those losses, according to a presentation to bank regulators reviewed by The Wall Street Journal. More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks and vacancy rates in the apartment, retail and warehouse sectors have already exceeded levels seen in the real-estate collapse of the early 1990's, the newspaper noted.
"That's the big bogey-bear staring us in the face," Bush said. "But when I ask banks about their commercial real-estate exposure, they all say the same thing -- that they don't have many major problems. Then you read the Fed report and it's completely different. I don't know which to believe." Regional banks are particularly exposed to commercial real estate loans because they didn't sell them through securitization as much as larger rivals, according to Keefe, Bruyette & Woods analyst Julianna Balicka. These types of loans make up more than 35% of regional banks' total loans, up from 25% in 2000, she said in a recent note to investors.
The California bank units of Zions Bancorp and Western Alliance had more than 40% of their loans in commercial real estate at the end of June. At Center Financial , Hanmi Financial , Nara Bancorp and Wilshire Bancorp those types of loans accounted for more than 70% of total loans, according to KBW's Balicka. But it's not only regional banks that are exposed. Commercial real-estate loans made up 12% of large banks' total loans at the end of June, up from 9% in 2000, the analyst noted.
J.P. Morgan Chase , which is due to report third-quarter results on Wednesday, recently gave up trying to sell One Chase Manhattan Plaza, a 60-story skyscraper in lower Manhattan, after bids came in too low, according to a person familiar with the situation. The landmark office tower was one of 23 U.S. office properties J.P. Morgan was trying to sell, according to Bloomberg News, which noted the remaining properties are still for sale. At the end of June, the bank had almost $65 billion of wholesale loans extended for real-estate related purposes, according to its latest quarterly regulatory filing.
However, J.P. Morgan is more exposed to consumers, holding over $85 billion in credit card loans at the end of June. Consumer loan losses from the subprime mortgage crisis have begun to abate, but Bush is concerned that rising long-term unemployment in the U.S. will mean lingering consumer credit problems for banks. "I'm not convinced consumer credit will improve a lot," she said. Indeed, the OCC's Long said this past week that the severe threat from last year's financial crisis has been replaced by a more traditional unemployment-driven economic cycle, which may be in its early stages, according to Robert Garsson, a spokesman for the regulator.
J.P. Morgan Chase is expected to make 49 cents a share in the third quarter, according to the averaged estimate of 19 analysts in a Thomson Reuters survey. Profit will come mainly from the bank's capital markets and investment banking businesses, while credit costs remain high, Matt O'Connor, an analyst at Deutsche Bank, wrote in a note to investors earlier this week. Provisions for credit losses will likely come in at $8 billion during the third quarter, in line with the second quarter. Credit card losses could rise to 11.5% in the third quarter, from 10% in the second, the analyst estimated. Still, J.P. Morgan has more capital than most of its peers, O'Connor noted. And those rivals likely struggled more in the third quarter.
Citigroup , which reports on Thursday, is expected to lose 21 cents a share in the third quarter, according to the average estimate of 17 analysts polled by Thomson Reuters. Citigroup had more than $67 billion of credit card loans that weren't covered by a government guarantee at the end of June, according to KBW analyst David Konrad. Potential losses on these exposures could reach almost $18 billion through the current credit cycle, which Konrad expects will end in the fourth quarter of 2010. Konrad reckons Citigroup faces total potential losses of more than $124 billion before the cycle ends. The bank has taken $5.7 billion in net charge-offs so far, the analyst pointed out in a note to investors on Oct. 2. He's forecasting annual losses for Citigroup through 2011.
Bank of America , which reports results on Oct. 16, is forecast to lose 6 cents a share, according to a Thomson Reuters poll of 22 analysts. Deutsche Bank's O'Connor expects Bank of America to lose 42 cents a share. The bank had $13.4 billion in loan loss provisions during the second quarter and it could set aside the same amount or slightly less during the third quarter, the analyst said. Reserves could be bolstered by $3.5 billion, down from $3.7 billion in the second quarter, he added. Bank of America's credit-card business could be one of the main drags this quarter. Losses in this area could reach 13.5% in the third quarter, up from 11.7% in the second, O'Connor forecast.
Wells Fargo , scheduled to report on Oct. 21, is expected to make 36 cents a share, according to the average forecast of 23 analysts surveyed by Thomson Reuters. That's down from 57 cents a share in the second quarter.
The bank's mortgage business will likely generate about $3 billion in revenue during the third quarter, up from $2.5 billion in the second, O'Connor forecast. However, credit losses will continue to weigh on the San Francisco-based bank. O'Connor sees loan loss provisions rising to $6.2 billion in the third quarter, from $5.1 billion in the second. Charge-offs may jump 15% to 20%, the analyst added. Although that would be down from a 35% surge during the second quarter.
Scant Earnings Relief as Banks Build Reserves
Costs to cover sour loans could double, helping to cut earnings by 28% for the third quarter when banks report results this week. When will loan losses bottom out? Three months from now, maybe—just maybe—banks will announce quarterly results that finally bring a sense of closure to losses from loans they made during the credit boom. The current round of reports, which start coming out this week, certainly isn't expected to provide much relief. This will mark the 11th-straight quarter in which the industry has delivered worse results than the previous year, according to Keefe, Bruyette & Woods (KBW), the financial-services specialty firm. Median earnings per share will be down more than 28% for the 171 banks, the firm estimates.
Not all individual results will be so dire. On Wednesday, Oct. 14, JPMorgan Chase will be the first big bank to report. Analysts expect Chase to turn in earnings of 52¢ a share, compared with a loss of 6¢ a year ago, according to Thomson Reuters. Bank of America, on the other hand, is expected to report a loss on Oct. 16 of 4¢ a share, vs. a profit of 15¢ in the same quarter last year, according to Thomson Reuters. The industry's woes particularly stem from its need to build reserves for souring loans of all types—to consumers, businesses, and commercial real estate owners. Bank executives have already warned investors that they spent more for such provisions during the quarter. The bankers are reacting to increasing delinquencies and to the fact that more troubled loans have moved beyond rehabilitation. KBW expects the industry's median cost for the provisions to come in at about double last year's figure.
The amount of provisioning expenses will vary a lot by bank, of course. BofA will likely report setting aside about $11.2 billion in the third quarter for loan losses, nearly twice as much as in last year's third quarter, estimates analyst Chris Kotowski of Oppenheimer (OPY). JPMorgan Chase is likely to up its expenses, too, but not by as much, setting aside $7.9 billion, compared with $5.8 billion last year. Many analysts say this quarter's results have been so well-anticipated that what's most likely to move stock prices during the reporting season is what bank executives say about the loss provisions they'll be taking in the fourth quarter. Wall Street hopes bankers will drop hints that they're about to have the recession's version of a "blow-out quarter"—one in which they clear out the losses, as opposed to stunning the Street with amazing profits.
"I think they're going to be very aggressive in the fourth quarter about recognizing problems and reserving for them so they won't have that drag on earnings" in 2010, says Kotowski of Oppenheimer. The Securities & Exchange Commission frowns on decisions that shift losses from one quarter to another, but bankers have a fair amount of discretion when recording costs for bad loans. They can estimate how much is reasonable to set aside in advance for loans expected to go bad. Later they can decide when to give up on a specific loan and how much of it to count as a loss to reserves. (It helps to have facts on hand to support their estimates and judgments in case auditors and regulators check their numbers.)
Additional facts will be made clear in the coming weeks, and Kotowski believes bankers should offer a pretty good read later this year on the ultimate damage. Given how quickly bank assets are souring now, he says, "the final rightsizing of reserves" will likely take place in the fourth quarter. That would be the 11th-straight quarter banks have built reserves in spite of rising losses. By then, Kotowski figures, reserves at the five biggest banks in the U.S. will be up to 3.4% of their outstanding loans—about twice the norm. Is this wishful thinking, like a food-poisoning victim hoping that each heave will be the last? A predictable end to losses is most plausible in the consumer-loan category. If unemployment stops rising later this year and if house prices hold steady—as many economists expect—it's fair to think bankers will then have the right numbers for loans on credit cards, cars, and houses.
The biggest doubts revolve around the banks' loans on apartment complexes, shopping centers, and office buildings. Commercial real estate losses are always the last to sink to lows after a recession because multiyear tenant leases delay the inevitable declines in building cash flows. Some real estate experts say it could be at least another year before building prices find their lows. That means it could take that long before bankers can reliably estimate how much they'll lose in foreclosures—and whether the reserves they will take next quarter are enough.
Writedowns on Mortgage-Collection Servicing Make Even JPMorgan Vulnerable
The four biggest U.S. banks by assets may have to take writedowns on $55 billion of mortgage- collection contracts after marking them up by $11 billion in the second quarter, casting a shadow over earnings. Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. wrote up the value of the contracts, known as mortgage-servicing rights or MSRs, by 26 percent in the quarter as mortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.
Mortgage rates fell about 0.26 percentage point in the third quarter, according to Freddie Mac, and servicing costs are rising, meaning the four banks, which handle collections on more than $5.9 trillion of U.S. mortgages, may face writedowns. "We’re very bearish on MSR valuations," said Paul Miller, a banking analyst at FBR Capital Markets in Arlington, Virginia. "They are overvalued. There are higher costs associated with the servicing, and we’re very concerned about it."
The four banks control 56 percent of the market for the contracts, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter that has covered the industry since 1984. Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors.
The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge those movements using interest-rate swaps and other derivatives. Under U.S. accounting rules in place since 1995, banks are supposed to report the value of their mortgage-servicing rights on a fair-market basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books.
Because there’s no active trading in the contracts, there are no reliable prices to gauge whether banks are valuing the rights accurately, analysts said. "It’s an accounting game," said Richard Bove, an analyst at Rochdale Securities Inc. in Lutz, Florida. "The deeper you get into the subject, the more items you find that are impossible to determine, and therefore it becomes a give up. Whatever they want to show, they show."
JPMorgan reports its third-quarter earnings on Oct. 14. Seven analysts surveyed by Bloomberg expect the bank to post a profit of $2 billion, down 27 percent from the second quarter. Citigroup, which reports the next day, is estimated by eight analysts to post a loss of $2.5 billion after recording a $4.3 billion profit in the second quarter when it sold a controlling stake in its Smith Barney brokerage.
Bank of America’s earnings are expected to drop 95 percent from the second quarter to about $165 million when the lender announces results on Oct. 16, according to the mean estimate of 10 analysts. Eight analysts estimate Wells Fargo will post net income of $2.1 billion on Oct. 21, down 34 percent from its record earnings the previous quarter.
Whether the banks will take losses as a result of any MSR writedowns in the third and fourth quarters depends on the level of their hedging. Bank of America, which lowered the value of its rights last year by $6.7 billion, still added $2 billion to its earnings as hedges outperformed the declines. JPMorgan’s hedges earned $1.5 billion more than the $6.8 billion it took in writedowns on its collection contracts in 2008.
Bank of America holds the largest amount of MSRs, with $18.5 billion as of June 30. JPMorgan had $14.6 billion, while Wells Fargo owned $15.7 billion and Citigroup $6.8 billion. The four banks don’t own most of the mortgages they service. Wells Fargo handles $270 billion of its own residential mortgages and $1.39 trillion of loans for others, according to company filings. Bank of America services $2.11 trillion of mortgages, $1.70 trillion of them for investors. Citigroup services $770 billion, including $579 billion of loans it doesn’t own.
JPMorgan, which handles $1.4 trillion of mortgages, said it services $1.1 trillion of loans for other investors. Spokesmen for the four banks declined to comment about how the rights are valued. The companies say in regulatory filings that the assets are volatile and marking them requires making assumptions about future conditions. "The valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable," San Francisco-based Wells Fargo said in its second-quarter regulatory filing.
Wells Fargo wrote up the value of its MSRs by $2.3 billion in the quarter, the result, it said, of model inputs and assumptions. The hedges it used to offset the movement of the servicing rights fell $1.3 billion, resulting in a net gain of $1 billion to its $3.2 billion second-quarter profit. New York-based JPMorgan, which wrote up its MSRs by $3.83 billion in the quarter, reported a $3.75 billion loss on its hedges, leaving it with an $81 million profit. Bank of America based in Charlotte, North Carolina, gained $3.5 billion on the increase in value of its collection contracts. The bank didn’t disclose the performance of its hedges. Citigroup, which marked up the value of its rights by $1.3 billion, also didn’t disclose its hedges.
"Nobody wants to point out that the emperor has no clothes," said FBR’s Miller. "They all took massive hedging losses over the last quarter, mainly coming out of May, when rates shot up 150 basis points, and mysteriously MSRs were written up to match those losses." A basis point is 0.01 percentage point. Banks say there is no liquid market for the securities, as the volatility of the rights has pushed some smaller firms out of the market and record delinquencies have led others to shun mortgage assets. The banks list the rights as Level 3 assets, an accounting term for securities whose value is unclear, and they rely on internal models to determine their value.
"About 75 percent of residential MSR assets are owned by 10 firms, so when you’ve got that supply-demand dynamic that changes, there’s not going to be a whole lot of trading," said Daniel Thomas, a managing director in asset sales at Mortgage Industry Advisory Corp. in New York. "When the market is dry like it is as far as trading volume, these guys have a lot of latitude for a Level 3 input valuation."
Servicing rights provide a steady stream of income. The four banks collected about $4.1 billion from fees in the second quarter. Much of that revenue, about $3.2 billion, was already accounted for in the valuations of the rights. Servicers face higher costs as delinquencies rose almost 80 percent in the last year and large banks move to implement President Barack Obama’s mortgage-modification program. Home loans 60 days or more past due climbed to 5.3 percent of loans through June 30, up from 4.8 percent on March 31 and 3 percent a year earlier, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a Sept. 30 report.
Contacting and working with borrowers who fall behind on their mortgages is time consuming and costly. Loan-servicing employees can handle as few as one-tenth the number of delinquent loans as performing loans, said Steven Horne, the former director of servicing-risk strategy at Fannie Mae who now heads Wingspan Portfolio Advisors LLC, a specialist in distressed-loan collections in Carrollton, Texas. First Tennessee Bank National Association, a subsidiary of First Horizon National Corp., saw its servicing costs rise to about $80 a year per loan from $60 a loan a year earlier as delinquencies and defaults rose, said David Miller, head of investor relations at the bank.
While higher servicing costs and falling mortgage rates lower the value of the rights, the weak economy can push them higher. Borrowers who owe more than their home is worth or who have lost their jobs are often unable to refinance, tempering the impact of lower rates on prepayments. Banks’ hedges also often benefit from lower rates. In the U.S., 26 percent of borrowers owe more than their home is worth, said Karen Weaver, global head of securitization research for Deutsche Bank Securities in New York. In parts of California, Florida and Nevada, it’s as high as 75 percent. The U.S. economy has lost about 6.9 million jobs since the recession started in December 2007.
Difficulties in refinancing mortgages during the worst recession since World War II are reflected in banks’ expectations of the life of the servicing rights. The assumed weighted average life of a servicing right tied to a fixed-rate mortgage jumped to 5.11 years as of June 30, Bank of America said in a regulatory filing. That’s up from 3.26 years at the end of 2008, following a 0.28 percentage point rise in mortgage rates. The assumed weighted average life had fallen from 5.38 years on Sept. 30, 2008, after mortgage rates dropped 0.95 percentage point in the fourth quarter.
A change in prepayment rates that would cause a 0.48 year drop in the weighted-average life of the portfolio would result in an estimated $1.43 billion decline in the value of its servicing rights, the bank said. "Either because people are underwater, which means it’s unlikely they are going to jump out of that mortgage, or they just aren’t moving around as much, those mortgages are going to last a lot longer, and that would help the valuations," said Ray Pfeiffer, chairman of the accounting department at Texas Christian University’s Neeley School of Business.
The volatility of the rights and the cost of hedging them have led First Tennessee Bank to cut more than half of its MSR holdings, which included contracts to service about $100 billion of mortgages at its peak in 2008. "The underlying cash flow of the servicing business is pretty good, the fees relative to the servicing costs are actually fairly attractive," Miller said. "It’s a very difficult asset to hedge, and that’s one of the things that makes that business, in our mind, less attractive."
State Budgets Get 'Boost' from Clunkers
Struggling states and towns got a dose of badly needed money this summer from a Cash for Clunkers program that poured hundreds of millions of dollars of tax revenue into their budgets. Now, like the auto industry, recession-ravaged governments are seeing revenue fall off as car buyers take a breather from the frenzied sales of July and August. That means less money for schools, roads, public safety and other projects that get much of their funding from sales tax collections.
And while officials welcomed the shot in the arm, the extra clunkers money won't come close to filling the gaping holes in their budgets or do much to solve the worst revenue downturn in decades. "It is chump change," said David Zin, an economist with the Michigan state senate's fiscal agency. State and city officials say their budget problems are too severe for one government program to fix.
"Fifty-thousand is not to be sneezed at," Dean Rich, finance director of O'Fallon, Ill., said of the city's expected tax gain from its 16 car dealerships. But it's not enough to prevent a job freeze and cuts to capital projects for the town of 29,000 people. "It's not the windfall that is going to fix the $1 million shortage we have this year," he said.
Like most governments, O'Fallon suffered during the recession as people facing job losses, reduced pay, lost homes and general unease over the economy snapped their wallets shut. That means big drops in sales tax, which makes up around half of many state budgets. Sales of cars and trucks, big-ticket items with high price tags, are a big component of sales tax collections.
Cash for Clunkers held some promise — customers bought nearly 700,000 new vehicles during late July and August, taking advantage of rebates of up to $4,500 on new cars in return for trading in their older vehicles.
The program ended up tripling the size of its original $1 billion price tag due to its broad popularity. For government budget offices, that represented some rare good news. The auto forecaster Edmunds.com estimated that the average clunker sales price was $26,321, meaning roughly $18 billion worth of new vehicles were sold under the program. Multiplied by the average combined state and local sales tax of 7.5 percent, the total tax bill amounts to a loose estimate of $1.36 billion.
But here's some perspective — the budget shortfall of Michigan alone, the symbolic heartland of the U.S. auto industry, amounts to $2.8 billion. And it pales in comparison to the $240 billion that states collected in total general sales taxes in 2008. "That's more than a drop in the bucket ... but not much more for state budgets," said Robert Ward, director of fiscal studies for the Rockefeller Institute of Government in New York.
The taxes brought in by clunkers offered a summer shot of adrenaline for most states. The funds — often earmarked for school aid, highway repairs and law enforcement — came at a time when they were struggling with big shortfalls. Kentucky reported that clunkers' taxes propped up its Road Fund, which supports the state's network of roadways. Motor vehicle usage taxes grew 11.4 percent to $36 million in August, helping keep the fund flat for the month. The state estimates it can now afford to see receipts fall more than 4 percent for the rest of fiscal year and still meet its budget forecasts.
Legislative estimates in Michigan show the state may have taken in $39 million from Cash for Clunkers. About a third of that money is devoted to education. Massachusetts reported that motor vehicle sales tax revenue rose nearly 36 percent in August from a year earlier, higher than the state's monthly target. That gain, combined with a rise in the overall sales tax that month, pushed vehicle tax collections above the monthly goal.
The extra money may be a help, but state budget officials say it's minor compared with their huge problems. Kentucky officials have warned that until unemployment improves — about 11 percent of state residents are now jobless — tax revenues will remain in the doldrums. In Michigan, where the state sales tax is the major source of aid for schools, lawmakers proposed cutting $218 per pupil from the aid the state government gives to local school districts. That's despite the clunkers money and extra vehicle sales tax revenue from laid-off auto workers who got vouchers for new cars as part of their severance. Sales tax collections are still down 9 percent.
Auto sales nationally fell 41 percent from August to September, a drop caused largely by people who would have normally waited a few months to buy a new vehicle rushing in to take advantage of the federal program's big rebates. That hangover showed up in Massachusetts' sales tax collections last month, which were 5 percent below forecasts. That worries Robert Bliss, a spokesman for the state revenue department. "Has the pool been drained as a result of this program for the next couple of months? That is the question," he said.
California Budget Is Already in the Red 10 Weeks After Passage
California Governor Arnold Schwarzenegger will know within a month whether a $1.1 billion drop in revenue collections is part of a growing budget shortfall or an isolated event, his budget spokesman said. Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.
"The culprit here appears to be estimated quarterly personal income tax statements," H.D. Palmer, the governor’s budget spokesman, said yesterday. "The numbers are cause for concern, but the issue now for us is to determine if this is a one-time event or whether it has more long-term implications." The latest figures show that California is facing resurgent fiscal strains brought on by the U.S. recession. Since February, Schwarzenegger and lawmakers have cut $32 billion from spending, raised taxes by $12.5 billion and covered $6 billion more with accounting gimmicks and borrowing. Even with those actions, state budget officials predict an additional $38 billion in deficits in the next three fiscal years combined, including $7.4 billion in the year starting July 1.
Schwarzenegger must present a budget for the coming fiscal year in January. The state’s Franchise Tax Board will deliver new data to the governor in November. The budget news comes as the most populous U.S. state prepares to sell as much as $15 billion of bonds in the next nine months to refinance debt and fund public-works projects, and as a surge in fixed-rate municipal issuance sent benchmark rates up by the most in almost four months.
California, already the largest borrower in the municipal market, may offer $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, state Treasurer Bill Lockyer said. The exact sale amount hasn’t been decided. "If the market is inhospitable, we won’t go," Lockyer said in an interview yesterday. "We’ll just have to wait and see how the feelings are when we get ready to think about it again."
Additional bond sales by California would follow an offering of $4.1 billion of general obligation bonds this week. The state was forced to scale back the size of the deal by almost $400 million as benchmark yields surged. The yields climbed after gains in the tax-exempt market last week pushed them to a 42-year low. California’s sale follows a two-month rally in municipal bond prices, fueled by a record flow of money into mutual funds that outweighed lingering fiscal strains on localities, said Craig Elder at Milwaukee-based Robert W. Baird & Co.
U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since the period ended Sept. 18. Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves. California, a state that’s been among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.
Even after increasing what it would pay, California still borrowed more cheaply than during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April. "Everybody thinks there’s still an appetite for California bonds," Lockyer said. "There’s certainly a continuing need for long-term investments in schools, high-speed rail, stem-cell research centers and so on."
Appliances Get Rebates
Missed out on "cash for clunkers?" Don't worry, there's a new government program on the way. The Department of Energy's $300 million "cash for refrigerators" rebate program, meant to spur the purchase of energy-efficient refrigerators and other appliances, will take effect in the coming months.
The program doesn't require a trade-in of old appliances. Instead, customers will receive a rebate on the purchase of a qualifying new Energy Star-rated appliance, regardless of what happens to their old one, says Department of Energy spokeswoman Chris Kielich. In many cases, the store where you purchase your new appliance will remove the old one, she says, and some states have recycling programs.
Guidelines and criteria, including eligible purchases and rebate amounts, are determined by each state. States have to submit their detailed plans for how the program will work by Thursday. The rebates should be available for consumers by the end of the year or the beginning of 2010. For more information, check your state energy office Web site. For a list of state energy officials, go online to energy.gov/ InYourState.htm.
The 'Democratization of Credit' Is Over -- Now It's Payback Time
Karen King owes nearly $36,000, more than she's ever earned in a year. All day long, bill collectors call. She hunts for a second job, sometimes skips meals, and stays with other family members at a grandfather's crowded apartment, trying to get out of debt and turn her life around. She largely holds herself at fault. "Years ago, I lived for now. It was so stupid," the 28-year-old says. "It's depressing, but I can't live that life anymore." Now, she says, "I basically want to live for the future."
The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent. But the financial crisis and recession have reversed what some economists dubbed the "democratization of credit," forcing a tough adjustment on both low-income families and the businesses that serve them.
"We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans," says Ronald Mann, a Columbia University law professor. Now, "it will be harder for families at the bottom of the income ladder to get credit cards," he says.
The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show. For families with incomes between about $20,500 and $37,000, the ratio of debt to assets rose to 18.5% in 2007 from 14.4% in 1998 -- more sharply than the increase among the overall population -- according to the Fed's Survey of Consumer Finances.
In addition, the chances of default and delinquency on home mortgages are higher among lower-income households, according to data from Equifax and Moody's Economy.com. The democratization of credit began decades ago. Federal legislation in the late 1970s required banks to avoid discriminatory lending and meet the needs of local communities, spawning a wave of home buying and entrepreneurship in lower-income neighborhoods. The rate of homeownership in families with incomes in the bottom two-fifths rose to nearly 49% by 2001 from below 44% in 1989, according to Fed data analyzed by Mr. Mann at Columbia.
Credit-card borrowing took a similar path. One cause was a 1978 Supreme Court decision that let banks charge whatever interest rate was legal in the state where their card operation was headquartered. The ability to charge higher rates made it more profitable to offer cards to risky borrowers. Adding oomph to both credit-card and mortgage lending was the growth of markets where lenders could sell their loans. By 2007, 35% of Americans in the bottom two-fifths of income had a credit card with a balance, up from just over 21% in 1989. And use of these cards increased. The median balance on the cards, adjusted for inflation, grew 180% over that period for people in the bottom fifth of income and 80% for those in the next higher fifth.
When the recession struck, banks that had eagerly wooed new credit-card customers reversed course. "Rather than keeping accounts that have high loss potential and limited revenue opportunity, the mission becomes to close out those customers' active lines and drive them off the books," said a report from TowerGroup, a research firm. By June 2009, banks were closing credit-card accounts at a rate of 14% or 15% annually, double the rate of a year earlier.
Government policy, in some ways, has reinforced lenders' business imperative to pull back. A new credit-card law limits banks' freedom to raise interest rates without 45 days' notice. Anticipating this and other changes, card companies took aim at delinquent accounts and shed customers deemed most at risk of default, says Chris Stinebert, president and chief executive of the American Financial Services Association, a trade group. "Banks and credit issuers are looking at their own debt and trying to collect as much as they possibly can," he says.
Backers of the card legislation say one goal is to erect some obstacles to both the lending and the borrowing excesses of recent years. Treasury Secretary Timothy Geithner, testifying before Congress in July, said: "We now know that millions of Americans were...unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education." All this means a new reality for consumers like Ms. King. Most of the credit cards she had were maxed out by 2004. She would sometimes just let the bills pile up and not pay the minimum. "I would start paying it, and then my sister almost got evicted from her old apartment, or my grandfather decided he couldn't pay the rent. They needed help," she says.
Later, the store cut her work hours. As she fell further behind, issuers canceled her credit cards and handed the debts over to collectors. Ms. King's credit score slid to 576, a level that deems her a high-risk borrower. Last fall, wanting to buy gifts for her mother and sister and clothes for a young niece, she applied for credit and was rejected at Macy's and Dress Barn, finally getting a card with a $250 limit at the Children's Place.
Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate's degree from a community college -- loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather's two-bedroom apartment, where her mother, uncle and sister also live. Ms. King's father died when she was four, and her mother reared her and two siblings. A basketball star in high school, she was the first in the family to pursue higher education. She got her first credit card when she began college and was working at a fast-food restaurant. But, she says, she never learned how to mind a budget.
Legislation passed this year will require that when banks issue a credit card to someone under 21, a parent or guardian must co-sign and have joint liability. Out of college and working at the shoe store, Ms. King kept up a busy social life, eating out several times a week and going to movies -- even as the collectors called. But she lost the shoe-store job in January, and then learned that a prospective new employer had rejected her after running a credit check. Fearing that her credit record would trip her up again and again, she resolved to fix her financial mess.
Gone are dinners at Red Lobster and Olive Garden and purchases like new basketball shoes. She has a part-time job as a tour-bus driver that pays $13 an hour plus tips. She held a second part-time job, in telemarketing, for several months, but it was on suburban Long Island, and getting there, using both the subway and a commuter train, finally became too much. She now is looking for a second part-time job closer by. One day, when the subway to her tour-bus job was rerouted, she had to take a taxi. She watched the meter anxiously the whole way, groaning when she had to hand over a $12 fare. With the aid of a financial counselor provided by a nonprofit, Ms. King is applying triage to her debts. "First, I want to take care of all the little things," she says, "and then the student loans."
When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person's credit report when it is settled for a partial payment. She rejected any idea of a bankruptcy filing for the same reason. "It takes forever to come off" the credit report, she says. To help people like her, several American cities have added financial-counseling centers. In New York, their clients' average debt is $18,000, and half have incomes under $10,000. Counselors work with families to follow a budget, imposing choices they may not have had to make in years.
On a warm day, Ms. King ducked into a bodega, H&M Madison Express. She allowed herself a bottle of water, skipping a snack, unlike in the old days. Decisions like that add up, said the bodega's manager, Hekmat Mustafa. Until 11 months ago, he accepted credit cards, but with fewer customers using them he stopped, to avoid a monthly fee and small fixed fee on each tiny purchase. "The rise I see now is in food stamps, even from teenagers," Mr. Mustafa said. The number of food-stamp recipients was up 22% in June from a year earlier. As he spoke, two customers walked in, both to buy individual cigarettes for 50 cents. Not long ago, he said, they would have bought a pack, for $9.
At the other end of the retailing spectrum, Sears Holdings Corp. last year began promoting its layaway program to enable credit-deprived families to continue to shop. In Ms. King's world, she says, "all of my friends are going through the same thing I am." It looked that way at a cookout she held in late summer -- potluck, to save costs. Her younger sister, Janice, said she was also awash in debt, from medical expenses and a bad shopping habit. She has a part-time job at a supermarket. Their mother, also named Janice, left her apartment amid mounting utility bills and moved in with her father and daughters. She is trying to pay off $5,000 of debt so she can rebuild her credit and get an apartment of her own.
A 22-year-old friend, Norman Broggin, lost his job at the same shoe store as Ms. King in the spring. He said he had no money to socialize anymore. Looking around at the laughing group, he said it was the first time they had been together in a long while. Before, "we would hang out every weekend," he said. "Get a drink at a nice bar, eat dinner at a nice restaurant. We don't do anything anymore." Some are turning to wherever they can for credit. A publicly traded pawnshop chain, EZCorp., reported a 37% rise in revenue in the second quarter. "With credit limited and other options disappearing, there are people looking for somewhere they can get emergency cash," said David Crume, president of the National Pawnbrokers Association.
Cash-strapped workers have long obtained advances through "payday loans," available at storefront lenders for fees that equate to high annual interest rates. Even that move is not so easy now. "More customers are walking in the door, but turndowns are up," said Steven Schlein, a spokesman for the payday-loan industry's trade group, the Community Financial Services Association of America. Federal Reserve data show that the use of credit cards has been eclipsed by use of debit cards, which don't entail a loan. A counselor advised Ms. King to use her debit card for purchases as she tries to rebuild her credit score.
Sometimes, in spare moments between work and commuting and budget calculations, Ms. King flips through a photo album that records her old life: house parties, birthdays, pro-basketball games. "I was a social person. I had interest in a lot of things," she says. "I had dreams. Now I'm just paying off the past."
Failures of Small Banks Grow, Straining F.D.I.C.
A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009. In what has become a ritual, the Federal Deposit Insurance Corporation has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank.
While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves. Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy.
Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red. The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses. The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners.
In some cases, they tighten lending and make it harder for longtime customers to obtain loans or favorable terms. In other cases, managers of the new bank make other changes, like ending offers for high-interest certificates of deposit and calling in certain lines of credit. In the longer term, some new owners are likely to close branches of the bank they have acquired in order to cut costs.
"In the near term, bank failures can be painful," said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. But a bank that is teetering on collapse is not going to lend, she said, and "that’s not good for the economy." Regulators expect closures to ripple through hundreds of small banks over the next couple of years, especially in the Midwest and Southeast, where lenders have been hard hit by the recession.
These banks loaded their balance sheets with loans to home builders and other property developers to make up for lost business in credit card and mortgage lending that bigger competitors wrested away. They eased their lending standards during the boom years and made big bets on new housing developments, strip malls and office projects. Now, many of those deals are falling apart, and the lenders are scrambling to raise capital to cushion the losses.
"These banks were big enough that they could do loans that were fairly sizable," said John R. Chrin, a former investment banker who is now an executive in residence at Lehigh University. "If they go bad, they are toast." The pace of bank failures is expected to accelerate in the coming months. There were just 25 bank failures in 2008 and just 10 in the five previous years. But in September alone, regulators took over 11 banks in nine states that were saddled with soured commercial real estate loans, from Corus Bank, a $7 billion construction lender based in Chicago that financed projects across the country, to Brickwell Community Bank in Woodbury, Minn., which had just a single branch and $72.6 million in assets.
Three others were taken over this month, including Warren Bank, a small lender just outside Detroit. Regulators swept into the offices on a recent Friday night after brokering a sale to Huntington Bancshares of Ohio, a regional bank with a big presence in Michigan. By Saturday morning, Huntington had taken control of the bank’s computer systems, started reassuring depositors and placed vinyl signs with its name outside some of the Warren Bank branches. Even though the process went smoothly, customers still found it unnerving.
"People expect companies to go out of business, not banks," said James R. Fouts, the mayor of Warren, Mich., whose working class city of 140,000 has had a front row seat to the collapses of General Motors and Chrysler. "That is something that you expect to hear about in the Great Depression, and it further exacerbates the feeling that financially, the country is not yet in stable shape."
The banking system may also be facing a long recovery. About $870 billion, or roughly half of the industry’s $1.8 trillion of commercial real estate loans, now sit on the balance sheets of small and medium-size banks like these, according to an analysis by Foresight Analytics, a research firm. For most of the banks, this represents the biggest and riskiest part of their loan portfolio, since they lack the trading streams and fee businesses of their larger rivals. And as a group, small banks have written off only a tiny percentage of the losses that analysts expect them to incur.
In fact, applying only the commercial real estate loss assumptions that federal regulators used during the stress tests for the big banks last spring, Foresight analysts estimated that as many as 581 small banks were at risk of collapse by 2011. By contrast, commercial real estate losses put none of the nation’s 19 biggest banks, and only about 5 of the next 100 largest lenders, in jeopardy.
Even Citigroup, the biggest and most troubled of the banks, has a relatively small portion of its loans tied to commercial real estate and may begin to recover faster than other rivals. Gerard Cassidy, a veteran banking analyst, said the problems call to mind the wave of small bank failures in Texas and New England two decades ago during the savings and loan crisis — only on a national scale. Back then, regulators closed more than 700 lenders in those regions. Today, Mr. Cassidy projects that as many as 1,000 small banks will close over the next few years and that their losses will be more severe. "It’s a repeat on steroids," he said.
But Ms. Bair said the savings-and-loan crisis far surpassed the current situation. "We aren’t anywhere close to that today, and based on current projections, I don’t think we will get near that pace," she said. Even if hundreds of banks collapsed, they would not threaten to bring the financial system to its knees. Together, the 8,176 smallest banks control just 15 percent of the industry’s $13.3 trillion in assets. And thanks to the expansion of the government’s deposit insurance program, regulators also appear to have squelched the threat of bank runs that brought down IndyMac Bank and Washington Mutual last year.
Consumer deposits are now insured up to $250,000 per account, and the F.D.I.C. offers unlimited coverage on noninterest payroll accounts used by businesses. "We’ve passed the panic stage," said Frederick Cannon, the chief equity analyst at Keefe, Bruyette & Woods in New York. What is more, community bank supporters say the bulk of their institutions will emerge from the crisis stronger. "The community banks are picking up market share," said Camden R. Fine, the head of the Independent Community Bankers of America. "People are angry with all the shenanigans on Wall Street," he said. "They believe their money stays local when they put it in a community bank, rather than sent off to Never-Never land."
Elizabeth Warren's Oversight Panel Says Obama Plan Won’t Slow Foreclosures
A day after the Obama administration proclaimed significant progress in its effort to spare troubled homeowners from foreclosure, an oversight panel on Friday sharply criticized the program and declared it would leave millions of Americans vulnerable to losing their homes. In a report mild in language but pointed in substance, the Congressional Oversight Panel — a watchdog created last year to keep tabs on taxpayer bailout funds — said the administration’s program would, "in the best case," prevent "fewer than half of the predicted foreclosures."
The report rebuked the administration for failing to shape a program that addressed the most significant engines of the foreclosure crisis — soaring joblessness and exotic mortgages with low introductory interest rates that give way to sharply higher payments over the next three years. Many of those mortgages are too large to qualify for modification under the administration’s plan. People who lose their jobs often lack enough income to qualify for relief.
The administration’s plan appears "targeted at the housing crisis as it existed six months ago, rather than as it exists now," asserted the oversight panel in its report. "The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted."
In a telephone briefing with reporters, the oversight panel’s chairwoman, Elizabeth Warren, said the administration’s housing program was so limited that it was unlikely to keep pace with the growing wave of foreclosures. "Even when Treasury’s programs are running at full speed, foreclosures are estimated to outpace modifications by about two to one," Ms. Warren said. "It simply isn’t clear that the programs in place will do enough to tame the crisis and have a significant impact on the broader economy."
The Treasury acknowledged that its anti-foreclosure program was limited, with the effect of rising unemployment not fully checked. But the department said other relief efforts, like extended jobless benefits and continued health insurance for people who lose work, were better suited to alleviating economic distress than the housing program. "In developing this program, it was critical that we address challenges that could be solved quickly with the tools available to us to ensure the most effective use of taxpayer money," said Meg Reilly, a Treasury spokeswoman.
The administration’s decision to limit the cost of its one program aimed at helping homeowners could become more contentious as the foreclosure crisis grinds on. Populist anger has flashed over the rescues of major institutions including Citigroup and the American International Group — the most prominent components of a $700 billion taxpayer-financed bailout — while homeowners struggle. "These Treasury people are all from Wall Street, and they’re not doing anything but protecting Wall Street," said Melissa A. Huelsman, a Seattle lawyer who represents homeowners fighting foreclosure. "They don’t care in the least about protecting homeowners."
When the Obama administration began its $75 billion Making Home Affordable program in March, it said the plan would spare as many as four million households from foreclosure. On Thursday, Treasury announced that 500,000 homeowners had since had their payments lowered on a trial basis, celebrating this as a milestone. But the report from the oversight panel directly challenged the administration’s characterizations. Most prominently, the panel had grave uncertainty about whether large numbers of the trial loan modifications — which typically run for three months — would successfully be converted to permanent terms.
As of the beginning of September, only 1.26 percent of trial modifications that had made it through the three-month trial period had become permanent, the report found. Of course, very few of those trial loans had reached their three-month expiration because the program only recently began processing large numbers of applications. As of Sept. 1, the Obama plan had produced 1,711 permanent loan modifications. Some homeowners complain they have received trial modifications only to have them canceled for what seem dubious reasons — checks sent but supposedly never received, documents once in the file but suddenly missing.
"We’re on the phone arguing with mortgage companies every day," said Dan Harris, chief executive of Home Retention Group, a company that negotiates with mortgage companies for loan modifications on behalf of homeowners, adding that trial modifications for four of his clients had been canceled over the last month. "It’s incredible." Major mortgage companies say they have significantly increased staffing to better manage the flow of paperwork, while notifying customers of the need to send in fresh documents to make their trial modifications permanent. But the companies offer no assurances that a large number of trial modifications will indeed become permanent.
"The process is too new," said Dan Frahm, a spokesman for Bank of America. "We don’t know the number." He estimated that 15 percent to half of all trial modifications would fail to become permanent. The Treasury expressed hopes that a newly streamlined process that allowed borrowers to submit documents to mortgage companies more easily would help make large numbers of trial modifications permanent. "We are intent on working with servicers to ensure that eligible borrowers receive permanent modifications," said the department spokesperson, Ms. Reilly.
The oversight panel’s report expressed chagrin that the vast majority of loan modifications did not lower loan balances, leaving many homeowners still "under water," or owing more than their homes were worth. This tends to lower all property values, the report noted, because underwater borrowers have less incentive to care for their homes, and greater reason to stop making payments and default.
An Obama administration official who spoke on condition of anonymity, citing a lack of authorization to speak publicly, said the Treasury would have preferred that the program focused more on writing down principal balances but ultimately opted against it because "that would make it significantly more expensive to the taxpayer." In Wauwatosa, Wis., Theresa Lutz, 47, has been seeking to lower the payments on her home for several months. She is a graphic designer whose working hours were cut last summer. In September, her employer cut her salary by 6 percent. That has made it difficult for her to pay her monthly mortgage of $1,307.
As Ms. Lutz described it, her mortgage company, Wells Fargo, initially agreed to lower her payments. But then, last week, the bank informed her that she would have to come up with a fresh $3,000 to compensate the investor who owned her loan. A Wells Fargo spokesman, Kevin Waetke, said that information had been conveyed "in error" and "the customer has been notified that payment does not need to be made."
As Ms. Lutz struggled to clarify her agreement with Wells Fargo, she expressed dismay at news of the oversight panel’s report, and its finding that not enough help seemed to be on the way. "It looks to me like Wall Street is too invested in our government," she said. "Big business is winning out over the average person."
Mortgage modification program hits initial target
Federal officials say the Making Home Affordable program reached its goal of 500,000 more than three weeks ahead of schedule.
The often-criticized government program to help homeowners avoid home foreclosures has reached its initial goal for modifying mortgages -- after the Obama administration started prodding banks in July to move more quickly in easing loan terms. But it might be too little too late to stem the tide of foreclosures. A government oversight report to be released today expressed doubts that the administration would reach its overall objective of preventing 3 million to 4 million foreclosures, much less keep many of those who modified their mortgages from losing their homes.
Federal officials said Thursday that the Making Home Affordable program reached its initial target of 500,000 trial mortgage modifications more than three weeks ahead of schedule. The result indicated that despite their early sluggish response, banks and mortgage servicing companies could have pushed modifications through the program more aggressively since its launch in March, said Ken Stein, associate director of the California Reinvestment Coalition, an advocacy group for homeowners. "They're improving and that's good, but the numbers are still insufficient," he said.
Industry officials, however, said banks already were modifying loans on their own -- about 2 million since late 2007 through the industry's Hope Now program -- and they pointed out that it took time for the government initiative to get up and running. "This is a new program that had a lot of kinks," said Scott Talbott, the top lobbyist for the Financial Services Roundtable, which represents large financial institutions. "And now it is up to speed, and I expect the pace to continue."
But in a report today, the Congressional Oversight Panel monitoring use of government bailout money raised concerns about the effectiveness of the $75-billion Making Home Affordable program. "It isn't clear the program in place will do enough to tame the crisis," said Elizabeth Warren, the panel's chairwoman. The report also questioned whether the modifications would put homeowners into "long-term stable situations."
Analysts echoed those worries, saying there's a long way to go to get those 500,000 homeowners into long-term restructured mortgages that they would be able to afford. And although the program is helping ease the foreclosure crisis, it's unlikely to end it. "The [program] is kicking into a higher gear, but not high enough to forestall a continued increase in foreclosures and more house price declines," said Mark Zandi, chief economist at Moody's Economy.com.
Borrowers whose mortgages are modified tend to default on the new terms at a high rate, he said. Of the estimated 4.5 million homeowners in foreclosure or headed there with mortgages 90 days or more delinquent, the program ultimately will save only 1 million of them, Zandi predicted. Obama administration officials said they understood that foreclosures continued to rise and intended to keep the pressure on mortgage companies. But they touted the improved participation in the program.
"We believe we are absolutely moving in the right direction and have reached an important turning point in our modification efforts . . . but we are nowhere near the finish line yet," Housing and Urban Development Secretary Shaun Donovan said. Officials from HUD and the Treasury Department met Thursday with top mortgage servicers in Washington to discuss improving responsiveness to borrowers and the efficiency of the program.
The program was designed to ease foreclosures by helping struggling homeowners modify their mortgages, such as by cutting interest rates and extending the length of the loans. But government guidelines and other rules weren't released right away, and banks shied away from the program even after it was refined. This spring, the government added cash incentives for borrowers and lenders to participate. And in July Donovan and Treasury Secretary Timothy F. Geithner pushed the chief executives of mortgage servicers to increase staffing, streamline application procedures and improve their customer response.
Geithner said the three-month trial modifications are being added at a faster rate than homeowners are becoming eligible for the program. Administration officials said that about 40% of the nation's estimated 1.2 million eligible homeowners were taking part. The latest comprehensive data, as of Sept. 30, showed that JPMorgan Chase & Co. had modified the most mortgages, 117,196, followed by Bank of America Corp.'s 94,918 and Citigroup Inc.'s 68,248. The pace of loan modifications has nearly doubled since the end of July. But the 487,081 trial modifications as of the end of September amount to just 16% of the eligible delinquent mortgages.
Help From Fannie and Freddie for Foreclosed Homes
Home buyers are not accustomed to getting much help with their mortgage financing; generally, they’re happy just to get a loan closed. At least one group of borrowers, though, could get a break. Fannie Mae and Freddie Mac, the government-controlled companies that buy mortgages in bulk from lenders, are offering financing incentives for buyers of foreclosed homes that Fannie and Freddie own.
Home buyers have until Oct. 30 to apply to take advantage of Freddie Mac’s SmartBuy program, which began in July and offers up to 3.5 percent of a home’s sale price to help cover closing costs. To qualify, the home must be a principal residence and must be chosen from Freddie Mac’s HomeSteps Web site for its foreclosed properties (homesteps.com/homeshoppers.htm). Loans must close by year’s end. The HomeSteps properties also include two-year warranties on major appliances and electrical, plumbing, air-conditioning and heating systems.
HomeSteps includes relatively few properties in New York City and the surrounding counties, however, in part because Freddie Mac accepts few loans greater than $417,000. Last week, for instance, the site had no homes in Manhattan and five in Westchester County, including a three-bedroom apartment in Yonkers and a four-bedroom home in South Salem, both listed for $300,000. (There were a few more homes in New Jersey and in Fairfield County, Connecticut.)
Nor does the Fannie Mae program, HomePath.com, have many foreclosed homes for sale in the greater New York region. A one-bedroom apartment on West 110th Street, selling for $378,000, was the site’s only Manhattan listing last week. (Thirteen homes were available in Nassau County, by contrast.) The incentives for buyers in Fannie Mae’s ongoing program are even more aggressive than those offered by Freddie Mac. Through participating lenders, Fannie will offer mortgages to buyers who make a down payment of 3 percent, and these buyers do not have to secure private mortgage insurance, or P.M.I., as they would when doing business with nearly any other lender.
A Fannie Mae spokeswoman, Amy Bonitatibus, said the company "already owns the risk" on the property. "So buyers can save a couple hundred dollars a month in insurance," she said.
Fannie Mae will often offer closing cost assistance to buyers, so long as they negotiate for it. Unlike Freddie Mac’s, Fannie’s assistance level is not capped. Under the program, the average homeowner has received payments equivalent to 3.75 percent of the loan’s value.
Until June, Fannie Mae also offered to pay for home repairs during the borrower’s first six months in the property, up to $3,000. The company is considering whether to renew, or change, that program. Also, in areas hit hardest by the economic downturn that have qualified for federal financing through the National Stabilization Program, which helps distressed communities, Fannie Mae may discount its foreclosed properties by up to 15 percent. Most of Fannie Mae’s foreclosure incentives are offered to buyers who will use the property as their primary residence, or so-called public entities like Neighborhood Housing Services and other organizations that rehabilitate properties and sell them to owner-occupants.
Banks, meanwhile, have been leery of offering financing incentives on foreclosed homes. But Brad Geissen, the chief executive of Foreclosure.com, which, among other things, posts listings of foreclosed homes, said that in his discussions with banking executives, banks appear ready to offer similar programs. "We’re starting to see banks loosen up on financing and consider a number of different incentive programs to move their inventory," Mr. Geissen said. "I know a number of banks who are getting ready to release programs like this, between now and the end of the year."
Fed Buys Notes Fannie Mae Sold Yesterday as Part of Purchases
The Federal Reserve bought $170 million of two-year notes sold yesterday by Fannie Mae, the quickest purchase after issuance of benchmark bonds from the company or similar institutions since the central bank began acquiring so-called agency debt. The purchase was part of $2.6 billion of buying today, the New York Fed said on its Web site. The central bank listed the notes among ones it would accept bids for yesterday, about 90 minutes after Washington-based Fannie Mae announced the results of its $5 billion sale in a statement.
The Fed last month said it would begin buying "on-the- run" agency debt, or the most recently issued notes in different maturities. It has purchased $136.3 billion of Fannie Mae, Freddie Mac or Federal Home Loan Bank bonds since December, according to data complied by Bloomberg. The $200 billion program was extended to March 31, from yearend, by the central bank last month. David Giradin, a spokesman for the New York Fed, didn’t immediately return a telephone message seeking additional comment.
High Court to Hear Two Big Finance Cases
Two major court cases that could rock Wall Street.
The last time a Supreme Court decision roiled the stock markets was December 13, 2000. Remember Bush versus Gore and the hanging chads? This year, another High Court verdict has that potential. Plaintiffs in a blockbuster separation-of-powers case are challenging the constitutionality of the Public Company Accounting Oversight Board, a regulator created under the Sarbanes-Oxley Act passed in 2002 after the Enron scandal. The PCAOB oversees accounting firms that audit public companies.
If the Supremes find the PCAOB unconstitutional, look out below! Because Congress didn't provide a way to address the PCAOB separately from Sarbanes-Oxley, the whole act could end up being viewed as unconstitutional by lower courts. Congress would then have to revisit the law, rather than crafting a fix specifically for the PCAOB. Stocks initially might soar because Sarbanes-Oxley imposes significant costs on publicly traded companies. Afterwards, however, the markets might have second thoughts: Congress could make the law even tougher.
Fittingly, the High Court is scheduled to hear oral arguments in "Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Board and the United States of America" on December 7. A decision would come months later. The Free Enterprise Fund is a nonprofit, libertarian organization that has long opposed Sarbanes-Oxley because it says that Sarbanes-Oxley imposes too many costly regulations on American companies, hobbling them in highly competitive global markets. Beckstead and Watts is an accounting firm based in Henderson, Nev., that audits small, publicly traded companies.
The PCAOB is empowered to regulate accounting firms that audit public companies. The law states its board members and employees are not part of the federal government. Congress wanted them to be free from political meddling. But the PCAOB, according to the plaintiffs, has the unchecked power to tax the accounting firms to fund its operations. "The President is given all executive power under the constitution -- yet no power to regulate this powerful agency which exercises executive powers," says Jones Day lawyer Michael Carvin, lead counsel for the plaintiffs.
The PCAOB falls under the purview of the Securities and Exchange Commission, an independent regulator whose chairman is appointed by the president. A lower court ruled against the plaintiffs, and the court of appeals affirmed the ruling. They said there was no violation of the constitution because the PCAOB board members are "inferior officers" appointed by the SEC. The one dissenting appeals judge concluded that the Act violates the separation of powers because the PCAOB is an independent agency whose board members are removable for cause only by another independent agency -- encroaching on the president's authority. Watch out for market swings if the high court remands the case to a district court for a rehearing.
Another major case could rock the profitability of mutual-fund companies by exposing them to a raft of lawsuits. In Jones v. Harris Associates, parent company of Oakmark Funds, the plaintiffs allege that the advisory fees charged by Harris were steep enough to be a breach of Harris' fiduciary duties under the Investment Company Act of 1940. Harris, which served as advisor, charged Oakmark Funds a fee of 0.88% on assets of $6.3 billion. The plaintiffs said Harris charged an institutional investor 0.45% on assets of $160 million. Charged that amount, the mutual funds would have saved up to $58 million, the disgruntled investors contend. Harris argues that it provides fund customers more services.
Since 1982, fund managers have adhered to a legal standard which advises that fees not be disproportionately larger than those charged by other fund companies. A district court sided with the funds. So did an appeals court. However, the plaintiffs complained to the Supreme Court that one appeals judge said shareholders had to prove that the asset manager misled directors about the fairness of fees. The funds are upset because another judge in the same panel did not recognize the 1982 precedent. Without this standard, they are vulnerable to lawsuits. Supporters of the plaintiffs, including state regulators and John Bogle, founder of mutual-fund giant Vanguard Group, argue in a pro-plaintiff brief that fund boards have no incentive to negotiate favorable fee deals for investors. Hmmm. ETFs, anyone?
A Home Price Rebound Isn't Necessarily a Boom
by Robert Shiller
The sudden rise in home prices suggests that the psychology of the market has shifted substantially. But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom. To a large extent, where we’re heading depends on what home buyers are thinking. Some clues are found in the annual home-buyer surveys that Karl Case, the Wellesley economics professor, and I have run for years.
For the surveys, we canvas recent home buyers in four cities — Los Angeles, San Francisco, Milwaukee and Boston; the surveys are now being conducted under the auspices of the Yale School of Management. We have just received the 2009 results, with responses from June and July. This year’s survey coincides nicely with the upturn in home prices, the sharpest change in direction we have ever seen. The data show that the Standard & Poor’s/Case-Shiller 10-City Composite Home Price Index for the United States rose 3.6 percent between April and July. While that is not a whopping increase, it followed a decline of 4.8 percent in the previous period, between January and April.
The suddenness of this shift surprised me. In my column in June, I wrote that home prices might well continue to decline for years. As of that time, the S.& P./Case-Shiller price index had fallen every month for almost three years. Add to that the prospect of continuing high unemployment and a weak economy for years to come, and the prospects for home prices did not seem rosy. But the new data are startling. Since the indexes began in 1987, the closest parallel to such a change came at the conclusion of the last housing bust, at the end of the 1990-91 recession. Home prices rose 2.3 percent from April to July 1991 after having fallen 2.1 percent from January to April that year. By July 1996, five years after that "turnaround," home prices were down 0.6 percent from their July 1991 level, and down 13.8 percent in inflation-adjusted terms.
Could the more extreme recent shift mean that home prices will just keep rising this time? Here is where our new survey results are helpful. We looked at both the long- and short-term attitudes of home buyers. In our survey, we ask, "On average over the next 10 years, how much do you expect the value of your property to change each year?" The average answer among 311 respondents in 2009 was an increase of 11.2 percent. The median response — with half above, half below — was 5 percent, also high. That sounds rather like bubble thinking.
For a home buyer who borrows 90 percent of the money to acquire a house, an appreciation rate of 11.2 percent offers an investment bonanza. By putting a small amount of money down, investors stand to make a large gain if home prices climb. That is the power of leveraging. Recently, however, home buyers have also experienced the unpleasant consequences of leverage when home prices fall. Investing in a home during the wild past few years has been like gambling in a casino: You can leave with riches or empty pockets.
In our survey data from one year earlier, when prices were falling at an annual rate of nearly 20 percent, buyers were still expressing long-term optimism. Then, the average answer to the question about expected yearly increases in home values was 9.5 percent a year, with a median of 5 percent — high figures indeed for that time. The bubble thinking is not new. Those long-term expectations may not have changed much in character, but short-term expectations certainly have. In the survey, we also ask, "How much of a change do you expect there to be in the value of your home over the next 12 months?" Here, the average answer for June-July 2009 was a 2.3 percent rise, versus a negative 0.4 percent a year earlier. That was a dramatic change.
Another survey question is this: "If you think that present trends will not continue forever, what do you think will stop them?" Respondents were asked to answer in their own words. In 2008, when the current trend was unambiguously down, people nonetheless made it clear that they thought a housing recovery would come as the recession ended, with a new president after the election, and after home prices have come back down. What has changed in 2009 is that they suddenly see this anticipated scenario as actually playing out.
An additional question pertains to short-run considerations of market timing. We have been asking respondents whether they agree with this statement: "I bought now because I felt that I had to even though I might have done better financially if I had waited." During the housing boom in 2004, only 17.9 percent agreed with that statement. That figure doubled, to 36.7 percent, when prices were dropping fast in 2008, and now has come back to 24.8 percent.
WHAT should we conclude? Given the abnormality of the economic environment, the sudden turn in the housing market probably reflects a new home-buyer emphasis on market timing. For years, people have been bulls for the long term. The change has been in their short-term thinking. The latest answers suggest that people think the price slide is over, so there is no longer such a good reason to wait to buy. And so they cause an upward blip in prices.
At the moment, it appears that the extreme ups and downs of the housing market have turned many Americans into housing speculators. Many people are still playing a leverage game, watching various economic indicators as well as the state of federal bailout programs — including the $8,000 first-time home-buyer tax credit that is currently scheduled to expire before Dec. 1 — in an effort to time their home-buying decisions. The sudden turn could signal a new housing boom, but is more likely just a sign of a period of higher short-run price volatility.
Robert J. Shiller is professor of economics and finance at Yale
IMF hears how banker's sins are paid for by the public
While I am not a drama critic I have witnessed a few economic dramas in my time and can thoroughly recommend David Hare's attempt to understand the financial crisis, The Power of Yes, at the National Theatre. For anyone wanting a dramatic explanation of the crisis which led the Queen to ask why she had not been warned, this is a tour de force. I saw it on return from the annual meetings of the World Bank and International Monetary Fund in Istanbul, where the international debt set were still trying to come to grips with the magnitude of the crisis and agonising about the so-called "exit strategy".
Since nobody has any idea where the exit is, there was quite a lot of agonising. However, your intrepid reporter can reveal that the meeting was not quite as agonising on a personal level for the British Treasury team as it was at the last Bank/Fund meeting in Istanbul, which took place in 1955. On that occasion there were riots in Istanbul (this was pre-globalisation and nothing to do with the IMF) and the Treasury team had difficulty in leaving their hotel. Sterling was under pressure and the chancellor, "Rab" Butler, later recalled: "I repeated to the domes and minarets several times the incantation that the pound… would… be steadily defended by our resources combined with stiff anti-inflationary measures."
At the time there was a plan – known as Operation Robot – to float the pound, but it was never implemented. The pressures were such that it was feared that sterling would sink deep into the Bosphorus and be swept who knew where. It took the break-up of the Bretton Woods system in the 1970s to float the pound; and its downward float in the past year or so has been quietly, and not so quietly, welcomed by those who care about the competitiveness of British industry.
The only pressure our present Chancellor, Alistair Darling, was under in Istanbul was to recognise the UK's diminished role in the world by ceding some of its voting rights on the board of the IMF. But he was having none of it. It may be almost impossible these days to pick up a financial section without being told that economic power is shifting fast from west to east, but the UK boasts of its large contribution to IMF resources and the chancellor quotes a familiar slogan: "No taxation without representation."
The need to do something about the IMF is well argued in a new report from the Group of Thirty entitled "Reform of the International Monetary Fund". Unlike the G20, which comprises leading governments from the developed and developing world and has become the key decision-making body for world economic policy, the G30 is a private body with a highly prestigious membership of past and present policymakers, as well as senior private sector members.
Stanley Fischer, one of its senior members and a former IMF official, summarises its message thus: "The current financial crisis exposed weaknesses in the effectiveness of the fund's system of bilateral and multilateral surveillance. These weaknesses are linked to the reluctance of some members to accept surveillance advice; in some important cases, member countries ignore it entirely." It doesn't name names, but the US and UK come readily to mind. The G30 wants "greater focus on international economic and financial linkages and spillovers" and urges that the IMF "better reflect changing global economic realities and relationships". But it was not just that the IMF's advice was ignored.
An even bigger problem, surely, was that the IMF was itself a champion of what has proved to be a broken economic and financial model. Now that we are left with the wreckage, the IMF is as cautious as anybody else in forecasting recovery – its projection of a mere 1% real growth on average in the advanced economies next year implies a continuing rise in unemployment – and the general consensus at the Istanbul meetings seemed to be that recovery is far from assured.
Thus, for all the talk of the supposed need to tighten policy if and when recovery is well established, one normally hawkish IMF official confided: "I've been a bit uncomfortable, personally, [with] the emphasis on 'exit strategies'." One aspect of IMF analysis that certainly sticks in my throat is when the organisation or its officials publicly lecture governments such as Britain's on the putative need to cut social security budgets to deal with deficits that have been swollen by a recession precipitated by the financial sector.
Hare's play ends with an exchange between the author and financier George Soros in which Hare asks Soros what he said to Alan Greenspan when the latter observed: "The benefits of the market are so great that you have to live with the price." Soros replies: "I said: 'Yes, but Alan – the people who end up paying the price are never the people who get the benefits'." As one central banker pointed out in Istanbul, anyone who thinks things are going nicely forgets that such stability as there is comes in response to "an infinitely bold set of measures" and, in the face of the banking crisis, "taxpayers' risk equivalent to 25% to 30% of GDP to avoid Armageddon".
It is still not clear that the commercial bankers have appreciated the rightful degree of public anger. But central bankers have. In Istanbul Paul Tucker, the deputy governor of the Bank of England responsible for financial stability, told the Institute of International Finance: "We can't continue with a regime where, to put it crudely, the downside is picked up by the taxpayer and the upside is picked up by bank shareholders and executives." Talking of downsides and upsides, I could scarcely believe, on returning to London, that Tony Blair, who gave us the downside of Iraq, is being touted for the European presidential job. The Presidency of Pentonville would surely be a meet and just end to his career.
Dutch lender DSB in central bank's hands after run
The Netherlands' central bank said Monday it has taken control of DSB Bank NV after clients began a run amid fears the regional lender might collapse. Doubts about the health of DSB, a small but well-known bank based in the north of the country, grew since the start of October as media reports questioned its solvency and clients began having problems withdrawing money from their Internet accounts.
De Nederlandsche Bank said in a statement Monday it had asked the Amsterdam District Court to put DSB under its curatorship "because of a large outflow of liquidity that brought the existence of DSB in danger in the short term." DSB's failure is the first suffered by a bank in the Netherlands since several major banks were given bailouts or taken over by the government at the peak of the financial crisis last year.
DSB told critics at the start of October it had euro1.5 billion in cash -- enough of a buffer to withstand a run on its euro4.3 billion ($6.6 billion) in deposits. Bank accounts in the Netherlands are insured by the government for the first euro100,000, and the central bank said customers would be able to pull money from their accounts using bank passes until midnight Wednesday. DSB reported net profit of euro45.5 million in 2008, down from euro55 million in 2007.
The painful bills about to wallop New Zealand's wallets
Triple whammy for motorists: Petrol and car registrations will be more expensive, and there will be less support for accident victims. Steep hikes in the price of petrol and car registrations are about to hit taxpayers hard in the pocket, as the government moves to bail out the financially troubled Accident Compensation Corporation. Wage earners will also lose hundreds of dollars a year from their pay packets, as the ACC levy rises. The government is expected to announce the "substantial increases" on Wednesday.
On Friday, ACC revealed it had posted a $4.8 billion loss for the last financial year, in what is being described as the biggest corporate loss in New Zealand's history. Cabinet will tomorrow approve a bailout plan that also aims to safeguard ACC's financial future. The proposed changes will be open to public discussion for four to five weeks before ACC makes recommendations to the government. While motorists and wage earners will shoulder the burden, the rescue package also involves paring back entitlements and getting injured workers off the compensation scheme faster. Already, ACC has cut funding for some services, such as physiotherapy. Wage earners currently pay an ACC levy of 1.7% of what they earn, up to $110,000 (any income above that does not attract a levy). That is set to rise to 2.5%.
The Sunday Star-Times understands the ACC levy for a family earning $38,000 is likely to rise by $304 a year, plus an extra $52 to register the family car and 4c a litre more at the fuel pump. If the government chooses not to increase the ACC petrol excise, which is now 9c a litre, the ACC component of registering a car, now $168, will go up even more – possibly by as much as $107. Someone on the average wage of $45,000 will pay $360 more a year to ACC, plus the extra fuel and vehicle registration costs. The ACC levy for those on $65,000 will go up about $520 a year while those earning $85,000 will pay $680 more. To soften the blow for taxpayers, the government is expected to introduce the changes gradually, with higher car registration and levies likely to be implemented next June.
ACC chairman John Judge told the Star-Times ACC's debt was worth about $3000 for every New Zealander, and it was going to take a "hard-nosed" approach – and possibly up to 10 years – to get it into a sustainable position. This would require "substantial" levy increases and legislative change to get people off the scheme and back to work quicker. "In the last five years we've lost $9b. We need to act today because this liability is like a mortgage – if we don't start paying it off tomorrow it gets bigger by $700 million-$800 million a year." Judge said ACC would not slash entitlements "but we are going to make sure that you only get the entitlements that you are due and that you need".
ACC Minister Nick Smith said the choices for the government were "pretty ugly". "It is inevitable there will be levy increases," he said. "The government's preferred approach is to get savings out of ACC operationally and out of pulling back on some of the welfare-type entitlements ... Without change, ACC is on course to go broke. "This $4.8b loss will go down in New Zealand history as the biggest corporate loss of any entity, public or private, and is actually bigger than any deficit that the government has run collectively across all portfolios."
ACC's total liabilities over the past four years has blown out from $9.4b to $23.8b, mostly due to an increasing number of claims, a widening of entitlements that could be claimed, such as self-harm, and the actual cost of meeting the claims.
Labour's ACC spokesman David Parker said the situation was not as gloomy as the government was projecting. The ACC's liabilities and costs were increasing but it was also the country's biggest insurer, and the cost blow-out could not simply be blamed on poor management. The government could soften the blow for taxpayers by extending the date for the full funding of historic claims, which were due to come into effect in 2014.
Britain's state pension system needs revolution, not tinkering
Pensions have hit the headlines again, highlighted this time by Tory proposals to accelerate the timetable for raising state pension age. They say it is necessary to fund planned increases to the meagre basic state pension. Having risen only in line with price inflation for several decades, it has fallen way behind average earnings. The 2007 Pensions Act provided for a restoration of the link with earnings inflation by 2015 at the latest, yet even before this starts the Conservatives claim it may be unaffordable.
How can this be? The changes to the state pension were part of the detailed reforms arising from the 2006 Pensions Commission report. Just three years ago ministers assured us these represented "the most radical reform of the pension system since Beveridge", and the commission itself welcomed them as "a new pensions settlement which could last". But apparently they already need to be changed. So much for long-term thinking.
The reforms were not really radical; they were a political compromise. The changes entail tinkering with the existing system instead of carrying out the complete overhaul that is needed to bring the system into the 21st century. Can we rely on politicians to rise to this challenge? Political time horizons are short-term, pensions policy long-term.
Perhaps because pensions are so important to every potential voter, politicians have been too frightened to be truly radical. But there are times when such boldness is essential. Just changing state retirement age is not the answer. Just re-tying the basic state pension to earnings inflation is not a solution either. The national insurance system has failed pensioners. Our state pension is about the lowest – and by far the most complex – in the developed world. It has also failed to cope adequately with women's work patterns. Already, just under half of UK pensioners end up having to claim means-tested benefits to avoid poverty.
We should think afresh. We need to end the confusion between pensions as a later-life social safety net and as a long-term savings vehicle. If the state provides a social welfare base, people can be encouraged to provide more for themselves. At the moment, the state pension does not provide adequate social welfare, yet mass means-testing undermines private provision.
After a lifetime of contributions, a person with a full national insurance record will be entitled to the princely sum of £95.30 in basic state pension, perhaps with a bit extra from the state second pension. This is not enough to avoid poverty. So millions have to claim pension credit and other means-tested benefits, which give them at least £130 a week. Anyone over 60 who has not bothered to save, does not keep working and has no other income can receive more than those who contributed loyally to national insurance and saved for their future. This is not a sustainable position.
We need to sweep away the mind-boggling complexity of our current system. We do not need both a basic and a second state pension, each with different qualification rules, neither of which provides adequate welfare. Far more sensible would be to introduce a simple, flat-rate basic minimum pension, set at or slightly above the pension credit level, which could take over from the existing provisions from at least age 75. The majority of over-75s are entitled to pension credit anyway, and there would be savings from scrapping the means test. The costs would easily be funded by changes such as ending contracting out, reducing the regressivity of national insurance or adjusting the age allowance.
Such a pension would avoid mass means-testing of pensioners, so they would not be penalised for having saved, as well as encouraging more flexibility around retirement. Then people can decide whether and how much longer they want to work and more easily plan for later life income. This could end poverty among the elderly, end the means test for most older citizens and would finally be fair to women. It need not even entail extra government spending. But it would require visionary courage and a commitment to the true simplification of pensions, both conspicuous by their absence in recent years.
British house prices 'have further 17% to fall'
The recent rises in house prices will prove to be a false dawn because of the broader problems facing the British economy, Fitch Ratings said yesterday. The ratings agency predicted that house prices in Britain would fall by around 30pc in total from the October 2007 peak, indicating that they have a further 17pc left to fall. The current average house price of £162,000 is 13pc lower than that peak, Fitch said. Rising unemployment, which will peak next year and remain at that level into 2011, as well as a low wage inflation and poor credit availability, will drag on house prices, the report said.
"Despite the fact that a global economic recovery is under way, the economic fundamentals do not augur well for a sustained strong recovery in the UK housing market," said Alastair Bigley at Fitch. Both Halifax and Nationwide have reported house price rises in recent months but Mr Bigley said they were being driven by a lack of supply in the market and cash-rich buyers, which was not sustainable. Fitch says the UK’s average house price-to-income ratio is likely to come down to below the long-term average, as it did during the early 1990s recession. The ratio is currently "significantly higher" than the long-term average.
But not everyone is as downbeat as Fitch even though many analysts have reservations on the pace of recovery. Howard Archer, chief UK and European economist at IHS Global Insight, said: "Despite further likely gains in the very near term, we suspect that house prices will be prone to significant relapses and will probably be no more than flat overall between now and the end of 2010." Ray Boulger, senior technical manager at John Charcol, said: "I think during the next few months there is every indication that prices are going to keep rising."
Russia Needs 15 Years to Reduce Energy Reliance, Medvedev Says
Russia will need as long as 15 years to free itself of its reliance on raw materials and become a modern economy, President Dmitry Medvedev said. "That is a perfectly plausible time frame in which to create a new economy, an economy that will be competitive with other major world economies," Medvedev said in a television interview last night. "Once a significant portion of our revenue is generated by something other than energy exports, let’s say at least 30 or 40 percent of it, then we would already be living in a different economy and a different country."
Russia entered the credit crisis with its budget and current account in surplus and with the government assuming the world’s third-biggest currency reserves would shield it from the worst of the global recession. Slumping commodity prices shattered that assumption and helped plunge the economy into its worst decline for a decade, forcing the central bank to manage a 35 percent ruble decline in the six months through January.
"I must admit that we sank below our lowest expectations," Medvedev aid. "The real damage to our economy was far greater than anything predicted by ourselves, the World Bank, and other expert organizations."
Volatile commodity prices have continued to undermine stability in the world’s biggest energy exporter. Urals crude oil, Russia’s main export blend, fell $100 a barrel between its peak in July last year and the beginning of 2009.
Energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states in the first seven months, according to the Federal Customs Service. About 30 percent of Russian gross domestic product comes from oil and gas, the government says. "Everything was okay as long as prices for energy and raw materials were high," Medvedev said. "Then those prices fell. Our economy was hit hard. Our citizens were hit hard."
Russia should pursue energy efficiency, including creation of new fuels and energy saving, develop nuclear power, information infrastructure, and produce its own medicines, the president said. Medvedev, who has called Russia’s raw material dependency "humiliating" and "primitive," said the economy will contract a "very serious" 7.5 percent this year, compared with an official government forecast for an 8.5 percent decline. The government predicted last month that the economy will return to growth in 2010.
Unemployment remains "very high," making it "a clear challenge for the president, the Cabinet and other government authorities," Medvedev said. The jobless rate fell to 7.8 percent in August, lower than previously estimated, from 8.3 percent in July on rising seasonal demand for agriculture and construction. The number of unemployed was 6 million, the Federal Statistics Service said. Russia aims to bring down inflation, which was "rampant in this country," to a range between 5 percent and 7 percent or less, according to the president. "Then we will be able to lend at normal rates," he said. "Then our citizens will be able to obtain mortgages and consumer loans at reasonable rates."
The annual inflation rate fell to 10.7 percent last month from 11.6 percent in August, according to the Federal Statistics Service. Inflation has averaged more than 14 percent a year since 1998. Russia’s goal is "to achieve a balanced budget or a budget with a minimal deficit within a year," Medvedev said. "‘All the government’s efforts and decisions should be directed toward this end." The deficit held steady at 4.7 percent of gross domestic product in the year through September as the government spent 1.35 trillion rubles ($43.9 billion) more than it collected, the Finance Ministry reported Oct. 9.
Soros says EU "wrong" to push austerity on Latvia
Billionaire investor George Soros blamed the European Union on Saturday for not doing enough to help Latvia, one of the bloc's most damaged economies, recover from the financial crisis and return to growth. The Baltic country, an EU member since 2004, is trying to meet the terms of a 7.5 billion euro ($11.06 billion) rescue package agreed with the EU and the International Monetary Fund.
Sweden, one of the bailout's main contributors, this week criticized its neighbor in a series of public comments for backtracking on promises to cut public spending. But George Soros, famous for making a fortune on currency markets, said that this approach was wrong. Without help from foreign lenders and more leniency on its budget, Latvia's currency peg with the euro would break, he said in an interview broadcast on Swedish public radio on Saturday.
"The pressure for them to reduce government spending -- the problem is in the private sector -- is the wrong kind of policy, which ought to be avoided," he said. "I think that the European Union countries ... ought to help Latvia more than they are currently doing." Asked if he thought the EU was misguided in urging austerity measures, Soros said: "Yes, I think that is the wrong policy," adding that Latvians had already made enough sacrifices to maintain their currency peg.
Foreign lenders, led by Sweden, have urged Latvia to cut public spending by 500 million lats ($1.04 billion) in its 2010 budget, but so far the country has only promised 325 million lats of cuts.
The shortfall provoked sharp criticism this week from the prime minister and central bank governor of Sweden, where banks are heavily exposed to Latvia through bad loans. On Friday, the International Monetary Fund said it had held "fruitful" discussions with Latvia about the budget. Separately, Latvia's prime minister said on Saturday that he was planning more measures to win approval from international lenders. The measures, he said, would be discussed with the European Commission next week.
How Iceland Is Coping With a Broken Economy
It's been one year since Iceland slid into the financial abyss with the failure of leading banks. The economy still hasn't recovered, but Icelanders appear to have gotten used to life in the crisis. They live more modestly now and seem surprisingly content. The prize came almost exactly a year later. The managers at Iceland's four banks -- Kaupthing Bank, Landsbanki, Glitnir Bank and the Central Bank of Iceland -- were honored for "demonstrating that tiny banks can be rapidly transformed into huge banks, and vice versa." The top brass were also lauded for showing "that similar things can be done to an entire national economy."
The satirical "Ig Nobel" prize for economics was awarded to the Icelandic Banks by Harvard University. Financial institutions that no one had heard of a year ago became household names this time last year as the Icelandic economy imploded. To recap: Iceland's small banks had vastly expanded since the middle of the decade. Hundreds of thousands of savers had put money into online bank accounts with enticing names like Icesave or Kaupthing Edge. The billions of euros and pounds came primarily from Germany, the Netherlands and Great Britain. At the same time the Icelanders got heavily involved in the international speculation business -- with dramatic results. When the American investment bank Lehman Brothers collapsed in September 2008, debts at Kaupthing, Glitner and Landsbanki multiplied fivefold. Wihtin a few days the Icelandic economy went into shock, the banks became insolvent and were put under state control. The last bank to fall was the Kaupthing on Oct. 9, 2008.
What followed were the last throes of a tiny country, which within a few days had fallen victim to the vagaries of the global financial crisis. The Icelandic Central Bank and the government did everything they could to fend off disaster, taking over responsibility for the banks and pledging to include foreign bank customers in the state deposit insurance. However, they had to give in to outside pressure, particularly from Great Britain. London first of all applied anti-terrorism legislation against what was essentially a friendly country, using the so-called Landsbanki Freezing Order 2008 to freeze the banks assets in the United Kingdom.
The Icelanders may have protested vehemently at suddenly finding themselves on a par with rogue states like Libya and North Korea. Yet Reykjavik still had to give in eventually. It agreed in the end to a plan to write off the banks' debts and in exchange to get loans from the International Monetary Fund, the European Union and other Nordic countries. The furious street protests that hounded the government from office also ran out of steam. They still continued to vent their anger with charming home videos that were widely viewed on YouTube.
And yet, one year later it is surprisingly difficult to find traces of the consequences the crisis has had on the island of fire and ice. Particularly when one thinks of the horror scenes that were played out in the weeks following the collapse of Kaupthing. Of course there is now some unemployment, something the Icelanders had little experience with up until one year ago. In the second quarter of 2009 the unemployment rate had reached 9 percent, before the crisis it had been around 3 percent. The figures weren't higher because most of the poorly paid guest workers from the former Yugoslavia and other countries, who had few legal rights, were simply sent home. Still, in comparison with other countries such as Spain or Ireland, where almost one in five is out of work, the figure is surprisingly low.
At the same time, Icelanders do feel the crisis in their daily lives: Imports from Europe have become extremely expensive, including the goods available in the country's supermarkets. Large supermarket chains like Bónus and Hagkaup have more or less doubled the prices for many popular products. Fortunately, though, currencies in other countries have suffered as a result of the financial crisis, and Icelandic companies are now buying products there. Instead of Swiss chocolate, people are now consuming Polish candy bars.
Signs of the crisis can also be found on Laugavégur street, Reykjavik's shopping boulevard and the city's place to see and be seen. Fewer SUV's with grotesque airplane tires, so beloved by the Icelanders, can be seen plying their way down the street this fall. It could be a result of the horrendous costs of tires and gas, but perhaps it also a sign of a new environmental awareness that has caught on quickly with the trend-conscious Icelanders. In terms of fashion, the country is also reverting to simpler times. Newspaper supplements are paying adage to old Viking recipes for hair dyes made with roots and mosses, making it both fun and chic.
Indeed, it appears the Icelanders are faring better than many victims of the Viking banks would like to hear. Earlier this week, when the United Nations declared Norway to be the country with the world's highest quality of life, Iceland came in a remarkable third place. Germany, where depositors were damaged by the bankruptcy of Kaupthing (with accounts similar to those held by Dutch and British depositors in the company's Icesave subsidiary), placed 22nd. The ranking came despite the fact that a recent report by the Organization for Economic Cooperation and Development (OECD) has determined that the Icelandic economic and financial system is still lying in ruins and stated that taxes would have to be increased and public expenditures radically cut. It added that the government's own economic stimulus package had merely exacerbated the crisis.
But none of that seems to bother the Icelanders, who seem to embrace the contradictions. In the current "World Database of Happiness," the Iclanders are in first place, even ahead of the chronically happy Danes. Eric Weiner, author and publisher, explains the circumstances as such: "The Icelanders aren't perfectionists." Besides, they wouldn't listen if somebody wanted to make clear to them that they were inadequate. Instead, they just get on with things, regardless of what comes next.
Indigent Burials Are on the Rise
Coroners and medical examiners across the country are reporting spikes in the number of unclaimed bodies and indigent burials, with states, counties and private funeral homes having to foot the bill when families cannot. The increase comes as governments short on cash are cutting other social service programs, with some municipalities dipping into emergency and reserve funds to help cover the costs of burials or cremations.
Oregon, for example, has seen a 50 percent increase in the number of unclaimed bodies over the past few years, the majority left by families who say they cannot afford services. "There are more people in our cooler for a longer period of time," said Dr. Karen Gunson, the state’s medical examiner. "It’s not that we’re not finding families, but that the families are having a harder time coming up with funds to cover burial or cremation costs."
About a dozen states now subsidize the burial or cremation of unclaimed bodies, including Illinois, Massachusetts, West Virginia and Wisconsin. Most of the state programs provide disposition services to people on Medicaid, a cost that has grown along with Medicaid rolls. Financing in Oregon comes from fees paid to register the deaths with the state. The state legislature in June voted to raise the filing fee for death certificates to $20 from $7, to help offset the increased costs of state cremations, which cost $450. "I’ve been here for 24 years, and I can’t remember something like this happening before," Dr. Gunson said.
Already in 2009, Wisconsin has paid for 15 percent more cremations than it did last year, as the number of Medicaid recipients grew by more than 95,000 people since the end of January, said Stephanie Smiley, a spokeswoman for the Wisconsin Department of Health Services. In Illinois, Gov. Pat Quinn tried to end the state’s indigent burial program this year, shifting the financing to counties and funeral homes, but the state eventually found $12 million to continue the program when funeral directors balked.
The majority of burials and cremations, however, are handled on the city, county, town or township level, an added economic stress as many places face down wide budget gaps. Boone County, Mo., hit its $3,000 burial budget cap last month, and took $1,500 out of a reserve fund to cover the rest of the year. While the sum is relatively low, it comes as the county is facing a $2 million budget shortfall, tax collections are down 5 percent and the number of residents needing help is expected to grow.
"We’ve had a significant increase in unemployment, wages are dropping, industrial manufacturing jobs go away and companies scaled back or even closed their doors," said Skip Elkin, the county commissioner. "But we feel an obligation to help families who don’t have any assets." The medical examiner of Wayne County, Mich., Dr. Carl Schmidt, bought a refrigerated truck after the morgue ran out of space. The truck, which holds 35 bodies, is currently full, Dr. Schmidt said. "We’ll buy another truck if we have to," he said.
Many places are turning to cremation, which averages a third to half the price of a burial. However, they will accommodate families’ requests for burial. Clyde Gibbs, the chief medical examiner in Chapel Hill, N.C., said the office typically averaged 25 to 30 unclaimed bodies each year. At the end of the 2008 fiscal year there were at least 60, Dr. Gibbs said. The office cremates about three-quarters of the remains, and scatters the ashes at sea every few years.
In Tennessee, medical examiner and coroners’ offices donate unclaimed remains to the Forensic Anthropological Research Center, known as the "Body Farm," where students study decomposition at the University of Tennessee. The facility had to briefly halt donations because it had received so many this year, said its spokesman, Jay Mayfield.
The increase in indigent burials and cremations is also taking a toll on funeral homes, which are losing money as more people choose cremation over burial. In 2003, 29.5 percent of remains were cremated; by 2008 the number had grown to 36 percent, according to the Cremation Association of North America, and it is expected to soar to 46 percent by 2015, according to the association’s projection of current trends. Don Catchen, owner of Don Catchen & Son Funeral Homes in Elsmere, Ky., who handles cremations of the poor in Kenton County, said the $831 county reimbursement for cremations was "just enough to cover the cost of what I do — I donate my time."
In Florida, where counties switched to cremation a few years ago to save on costs, Prudencio Vallejo, general manager of the Unclaimed Bodies Unit of the Hillsborough County Medical Examiner’s Office, said cremations were $425, compared with $1,500 for a burial. They have risen about 10 percent this year, Mr. Vallejo said. "Most people, the first thing that they say is ‘We wouldn’t be coming to you if we could afford to do it ourselves,’ " he said.
Broward County, Fla., paid for the cremation of Renata Richardson’s daughter, Jazmyn Rose, who was born stillborn on Sept. 25, 2008. Ms. Richardson, 26, lost her job at an advertising agency in July and could not afford to pay. The county spent about $1,000 on a cremation and pink urn, engraved with the baby’s birth and death date, and a Bible passage. It now sits in the bassinette where she was to sleep. "I was strapped for cash, I was in mourning, and I didn’t know what they were going to do with her," Ms. Richardson, of Davie, Fla., said. "I was honored that they went that far to help me."
Debate Follows Bills to Remove Clotheslines Bans
After taking a class that covered global warming last year, Jill Saylor decided to save energy by drying her laundry on a clothesline at her mobile home. "I figured trailer parks were the one place left where hanging your laundry was actually still allowed," she said, standing in front of her tidy yellow mobile home on an impeccably manicured lawn. But she was wrong. Like the majority of the 60 million people who now live in the country’s roughly 300,000 private communities, Ms. Saylor was forbidden to dry her laundry outside because many people viewed it as an eyesore, not unlike storing junk cars in driveways, and a marker of poverty that lowers property values.
In the last year, however, state lawmakers in Colorado, Hawaii, Maine and Vermont have overridden these local rules with legislation protecting the right to hang laundry outdoors, citing environmental concerns since clothes dryers use at least 6 percent of all household electricity consumption. Florida and Utah already had such laws, and similar bills are being considered in Maryland, North Carolina, Oregon and Virginia, clothesline advocates say.
The new laws have provoked a debate. Proponents argue they should not be prohibited by their neighbors or local community agreements from saving on energy bills or acting in an environmentally minded way. Opponents say the laws lifting bans erode local property rights and undermine the autonomy of private communities.
"It’s already hard enough to sell a house in this economy," said Frank Rathbun, a spokesman for the national Community Associations Institute, an advocacy and education organization in Alexandria, Va., for community associations. "And when it comes to clotheslines, it should be up to each community association, not state lawmakers, to set rules, much like it is with rules involving parking, architectural guidelines or pets."
As much a cultural clash as a political and economic one, the issue is causing tensions as homeowners, landlords and property managers have traded nasty letters and threats of legal action.
"I think sheets dangling in the wind are beautiful if they’re helping the environment," said Mary Lou Sayer, 88, who was told firmly by fellow residents at her condominium in Concord, N.H., that she could not hang her laundry outdoors after her daughter recently suggested she do so to save energy.
Richard Jacques, 63, president of the condominium’s board, said he moved to the community specifically for its strict regulations. "Those rules are why when I look out my window I now see birds, trees and flowers, not laundry," he said. Driven in part by the same nostalgia that has restored the popularity of canning and private vegetable gardens, the right-to-dry movement has spawned an eclectic coalition.
"The issue has brought together younger folks who are more pro-environment and very older folks who remember a time before clotheslines became synonymous with being too poor to afford a dryer," said a Democratic lawmaker from Virginia, State Senator Linda T. Puller, who introduced a bill last session that would prohibit community associations in the state from restricting the use of "wind energy drying devices" — i.e., clotheslines.
At least eight states already limit the ability of homeowners associations to restrict the installation of solar-energy systems, and legal experts are debating whether clotheslines might qualify. "It seems like such a mundane thing, hanging laundry, and yet it draws in all these questions about individual rights, private property, class, aesthetics, the environment," said Steven Lake, a British filmmaker who is releasing a documentary next May called "Drying for Freedom," about the clothesline debate in the United States.
The film follows the actual case of feuding neighbors in Verona, Miss., where the police say one man shot and killed another last year because he was tired of telling the man to stop hanging his laundry outside. Jeanne Bridgforth, a real estate agent in Richmond, Va., said that while she had no personal opinion on clotheslines, most of her clients were not thrilled with the idea of seeing their neighbors’ underwear blowing in the breeze.
She recalled how she was unable to sell a beautifully restored Victorian home in the Church Hill neighborhood of Richmond because it looked out onto a neighbor’s laundry hanging from a second-story back porch. In June, the house went into foreclosure. "Where does it end?" Ms. Bridgforth said of the legislative push to prevent housing associations from forbidding clotheslines.
Dwight Merriam, a lawyer from Hartford and an expert in zoning law, dismissed this concern. "This is not some slippery slope toward government micromanaging of private agreements," Mr. Merriam said, adding, however, that for these state laws to succeed they need to exempt existing agreements. One of the biggest barriers to change, he said, is that most housing compacts that were written more than 30 or so years ago allow rules to be altered only if 80 percent to 100 percent of the association members attend a meeting and vote, which rarely happens.
Ms. Saylor, from the mobile home park, said, "Pressure makes a difference." After a petition calling on the owner of the property where she lived to reverse the prohibition against line drying laundry, she said, the owner recently acquiesced. But Alexander Lee, a lawyer in Concord, N.H., who runs a Web site, Project Laundry List to promote hanging clothes to dry, said the actual electricity consumption by dryers was probably three times as much as federal estimates because those estimates did not take into account actual use at laundromats and in multifamily homes. Change promises to be slow, said Mr. Lee, 35. "There are a lot of kids these days who don’t even know what a clothespin is," he said. "They think it’s a potato chip clip."