No, not another RTC-type bailout. Perhaps another "RFC," updated from the 1930s.

Despite the constant parade of "no bailout!" exclamations accompanying email signatures on blog comments and the efforts by certain members of the blogosphere to energize an anti-bailout crowd, it seems that the housing/mortgage/financial crisis is spinning out of control to the point that some point of bailout seems necessary (something unhappily predicted by this blog back in late 2007). How might it look? A story in the Wall Street Journal reviews:

The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said.

Another proposal would be the creation of federal insurance for investors in money-market mutual funds, coverage akin to the insurance that currently safeguards bank deposits. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.

In addition, the Securities and Exchange Commission is set to propose a temporary ban on short-selling. It's not clear how broadly the ban might extend, but it could apply only to financial stocks...

The administration had been taking a patchwork approach to the financial crisis, putting out fires as they ignited. The new moves represent an effort to take a more systematic approach, after a spiral of bad debts, credit downgrades and tumbling stocks brought down venerable names from investment bank Lehman Brothers Holdings Inc. to insurance giant American International Group Inc. Banks have grown unwilling to lend to one another, a sign of extreme stress, because financial markets work only when institutions have faith in each other's ability to meet their obligations.

Word of the plan came the same day as the Federal Reserve and other major central banks offered hundreds of billions of dollars in loans to commercial banks to alleviate a deepening freeze in the world's credit markets. That step appeared to have moderate impact on lending among banks. Meanwhile, a wave of redemptions continued hitting money-market funds, causing a second large fund to shut to investors...

The flurry of moves under discussion may bring the markets some breathing room, but it isn't clear whether they will amount to a long-term solution to the complex financial problems sweeping the market...

Treasury Department officials have studied a structure to buy up distressed assets for weeks, but have been reluctant to ask Congress for such authority unless they were certain it could get approved. The intensified market turmoil may have changed that political calculus, even with less than two months left until the November elections.

A big question still to be answered is how the government will value the assets it takes onto its books. One possible avenue could be some sort of auction facility, so that the government would not have to be involved in negotiating asset values with companies. Financial companies would likely take big losses...

Exactly how such an entity might be structured isn't yet clear. The possible plan isn't expected to mirror the Resolution Trust Corp., which was used from 1989 to 1995 during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and eventually sell them back into the market.

The program may look more like the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to inject liquidity into the market by giving loans to banks and other businesses.

According to a top congressional aide, the Treasury department wants authority to either control the program or have it be a separate division of the government...

Thursday, Republican nominee Sen. John McCain sought a broad expansion of government regulation over financial institutions, including the formation of a body to both assume distressed mortgages and help failing investment banks.

Saying the government cannot "wait until the system fails," Sen. McCain called for the creation of an entity that would essentially help companies sell off bad loans and other impaired assets. It is unclear how the body, dubbed the Mortgage and Financial Institutions trust, would operate, including whether or not institutions would seek help or whether the government would intervene on its own behalf.

His rival, Democratic Sen. Barack Obama of Illinois was less specific about what steps he would take, offering broader outlines of policy proposals that included a "Homeowner and Financial Support Act." The measure, which would inject capital and liquidity in the financial system, is designed to provide a more coordinated response than "the daily improvisations that have characterized policy-making over the last year."

Can't wait for those debates!

Worst financial crisis since the 1930s?

Although it's unlikely that we'd see the same type of market unraveling that led to the Great Depression, the degree of the crisis is leading many to claim that it's the worst since the 1930s. Although the U.S. now has policies in place to avoid another Depression, the road ahead is still uncharted. From a Wall Street Journal article:

The financial crisis that began 13 months ago has entered a new, far more serious phase.

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners...

The consequences for companies and chief executives who tarry -- hoping for better times in which to raise capital, sell assets or acknowledge losses -- are now clear and brutal, as falling share prices and fearful lenders send troubled companies into ever-deeper holes...

Each episode seems to bring government intervention that is more extensive and expensive than the previous one, and carries greater risk of unintended consequences.

Expectations for a quick end to the crisis are fading fast. "I think it's going to last a lot longer than perhaps we would have anticipated," Anne Mulcahy, chief executive of Xerox Corp., said Wednesday.

"This has been the worst financial crisis since the Great Depression. There is no question about it," said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy. "But at the same time we have the policy mechanisms in place fighting it, which is something we didn't have during the Great Depression."...

The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied...

Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.

At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets...

Deleveraging started with securities tied to subprime mortgages, where defaults started rising rapidly in 2006. But the deleveraging process has now spread well beyond, to commercial real estate and auto loans to the short-term commitments on which investment banks rely to fund themselves. In the first quarter, financial-sector borrowing slowed to a 5.1% growth rate, about half of the average from 2002 to 2007. Household borrowing has slowed even more, to a 3.5% pace...

Hedge funds could be among the next problem areas. Many rely on borrowed money to amplify their returns. With banks under pressure, many hedge funds are less able to borrow this money now, pressuring returns. Meanwhile, there are growing indications that fewer investors are shifting into hedge funds while others are pulling out. Fund investors are dealing with their own problems: Many have taken out loans to make their investments and are finding it more difficult now to borrow.

That all makes it likely that more hedge funds will shutter in the months ahead, forcing them to sell their investments, further weighing on the market...

This crisis is complicated by innovative financial instruments that Wall Street created and distributed. They're making it harder for officials and Wall Street executives to know where the next set of risks is hiding and also contributing to the crisis's spreading impact...

The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago...

Few financial crises have been sorted out in modern times without massive government intervention. Increasingly, officials are coming to the conclusion that even more might be needed. A big problem: The Fed can and has provided short-term money to sound, but struggling, institutions that are out of favor. It can, and has, reduced the interest rates it influences to attempt to reduce borrowing costs through the economy and encourage investment and spending.

But it is ill-equipped to provide the capital that financial institutions now desperately need to shore up their finances and expand lending...

One pleasant mystery is why the crisis hasn't hit the economy harder -- at least so far. "This financial crisis hasn't yet translated into fewer...companies starting up, less research and development, less marketing," Ivan Seidenberg, chief executive of Verizon Communications, said Wednesday. "We haven't seen that yet. I'm sure every company is keeping their eyes on it."

At 6.1%, the unemployment rate remains well below the peak of 7.8% in 1992, amid the S&L crisis.

In part, that's because government has reacted aggressively. The Fed's classic mistake that led to the Great Depression was that it tightened monetary policy when it should have eased. Mr. Bernanke didn't repeat that error. And Congress moved more swiftly to approve fiscal stimulus than most Washington veterans thought possible...

But the risk remains that Wall Street's woes will spread to Main Street, as credit tightens for consumers and business. Already, U.S. auto makers have been forced to tighten the terms on their leasing programs, or abandon writing leases themselves altogether, because of problems in their finance units. Goldman Sachs economists' optimistic scenario is a couple years of mild recession or painfully slow economy growth.

Lenders mostly dismiss "Hope for Homeowners" Bill

Remember that huge housing bill passed by Congress in July in which the FHA would re-write toxic mortgages if lenders would only reduce loan balances by 10%? Apparently lenders are saying "Thanks for thinking of us, but no thanks, we'll do our own workouts. Have a nice day!" From a CNNMoney.com story:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn't seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

The program calls for lenders to voluntarily refinance delinquent mortgages by reducing loan balances to 90% of a home's current market value. The new loans will be backed by the FHA, which will be receive 5% of the new loan balance as a payment from the lender...

Bank of America (BAC, Fortune 500) managing director Michael Gross said that the new FHA program was just one of many loan workout options that the bank is employing.

And he stressed that the bank's own efforts to save troubled loans, especially those B of A inherited when it bought Countrywide, have been successful. He said that the bank increased its loan modifications by 450% this past August compared with August of 2007.

When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

And Mary Coffin, speaking for Wells Fargo (WFC, Fortune 500), testified that relatively few of her bank's borrowers owe more on their mortgages than their homes are worth, meaning they would be unlikely to benefit from the FHA's refinancing and write down program...

Even Sheila Bair, who heads the Federal Deposit Insurance Corporation, praised the FHA program but said that few borrowers with IndyMac, the bank that the FDIC took over in July, would use it.

She said that her responsibility to maximize profits for the investors would probably limit the number of IndyMac borrowers who would take advantage of Hope for Homeowners

Woodside Homes files Chapter 11

Utah-based Woodside Homes, a $1 billion private builder ranked as #7 on the Builder 100 list of private companies in 2007, has filed for Chapter 11 bankruptcy protection. From a BuilderOnline.com story:

As promised to its creditors, Woodside Homes put itself and its subsidiaries into Chapter 11 bankruptcy by its Tuesday, Sept. 16 deadline by filing yesterday with the U.S. Bankruptcy Court for the Central District of California.

On Aug. 20, five insurance companies—holders of more than $475 million of Woodside's notes—filed a petition to force the builder into involuntary bankruptcy so they could collect their debts. Two days later, JPMorgan Chase, as agent for itself and 14 other bank lenders of $330 million to the home builder, joined the petition.

Rather than oppose the requests, on Aug. 27, Woodside said it would cooperate by putting itself into bankruptcy court reorganization by Sept. 16...

While the case is working its way through the system, a bankruptcy judge has given the company permission to continue its home building business as usual, using its cash on hand to continue paying employees, vendors, and subcontractors to sell and build homes...

What the company won't be doing under the court-prompted agreement with its lenders is selling off any big assets or buying new land. It will be providing its creditors with accounting of its financial activities.

Founded in 1977, Woodside has a wide footprint, building in high-growth states as well as more stable markets. According to its Web site, the Utah-based company builds in Arizona, California, Colorado, Florida, Maryland, Minnesota, Nevada, Texas, Utah, and Virginia.

The company has exposure in some giant ailing joint ventures in the Las Vegas area, Inspirada and Kyle Canyon, both Focus Property developments with consortiums of big builder partners. It also is active in Las Vegas Lakes.

Woodside was ranked No. 7 in revenue during 2007 among private builders on the BUILDER 100, with $1 billion in sales. With 2,703 closings, the company was ranked No. 8 among private builders in unit sales.

Jim Cramer predicting housing bottom

Cramer: 'We're all communists now!'

Yes, Jim Cramer can seem crazy (can you imagine his pillow talk?). And yes, his stock picks can seem goofy. But the guy does know his markets, and he now thinks that things have gotten SO BAD (i.e., businesses failing plus numerous write-downs) that we're nearly at the end of our economic malaise. Even better, he says that builders are reporting fewer cancellation rates, which could either mean (a) buyers are going through with home purchases without needing to sell existing homes or worrying about future price declines; and/or (b) buyers aren't even thinking of signing sales contracts unless they're fully committed to the process. From an MSNBC video.

Financial crisis to prolong housing slump

As the housing and mortgage crisis continues to create more destruction on Wall Street, it's not surprising to hear that this only means bad news for the nation's builders, most notably through tighter requirements for business loans and mortgages for buyers. From a BuilderOnline.com story:

Builders who think the financial meltdown happening on Wall Street this week won't affect them should think again.

The capital to run their businesses—acquisition, development, and construction (ADC)—is likely to become less available and more expensive. The mortgages that consumers require to purchase a new home will become even harder to get, despite the recent federal takeover of mortgage finance firms Fannie Mae and Freddie Mac. And the number of jobs that Americans need to qualify for and pay those home loans will continue to shrink if banks are reluctant to give businesses the credit they need to expand and hire more workers...

"What is different today [from past housing downturns] is that you have an overall market problem—it's not isolated to any one geographic area or several geographic areas. It's almost a systemic problem," John Bittner, a partner at Grant Thornton, told BUILDER this week. "What you are seeing now is a much more protracted decline in the housing market because of the situation in the financial markets."...

Bittner, like others, foresees credit becoming even more difficult to get for builders in the months to come. "Credit will only be available to those with the most pristine of balance sheets, and if it's available, it won't be cheap," he predicted to BUILDER. "And the restrictions and covenants placed on the loans will be considerable."

Such a situation does not bode well for builders, who have been fighting for survival and cash flow for months. In a market where firms such as WCI, Woodside Homes, Neumann Homes, Kimball Hill Homes, and others are going bankrupt, what home building companies have such clean balance sheets? "That's the problem," Bittner said. "Very few of them have. They're long in land, and they have a significant amount of debt on their balance sheet. The larger publicly traded home builders, the smaller privately owned home builders with $100 million to $500 million in revenue—they all bought into [the boom] when times were good. Very few, if any, have the balance sheet to go out and get credit these days."...

With the economy reeling, consumers rethinking their spending, and banks reducing their own financial exposure by lending less money, builders will likely start feeling the pain of the overall economic tumult as well as the effects of the ongoing housing downturn.

Home prices to hit bottom by summer '09?

Yes, it is true that we've constantly been hearing false predictions of when the housing market will hit bottom, both in terms of sales, but more importantly in terms of price. I always tend to consider the source of such predictions, and generally discount those from trade groups such as the NAR or the MBA and give greater credence to universities and private data companies.

But at a recent forum sponsored by Standard & Poor's and the Chicago Mercantile Exchange, a panel of economists actually agreed that we should be seeing some pricing stability return to the market by next summer. From a CNNMoney.com story:

Several panelists, including Economy.com's chief economist Mark Zandi, Goldman Sachs (GS, Fortune 500) economist Charlie Himmelberg, S&P managing director David Blitzer and S&P senior economist Beth Ann Bovino all agreed that home prices would stabilize sometime during the summer of 2009.

"The bottom of the housing market is coming into view," said Zandi, whose recent book "Financial Shock," examines how the subprime mortgage crisis occurred. "House prices, based on the S&P Case-Shiller index, are down 20% peak-to-trough and I expect them to fall another 5% to 10%."

"The key is housing affordability," Zandi said. "The [price] decline is beginning to restore affordability, which is now near its long-term average. In some places, Boston, Chicago, Denver, Orange County, affordability has been restored and those markets have stabilized."...

One piece of good news noted was home sales volume. The number of homes sold each month has already leveled off nationally, staying within a narrow range nearly every month this year at an annualized rate of about 5.5 million units a year.

Bovino said her forecast for home price decline is slightly more bearish than Zandi's, mostly based on S&P's belief that the country is now in a recession. With the economy struggling, job losses rising and a tough lending environment, she expects prices to fall another 10%.

"We think there will be an overshoot [with prices going beyond their logical bottom]," she said, in part because so many buyers are afraid to get into the market. "Nobody wants to catch a falling knife," she said.

And after prices do bottom out, Himmelberg expects them to remain fairly flat for a year or so...

The panelists were careful to couch their optimism with caveats. Zandi, for example, points out that there is a lot of uncertainty about the fate of Fannie and Freddie, in the wake of their government takeover.

There is some speculation that the companies will be downsized by a new administration after the presidential election in November.

What will a smaller Wall Street look like?

Are the boom times of Wall Street over for good? That's the topic reviewed for a story in the New York Times, and how a slimmed-down financial sector might impact the overall economy:

As the tectonic shifts within the American financial industry shook the world’s markets on Monday, many experts predicted that events of the last 72 hours heralded a new period of painful change for Wall Street.

The predictions were sobering. Investment banks will be smaller. Their profits will be leaner. Jobs in finance will be scarcer. And the outsize role of Wall Street in the nation’s economy will shrink...

A debate is raging over what lies ahead for Wall Street now that only two major American investment banks, Goldman Sachs and Morgan Stanley, remain independent. While Wall Street has gone through tough times before only to emerge bigger and stronger, some question whether the industry can rebound quickly after using high levels of leverage, or borrowed money, to binge on risky investments. Those investments have proved to be disastrous. Worldwide, financial companies have reported more than $500 billion in charges and losses stemming from the credit crisis — a figure some experts say could eventually exceed $1 trillion....

“We are all in this business conditioned to cycles in crises and we’re also conditioned to markets snapping back relatively quickly because the crisis can be identified and measured,” said Donald B. Marron, chief executive of the private equity firm Lightyear Capital, which is focused on financial services, and former chief of PaineWebber Group. “What’s different now is you can’t do either."

A marriage of Bank of America and Merrill Lynch in a sense would hark back to the past. During the Depression, Congress separated commercial banks, which take deposits and make loans, from investment banks, which underwrite and trade securities. The investment banks were allowed to do business with less oversight, while commercial banks operated with tighter supervision.

But after Congress repealed those Depression-era laws in 1999, commercial banks began muscling in on Wall Street’s turf. As the new competition whittled down profit margins, investment banks used more of their capital to trade securities and also began developing financial derivatives to fuel profits.

Now, executives like John A. Thain, the chief executive of Merrill and a former Goldman executive, say investment banks will need large bases of deposits to shore up their capital for times of trouble. “As we go forward, size is going to matter,” Mr. Thain said Monday...

Meanwhile, the Federal Reserve is expanding its back-door channel for financing what officials hope is an orderly shakeout on Wall Street.

But the Fed, and ultimately the taxpayers, could get left holding the bag. In allowing investment banks to post collateral that includes stocks, junk bonds and subprime mortgage-backed securities, the Fed said it would be mirroring the rules of two industry-operated overnight lending systems, known as tri-party repo systems, operated by JPMorgan Chase and Bank of New York.

Fed officials have themselves expressed concern that those lending programs needed to reassess their practices because lenders were holding collateral that might prove difficult to sell. .. What seems to be clear to most everyone on Wall Street is that the era of high-octane trading profits and deals fueled by extreme bank borrowing is over, at least for now. That will clamp down profits across the industry for some time. Just as Americans are finding it harder to borrow to build a new room or to buy a new car, big players on Wall Street are being forced to rein in the amounts they borrow...

Already, Wall Street firms are reducing their debt levels, and regulators are expected to create new rules about leverage, liquidity and capital levels. The rules, if strict, could force Goldman and Morgan Stanley to merge with a bank that has customer deposits, a steady source of capital, and thus is buffered from collapse.

Wall Street veterans are divided over the extent of the industry’s problems. Some point out that Wall Street tends to go through a downturn or outright crisis every four or five years, and that it usually recovers quickly. But others argue what is happening now represents the end of a 30-year credit “superbubble” that affected the financial sector just as much as it did consumers.

What now for Fannie & Freddie?

With Fannie Mae and Freddie Mac now firmly under federal control, what might the future look hold for the mortgage giants? Barron's has an idea (hat tip: Brian McDonald):

FANNIE MAE AND FREDDIE MAC , THOSE two wild and crazy kids who partied on Uncle Sam's dime, finally have been sent to the "time out" corner. In the near term, the federal bailout of the heretofore quasi-governmental mortgage giants, which occurred last week amid doubts about their continued solvency, will improve conditions in the secondary mortgage market, and already has begun to lower mortgage rates.

Longer-term, some in government and the financial markets think Fan and Fred should remain under federal control, while others favor privatization or the outright elimination of the agencies -- an outcome that, by some estimates, could boost mortgage rates to as high as 9%-10%. Whatever Congress decides, the seizure of Fannie (ticker: FNM) and Freddie (FRE) closes an especially ugly chapter in U.S. financial history, when greed trashed fear, and opens the door to a rethinking of mortgage finance generally, perhaps along the European model that more responsibly ties lenders to credit risk...

In the government takeover, engineered by Treasury Secretary Henry Paulson, the top managers and directors of both Fannie and Freddie have been shown the door. The Treasury has agreed to invest up to $100 billion in each of the agencies to ensure that they maintain a positive net worth on a GAAP basis...

By placing Fan and Fred in "conservatorship," not receivership, the government has created what Paulson calls a time out to recapitalize and rehabilitate the companies, not liquidate them. Both now will be under the thumb of their new regulator, the Federal Housing Finance Agency, with Treasury looking over the FHFA's shoulder...

Some proponents of continued government control argue not only that the size of their balance-sheet investment portfolios, or the mortgages on their books, should be reduced, but that the two should lose their privileged debt status, thus evening the playing field with their private competitors in the Wall Street securitization business and the mortgage-insurance game.

As for Fannie's and Freddie's shared social mission of providing cheap mortgages and extending home ownership to the less affluent, that might best be assumed by other government-owned and financed agencies, such as the Federal Housing Administration, or FHA...

Many observers, no matter their political stripe, have high hopes the U.S. will copy Europe in using "covered bonds" to finance most home mortgages. In this case, banks and other lenders retain the credit risk on home mortgages they have made, but sell bonds backed by those mortgages to outside investors, thus off-loading interest-rate risk. Such a system is cheaper and more efficient than the multi-level government-sponsored-enterprise financing system that has flourished in the U.S. for years...

THE BIGGEST POSITIVE to emerge from the Fran and Fred bailout to date is the increased amount of money that will flow into the secondary mortgage market, and at lower interest rates, to make up for the agencies' recent neglect of their mission. Under the rescue plan, the Treasury Department will create a new, unlimited borrowing line for both companies, permitting them to borrow directly from the government, using existing mortgage paper the U.S. owns to collateralize the loans.

Growing coalition of builders taking on banks' lending practices

Since forming in early June in an effort to coerce some lenders to stop the reported practice of forcing builders into technical default, the Homebuilder's Coalition for Responsible Bank Behavior has quickly grown into a national force with over 80 member companies. Although I'm planning to tackle this subject for my October column in Builder & Developer magazine, for now Builder magazine has a piece:

Mick Pattinson, the embattled executive of Barratt American Inc., has joined forces with more than 30 fellow contractors from as far away as Medford, Ore., to convince banks to restore lending lines that have been shut down as the housing crisis has worsened.

He's the driving force behind Homebuilder's Coalition for Responsible Bank Behavior, which got its start in early June.

Two of Pattinson's credit lines set at $125 million were suddenly shut off after the housing crisis struck with full force in August 2007 when regulators were pressuring banks to retreat from financing new construction.

The pressure has continued as the credit crisis has deepened in 2008...

Coalition members, mostly small- to medium-size builders, include such high-profile individuals as Sherm Harmer, principal of San Diego-based Urban Housing Partners Inc., Rich Gustafson, president of San Diego-based City Mark Development and Horace Hogan, CEO of Carlsbad-based Brehm Communities.

Coalition members have been pressuring lawmakers and high-level bureaucrats in Sacramento and Washington to talk to banks about the issue of lending, or not lending, as the case may be...

Pattinson said his struggles began in the summer of 2007, when Charlotte, N.C.-based Bank of America Corp. froze his credit on two major projects...

Pattinson said BofA asked him to pay down the amount owing on the lines with the expectation that they would be unfrozen and renewed.

Nevertheless, over the next several months, he said he reduced his indebtedness to $70 million from $100 million, half of which was taken from $15 million that should have been paid to his subcontractors.

He said he stopped paying interest on the two lines in March when he realized the lender would probably not unfreeze, or renew, his credit under any terms or conditions.

Those loans are now in default, and his subcontractors still have not been paid.

At that point, he said he was forced to lay off more than 100 employees and greatly retrench operations...

Meanwhile, his group has launched a Web site, pathtodefault.com to publicize the plight of builders such as Barratt American.

Pattinson said he's trying to find new sources of money so he can re-capitalize operations and prepare for what he believes will be the inevitable up-tick in new housing construction...

Sherm Harmer, who serves as the president of the local chapter of the Building Industry Association, emphasized that not all banks are at fault. "There's a disparity between lenders and lending practices," he said.

He noted some banks have been willing to work with contractors. And he said he understands the enormity of the crisis facing the banking industry.

"It's a liquidity crisis," said Harmer.

Still, home builders are struggling, and in many cases, can't finish existing projects. "It's in slow times like these you need credit," Harmer said.

Does the U.S. need to heed the advice it once offered Japan?

When Japan's banking system had its own meltdown in the early 1990s, the advice offered by the U.S. was to admit the damage, take corrective action and move on. Now, in a deja vu reminiscent of some Greek tragedy, the U.S. banking system finds itself in similar peril, a story in the Wall Street Journal suggests that sometimes the best advice is that which finds it way back to the source:

When Japan was mired in economic crisis, the U.S. urged it to take decisive action to deal with its ailing banks. Japan didn't follow the advice and the crisis dragged on for years. Now, it is the U.S. that is mired in crisis and facing the prospect of swallowing the bitter medicine it once proffered...

Japan's stock-market bubble began rapidly deflating in 1990 and its property bubble followed suit shortly afterward. Many borrowers were unable to make payments on their debt and bad loans piled up on bank balance sheets. A long period of lackluster economic growth made a tough situation worse. With the financial system saddled with bad debts, Japan desperately needed its banks to acknowledge the severity of their problems and for some banks to shut their doors. But the banks, unwilling to take steps that might render them insolvent, refused to acknowledge their problems, extending the crisis...

Still, U.S. financial firms have been much quicker to acknowledge losses than their Japanese counterparts were. While the slicing and dicing of mortgages into tradable securities played a part in the mortgage mess, accounting rules make it difficult for firms to ignore losses on those securities, says Princeton University economist Hyun Song Shin. In contrast, by continuing to extend credit to bad borrowers, Japanese banks were able to put off recognizing the extent of their debt problems.

"The denial strategy is harder to pull off -- it will catch up to you in the accounting," says Mr. Shin. "That's one of the more encouraging and hopeful signs in the U.S."...

One last problem the current U.S. situation shares with Japan in the 1990s may be a financial sector that is far larger than it should be. "If you have an unsustainable lending boom, then by definition the lending has to shrink," says Adam Posen, a deputy director at the Peterson Institute for International Economics in Washington.

In Japan, that didn't happen. Rather than failing, troubled banks merged with healthier ones. But even though the combined bank would often end up with branches that were within steps of one another, few bank workers lost their jobs. Mr. Posen worries that concerns about the systemic risk to the financial system will prevent the U.S. from allowing enough firms to shut their doors to make the necessary capacity cuts.

In that regard, the tougher line with Wall Street that U.S. officials took over the weekend is encouraging. Refusing to financially backstop a takeover of Lehman Brothers Holdings Inc. with government money, as they did for J.P. Morgan's hasty acquisition of Bear Stearns, they showed they were far more willing to let a troubled firm fail than their Japanese counterparts were. Also, many financial firms have already begun cutting operations in a way Japanese banks balked at...

Quickly shrinking the financial sector could have a social cost, as well, putting tens of thousands of people out of work. Where will they go?

I'm baaack!

Fannie Mae & Freddie Mac. Lehman Bros. Merrill Lynch. Hurricane Ike. It sure looks like I chose a terrible time for a vacation-enabled news blackout! Actually, it wasn't so much a blackout as it was an impossibility for me to blog, so many thanks to guest blogger Heidi Gothard to cover the major stories in my absence.

I'm back from a very interesting trip to mostly Spain and Portugal, where I saw dozens of cranes in nearly every city we visited (Spain has also had their own version of a real estate bubble & bust).

But the more interesting stories for me were how a city like Bilbao, Spain, could take an idea like the Guggenheim Museum and not only incorporate its architecture into its immediate space, but at the same time invigorate a gritty part of the city, jump-start a long-term redevelopment plan and again put an old city on the tourist and economic map. Or in Barcelona, where the city council had enough foresight to offer free space in prime areas to showcase the works of homegrown artists like Picasso or Dali, and in the process helped create the busiest cruise ship terminal in Europe and one of the largest Spanish economic engines for a city that was once a Roman stronghold (where you can visit one of the best Roman excavations I've ever seen underneath the city's history museum).

Instead of taking expensive excursions offered by a cruise ship line, we walked -- a lot -- to discover great examples of large, mixed-use cities, and in the process stumbled upon some great cultural treasures in cities both large and small, practiced some very bad Spanish with the locals (try that in Portugal!) and even lost some weight (not an easy task with 24-hour food service).

I'm thinking of pitching a story idea to a magazine such as Urban Land on how the appropriate use of art & architecture can help redevelop a city, but once I get my photos uploaded I'm sure I'll also post many thoughts here.

For now, however, there are domestic economic calamities to cover, not to mention what the Governor of Alaska might do to fix the housing bust if it were up to her?

Scary Times

Just how bad is the Fannie/Freddie situation? Back in July, according to a CNN.com article, Ben Bernanke assured us that these two GSEs were just fine:

U.S. Federal Reserve Chairman Ben Bernanke told the U.S. Congress on Wednesday that troubled mortgage giants Fannie Mae and Freddie Mac are in "no danger of failing."

The two mortgage giants are "adequately capitalized," Bernanke said. However, "weakness of market confidence is having an effect" on the companies, making it difficult for them to raise capital.

How could he have been so wrong just a few months ago? Did he know and was just spinning the truth on some misguided hope that this fiasco could be avoided? Or was he that clueless? Either through corruption or incompetence, that does not bode well for the decision making process at the Federal Reserve.

And what of the bafoons running Freddie and Fanny? According to the WSJ, they are facing the humiliation of being removed from their jobs:

Mr. Lockhart appointed a new chief executive officer for each company but said he hopes to keep most other employees in place. At Fannie, Herb Allison, who has served for the past eight years as chairman of the investment company TIAA-CREF, succeeds Daniel Mudd. Freddie's chief executive, Richard Syron, was replaced by David Moffett, who has been vice chairman and chief financial officer of US Bancorp.

It appears Mssrs. Syon and Mr. Mudd (how apropos is that name?) were brought in to clean up the place in 2003. They did a heck of a job, Brownie.

……But then the companies' efforts to disguise the normal fluctuations in their earnings led to regulatory findings that they had violated accounting rules. The scandals flushed out top executives at both firms.

In late 2003, Freddie drafted in as its chairman and CEO Mr. Syron, a former president of the Federal Reserve Bank of Boston and chief executive of the American Stock Exchange. A year later, Fannie gave a battlefield promotion to its chief operating officer, Daniel Mudd, giving its CEO job to the decorated ex-Marine, a son of TV newsman Roger Mudd.

But the humiliation of being booted is somewhat tempered by the obscene amount of money both are carting away:

Mr. Syron may walk away with an exit package that could total as much as $15 million, says David Schmidt, a senior consultant at James F. Reda & Associates LLC, a compensation consulting concern in New York. That includes a pension and deferred compensation, about $3.7 million in severance pay, and a possible payment of $8.8 million to compensate for forfeiting certain equity grants.

Mr. Mudd's exit package, including stock he already owns, could total $14 million, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday's closing price. That value of that stock could fall sharply, however.

Of all the blogs, I think Mr. Mortgage’s blog http://mrmortgage.ml-implode.com/ hits the key factors the best. He is clearly outraged at what’s happening, as we all should be.

He points out that Freddie/Fannie’s toxic loans were made due to corruption/incompetence all the way to the top ( his entry 'Enron on Steroids').

He says these loans should not be bailed out by us taxpayers, and in fact at the time they were made, were explicitly not backed by the government. He and another blogger, Karl Denninger, extract the important points to focus on in this mess. Whether anybody is listening is debatable.

Just. Not. Getting. It.

According to an article in the WSJ, ‘Foreclosure Effect on Home Prices May Be Small’, three economists from the National Bureau of Economic Research (it may be my ignorance, but who are these guys and where have they been?) are saying prices will only go down about 6% from 2007 to 2009:

“Even in the face of an extreme foreclosure wave such as that experienced in 2007, our evidence indicates that foreclosure shocks have relatively small effects on U.S. house prices,” the authors, Charles Calomiris of Columbia University and Stanley Longhofer and William Miles of Wichita State University wrote.

The authors’ model incorporated MBA foreclosure and Ofheo home price data from 1981 to 2007, and used home foreclosure forecasts for 2008 and 2009 from Economy.com. The model included data on employment, building permits and existing home sales. In their paper, the authors said the study was first to estimate the effect of foreclosures on home prices for all the U.S.

Even under an “extreme” foreclosure shock scenario, with foreclosures up 75% compared to the baseline in 2008 and 2009, U.S. home prices only decline about 5.5% between the the second quarter of 2007 to the end of 2009, the authors estimated.

Home prices, they wrote, “are quite sticky,” and “fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.”

“We conclude that a reasonable estimate of the future path of U.S. housing market prices is that they will remain essentially flat, on average, for the next two years notwithstanding the large predicted increase in foreclosures,” they wrote.

What warms my negative little heart are the comments on this article. Posters had a good time poking holes in the ‘sticky price’ argument. The comments are a bit pungent, but I am glad that so many people get it. Pricing has been anything but sticky. As the next wave of Alt A loans adjusts, we are likely to see another sharp drop.

A little sunshine in the doom and gloom

Actually, this just proves my suspicion, that there are buyers out there, ready, willing and able to do the deal (how many will close escrow may have to wait for another blog entry). Since the stupid deals (which accounted for about 70% of transactions over the past five years, according to um, an expert, i.e., me) are gone, in their place are home sales that make sense. Still, many buyers continue to sit on the sidelines, waiting for reality to hit pricing. But when that does happen, buyers re-enter the market.

An agent in one of the hardest-hit markets is averaging a sale a week, an acceptable, maybe even better than average, rate before the boom. What’s this agent’s secret? She basically rolled back to pre-2003 standards and procedures. She is also advertising in unusual venues like carefully targeted PennySaver ads in certain communities. There is a level of handholding, educating and financial housing-cleaning that would have been unheard of during the boom. Loans are obviously much harder to come by and take a lot more work to make happen. The new homes themselves are an incredible bargain – everything that used to be an option is included. These simple, even obvious strategies are the big secret.

The agent is Marie Keefe and she is selling four homes a month at Avalar in Coachella. She cut pricing from the mid $200-$300K to $180-$260K range, and this price cut still includes back and front yard landscaping and a ton of included features.