Debt Rattle

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Debt Rattle

By Alan Abelson

08-27-07

CRISES OF ANY KIND INEVITABLY BRING out the best and the worst in people.  They inspire the too few voices of reason as well as the predictable strident expressions of hysteria.  And especially intriguing perhaps are the unexpected revelations they offer.  The current credit crisis, still fermenting and gathering toxicity, is plainly no exception.
 
The cries of the dispossessed — and the multitudes about to be — resound pitiably throughout the land. What for so many years had been a roaring seller’s housing market is with breathtaking rapidity turning into a buyer’s dream.
 
The climate for borrowers has turned inhospitably chilly and downright frigid for wannabe homeowners.  No mystery why.  As the trusty data collectors at Federal Deposit Insurance Corp. observe in their latest communique, delinquent loans grew by a monster $6.4 Billion in the second quarter of this year, paced by – what else? – overdue mortgage payments, a leap of 10%, the greatest quarterly increase since the final three months of 1990, when, as you may remember, the listing economy was mired in recession.  Actual foreclosures, by RealtyTrac’s count, are a startling 93% higher than a year ago.

Today’s Bankruptcy Law helps the Banks

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The New Bankruptcy Law is protecting Banks and Lenders more than the Consumers.

CONGRESS REVISED THE nation’s bankruptcy laws under 2005’s Bankruptcy Abuse Prevention and Consumer Protection Act, effectively making it harder for individuals to claim insolvency. The reform was seen by critics as protecting banks and lenders more than the consumers the legislation’s title claimed to help. Now, as the fallout from the subprime mess continues to expand, an uptick in bankruptcy filings may yet be another kink in the growing mortgage crisis.

Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, has long thought the revised law to be too restrictive. Now, Sommer says, it needs to be revamped again to better reflect the current mortgage market. (The original bankruptcy law dates back to 1978, when exotic mortgages were less common and foreclosure was rarely a reason to file for bankruptcy.)

Even with the toughened rules, personal bankruptcy filings for the first six months of 2007 are up 48.3% compared with the same period last year. As of June 30, 391,105 individuals filed for bankruptcy this year, up from 263,660 a year earlier, according to the American Bankruptcy Institute.

Once-confident homeowners who, during the real-estate boom, bought homes using adjustable-rate, interest-only, no-money-down mortgages are now overwhelmed by a weaker house values and crushing debts. Indeed, foreclosure filings reported in July jumped 93% from July 2006, and 9% from June.

Still, bankruptcy filings are well below pre-2005 levels. Sommer says the higher costs and increased paperwork of the new law make it too onerous for consumers to file. Ultimately, he says, that makes it harder for those facing foreclosure to use personal bankruptcy to protect their homes while they figure out how to meet ballooning mortgage payments.

“One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding,” says Sommer, who also serves as the supervising attorney of the Consumer Bankruptcy Assistance Project in Philadelphia. “Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.” Besides lowering costs, another part of his proposal involves stripping down the mortgage to the home’s current value and re-amortizing that over 30 years.

Here’s what else Sommer had to say about the bankruptcy code’s problems and his ideas to help borrowers facing foreclosure hold on to their homes.

SmartMoney.com: Why do you think the number of bankruptcy filings is higher so far this year than last year?

Henry Sommer: The number of bankruptcy filings has gone up steadily. They went way down right when the law went into effect [in 2005] — primarily because people rushed to file beforehand. Since then, it’s only at 70% of levels before…. It has been steadily going up. Certainly, people having problems with their mortgages is one reason why they’re filing.

SM: How do you propose to change the bankruptcy law?

HS: There are a couple of different types of changes we propose. One is to make filing for bankruptcy less complicated. One of the side effects of the new law — and I’d like to think Congress didn’t intend this — is the phenomenal increase in paperwork and cost associated with filing, and it’s therefore denying access to people who can’t afford them. So one type of change we’d like to see is a cutback on the paperwork and the expense of bankruptcy. The other is that bankruptcy laws be changed to give people more tools to deal with foreclosures, including these exploding adjustable rate mortgages (ARMs) you see now, where payments just go so high because of the interest rate adjustments. So we propose changes to make bankruptcy more useful.

SM: What’s an example of that?

HS: Typically, when people face a foreclosure, bankruptcy has allowed them to take up to five years to catch up on their arrearages. In a Chapter 13 case, [usually you would] start paying your monthly mortgage payment of, say, $1,000. You [pay] arrearages over 12 months…. Bankruptcy allows you to do that. That’s worked well for people who had a temporary income interruption that caused them to fall behind on payments. [Our proposal] gives three, four or five years to catch up, instead of typically two months…. The two months, or slightly longer, is how long mortgage companies will usually give debtors to catch up outside of bankruptcy.

That doesn’t work so well when your monthly payment has been bumped up because of an adjustable rate mortgage. That’s the problem suddenly facing a lot of people. It doesn’t work if you can’t even afford the monthly payment. Our proposal is to take the ARMs and re-amortize them over 30 years as a fixed rate. They’d do that as part of Chapter 13 bankruptcy. [This would apply] if your house was overappraised or it’s fallen in value. Say you got a 100% mortgage for your $200,000 house, and now it’s worth $170,000. You re-amortize it over 30 years and pay off the mortgage that way. That’s the crux of our proposal — strip down the mortgage to the current value of the house and re-amortize that over 30 years. We’re hoping that will be introduced in Congress in September.

SM: Is that considered at least a partial loan forgiveness?

HS: No, definitely not. It’s been done for years with cars. In 1978 [when the law was first established] we didn’t have these kinds of mortgages either. Even if it made sense in 1978, it doesn’t make sense now.

We’re not trying to repeal the 2005 law wholesale, but we’re trying to get rid of the excess paperwork and deal with the particular mortgage problem, which really wasn’t addressed in the 2005 revisions. One of the nice things about bankruptcy until 2005 was that it was a pretty inexpensive proceeding. Most places would have it done for under $1,000. Some places have gone up 50% to 100%. That’s a real big barrier.

SM: How much paperwork are we talking about?

HS: The paperwork is roughly doubled. Among other things, debtors must provide tax returns, 60 days’ worth of pay stubs, bank statements and complete a six-page “means testing” form. All of these are new requirements, along with the requirement of obtaining credit counseling before bankruptcy and a credit education course during the case. On top of this, the United States Trustee’s office, part of the Justice Department, often demands numerous additional documents, like six months’ worth of pay stubs, two years of tax returns, all credit card statements.

SM: Steve Bartlett, president and chief executive of Financial Services Roundtable, an organization that represents financial-services companies, in May testified in Congress that the new bankruptcy reform law is working well as evidenced by the big decrease in filings since it was enacted.

HS: I disagree with him. He’s employed by banks and other creditors. He bases that on the fact that the number of bankruptcy filings are down. He said the number of bankruptcies was down something like 40%…. But what about all the people who want to file but can’t? People aren’t filing because it’s much more difficult. It’s something of a misperception out there that you can’t file for bankruptcy anymore.

SM: Why do people think that?

HS: There was kind of a superficial publicity when the new law went into effect. Many were told that by debt collectors, which of course makes the debt collectors’ job easier. That’s another reason why that [notion] will slowly go away — when people know of others who have file for bankruptcy.

One of the things mortgage companies say is that they’ll do a loan modification, they’ll reduce the principal. But it’s extremely hard to get those. A lot of people are led down the path thinking they’ll get them and the next day they’re facing foreclosure. So what the companies claim to be doing and what they’re actually doing are two different things.

SM: What would you advise at-risk consumers do?

HS: People have tendencies to put their heads in the sand and wait for a solution to come. But the sooner they deal with it, the better…. If people think they’re going to have a problem, it’s a good time to figure out what their options are.

Top Savings Deposit Yields

barrons-08-27-07.gifTop Savings Deposit Yields from Barrons Magazine dated 08-27-07

Money Market Accounts

          Institution                      Phone Number         Yield      

  1. Indymac Bank               877-202-5088          5.75
  2. WT Direct                     800-983-4732          5.26
  3. E-Loan.com                  888-533-5333          5.25
  4. Countrywide Bank         800-844-1091          5.25
  5. Transportation Allia      800-837-4214          5.25

Six-Month CDs

          Institution                      Phone Number         Yield      

  1. Countrywide Bank         800-844-1091          5.50
  2. UmbrellaBank.com       866-862-7355          5.42
  3. Corus Bank                  800-555-5710         5.40
  4. First Trade Union Sa    800-242-0272         5.25
  5. Indymac Bank              877-202-5088          5.25

One-Year CDs

          Institution                      Phone Number         Yield      

  1. Countrywide Bank         800-844-1091          5.65
  2. Indymac Bank              877-202-5088          5.25
  3. First Metropolitan        800-435-4040         5.43
  4. Corus Bank                  800-555-5710         5.42
  5. Fireside Bank               877-326-4167          5.38

Five-Year CDs

         Institution                      Phone Number         Yield      

  1. E-Loan.com                 888-533-5333          5.55
  2. Fireside Bank               877-326-4167          5.50
  3. Intervest Ntl Bank      212-218-8383            5.50
  4. First Comm Bank         614-239-4680          5.45
  5. First Metropolitan        800-435-4040         5.38

 Rates are the highest yields offered by federally-insured banks and savings associations nationwide.

Phone verify rates and yields before investing or sending money.

Ask if calculated interest is compunded daily, monthly, quarterly, semiannually or annually.  And for God’s sakes learn the difference.

Investment Outlook

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Investment Outlook
Bill Gross | September 2007

During times of market turmoil it helps to simplify and get basic – explain things to a public and even yourself in terms of what can be easily understood. Goodness knows it’s not a piece of cake for anyone over 40 these days to understand the maze of financial structures that now appear to be unwinding. They were created by youthful financial engineers trained to exploit cheap money and leverage who showed no fear and who have, until the last few weeks, never known the sting of the market’s lash. They are wizards of complexity. I, however, having just turned 63, am a professor of simplicity.

So forgive my perhaps unsophisticated explanation to follow of how the subprime crisis crossed the borders of mortgage finance to swiftly infect global capital markets. What Citigroup’s Chuck Prince, the Fed’s Ben Bernanke, Treasury Secretary Hank Paulson, and a host of other sophisticates should have known is that the bond and stock market problem is the same one puzzle players confront during a game of “Where’s Waldo?” – Waldo in this case being the bad loans and defaulting subprime paper of the U.S. mortgage market. While market analysts can guesstimate how many Waldos might actually show their face over the next few years – 100 to 200 billion dollars worth is a reasonable estimate – no one really knows where they are hidden. First believed to be confined to Bear Stearns hedge funds and their proxies, Waldos have been popping up with regularity in seemingly staid institutions such as German and French Banks that have necessitated state-sanctioned bailouts reminiscent of the Long Term Capital Management Crisis of 1998. IKB, a German bank, and BNP Paribas, its French counterpart, both encountered subprime meltdowns on either their own balance sheet or investment funds sponsored by them. Their combined assets total billions although their Waldos are yet to be computed or even found. 

Those looking for clues to the extent of the spreading fungus should understand that there really is no comprehensive data to allow anyone to know how many subprimes actually rest in individual institutional portfolios. Regulators have been absent from the game, and information release has been left in the hands of individual institutions, some of whom have compounded the uncertainty with comments about volatile market conditions unequaled during the lifetime of their careers. And too, many institutions including pension funds and insurance companies, argue that accounting rules allow them to mark subprime derivatives at cost. Defaulting exposure therefore, can hibernate for many months before its true value is revealed to investors and importantly, to other lenders. 

The significance of proper disclosure is, in effect, the key to the current crisis. Financial institutions lend trillions of dollars, euros, pounds, and yen to and amongst each other. In the U.S., for instance, the Fed lends to banks, which lend to prime brokers such as Goldman Sachs and Morgan Stanley which lend to hedge funds, and so on. The food chain in this case is not one of predator feasting on prey, but a symbiotic credit extension, always for profit, but never without trust and belief that their money will be repaid upon contractual demand. When no one really knows where and how many Waldos there are, the trust breaks down, and money is figuratively stuffed in Wall Street and London mattresses as opposed to extended into the increasingly desperate hands of hedge funds and similarly levered financial conduits. These structures in turn are experiencing runs from depositors and lenders exposed to asset price declines of unexpected proportions. In such an environment, markets become incredibly volatile as more and more financial institutions reach their risk limits at the same time. Waldo morphs and becomes a man with a thousand faces. All assets with the exception of U.S. Treasuries look suspiciously like every other. They’re all Waldos now. 

The past few weeks have exposed a giant crack in modern financial architecture, created by youthful wizards and endorsed as a diversifying positive by central bankers present and past. While the newborn derivatives may hedge individual institutional and sector risk, they cannot eliminate the Waldos. In fact, the inherent leverage that accompanies derivative creation may foster systemic risk when information is unavailable or delayed in its release. Nothing within the current marketplace allows for the hedging of liquidity risk and that is the problem at the moment. Only the central banks can solve this puzzle with their own liquidity infusions and perhaps a series of rate cuts. The markets stand by with apprehension. 

But should markets be stabilized, the fundamental question facing policy makers becomes, “what to do about the housing market?” Granted a certain dose of market discipline in the form of lower prices might be healthy, but market forecasters currently project over two million defaults before this current cycle is complete. The resultant impact on housing prices is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression. Granted, stock markets have periodically retreated by significantly more, but stocks have never been the savings nest egg for a majority of Americans. 70% of American households are homeowners, and now many of those that bought homes in 2005-2007 stand a good chance of resembling passengers on the Poseidon – upside down with negative equity. A 10% “hook” in national home prices is serious business indeed. It’s little wonder that Fed, Treasury, and Congressional leaders are shifting into high gear. 

Housing prices could probably be supported by substantial cuts in short-term interest rates, but even cuts of 200-300 basis points by the Fed would not avert a built-in upward adjustment of ARM interest rates, nor would it guarantee that the private mortgage market – flush with fears of depreciating collateral – would follow the Fed down in terms of 15-30 year mortgage yields and relaxed lending standards. Additionally, cuts of such magnitude would almost guarantee a resurgence of speculative investment via hedge funds and levered conduits which have proved to be the Achilles heel of the current crisis. Secretary Paulson might also have a bone to pick with this “Bernanke housing put” since it more than likely would weaken the dollar – even produce a run – which would threaten the long-term reserve status of greenbacks and the ongoing prosperity of the U.S. hegemon. 

The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions emblematic of the RFC, or perhaps to be more current, the RTC in the early 1990s when the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation. And for those who would still have them eat some Wall Street cake as opposed to Midwest meat & potatoes (The Wall Street Journal editorial page suggested they should get darn good and used to renting once again) look at it this way: your stocks and risk-oriented levered investments will spring to life like the wild flowers in Death Valley after a flash flood. And if you’re a Republican office holder, you’d win a new constituency of voters – “almost homeless homeowners” – for generations to come. Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you? William H. Gross

Managing Director

PIMCO – Pimco Bonds

What a new Federal Minimum Wage means for the states

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With the recent passage of a federal minimum wage bill, the first national minimum wage increase in over a decade is imminent. This bill will provide a wage boost for 12.5 million workers. Under the legislation, the first step of the minimum wage increase—from $5.15 to $5.85—will go into effect on July 24, 2007, 60 days after the president signed the bill. The minimum wage continues to rise annually for two years under the legislation, reaching $7.25 in 2009.

The interaction between the federal minimum wage and state minimum wages varies. Currently, 33 states have passed minimum wage laws establishing higher wage floors than the federal $5.15 level. Several of these states are in the midst of phased-in minimum wage increases of their own, and some index their wages to inflation. The federal phased-in hike will in some cases surpass state minimum wages and in some cases not. By September 2009, the number of states with minimum wages above the federal level will be down to 12, with several states tied with the federal rate of $7.25.

The table below shows how the federal increase will impact minimum wage workers state-by-state. The dates do not necessarily reflect effective dates of change (which vary), but rather show what the operative minimum wage in the state will be on the date specified. Values that are in bold are wage rates that will increase due to the federal increase. This table only describes the effective minimum wage rate for workers covered by the federal Fair Labor Standards Act (FLSA).

Effective minimum wage rates for workers covered by FLSA

Meduim Home Price 1.5 percent below the price a year ago

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Second quarter numbers are in from the National Association of Realtors

Some of the results of the survey, from the National Association of Realtors were more positive. More metro area markets – 97 of 149 – gained ground than lost.

One of the four U.S. regions, the Northeast recorded a slight price gain of 0.7 percent. The West lost 0.4 percent, the South 1.6 percent and the Midwest 2.2 percent.

NAR predicts home prices will turn slightly positive again by spring of 2008 and rise about 2 percent that year.

Among individual metro areas, prices in the second quarter plunged furthest in Elmira, N.Y., down 17.9 percent to $71,700. Other big losers included Palm Bay, Fla. (down 15 percent to $183,300), Davenport, Iowa (down 11.3 percent to $103,300) and Sarasota, Fla. (down 11.3 percent to $311,400).  Top of page

Metropolitan Area Median home price % Change
Northeast $263,300 3.0%
Midwest $196,400 3.4%
South $177,900 -1.9%
West $266,700 -2.3%

More and More Unsold Homes

July foreclosures nearly double from last year; industry group raises forecast for more.

 By Les Christie, CNNMoney.com staff writer – August 21 2007

NEW YORK (CNNMoney.com) — The flood of foreclosure filings showed no sign of let-up in July, according to the latest data from RealtyTrac, the online marketer of foreclosure properties.

179,599 foreclosure filings, which include default notices, auction sale notices and bank repossessions, were reported nationwide for a 9 percent rise over the previous month and a 93 percent jump compared with July, 2006.

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This past winter, RealtyTrac had forecast a 33 percent increase in U.S. foreclosures for the year but now it’s raised its outlook. “It’s trending to close to 2 million now, 60 percent more than last year,” said Rick Sharga, RealtyTrac’s vice president for marketing.

Moody’s Economy.com is even more pessimistic with its forecast of some 2.5 million defaults for the year.

“While 43 states experienced year-over-year increases in foreclosure activity, just five states – California, Florida, Michigan, Ohio and Georgia – accounted for more than half of the nation’s total foreclosure filings,” James J. Saccacio, chief executive of RealtyTrac said in a statement.

Nevada, at one filing per every 199 households, had the highest rate of any state, but California where one in every eight Americans lives, had the most numerically – a total of 39,013 and one for every 333 households. That was nearly four times higher than a year ago.

California had six of the top 10 metro areas with the highest foreclosure rates led by Stockton, which was second only to Detroit among metro areas, Merced was third, Modesto fourth, VallejoFairfield fifth, RiversideSan Bernardino eighth and Sacramento ninth.

Florida had the next highest total among the states, 19,179, or one for every 431 households. Georgia, at one for every 299 households, had the second highest rate.

Seven states, led by Utah, recorded year-over-year declines in filings. Utah had just 485, one for every 1,800 households and 58.3 percent fewer than in July, 2006. Oklahoma, down 34.4 percent, New Mexico, down 26.9 percent, and Rhode Island, down 18.8 percent, also had substantial drop-offs.

Saccacio said, “Some of these states could be benefiting from increased interest from real estate investors who have pulled out of more volatile markets where home price appreciation seems to have hit its peak.”