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Fed shouldn’t bail out imprudent borrowers
George Will is a nationally syndicated columnist.
George Will

   Exactly a century ago, panic seized financial markets. The collateral for perhaps half the bank loans in New York was securities whose values had been inflated by speculation. Then on Saturday night, Nov. 2, 1907, a 70-yearold man gathered some fellow fi nanciers at his home at 36th and Madison in Manhattan. The next morning, a New York Times headline proclaimed:
   “BANKERS CONFER WITH MR. MORGAN
   Long Discussion in His Library
   Not Ended Until 4 O’Clock“
   Both the Times and The Washington Post (”BANKERS IN CONFERENCE: Money Stringency and Remedial Measures Discussed in Morgan’s Library“) noted that bankers shuttled between meetings at Morgan’s mansion and the Waldorf-Astoria (then at 5th Avenue and 33rd Street) in a newfangled conveyance — an automobile. Working 19 hours a day, and restricting himself on doctor’s orders to 20 cigars a day, J.P. Morgan seemed so heroic that the president of Princeton University, Woodrow Wilson, said the financier should chair a panel of intellectuals who would advise the nation on its future.
   Six years later, however, under Wilson as the nation’s president, the Federal Reserve System was created, ending the era when a few titans of fi - nance could be what central banks now are — the economy’s “lenders of last resort.” Central banks have been performing that role during today’s turmoil in the market for subprime mortgages — those granted to the least creditworthy borrowers.
   The ill wind blowing through that market has blown two goods: The public mind has been refreshed regarding the concept of moral hazard. And the electorate has been reminded of just how reliably liberal Hillary Clinton is.
   Moral hazard exists when a policy produces incentives for perverse behavior. One such existing policy is farm price supports that reduce the cost to farmers of overproduction, and even encourage it. Another is the policy of removing tens of millions of voters from the income tax rolls, thereby making government largess a free good for them.
   And this would be such a policy: the Federal Reserve lowering the cost of money whenever risky lending to a sector of the economy (e.g., housing) makes that sector desperate for lower interest rates. Many banks, hedge funds and other institutions have pocketed profits from their dealings in the subprime market. The losses are theirs, too.
   Clinton leapt to explain the subprime problem in the terms of liberalism’s master narrative — the victimization of the many by the few. In a speech favorably contrasting a “shared responsibility” society with an “on your own” society, she said, in effect, that distressed subprime borrowers are not responsible for their behavior. “Unsavory” lenders, she said, had used “unfair lending practices.” Doubtless there are as many unsavory lenders as there are unsavory politicians. So, voters and borrowers: caveat emptor.
   But this, too, is true: Every improvident loan requires an improvident borrower to seek and accept it. Furthermore, when there is no penalty for folly — such as getting a variable-rate mortgage that will be ruinous if the rate varies upward — folly proliferates. To get a mortgage is usually to commit capitalism; it is to make an investment in the hope of gain. And if lenders know that whenever they go too far and require inexpensive money the Federal Reserve will provide it with low interest rates, then going too far will not really be going too far.
   In 2008, as voters assess their wellbeing, several million households with adjustable-rate home mortgages will have their housing costs increase. Defaults, too, will increase. That will be a perverse incentive for the political class to be compassionate toward themselves in the name of compassion toward borrowers, with money to bail out borrowers. If elected politicians controlled the Federal Reserve, they would lower interest rates. Fortunately, we have insulated the Federal Reserve from democracy.
   The Federal Reserve’s proper mission is not to produce a particular rate of economic growth or unemployment, or to cure injuries — least of all, self-inflicted ones — to certain sectors of the economy. It is to preserve the currency as a store of value — to contain inflation. The fact that inflation remains a worry is testimony to the fundamental soundness of the economy, in spite of turbulence in a small slice of one sector.
   Ron Chernow, in his book “The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance” (1990), says Morgan’s 1907 rescue was the last time private bankers “loomed so much larger than regulators in a crisis. Afterward, the pendulum would swing decidedly toward government financial management.” Happily, Chairman Ben Bernanke’s Federal Reserve remains committed to minimal management, which is what government does best.  

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Banks gone bad
BY ERIK SCHNACKENBERG
For The Sunday Gazette

   If you are planning to retire or are retired, expecting to live off the proceeds of your deferred compensation plan or 401(k), take another look at the figures in your account. Watching TV news, or reading the financial section of your newspaper should have prepared you for the shocking losses of the past several weeks. If you are a small investor, like most of us, squirreling away a portion of your salary and feeling smug about co-workers who were living paycheck to paycheck, the shock may be even more profound. What happened?
ARCANE WORLD
   The financial world of stocks
   is like Oz, but full of arcane language: “leveraged buyouts,” “arbitrageurs,” “inverted yield curves,” etc. Do we ever get to use these terms in everyday conversation? I don’t. We’ve assumed that the stock market is guided by the most sophisticated numbers
   assisted by computermodels of trends and patterns. The answer according to my own primitive financial mind is a simple one — basic greed of the banking system in general.
   Banks are businesses that must show a profit to their bondholders in roughly the same manner as a Mom and Pop grocery story must show a profit to, well, Mom and Pop. Banks make enormous amounts of money (unlike the Mom and Pop store) through mortgages, interest on loans, a wide range of fees, and investing in non-banking areas. One major cause of the recent market slide has been the banking industry’s willingness to issue subprime mortgages to people with poor credit or even nonexistent credit. If the extent of banking losses intrigues you, the numbers should cause you to sit up. The United States mortgage market is about $10.4 trillion, with 13 percent as subprime and $67 billion late or in active foreclosure. You didn’t invest in banks, so why should you be concerned over the plight of bankers?
WHO’S TO BLAME
   Here it is. Bankers caused the financial problem by aggressive marketing of mortgage loans and now they want the government (read as the taxpayers) to bail them out. This is the way it will be done in New York state. A new entitlement program called “Keep the Dream” is a refinancing program for homeowners to the tune of $100 million of state and federal funds. Of course, the term “state and federal funds” is misleading because funds are derived from taxpayers in one way or another, not the government. Gov. Eliot Spitzer has explained that the $100 million in funding will help 500 to 700 families in New York state, who are in arrears due to an inability to pay their high adjustable mortgage rates. Banks offered low-initial interest rates to borrowers with poor credit, aware that the banks could raise the interest rates later. Since $100 million represents far too many numbers for me to compute in my head when that number is divided by 500 or 700, I decided that each of those families will receive a huge chunk of government largesse at taxpayer’s expense. Did I fail to mention that $650,000 will be allocated for “counseling programs” as well?
   Newspaper reports further detailed how Fannie Mae, SONYMA and other government acronyms along with other lending institutions known as “banks” will fund the program. I don’t believe a word of it. Banks are not in business for philanthropic or altruistic reasons, but for profit. In other words, they need to make a classic buck for their shareholders and do not want to own a large list of foreclosed properties that would be placed at auction.
   Large financial institutions have marketing departments that constantly seek more clients for an ever-enlarging array of bank products. From the Internet to local newspapers, unsophisticated potential home buyers were lured by the offers of easy credit, low down payments, and the initial low interest rates. Now, in the face of ever increasing foreclosures, banks nationwide are pulling back from the subprime mortgages because many homeowners are now unable to pay their obligations to the lenders. In a word, the banks were greedy and now want to be bailed out. Easy credit created the housing bubble or mania and reached an unsustainable level. The bubble has burst and has had a serious negative effect on the stock market as well — although, logically, stocks should not have been affected, but the downturn is a result of panic and uncertainty.
EVERYBODY HAPPY?
   The “Keep the Dream” program appears to have pleased everyone: Gov. Spitzer, Sen. [Hugh] Farley and a Mr. Philip Lentz, the director of communications for SONYMA. The program is an easy fix for fi - nancial institutions as well as all those homeowners facing foreclosure, or so they claim. Taxpayers must be aware by now how the government (read both political parties) “fixes” problems. I smell the smoke and can see the mirrors already, especially after Mr. Lentz was quoted saying that “most” of the money will be guaranteed by the Federal National Mortgage Association or “Fannie Mae.” If you pay attention to details, the word “most” should warrant a second look at a program with a budget of $100 million and an additional $650,000 for counseling.
   I just finished reconciling my checkbook, and I think I’m now up to date with all my usual bills. With this background in mind, I consider myself somewhat of a financial wizard, and I’m seriously considering tapping into that $650,000 counseling fund as an “advisor.” I’ve roughed out my curriculum for teaching all those persons lured by the promise of easy credit and painless homeownership. Chapter One is tentatively titled, “There is no free lunch,” Chapter Two is, “Don’t buy that boat or other adult toy just because you’ve refinanced,” and Chapter Three will be the basic, “Don’t spend beyond your means.”
   Along with the banking industry, Fannie Mae, SONYMA, New York politicians, and the gaggles of corporate attorneys, I would be willing to accept a lucrative position as a “counselor” with the clear understanding that I would be acting with a purely philanthropic goal in mind.
   If taxpayers were truly able to discover all of the hidden fees, subsidies, and bewildering obscure programs, I imagine the barricades would be in the streets tomorrow, barely holding back the mob.

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The “Keep the Dream” program appears to have pleased everyone: Gov. Spitzer, Sen. [Hugh] Farley and a Mr. Philip Lentz, the director of communications for SONYMA. The program is an easy fix for fi - nancial institutions as well as all those homeowners facing foreclosure, or so they claim. Taxpayers must be aware by now how the government (read both political parties) “fixes” problems. I smell the smoke and can see the mirrors already, especially after Mr. Lentz was quoted saying that “most” of the money will be guaranteed by the Federal National Mortgage Association or “Fannie Mae.” If you pay attention to details, the word “most” should warrant a second look at a program with a budget of $100 million and an additional $650,000 for counseling.
   I just finished reconciling my checkbook, and I think I’m now up to date with all my usual bills. With this background in mind, I consider myself somewhat of a financial wizard, and I’m seriously considering tapping into that $650,000 counseling fund as an “advisor.” I’ve roughed out my curriculum for teaching all those persons lured by the promise of easy credit and painless homeownership. Chapter One is tentatively titled, “There is no free lunch,” Chapter Two is, “Don’t buy that boat or other adult toy just because you’ve refinanced,” and Chapter Three will be the basic, “Don’t spend beyond your means.”
   Along with the banking industry, Fannie Mae, SONYMA, New York politicians, and the gaggles of corporate attorneys, I would be willing to accept a lucrative position as a “counselor” with the clear understanding that I would be acting with a purely philanthropic goal in mind.
   If taxpayers were truly able to discover all of the hidden fees, subsidies, and bewildering obscure programs, I imagine the barricades would be in the streets tomorrow, barely holding back the mob.

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Subprime lesson

While many factors contribute to the health of the housing market or the strength of the economy, it’s clear that the subprime lending splurge is coming home to roost. “Saturday Night Live,” perhaps, said it best in a 2006 skit, producing a mock commercial for a self-help book titled, “Don’t Buy Stuff You Cannot Afford.” It’s a simple premise, yet it’s one that has been ignored by overeager borrowers and, in particular, overzealous lenders.
--The Columbian, Vancouver, Wash.

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Mortgage lenders get cash infusion Federal Home Loan Bank opens spigot
BY MARCY GORDON The Associated Press

   WASHINGTON — The Federal Home Loan Bank system has increased low-cost lending to fi - nancial institutions in an effort to bolster credit stability.
   As the housing crisis worsens and the Federal Reserve has swooped into the market to ensure liquidity, the 12 regional banks are making more cash available to banks and thrifts that make mortgage loans.
   Created by Congress during the Depression, the self-funded home loan bank system has some 8,100 members around the country: banks, savings and loans, and credit unions, predominantly small community lenders. Eight of every 10 U.S. financial institution belongs to the home loan bank system, which is a big player in the $8 trillion home-mortgage market.
   Because members are government-insured deposit takers, they are subject to federal regulation and underwriting guidelines and have made far fewer of the subprime mortgages — targeted at borrowers with weak credit — that triggered panic as defaults and foreclosures in that sector surged, experts say.
   The credit problems have spread though in recent weeks to the broader mortgage market, making investors nervous about nearly all types of home loans.
   The role of the little-noticed web of 12 federal home loan banks has taken on increased significance because Washington is not in favor of allowing mortgage giants Fannie Mae and Freddie Mac to increase their debt burden until they are under tighter government supervision.
   “The powers that be would defi - nitely prefer” the Fed’s market intervention and the home loan bank system’s stepped-up advances to a raising of the mandated investment caps for Fannie and Freddie, said Armando Falcon, a former director of the Office of Federal Housing Enterprise Oversight, chief regulator for the two companies.
   FHLB members in recent weeks have increased requests for loans, known as advances, from the home loan bank system.
   The increase in the loans, backed by the mortgages held by the member institutions, has been notable at the Atlanta bank, for example, which loaned about $7 billion to members so far this month, a 6.5 percent increase from the start of August and in contrast to a 3 percent rise during the 12 months ended June 30.
   The Atlanta region members include thrift Countrywide Bank, a subsidiary of the nation’s largest mortgage lender, Countrywide Financial Corp. The parent was forced to borrow $11.5 billion last Thursday from a group of banks so it could continue making home loans, and most of the company’s home-mortgage business has been transferred to the savings and loan. The amount advanced to the thrift by the Atlanta regional bank was not disclosed.
   “We have seen an increased demand from members,” said Chris McEntee, a spokesman for the Atlanta regional bank.
   Like Fannie and Freddie, the federal home loan banks are government-chartered enterprises, benefiting from the widespread assumption on Wall Street that the federal government would bail them out in the event of a crisis.
   That implicit backing enables the home loan banks as a group — made up of 12 individual cooperatives — as well as the two publicly traded companies to borrow cheaply on global markets by issuing hundreds of billions of dollars in top-rated securities backed by mortgages.  

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Mortgage industry cuts 40,000 jobs
BY IEVA M. AUGSTUMS The Associated Press

   CHARLOTTE, N.C. — At the North Carolina offices of mortgage lender HomeBanc Corp., Archie Clark is the only employee left. But in a few days, he’ll be gone, too.
   “It’s pretty much a ghost town over there,” Clark said. “Somebody went in and took the furniture from the lobby. I don’t know who did that. I put some of the other stuff in the back and locked it up.”
   When Clark finishes helping movers from the company’s Atlanta headquarters collect computers and other property, he’ll join the more than 25,000 workers nationwide who have lost jobs in the financial services industry since the beginning of the month — with more than half coming since last Friday. With few exceptions, the cuts are the direct result of woes in the nation’s housing market.
   More layoffs are announced daily. On Wednesday, Lehman Brothers Holdings Inc. closed its “subprime” mortgage business, laying off 1,200 workers at 23 offices; Scottsdale, Ariz.-based 1st National Bank Holding Co. closed its wholesale mortgage unit and cut 541 jobs, and Accredited Home Lenders Holding Co. added 1,600 positions to the heap. The night before, banking giant HSBC said it would close a main financing offi ce and cut 600 jobs.
   Since the start of the year, more than 40,000 workers have lost their jobs at mortgage lending institutions, according to recent company layoff announcements and data complied by global outplacement fi rm Challenger, Gray & Christmas Inc. Meanwhile, construction companies have announced nearly 20,000 job cuts this year, while the National Association of Realtors expects membership rolls to decline this year for the first time in a decade.
   It’s an employment collapse that threatens to rival the massive layoffs in the airline industry that followed the Sept. 11, 2001, terrorist attacks, when some 100,000 employees lost their jobs.
   “It’s far from over,” said Bart Narter, a senior analyst with Celent, a Boston-based financial research and consulting fi rm. “The subprime lending collapse will continue to ripple through the fi - nancial sector.”
   For five years, the nation’s housing market was booming and mortgage companies grew quickly, at times offering lucrative jobs to people with little experience. But as home values declined and interest rates rose in the past year, rising delinquencies and defaults — especially in subprime mortgages targeted at borrowers with risky credit — have pounded lenders who couldn’t keep pace.
   “These kind of mortgage lenders just sprung up like mushrooms and grew like men,” said John A. Challenger, chief executive at Challenger, Gray & Christmas. “They staffed up and now you have a bust.”
   America’s largest mortgage lender, Countrywide Financial Corp., began an undisclosed number of layoffs this week. Last week, Arizona mortgage lender First Magnus Financial Corp. shut down its operations and laid off nearly 6,000 workers. On Monday, Capital One Financial Corp. said it would shutter Greenpoint Mortgage, its wholesale mortgage banking business, and lay off 1,900 employees.
   “It’s only been weeks,” Challenger said. “These companies are acting remarkably quickly, stopping on a dime.”
   Andy Roach didn’t foresee the turmoil when he joined Greenpoint in March. As late as June, the 25-year industry veteran thought the business of making “Alternative A” mortgage loans — geared for those with slightly better credit than subprime borrowers — was on a solid track. But in July, he said, spooked investors stopped buying the securities the company sold by repackaging the loans.
   A little more than a month later, Capital One announced that Roach and about 1,900 of his colleagues across the country were out of a job.

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Luxury-home
builder reports
plunge in profits
   PITTSBURGH — Toll Brothers Inc., the nation’s largest builder of luxury homes, said Wednesday its third-quarter profit plunged nearly 85 percent as the housing downturn and credit worries triggered cancellations and hefty writedowns.
   The company’s chairman and chief executive said the quarterly cancellation rate, which rose to nearly 24 percent, was greater than at any point in the 21 years the company has been traded publicly.
   Toll Brothers said earnings for the three months ended in July sank to $26.5 million, or 16 cents per share, from $174.6 million, or $1.07 per share, during the same period last year.

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Lawmakers back crackdown on ‘predatory’ mortgage lenders
The Associated Press

   NEW YORK — State and federal lawmakers are calling for a crackdown on unscrupulous mortgage firms, saying that “predatory” lending practices have fed a growing national wave of foreclosures affecting millions of people with subprime home mortgages.
   Sen. Charles Schumer, D-N.Y., issued a study showing foreclosures in New York City’s five boroughs are up by 80 percent since February, indicating, he said, that the city “is now in the full throes of the subprime foreclosure meltdown.”
   Despite that credit crisis, some mortgage companies continue advertising that entices homebuyers with misleading loan offers, Schumer told a news conference on Sunday. “Banks should not be offering these loans and sucking more New York homebuyers and homeowners into taking on more debt attached to a sky high interest rate,” Schumer told a news conference. “But judging by the way lenders are still pushing misleading, deceptive and expensive mortgages, you’d never know there is a crisis.”
   Schumer also said some lenders apparently are using accounting standards that lock borrowers into agreements without opportunity to refinance, despite a recent Securities and Exchange Commission directive against the practice. Separately, State Sen. Jeff Klein, a Democrat whose district includes parts of the Bronx and Westchester, issued a detailed survey that showed foreclosures “rising at an alarming rate.”  

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issued a detailed survey that showed foreclosures “rising at an alarming rate.”  

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Help, but don’t bail out, homeowners

   There’s no denying that the subprime mortgage mess is threatening the health of the U.S. housing market, which is in turn threatening the health of the U.S. economy. Two weeks ago, the Federal Reserve helped banks that have gotten stuck with large numbers of non-performing loans (by lending tens of billions of dollars at discounted rates), and now there’s a move afoot in Congress — led by New York Sens. Charles Schumer and Hillary Clinton, among others — to help consumers faced with sharply higher mortgage payments when their short-term teaser rates expire. Indeed, something will probably have to be done to keep them from defaulting, too, but it’s important that the help doesn’t become a full-scale bailout.
   The default rate so far this year is roughly double that of a year ago, and the problem is likely to get worse before it gets better. That’s because interest rates on most remaining problem loans haven’t even been adjusted upward yet, according to a story in Tuesday’s New York Times, and about $400 billion in subprime loans are scheduled for rate increases of 30 percent or more by the end of next year. Keeping these loans from defaulting isn’t going to be easy.
   Ideas circulating in Congress include raising the threshold for federally insured loans (so more homes would qualify for normal loans and refinancings instead of “subprime” ones; prohibiting early payment penalties on subprime loans (a scheme used by banks to make refinancing impractical); and creating a billion-dollar fund for states to assist problem mortgage holders.
   While these solutions aren’t without their own problems, they’re worth pursuing if they help keep the subprime crisis from damaging the rest of the U.S. housing market — and the economy — quite severely.  

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“Banks should not be offering these loans and sucking more New York homebuyers and homeowners into taking on more debt attached to a sky high interest rate,” Schumer told a news conference.

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These predatory lending companies gave money to people who they knew would default on their mortgage and now they want the government to bail them out of debt.

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when their short-term teaser rates expire.

Quoted from z2im

CNN article "Flippers Fuel Foreclosures"

http://money.cnn.com/2007/08/30/real_estate/flippers_fuel_foreclosures/index.htm?postversion=2007083010

Makes sense that they are responsible for fueling the mortgage foreclosures as these real estate speculators can walk away from bad investments.  Those who reside in the homes that they purchased
have a greater incentive to keep payments current.

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What's the problem with buying something to improve it to sell it to make a profit?  It's not the fault of the person who spens outside their budget to buy the property?

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What's the problem with buying something to improve it to sell it to make a profit?  That's just one person's way of making the American dream, by getting RID of the slums, one house at a time by bringing in people who can and will pay more for better properties.

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It's the mortgage that the person gets, not the person who fixed up the property in the first place that's the problem.

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Rehabilitation of real property with the effect of raising the values of the homes and bringing a "better" class of residents to an area is certainly a positive thing.  However, borrowers must be financially responsible for their spending decisions.  The "flippers" plan on a quick sale and thus often do not allow for sufficient reserves.  The lenders are complicit in this situation.

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???Metroplex??? VanDyke???  

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funds are directed based on cronyism and political reciprocity.

Quoted from bumblethru

Ya know, this entire housing mess is out of control. First, the banks are ALLOWED to issue Subprime Mortgages. And the people are ALLOWED  to choose one. I'm sorry, but people have to be pretty stupid to NOT know that the interest rate will, in fact, go up eventually. I have an adjustable mortgage and have for 21 years. I KNEW that the interest rate would fluctuate. It was MY choice.  I know people who have a subprime mortgage and they were told many times by friends and family NOT to do it. But they CHOSE to. Now if we want to blame the government for our stupidity, go right ahead. They will just place more government oversite into our lives.

I like what shadow says....'you can't cure stupid'.

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I like what shadow says....'you can't cure stupid'.

Quoted from bumblethru

Nah...after the liberal government sees that picture they will pass a law forbidding any male child under the age of 10 to hold a cell phone. And the parents won't be able to use one in the house where male children reside. Cell phone will come with a warning label on them. And all male children will never be allowed to take their diaper off while in the presence of a deadly cell phone.

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Fed chief assures public
Bernanke, Bush promise action but no bailouts
BY JEANNINE AVERSA The Associated Press

   JACKSON, Wyo. — Federal Reserve Chairman Ben Bernanke vowed Friday to do all that is necessary to protect the national economy from the ill effects of a global credit crunch — but not to bail out investors and lenders “from the consequences of their financial decisions.”
   President Bush confidently predicted the country would safely weather the financial storm.
   Friday’s comments, made in separate appearances by Bernanke here and the president in Washington, sought to send a reassuring but tough message: Fed policymakers and the Bush administration are on top of the situation that has unnerved investors on Wall Street and around the world and raised anxiety on Main Street, but they’ll act in the best interests of the economy.
   While Bush announced steps Friday to help home- owners struggling to make their mortgage payments, he made it clear that he has no interest in bailing out lenders, some of whom got cocky, took on too much risk and ended up with bad loans.
   “The government’s got a role to play, but it is limited,” Bush said at the White House. “A federal bailout of lenders would only encourage a recurrence of the problem.”
   In anxiously awaited remarks, Bernanke suggested that the Fed’s next move will be driven by economic considerations, not only in response to troubles of investors and lenders.
   “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions,” Bernanke said. “But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”
   Still, many believe the odds are growing that the Fed will cut its most important interest rate, now at 5.25 percent, by at least a quarter of a percentage point on or before Sept. 18, its next regularly scheduled meeting. The Fed hasn’t lowered this rate in four years.
   The Fed “will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,” Bernanke told an economics conference here.
   On Wall Street, stocks rose after Bernanke’s remarks. The Dow Jones industrial average was up 119 points Friday.
   The fear is that if credit continues to become harder for people and businesses to get, spending and investment will be crimped. That could hurt overall economic growth. In a worst-case scenario, the country could slide into a recession.
   Credit is the economy’s life blood. It enables people to finance big-ticket purchases such as homes and cars and can help businesses bankroll expansions and other things that can boost hiring.
   Bush predicted that the economy would get through the financial crisis and urged patience.
   “The markets are in a period of transition as participants reassess and re-price risk,” the president said. “This process has been unfolding for some time, and it’s going to take more time to fully play out. As it does, America’s overall economy will remain strong enough to weather any turbulence.”
   Before the financial crisis erupted, the economy had a full head of steam, growing at a robust pace of 4 percent in the April-to-June quarter. But growth is expected to slow to half that pace in the current quarter and lose more speed in the final quarter of this year.
   The unemployment rate, now at 4.6 percent, is expected to creep up to around 5 percent by the end of this year.

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While Bush announced steps Friday to help home- owners struggling to make their mortgage payments, he made it clear that he has no interest in bailing out lenders, some of whom got cocky, took on too much risk and ended up with bad loans.

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Bush offers steps to ease foreclosures
BY MARTIN CRUTSINGER The Associated Press

   WASHINGTON — President Bush on Friday announced a set of modest proposals to deal with an alarming rise in mortgage defaults that have contributed to turbulent financial markets over recent weeks.
   Housing analysts said it was highly likely the limited steps Bush outlined will be expanded in coming weeks by a Democratic-controlled Congress intent on responding to growing voter anxiety as up to 2 million homeowners worry about losing their homes.
   Officials in the troubled housing industry said the important thing was that the administration had finally offered a proposal, a step they said should help calm global financial markets that have been on a rollercoaster ride in recent weeks as investors worried about a serious credit crunch.
   “This is not a cure-all, but it is good to see something coming out of the White House,” said David Seiders, chief economist for the National Association of Home Builders. “It is good for markets, both domestically and internationally, to see that the White House is facing the problem head on and at least starting to do something about it.”
   Bush’s comments came the same day that Federal Reserve Chairman Ben Bernanke pledged to do everything necessary to protect the economy from the market turmoil. His comments to a Fed conference in Wyoming were seen as a strong signal that the central bank was moving closer to cutting a key interest rate, possibly as soon as its next meeting Sept. 18.
   “Bernanke basically said that if problems in the financial market are hurting the economy, then the Fed will have to respond,” said Mark Zandi, chief economist at Moody’s Economy.com. “All the conditions are in place for the Fed to begin cutting interest rates.”
   The comments from Bernanke and Bush bolstered spirits on Wall Street, where the Dow Jones industrial average finished another erratic week with a gain of 119.01 points on Friday, to close at 13,357.74.
   Both Bernanke and Bush emphasized that their actions were not aimed at bailing out investors who had made bad decisions.
   “It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford,” Bush said in the Rose Garden. “Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders or a little help from their government.”
   With Treasury Secretary Henry Paulson at his side, Bush insisted the economy was strong and could weather market turbulence. But he did not repeat his forecast of Aug. 8, that the economy was headed for a “soft landing.” The next day, fi nancial markets went into a significant swoon, sparked by the announcement by France’s largest bank that it was halting redemptions in three large investment funds.
   That disclosure sent shock waves through the global financial system because it indicated problems from rising defaults on subprime mortgages in the United States — mortgages packaged and sold to investors worldwide — were more far-reaching than realized.
   Bush’s proposals unveiled Friday are designed to help combat those defaults. They would make it easier for borrowers now holding adjustable rate mortgages that are resetting to higher monthly payments to refinance those loans using the resources of the Federal Housing Administration. The FHA is a Depression-era agency created to help low and moderate-income Americans afford homes.
   Under the Bush proposal, which FHA officials said would take effect immediately, an estimated 60,000 homeowners who have fallen behind on payments because their mortgages have reset would be able to refinance with FHA-insured loans. That marks a signifi - cant change because FHA does not now insure refinanced loans from borrowers who are currently delinquent.
   “This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes,” Bush said.
   To qualify for the new program, being called FHA Secure, a borrower will have to prove the original loan was being repaid until it reset to a higher rate and they must have 3 percent equity in the home.
   The FHA does not supply the mortgage loan but it guarantees loans extended by banks and other lenders.
   Currently, the maximum loan the FHA can guarantee in most states is $202,000 although that can rise to $362,000 in high-cost states such as California and New York. The administration is supporting FHA overhaul legislation to lift those limits.
   FHA officials said another 20,000 people would be helped by a new type of risk-based pricing for its loan guarantees that will let lower income mortgage holders qualify by paying slightly higher premiums.
   This change, which will require the FHA to change its rules, is expected to take effect early next year after a public comment period.
   The 80,000 additional people who would qualify for FHA loan guarantees under the proposed changes Bush announced would still be a tiny portion of an estimated 2 million homeowners whose adjustable rate mortgages are scheduled to reset at higher rates by the end of 2008.
   Of those 2 million loans that will reset, FHA estimates that 500,000 could go into foreclosure.

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Subprime mortgage blood has lured more sharks into the water

   Every day, we are seeing articles about subprime mortgages and rising foreclosure rates. Many people were deceived by what looked like “easy money” for homeownership. It is unfortunate that lenders took advantage of the desire of so many who wanted to achieve the American Dream.
   Even more unfortunate, though, is that now there are new opportunities for these very same people to be taken advantage of in the foreclosure process.
   At Better Neighborhoods Inc., a nonprofit, HUD-certified housing agency, we provide counseling to help people navigate the confusing process of default and foreclosure. Trained counselors negotiate with lenders for loan modifications, payment plans, short sales and other solutions that best meet the needs of the homeowner. These services are provided at no cost to the homeowner. Similar services are available from HUD-certified counseling agencies throughout the Capital Region and New York, all at no cost.
   Yet, in the wake of the foreclosure crisis, for-profit “foreclosure consultants” have emerged who offer the same type of services for a fee, or offer to buy your house now so you can avoid foreclosure, with enticing promises that you can buy it back in a year.
   Sound too good to be true? It often is, and vulnerable homeowners are being duped into selling their homes and losing their equity to boot. If you have been contacted by one of these agencies, or are tempted to call the number on the telephone pole proclaiming “We buy homes!”, here are some questions you should ask to avoid being taken advantage of:
   Will I be paid fair market value for my home based on an independent appraisal, or do they determine the price? How much will the new loan be on the home? If it is more than the current loan, who is getting the extra money? How much will I have to pay to buy back my home? What are the terms of the lease agreement? How much will my monthly rent be, what will that cover, and how long am I entitled to remain in the home? Will the new owner sell my house to someone else while I am working on strengthening my finances in order to repurchase it? What do they charge in fees? Do they get a portion of the equity in my home? How many houses has the agency bought, and how many folks were able to actually purchase their homes back?
   What does the paperwork say? Is it consistent with what is being told to me?
   New York’s Home Equity Theft Prevention Act, enacted last year to protect homeowners in these transactions, mandates that written contracts must be given including notice to the homeowner that they have five days to cancel the transaction. Government agencies must monitor these companies to make sure they are in compliance with the law and that advertisements are not misleading.
   If you are in foreclosure and need assistance, or have further questions regarding foreclosure consultants, go to www.hud gov to find a HUD-certified counseling agency near you.
   ELLIE PEPPER
   Schenectady
The writer is assistant director of BNI.  

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Fewer buyers mean home sellers must be patient On the Money
BY EILEEN ALT POWELL The Associated Press

   NEW YORK — Joe Morse has bought a 40-foot motor home that he plans to drive across America over the next several years, visiting the state capitals and the national parks he wasn’t able to get to before he retired.
   But Morse hasn’t been able to take off on his grand tour because he hasn’t been able to sell his house in Cerritos, Calif.
   “I had hoped the house would sell almost immediately,” said Morse, 68, who retired in April as a technician for FlightSafety International, an aviation training company. But his open house drew few visitors, and there have been no bids in the two months it has been for sale.
   “Now I may have to take it off the market and wait until spring,” he said. “It’s frustrating, because I’d like to get on the road.”
   Morse is among thousands of Americans who can’t take the next step in their lives because they can’t sell their houses. Some are seniors trying to downsize for retirement, others are young couples trying to move up from their starter condominiums or growing families that need more space.
   “A lot of people are finding it’s taking longer to sell than they expected,” said Stephen Piazza, vice president of Quicken Loans in Livonia, Mich.
   A spike in defaults in mortgages made to people with poor credit has caused lenders to tighten their standards, making it harder for some would-be buyers to qualify for loans. At the same time, many potential buyers are hesitating, hoping that prices soften after the steep run-up in recent years.
   The National Association of Realtors said last week that sales of existing homes dropped for a fifth consecutive month in July and the number of unsold homes shot up to a record 4.59 million.
   That doesn’t mean there are no buyers, Piazza said. Still, an unexpected delay in selling a home — especially following boom housing years that saw multiple bids within hours of a house going on the market — can throw off an individual’s plans.
   Phillip Cook, a certifi ed financial planner in Torrance, Calif., who has worked with Morse, said that anyone developing a financial plan has to consider that there are ups and downs to the economy, including the housing market.
   “Real estate has its cycles just like everything else,” he said. “After the kind of run-up we’ve had … people think it won’t slow down, won’t go down. But it does.”
   That means families need to be flexible and not lock themselves into situations where they must sell at a specific time, potentially incurring losses that undercut their ability to live comfortably in the long run.
   “The question is, if we’re in the down part of the cycle, can we wait to get a reasonable offer?” Cook said. “Maybe we have to hang in there for several years until the market recovers.”
   If someone budgets carefully, he said, that person has options, as in: “What’s the minimum I can take and still make my [financial] plan work. … Maybe I won’t be as comfortable, but I can live with it.”
   For Eileen Griffin, who is 55 and divorced, selling her five-bedroom home in Cheshire, Conn., is key to getting on with her life, especially since her youngest daughter left home for college this fall.
   “I want to downsize, to buy a tiny house somewhere in Connecticut,” said Griffi n, who is a special education teacher. She’s also purchasing a condominium in Myrtle Beach, S.C., which is where daughter Jennifer if going to college and where she hopes to retire in five years.
   Her Connecticut home went on the market in April, and got some lookers but no offers. She relisted it in mid-August and has worked with a professional to “stage” the home to make it more appealing to potential buyers.
   “Despite all that, I’m just not getting calls to see the house,” Griffin said. “And it’s difficult for me — I’m living in a house that is staged for a potential buyer, so I can’t leave anything out on the counters, the laundry basket has to be empty, things have to be in their place.”
   She added: “Two mortgages over a long period of time would kill me. I’m hoping the big house sells.”

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Quick mortgage crisis help unlikely
Lawmakers set strategies, plan hearings but progress slow
BY JESSE J. HOLLAND The Associated Press

   WASHINGTON — Want government help to get out of a bad subprime mortgage? Don’t look for Congress to come to your rescue anytime soon.
   Lawmakers have lots of ideas and plans — as well as hearings to share their concerns and assess blame — but there’s no consensus on how to stop the foreclosures. The only thing everyone has agreed on is that something must be done.
   “We may have as many as 1 million to 3 million people who could lose their homes, not because they lost their jobs, not because the economy collapsed but because they got bad deals on mortgages,” said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee.
   House and Senate lawmakers are working on different plans to help Americans out of the mortgage crisis, none of which seem ready for a prime-time signing by President Bush. Dodd acknowledged as much last week as he urged the White House to take action, despite all the mortgage-related legislation his committee has planned for the fall.
   “Those matters will take a little more time,” Dodd said.
   Time may be running out. Financial markets in the U.S. and around the globe have been shaken by fears about spreading credit problems that started with home mortgages. It began with rising defaults in subprime mortgages — home loans made to people with weak credit histories.
   The rising delinquencies have jolted global credit markets because big hedge funds and other investors poured lots of money into risky subprime mortgages because of their higher returns and now face the prospect that they will not be repaid.
   The House and Senate are working on different tracks, but the plan furthest down the road is in the Senate, where senators will vote this month on the Transportation-Housing and Urban Development departments spending bill. Inside that bill is $100 million earmarked for nonprofi t housing groups to help homeowners with refinancing.
   Many mortgages are no longer held at banks, so people don’t know where to go when they start getting in trouble, senators said.
   “First and foremost, we need people on the ground to help innocent mortgagors, innocent homeowners refinance when they’re
on the edge of foreclosure and yet they have
the wherewithal for refinancing,” said Sen.
Charles Schumer, D-N.Y., who sits on the
Senate Banking Committee. “Somebody’s
got to fill that void.”
   While the Senate is working on that, Rep. Barney Frank, chairman of the House Financial Services Committee, will hold an inquiry Wednesday on credit rating agencies like Standard & Poor’s Corp., Moody’s Investors Service Inc. and Fitch Ratings. Such rating agencies have been criticized for not properly evaluating the risks of bonds backed by mortgages given to borrowers with weak credit.
   President Bush, meanwhile, urged Congress on Friday to concentrate on reforming the Federal Housing Administration, a Depression-era agency created to help low- and moderate-income Americans afford homes. The House passed a bill last year that would modernize the FHA, but a companion bill has yet to make it through the Senate.
   That legislation is one of Dodd’s priorities for the fall.
   “We’re looking at ways to deal with the credit rating agencies and FHA, which I had hoped we would have completed in July,” Dodd said. “We’ll hopefully bring that up as soon as we can with the return of the Congress in September.”
   However, even if it passes the Senate, it would have to be reconciled with the House legislation before it can go to the White House for Bush’s signature, a process that could take months.
   Some Democrats also would like to see mortgage giants Fannie Mae and Freddie Mac — which are recovering from accounting scandals — play a larger role in the mortgage market. Some want to see the two companies buy “jumbo” mortgages of more than $417,000 in high-cost areas of the country.
   The House in May passed legislation that would do that. But the situation has worsened since then, and the legislation must be reworked, Frank said. “The current crisis in the mortgage market demonstrates we should raise it to a higher level,” he said.
   Most of the other bills are still in planning stages, like numerous measures to regulate and penalize mortgage lenders who engage in predatory lending. Schumer acknowledged, however, that it won’t help anyone already suffering with a bad mortgage.
   “This won’t do anything about what happened in the past, but it will prevent the present crisis from getting worse because mortgage brokers are still preying on these people,” Schumer said.  

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‘Keep the Dream’ not financed by taxpayers

   I would like to set the record straight regarding the new “Keep the Dream” program mentioned in the Aug. 19 Viewpoint article by Erik Schnackenberg, entitled “Banks Gone Bad.”
   “Keep the Dream,” which was launched by the State of New York Mortgage Agency, is an innovative $100 million program designed to help homeowners at risk of foreclosure refinance their mortgages so they can keep their homes.
   The program will not be funded by taxpayer dollars. Rather, the resources will come from investors in the capital markets who invest in these mortgages through SONYMA’s partner, FannieMae — one of our most reputable government-supported housing institutions.
   Also, a portion of the $650,000 the state will use to provide homeowner counseling to recipients of “Keep the Dream” mortgages will come from internally generated SONYMA funds — not taxpayer dollars.
   It is also important to note that “Keep the Dream” is not a bailout for banks. Many of the banks that initiated inappropriate mortgages have long since sold those mortgages to investors. And the banks that still hold these mortgages would prefer that homeowners stay in their homes and make their monthly payments rather than go through New York’s arduous foreclosure procedures.
   “Keep the Dream” will provide valuable help to borrowers facing financial hardship because of higher payments due to an interest rate reset on an adjustablerate or other unconventional mortgage. It is consistent with SONYMA’s mission of providing home ownership opportunities
for working-class families throughout New
York state.
PRISCILLA ALMODOVAR
New York City
The writer is president and CEO for the State of New York Mortgage Agency.  

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Home foreclosures set a record Figures show mortgage crisis is worsening
BY MARTIN CRUTSINGER The Associated Press

   WASHINGTON — Homeowners, struggling to deal with sharp increases in their adjustable mortgage payments, got hit with a record number of foreclosure notices in the spring as the crisis in subprime lending intensified.
   The problem was the most severe in the industrial Midwest and former housing boom areas such as California and Florida, but economists warned the situation will get worse in coming months as an estimated 2 million adjustable rate mortgages taken out with low introductory interest rates reset to much higher rates.
   The crisis is most severe in subprime mortgages, loans provided to borrowers with weak credit, but it is now spreading to other types of mortgages, according to a quarterly report released Thursday by the Mortgage Bankers Association.
   That report showed the number of homeowners who got foreclosure notices in the April-June quarter hit an all-time high of 0.65 percent, up from 0.58 percent in the first three months of the year. It marked the third consecutive quarter that a new record has been set.
   The rising defaults in subprime mortgages have roiled global fi - nancial markets in recent weeks, sending stock prices on a rollercoaster ride as investors wonder which big bank or hedge fund will be the next to report huge losses from subprime mortgages that were bundled into securities and resold to investors.
   Both President Bush and Federal Reserve Chairman Ben Bernanke tried to calm fears late last week. Bernanke pledged the central bank would “act as needed” to limit any adverse economic effects from the market turmoil.
   Bush announced changes in the Federal Home Administration insured-loan program to help combat the expected wave of foreclosures and also answer attacks from Democrats that his administration has been slow to respond to a growing crisis in mortgage foreclosures.
   Democrats criticized Bush for not going far enough and vowed to push more aggressive legislation through Congress, not only to help homeowners facing foreclosure but also to attack predatory lending practices they contend led to the crisis.
   Sen. Charles Schumer, the chairman of the Joint Economic Committee, said the new mortgage delinquency numbers should serve as a wake-up call to Congress and the administration that urgent help is needed. Schumer is seeking $300 million in federal support for nonprofit mortgage counseling groups which he said were “the best defense against the coming storm of foreclosures throughout the country.”
   Private economists warned the worst slump in housing in 16 years and the turbulence in fi - nancial markets from a resulting serious credit squeeze could push the economy into a recession as more borrowers fall into default, dumping even more homes onto an already glutted market.  

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The program will not be funded by taxpayer dollars. Rather, the resources will come from investors in the capital markets who invest in these mortgages through SONYMA’s partner, FannieMae — one of our most reputable government-supported housing institutions.

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Homeowners facing foreclosure have options
BY NANCY TREJOS The Washington Post

   WASHINGTON — When Michael and Kimberly Walker wanted to buy a house three years ago, they had no money for a down payment, but that didn’t matter. They took out two loans — one for $167,000, the other for $40,000 — and ended up with a three-bedroom townhouse in Purcellville, Va.
   Having relied on an acquaintance to put together their financing, they didn’t pay much attention and were surprised to learn later that the interest rate for their first mortgage would increase after two years. The rate on that loan is now 10.8 percent but will reset to 11.8 percent in a couple of weeks. Their monthly payment for both loans is $2,058 plus taxes.
   Combined, they expect to make about $59,000 this year, he as an equipment operator for a construction materials company, she as a case-management clerk at the county’s circuit court. They have a 5-year-old son, credit card debt and two car loans. They no longer go out to dinner, buy clothing or go to movies. Still, they have not been able to pay their mortgage on time in the past six months. “It’s just adjusted to where we can’t keep control of it,” said Kimberly, 28.
   As the housing market weakens and lenders tighten their standards, people like the Walkers are struggling to figure out how to fend off foreclosure. “The answer is never easy, and it’s getting harder every day,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.
SUBPRIME LOANS
   During the real estate boom, many mortgage companies were willing to make loans — often adjustable-rate mortgages with low introductory rates that increase after two or three years — to people with spotty credit, known as subprime borrowers, or with no money for down payments.
   In the first three months of this year, the percentage of U.S. mortgages entering foreclosure was the highest since 1979, according to the Mortgage Bankers Association. Now lenders, consumer advocates and the government are trying to contain the damage. Last week, President Bush announced that the Federal Housing Administration would begin a program to allow homeowners who have good credit but can’t afford their mortgages to refinance to FHA-insured mortgages.
   Ultimately, though, it’s up to the homeowner to take charge because once the foreclosure procedure begins, it can be swift, lawyers said. “If folks sort of anticipate they are going to have trouble making mortgage payments, it’s always best to call the servicer before you fall behind,” Rheingold said. “Once you are behind, it’s going to spiral.”
   There are plenty of ways to avoid foreclosure: Refinancing, persuading the lender to modify the terms of the loan, selling the house or filing for bankruptcy protection, to name some. But there are also plenty of pitfalls, such as tax implications and longterm damage to your credit. “None of these options are great,” Rheingold said.
   So what should you do if you have one of the 2 million mortgages that are scheduled to adjust in the next two years?
   First, several consumer advocates and attorneys said, make sure you understand your loan. Surprisingly, many Americans don’t know what kind of mortgages they have, consumer advocates said. If you need help deciphering it, call a housing counselor or lawyer.
   If you have already missed payments, don’t ignore your lender. “Don’t refuse to take letters. Don’t refuse to take phone calls,” said Diane Cipollone, a lawyer at the National Fair Housing Alliance. “The sooner the homeowner contacts a counselor or attorney, the better their options are.”
LIMIT TO LENIENCY
   One thing in your favor is that lenders don’t want to foreclose, for the simple reason that it costs them money. “Banks don’t want to be in the business of owning real estate,” said Andrew Berman, associate professor of law and director of the Center for Real Estate Studies at the New York Law School.
   Their leniency only goes so far, however, and usually does not extend to the chronically late.
   “The last thing any lender needs right now is a foreclosed property, but they need to have some belief that the borrower will live up to their promise,” said Larry Pratt, president and chief executive of First Savings Mortgage in McLean, Va.
   Getting through to a decision-maker, however, might be tricky. Increasingly, mortgages are being pooled and sold to investors. So the company that gave you the loan may not be collecting the payments.
   Wanda Leys, a certified nursing assistant, learned that when an illness in her family made her miss a few payments on her four-bedroom Capitol Heights, Md., home. She has now paid what she owes and is not being threatened with foreclosure, but she said she worries because her adjustablerate mortgage will soon reset.
   She decided to reach out to her lender, but her loan had been sold from one company to another, and she couldn’t figure out whom to call.
   She sought help from the local nonprofi t group United Communities Against Poverty, which tracked down the loss-mitigation department of her new loan servicer, she said. “What they do is they call and they negotiate,” she said.
   For borrowers such as Leys, refinancing to a fixed-rate loan might be the best long-term solution. However, you can’t refinance if your property appraises for less than what you owe the bank. That is happening now in some parts of the country. On top of that, many loans made to subprime borrowers have prepayment penalties.
   And if you’ve missed mortgage payments, your credit score has most likely dropped, so you may not qualify as easily as you would have during the era of loose lending.
   “You have to look at the lending environment overall in the industry, and it’s not as easy to borrow at a low cost as it was two or three years ago,” said John Snyder, a homeownership specialist at the national nonprofit group NeighborWorks America.
   The Walkers said they tried and failed to refinance with their lender, Countrywide Home Loans, and with another bank. They are hoping for a loan modification, which would decrease the interest rate or stretch the remaining balance over a longer period, thus reducing the monthly payment. They are also trying to refinance with the Neighborhood Assistance Corporation of America, which has teamed with Citigroup and Bank of America to pledge $1 billion for people at risk of losing their homes.
‘NOBODY BENEFITS’
   Countrywide does not discuss individual cases, citing privacy concerns. In an e-mailed statement, the company said that it has 2,600 home-retention specialists and that it has kept 35,000 homeowners from foreclosure this year.
   “Nobody benefits from foreclosure,” the company said. “As we do with any customer requesting assistance, a home retention specialist is working directly with this borrower to come to a workout solution.”
   Lenders are often more likely to grant a forbearance or a repayment plan than a loan modification. A forbearance is a suspension or reduction of monthly payments until the borrower regains financial footing. With a repayment plan, the missed payments are spread out over time. The borrower has to pay them in addition to the regular mortgage.
   If none of these options works, it might be time to sell. If a borrower can’t get enough for the mortgage and closing costs, he or she might try a “short sale,” an arrangement in which the lender allows the sale of the property for less than is owed.
   A cash-strapped borrower should also think about a “deed in lieu of foreclosure,” which means giving the lender ownership rights without the shame of a foreclosure.
BANKRUPTCY OPTION
   Many counselors warn against filing for bankruptcy because it ruins the filer’s credit, albeit less so than a foreclosure. But lawyers say filing for Chapter 13 would at least halt foreclosure. But the borrower must have enough money to keep up with the regular mortgage payment and other debts.
   More help may soon be on the way. Many states have set up task forces to devise relief programs. In the meantime, if you fear falling behind on payments, seek help from one of the many nonprofit groups that focus on troubled homeowners. And beware of mortgage rescue scams.
   “The worst thing people can do is bury their heads in the sand,” said Jean Constantine-Davis, a senior attorney for AARP Foundation Litigation, a legal advocacy group in Washington.
   “The second-worst thing is dealing with people that are making promises that will make matters worse.”

Quoted Text

When Michael and Kimberly Walker wanted to buy a house three years ago, they had no money for a down payment, but that didn’t matter. They took out two loans — one for $167,000, the other for $40,000 — and ended up with a three-bedroom townhouse in Purcellville, Va.
   Having relied on an acquaintance to put together their financing, they didn’t pay much attention and were surprised to learn later that the interest rate for their first mortgage would increase after two years. The rate on that loan is now 10.8 percent but will reset to 11.8 percent in a couple of weeks. Their monthly payment for both loans is $2,058 plus taxes.
   Combined, they expect to make about $59,000 this year, he as an equipment operator for a construction materials company, she as a case-management clerk at the county’s circuit court. They have a 5-year-old son, credit card debt and two car loans. They no longer go out to dinner, buy clothing or go to movies. Still, they have not been able to pay their mortgage on time in the past six months. “It’s just adjusted to where we can’t keep control of it,” said Kimberly, 28.
   As the housing market weakens and lenders tighten their standards, people like the Walkers are struggling to figure out how to fend off foreclosure. “The answer is never easy, and it’s getting harder every day,” said Ira Rheingold, executive director of the National Association of Consumer Advocates

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Consumer prices in rare decline Housing industry at lowest ebb since 1995
BY MARTIN CRUTSINGER The Associated Press

   WASHINGTON — Consumer prices posted a rare decline in August while the battered housing industry saw construction fall to the slowest pace in 12 years.
   The new economic reports Wednesday were seen as justifi - cation for the Federal Reserve’s bolder-than-expected cut in interest rates to try to ward off a recession. Analysts said the waning inflation pressures gave the Fed the room to cut interest rates while the continued severe downturn in housing gave the central bank a reason to move.
   The Labor Department reported that consumer prices dipped by 0.1 percent in August. It was the first decline since a 0.4 percent drop in October 2006 and reflected a big drop in gasoline and other energy prices.
   Meanwhile, the Commerce Department reported that construction of new homes fell by 2.6 percent last month to a seasonally adjusted annual rate of 1.331 million units. That was the slowest pace since June 1995 and put construction activity 19.1 percent below the level of a year ago.
   The Fed on Tuesday cut its target for the federal funds rate, which governs the rates paid on millions of consumer and business loans, by a half-point to 4.75 percent, double the quarter-point reduction that had been expected.
   The Fed in its statement said that “some inflation risks remain,” but by making the bolder half-point cut in its federal funds rate, it was signaling that it clearly believed the threat of a recession outweighed concerns about inflation.
   Investors liked Wednesday’s benign inflation reading, believing it gave the Fed room to cut rates further. The Dow Jones industrial average rose by 76.17 points to close at 13,815.56. That gain followed a 336-point surge on Tuesday, the biggest one-day point gain in nearly five years, as investors reacted to the Fed’s rate cut.
   Analysts predicted housing construction would fall further in coming months, reflecting the recent turmoil in financial markets as investors lost their appetite for securities backed by mortgages because of rising mortgage delinquencies.
   “There is a continuing major downslide,” said David Seiders, chief economist for the National Association of Home Builders. “We know from our own surveys that August was a really rough month in the mortgage market and the housing market.”
   The organization’s survey of builder sentiment fell to 20, tying a record low set in January 1991 during the last severe housing downturn.
   Seiders said even with the Fed’s cut in interest rates he did not expect to see new home sales stop falling until early next year with construction starts not stabilizing until the middle of next year.
   The problem, he said, was that the rising mortgage foreclosures are dumping more homes on an already glutted market at a time when potential buyers are having difficulty getting mortgages because lenders are tightening standards. Mortgage foreclosures are expected to rise even further as an estimated 2 million adjustable rate mortgages with low teaser rates reset to much higher monthly payments over the next two years.
   Yale University economist Robert Shiller testified to the Joint Economic Committee on Wednesday that the current real estate downturn could end up being the most severe since the Great Depression and could drag the country into a recession.
   But other analysts said they believed that the Fed had acted in time, as long as it cuts rates further in coming months, to avert a full-blown recession.

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Mortgage foreclosures are expected to rise even further as an estimated 2 million adjustable rate mortgages with low teaser rates reset to much higher monthly payments over the next two years.

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With subprime mortgages, the American Dream went nuts
Froma Harrop
Froma Harrop is a nationally syndicated columnist.

   I had an adjustable-rate mortgage, once. I fully understood that after two years, my low come-on interest rate would be reset at a more realistic level. But when the two years passed — Powee! It was still something of a shock.
   The current mortgage crisis is about aggressive lenders, reckless borrowers and cheated investors. It’s also about psychology. The adjustable-rate mortgage has been the perfect enabler for an instant-gratification society.
   The EZ early payments let homebuyers borrow more money to buy more house than they could with a stodgy fixed-rate mortgage. Thus, they spare many the chore of saving for a solid down payment. As for the rate spike on the horizon, well, tomorrow is another day.
   The folks who made the loans grabbed quick profits by collecting big fees upfront, then dumped the risky mortgages onto securities sold to investors. The rating agencies, paid by the securities companies, bestowed their blessings on these iffy investments.
   One can sympathize with many of the borrowers now losing their homes. Some are sinking under the weight of subprime mortgages with punishing terms. Some suffered a reversal in fortune — perhaps a job loss — that dried up the cash flow needed to meet monthly payments.
   But there were also lazy borrowers who didn’t read the contract. There were magical thinkers who assumed that home values would always rise. And as always, there were greedy people who wanted a house they couldn’t afford and wanted it now.
   Stockton, California, has become a national leader in home foreclosures. It is an “affordable” exurb, 90 miles east of San Francisco. Many of the mortgages there are subprime.
   A story about a Stockton family in trouble shows a luxury kitchen that dwarfs the cooking facilities of some restaurants. Read on. The couple had bought a more modest house a few years earlier but decided to “move up” into a bigger model without waiting to sell their first home. They are now holding two mortgages and an equity loan for remodeling the newer house.
   This is the American Dream gone nuts. A big part of the sales pitch is to portray home ownership as the most superb of investments. In truth, the return on residential real estate hasn’t been all that great.
   From 1980 to 2005, money invested in the Standard and Poor’s 500 returned an average 12 percent a year, while home values even in the hot-hot markets of New York and San Francisco gained an average seven percent a year.
   Furthermore, explains Thomas Z. Lys, a business professor at Northwestern University, much of the real-estate gains represented mere inflation. And when you subtract the tons of money homeowners spend over the years on property taxes, mortgage costs, plumbing repairs and remodeled bathrooms, the return is even less.
   Sure, we can factor in the value of leveraging (you might see your house price go up after putting only 20 percent down) and that people who don’t own homes have to pay rent. But in the end, Lys concludes, the chief value of the house is ... as a place to live.
   There are sensible responses to the current mortgage crisis — and they don’t include bailing out anyone. First off, let it be a lesson to careless borrowers and investors who didn’t consider the risks they were taking. Second, the federal government should tighten up consumer protections on home loans: Do away with overly confusing or abusive mortgages. Third, everyone should stop hyping homeownership as something that every redblooded American must pursue.
   History tells us that real-estate mania will return. But let’s now enjoy a few years of thinking about our homes as homes.  

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There are sensible responses to the current mortgage crisis — and they don’t include bailing out anyone. First off, let it be a lesson to careless borrowers and investors who didn’t consider the risks they were taking. Second, the federal government should tighten up consumer protections on home loans: Do away with overly confusing or abusive mortgages. Third, everyone should stop hyping homeownership as something that every redblooded American must pursue.
  History tells us that real-estate mania will return. But let’s now enjoy a few years of thinking about our homes as homes.

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August new home sales tumble
Median prices fall by 7.5 percent to 7-year low
BY JEANNINE AVERSA The Associated Press

   WASHINGTON — New-homes sales tumbled in August to the lowest level in seven years, a stark sign that the credit crunch is aggravating an already painful housing slump.
   Sales of new homes dropped 8.3 percent in August from July, the Commerce Department reported Thursday, driving down sales to a seasonally adjusted annual rate of 795,000. That was the lowest level since June 2000.
   “This is just hideous,” said Ian Shepherdson, chief economist at High Frequency Economics.
   The home sales report came on the same day that the government reported a relatively brisk business growth rate in revised figures for the second quarter. But the 3.8 percent pace was less than previously estimated and it occurred before the credit crisis and its repercussions across the broad spectrum of the economy had taken hold.
   Home prices tanked.
   The median sales price in August fell by 7.5 percent from a year earlier to $225,700. That was the biggest drop in percentage terms in nearly 37 years. The median price is the middle point at which half sell for more and half for less. The average sales price dropped by 8 percent in August from a year earlier to $292,000. That was the biggest decline in 17 years.
   Sales fell in the South and the West in August compared with July. Sales, however, rose in the Northeast and Midwest.
   The new-homes sales report, combined with other recent economic reports showing a sharp drop in demand for big-ticket manufactured goods in August, suggested the economy lost momentum as it headed into the fall.
   On Wall Street, though, stocks rose. The Dow Jones industrial average gained 34.79 points to close at 13,912.94. Investors found a silver lining in the weak home-sales report. They believed it would increase the odds of a rate cut by the Federal Reserve next month, and thus investors bid stock prices higher.
   Another report issued by Commerce showed the economy staged a rebound in the spring before a credit crisis raised new fears about longer-term business health.
   The economy’s 3.8 percent growth rate in the April-to-June quarter was the strongest showing in just over a year. The new reading was slightly less robust than a previous estimate of a 4 percent growth rate. Nonetheless, it still marked a substantial improvement over the feeble 0.6 percent growth rate registered in the prior quarter.
   Gross domestic product is the value of all goods and services produced within the United States and is considered the best barometer of the country’s economic health.
   The increase in the rate of growth, though, is likely to be fleeting. The deepening housing slump and a painful credit crunch since the spring have darkened the mood of individuals and businesses alike. That has led analysts to predict that economic growth has slowed considerably in the quarter that ends Sunday.
   The weakness in housing points “to yet another hefty drag on GDP growth … during the third quarter and it shows no signs of letting up anytime soon,” said Michael Gregory, managing director and senior economist at BMO Capital Markets Economics.
   The National Association for Business Economics believes growth in the third quarter — the period from July through September — slowed to a pace of around 2.4 percent. It predicts the growth rate in the final three months of this year will be around 2.5 percent. Others think growth will turn out to be weaker than those projections.
   Fears that the troubled housing market and credit problems could short-circuit the six-year-old economic expansion have shaken Wall Street. The biggest worry is that people and businesses will cut back on their spending and investment, throwing the economy into a tailspin.  

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Official sees threat to economy Treasury chief urges action on unfolding housing crisis
BY MARTIN CRUTSINGER The Associated Press

   WASHINGTON — Treasury Secretary Henry Paulson said Tuesday the unfolding housing crisis posed a significant risk to the economy and called for Congress and private mortgage companies to move more quickly to help.
   But Democrats in Congress said it was the Bush administration that is moving too slowly. They said the latest proposals from Paulson fell far short of what is needed to deal with the prospect of as many as 2 million families losing their homes over the next two years as their adjustablerate mortgages reset to much higher monthly payments.
   In a speech at Georgetown University’s law school, Paulson said the financial industry should provide immediate help for homeowners trying to refinance to more affordable mortgages. He also called for an overhaul of laws and regulations governing mortgage lending to halt abusive practices that contributed to the current crisis.
   “Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding, and I view it as the most significant current risk to our economy,” Paulson said in his most somber assessment of the crisis to date. “The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.”
   On Monday, the nation’s three biggest banks announced the creation of a fund with up to $100 billion in resources to buy troubled assets such as mortgage-backed securities. Treasury Department officials participated in the behind-the-scenes discussions that led to creation of the fund, but no government resources have been pledged to the effort.
   Democrats, who are pushing for a bigger government role in resolving the crisis, believe if the administration does not act more forcefully the mounting foreclosures could become a major issue in next year’s presidential campaign.
   “Millions of American homeowners are getting crunched by tickingtime-bomb mortgages and they have yet to see their government take the necessary action,” said Sen. Robert Menendez, D-N.J. “It seems that every bold action this administration has taken has been to soften the blow for investors.”
   Sen. Charles Schumer, D-N.Y., said that since Aug. 21 when Paulson said he believed the mortgage problems would sort themselves out, there have been an additional 400,000 home foreclosure filings.
   “Every week, the administration moves closer to what many of us say is needed, but they do it so slowly, so haltingly, that they keep falling behind,” he said in an interview with reporters.
   Underscoring the soaring level of foreclosures, the Government Accountability Office released a new report showing that as of June 2007 more than 1 million mortgages were in default or foreclosure, an increase of 50 percent from two years ago.
   In his speech, Paulson said the government must balance the need to help homeowners stay in their homes against the threat that government rescue efforts could encourage investors to make risky decisions in the future. “I have no interest in bailing out lenders or property speculators,” he said.
   Federal Reserve Chairman Ben Bernanke said Monday the housing problem would be a “significant drag” on economic growth into next year and that it would take time for Wall Street to fully recover from a significant credit crunch.
   In August, financial markets around the world were roiled by the worst credit crisis in nearly a decade as investors became worried about rising defaults in the mortgage market, causing credit to dry up in a number of markets including the market for commercial paper, short-term loans used extensively by businesses. At the time, Paulson insisted the country would be able to work through the problems without any lingering adverse effects. However, as the extent of the troubles in subprime mortgages has grown and the housing slump has deepened, the administration has worked to increase its efforts.
   Paulson said in his speech that it was crucial for mortgage companies to move more quickly with an effort dubbed Hope Now to boost the number of homeowners who can be reached with credit counseling and help in refinancing to mortgages they can afford.
   “This is not about finger-pointing; it is about putting an aggressive plan together and moving forward,” he said.

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Go easy with subprime solutions

   How sexy a political issue is the subprime mortgage mess? Sexy enough that it brough