FDIC promoting mortgage help for the jobless

Given the high -- and increasing -- levels of unemployment throughout the U.S., the FDIC is encouraging those institutions buying failed banks and are sharing any losses with the agency to offer some breathing room to jobless borrowers at risk of foreclosure. While the idea will only impact a small number of borrowers, the idea could conceivably spread to other banks, thus limiting the damage from the one-two punch of toxic mortgage resets and unemployment. From CNNMoney.com:

Some unemployed homeowners at risk for foreclosure could get a temporary break on their mortgage payments under a plan being pushed by the FDIC.

The Federal Deposit Insurance Corp. said on Friday it is encouraging certain banks to reduce mortgage payments for the unemployed or underemployed for at least six months.

Overall, relatively few of the unemployed will benefit from this recommendation because the effort would only apply to a handful of institutions. Specifically, it would affect those that bought failed banks and participate in loss-share agreements with the FDIC. In such deals, the agency covers some of the losses incurred on the assets of the failed banks. Some 53 institutions, mainly regional or community banks, have entered into such arrangements since January 2008...

The expanding unemployment rolls have long vexed policymakers focused on stabilizing the housing market. Existing foreclosure-prevention programs, including the president's loan modification plan, generally do not help the jobless because they don't have enough income to sustain even reduced monthly payments...

Administration officials have said they are exploring ways to help the unemployed -- including through reduced payments, typically callled forbearance plans...

While many servicers have offered forbearance plans in the past, fewer are these days. That's because financial institutions no longer feel that borrowers will be able to land a comparable job within a few months...

Citigroup is one of the few banks that has implemented a plan to help the jobless during the housing crisis. The bank will lower the payments of eligible borrowers to an average of $500 a month for three months.

Under the FDIC's recommendation, unemployed or underemployed borrowers would have their payments reduced to an affordable level for at least six months...

Unlike a typical forbearance plan, where the arrears would have to be paid back within a year, the FDIC endorses allowing borrowers to catch up over the life of the loan.

Borrowers who cannot afford their payments once they get jobs would be considered for a loan modification program approved by the FDIC, which includes the president's plan. Eligible borrowers could have their monthly payments reduced to 31% of their pre-tax income if doing so would cost less than foreclosing on the home.

Cities increasingly holding lenders responsible for maintaining foreclosures

With cash-strapped cities lacking the funds (or really the responsibility) to maintain foreclosed units, some are getting quite serious about chasing down the scofflaws -- even if that means threatening an East Coast banker with a crime. And the few billions that the stimulus plan offered cities to clean up derelict housing? A veritable drop in the bucket. From a Wall Street Journal story (subscription required):

Officials at a Citigroup Inc. office in St. Louis placed a call to this desert town recently. The bank had caught word that Indio was coming after the lending giant with fines and threats of criminal charges. The offense: an algae-infested swimming pool at 79760 Eagle Bend Court.

Citigroup wound up in charge of the foreclosed home, one of thousands of such properties it was managing across the country. But last year, Indio passed a law that allowed it to charge banks with a criminal misdemeanor if they allowed a home to fall into disrepair...

The hard-line approach is part of this town's attempt to gain leverage over some of the nation's largest lenders. A couple of years ago, Indio was a real-estate bonanza. Old date farms were closing down, sprouting subdivisions in their places. Today it's a different scene with one in 10 houses either in default or foreclosure...

Lenders say that such repairs and upkeep are part of the normal course of business, and that Indio's ordinance hasn't prompted any special actions. A Washington Mutual spokesman said local real-estate agents send in photos of bank-owned properties so the lender can watch for disrepair from afar. A Fannie Mae spokeswoman said the lender's first goal is to "stabilize neighborhoods." New York Mellon said its role as trustee didn't merit citations from Indio.

Even before the mortgage crisis erupted in full, big cities like Cleveland and Buffalo had fashioned laws of their own to browbeat banks into taking care of urban blight. Now some small towns are also taking matters into their own hands.

Indio's neighbors Palm Springs, Desert Hot Springs and Cathedral City each pushed ahead with laws much like Indio's. The town's own ordinance was fashioned off a 2007 law from Chula Vista, a city south of San Diego which began fining lenders up to $1,000 a day for unsightly or dangerous code violations such as broken windows...

City officials say they ginned up a campaign to notify the banks about the new law, but few took action. "The banks were trying to test us to see if we were serious about this," says Jason Anderson, a code-enforcement officer in Indio.

Countrywide, one of the biggest lenders in the area, initially just tried to make the problem go away by writing checks, say city officials. Instead of attending to the upkeep on the properties, they'd ask, "How big was the fine?" Mr. Anderson recalls.

City officials say Countrywide has since become one of the most proactive lenders, contracting local real-estate agents to monitor properties and paying for gardeners to handle the upkeep. "There's considerable financial incentive for the bank" to maintain properties, a Countrywide spokesman said...

Economist Krugman seconds the call to nationalize banks

New York Times columnist and economist Paul Krugman seconds Nouriel Roubini's call to nationalize the nation's largest banks, laying out his case in plain English. From his column:

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders...

To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.

But here’s the thing: the funds needed to bring these banks fully back to life would greatly exceed what they’re currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it’s basically putting up all the money, the government should get ownership in return...

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders...

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K....

What we want is a system in which banks own the downs as well as the ups. And the road to that system runs through nationalization.

Will the Obama housing plan work?

According to a story at BigBuilderOnline.com, some industry analysts contacted for a story on the Obama plan to address the failing housing market remain unimpressed, although there are some kernels of promise. From the story:

After slashing the much sought after $15,000 tax credit for all primary residence home buyers to $8,000 for first-time home buyers only, the government has now released a plan that analysts say will do little to bolster the ailing housing market.

The two-phase plan seeks to refinance mortgages for 4 million to 5 million "responsible" homeowners and reduce payments for another 5 million "at-risk" homeowners through loan modifications. And while analysts say the plan won't completely fail, the likelihood of it standing up to its much-touted potential is questionable...

Said David Goldberg, analyst at UBS Investment Research: "Although non-distressed homeowners with LTVs in the specified range [80-105%] will benefit, we believe foreclosures among this group would have been minimal regardless."

Some even ask whether moving forward with this phase of the plan could potentially draw more negative market action.

"While we think the government is doing this in order to avoid helping those borrowers who engaged in the riskiest behavior during the boom years, this policy runs the risk of simply postponing foreclosures and dragging out the downturn," wrote Citigroup analyst Josh Levin...

UBS's Goldberg questioned the execution of the program, saying that while this loan modification plan has some degree of built-in incentives--more money goes to the lender if the borrower stays current and the loan is modified prior to delinquency--the complexity of the incentive structure will make it difficult to navigate.

Moving forward, housing market analysts are also concerned about the upcoming spring selling season, with Rehaut forecasting continued weak results due to the lack of consumer confidence, abolishment of seller-funded down payment assistance programs, and the failed $15,000 tax credit proposal. He does, however, point to the record length and magnitude of the current downturn as a relative positive, as it signals that the market should be close to an eventual trough...

"The one aspect that remains unclear is the possibility of bank-cram down legislation making its way into law potentially including protection from investors for servicers that pursue principal reductions," (Ivy) Zelman wrote. "In the event that such legislation was passed and principal reduction becomes more prominent, we believe the tsunami of future foreclosures could be substantially mitigated."...

Why the banks are broke

Wondering why banks like Bank of America or Citigroup are technically broke after $165 billion in bail-out funds to the nation's eight largest of them and *may* need to be nationalized until they can be re-sold to investors? A story in Time magazine summarizes:

Since October, the government has deposited $165 billion into the accounts of the nation's eight largest banks. Yet those same financial firms are now worth $418 billion less than they were four months ago, and the Congressional Budget Office estimates that the government's preferred shares are worth at least $20 billion less. In Wall Street terms, that's throwing good money after bad. All told, the government's annualized rate of return on its investment in the nation's largest banks is -1,096%. That's well beyond Bernie Madoff territory; he topped out at a mere -100%. (See pictures of the demise of Bernie Madoff.)

So how could $438 billion — $418 billion of their money and $20 billion of ours — go poof, just like that? Here's the easiest explanation: our banking system has sprung a leak..

To understand why nationalization may be inevitable, you have to get a handle on the true source of the banks' problems. The banking business — at least the way George Bailey practiced it in It's a Wonderful Life — was all about deposits and loans. You take in deposits, on which you pay a relatively low interest rate, say 2%. Then you lend that money to other people at a higher interest rate, say 7%. Pocket the difference. Repeat.

But starting in the early 1970s, banks began funding less of their lending with old-fashioned deposits. Bank deposits backed 90% of all loans four decades ago; today they back 60%. Where does the rest of the loan money come from? From the bank's past earnings and the money given to it by its investors. Using the house's money has generated higher profits — with significantly higher risks...

Another way banks sought to boost their profits — at least those available to shareholders — was through stock buybacks. Investors cheer buybacks, because they shrink the number of outstanding shares, boosting a company's profits per share and usually its stock price. But corporate stock purchases also decrease banks' capital, because their earnings are used to purchase shares rather than being retained as cash.

Worse, sometimes banks borrow money in order to buy back shares, upping their leverage and lowering their capital at the same time. In the past four years alone, the nation's largest banks, as defined by Standard & Poor's, have spent $300 billion buying back stock...

TARP does nothing to patch the hole in the banking system. And it certainly doesn't do anything to encourage banks to make more loans. Yes, banks have gotten nearly $300 billion in money from the government, and that's a lot of dough. But it's not free dough. In return for federal cash, the government has taken preferred-stock shares as the firm's markers. Unlike common stock, which is the kind you or I would buy from a broker, preferreds have to eventually be paid back, so they are really loans, not additional capital. (See which country has the best bailout plans.)

Say a bank has $5 in capital and $100 in loans. Now the government gives the bank an additional $100 in preferred shares and says, "Go make more loans." Well, the bank might then have $200 in loans, but it still has only $5 in common shareholders' equity. The result: if just 2.5% of its loans go bad, the bank's shareholders are wiped out. Wisely, the largest banks in the nation lent less in the fourth quarter of 2008 than in the previous three months — a strategy that has drawn some complaints.

But that hasn't removed the pressure on their shares. That's because the banks have had to continue to take loan losses. And banks don't have the option to pass those losses off on the new money they got from the government. They have to write down their common stockholders' equity first. And as that capital falls, so go the bank's shares. Some are alarmingly close to zero...

Nouriel Roubini, the New York University economics professor who was famously early in predicting that the end of the housing boom would cause a financial crisis, estimates that continued loan losses will force U.S. banks to come up with an additional $1.4 trillion just to stave off bankruptcy. And since the banks aren't likely to earn much money or attract new investors anytime soon, much of the money will have to come from the government.

Regulators are split on what to do next. The Federal Deposit Insurance Corporation is backing a plan to create what it calls an aggregator bank, which would buy up the loans of BofA, Citigroup and the rest of our now troubled system, theoretically putting an end to the escalating losses eating away at the banks' capital. But if the government buys those assets at current market rates, banks would be forced to take immediate losses on the sales, doing more harm than if the government just left the troubled loans where they are. Sources say the Federal Reserve would prefer to let the banks keep the loans and troubled bonds for now and instead provide the banks with insurance policies guaranteeing that the government will swallow a good deal of future credit losses. But a similar deal that the Fed struck with Citi did little to boost that company's stock or stave off fears that it may soon go under.

That's why a small but growing number of people are starting to talk about nationalization. Speaker of the House Nancy Pelosi recently said nationalization, or something close to it, is a better solution than just buying bad assets, because if the government takeovers succeed, then taxpayers get to keep the profits when they eventually resell the banks. But if the government doesn't turn a nationalized bank around, it could be very costly to taxpayers...

Click here for full story.

Citigroup approves of mortgage cram-downs

In a move that could set the stage for other large lenders to follow suit, Citigroup has announced its support of legislation to allow bankruptcy judges to alter the terms of mortgages, including reductions of principal. From a New York Times story:

In a move that would help troubled homeowners, Citigroup agreed to support legislation that would let bankruptcy judges adjust mortgages for at-risk borrowers, leading Congressional Democrats said on Thursday...

Members of the House and Senate said Citigroup had agreed to drop its opposition, providing no future mortgages are covered by the law.Citigroup, which is receiving more than $300 billion in bailout assistance, says that it is open to measures that would help homeowners...

The revised bill that Citigroup endorsed would allow bankruptcy judges to adjust the principal payments or interest rates on existing loans. Judges could also extend the terms on mortgage loans, according to the language of the bill, which would force lenders to take losses without a say in bankruptcy court proceedings...

No other bank has broken ranks with the industry on the proposed bill. Mr. Durbin said he hoped the move by Citigroup, should other banks and financial trade associations take the same stance, would lead to backing by enough Democrats and moderate Republicans to push the bill through.

Click here for full story.