M. Whitney Pod Cast on The Markets and Nationalization

Years and years of loans must work its way out of the system

Prime Luxury Takes a Hit

Feb. 20 (Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.

About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, a percentage reached within 10 months and the fastest since at least 1992, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. That’s almost twice as quickly as 2007 and a level 2006 owners haven’t attained after almost three years.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off.

“The biggest influence in rising delinquencies is related squarely to the economy rather than poor underwriting,” said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, New Jersey-based mortgage research firm. “We are apparently all suffering to some degree. It’s certainly more severe for some but still, it’s pretty much widespread.”

Jobless Rate

U.S. joblessness reached a 25-year high in January while the unemployment rate in the financial industry rose to 6 percent from 3 percent a year ago. It jumped to 10.4 percent from 6.4 percent in the category of professional and business services, according to the U.S. Bureau of Labor Statistics in Washington.

About 1.92 percent of homeowners with 2008 mortgages backed by Fannie Mae and Freddie Mac fell at least 60 days behind, LPS Applied Analytics said. Jumbo loans are bigger than what the two government-chartered agencies buy or guarantee, currently $417,000 in most places and as much as $729,750 in areas with higher home prices. The average credit score for 2008 jumbo loans was 762, LPS Applied Analytics said. Such scores are used to assess risk.

Jumbo lending slowed in the fourth quarter to $11 billion, or 4 percent of the mortgage market, the lowest quarterly amount since Inside Mortgage Finance started tracking that data in 1990. In 2007, jumbo loans made up 14 percent of total U.S. mortgage originations, according to the Bethesda, Maryland-based publication.

Financing Jumbo Loans

The top five U.S. jumbo lenders — Chase Home Finance LLC, Bank of America Corp., Washington Mutual Inc., Wells Fargo & Co. and Citigroup Inc. — originated a combined $55.3 billion in jumbos in 2008. They lent just $4.3 billion of that during the last three months of the year, according to Inside Mortgage Finance.

Banks don’t want to make jumbo loans because holding them on their books means they have to keep sufficient money in reserve in case borrowers quit paying, Inside Mortgage Finance Publications Chief Executive Officer Guy Cecala said.

The national average for a 30-year fixed-rate jumbo mortgage was 6.57 percent this week compared with 5.34 percent for a conforming loan, according to White Plains, New York-based financial data provider BanxQuote.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 20 basis points “for several decades,” according to BanxQuote CEO Norbert Mehl.

181 Basis Points

In August 2007, that difference jumped to as much as 200 basis points and has stayed between 100 and 200 basis points, Mehl said. A basis point is equal to 0.01 percentage point.

The difference between the jumbo interest rate and the prime conforming rate was 181 basis points on Feb. 18, according to Bloomberg data.

“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.”

Earnings Today

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Tim Geithner takes on a new approach

Credit cards, home equity lines, student loans, car financing: none come cheaply or easily in these credit-tight times. The banks, the refrain goes, just will not lend money.

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But it is not simply the banks that are the problem. It is also what lies behind them.

Largely hidden from view is a vast financial system that serves as the banker to the banks. And, like many lenders, this system is in deep trouble. The question is how to fix it.

Most banks no longer hold the loans they make, content to collect interest until the debt comes due. Instead, the loans are bundled into securities that are sold to investors, a process known as securitization.

But the securitization markets broke down last summer after investors suffered steep losses on these investments. So banks and other finance companies can no longer shift loans off their books easily, throttling their ability to lend.

The result has been a drastic contraction of the amount of credit available throughout the economy. By one estimate, as much as $1.9 trillion of lending capacity — the rough equivalent of half of all the money borrowed by businesses and consumers in 2007, before the recession struck — has been sucked out of the system.

Banking chiefs, who have come under sharp criticism for not making more loans even as they have accepted billions of taxpayer dollars to prop themselves up, say it is the markets, not the banks, that are squeezing American borrowers.

The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.

But analysts question whether this approach will be enough to unlock the credit that the economy needs to pull out of a deepening recession. Some worry it may benefit only select investors at taxpayer expense.

The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy F. Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion.

Investors and economists said that the effort could help restore some lending, but added that it might not be big enough to fully replace all or most of what has been lost, especially if the nation’s biggest banks are not restored to health.

We can agree the task is daunting

WASHINGTON — When Treasury Secretary Timothy Geithner unveiled his revamp of the U.S. bank-bailout fund, one of his central objectives was toughening oversight of how the money is used. Meeting that goal could be a challenge, though.

The Congressional Oversight Panel, the body named by Congress to oversee the $700 billion bailout, consists of five strong-minded members who agree about the enormity of their task, and little else.

The short-staffed panel is drawing heavily on the Harvard University law students and colleagues of its chairwoman, law professor Elizabeth Warren, as it churns out reports at a break-neck pace. Most of the staffers are 20-something aides from the Obama campaign, though an executive director and two banking lawyers were hired recently.

The panel’s other members have had to hustle for a chance to weigh in, or, in the case of the body’s two Republicans, to dissent altogether, something that isn’t supposed to happen on a panel dubbed “bipartisan.”

“I think the jury is out over whether this panel is effective in fulfilling its congressional mandate,” said Texas Republican Rep. Jeb Hensarling, who opposed last year’s Troubled Asset Relief Program and is the only current member of Congress on the panel.

At the helm is Ms. Warren, 59 years old, a consumer advocate who has spent her career battling big banks and credit-card companies. She is the author of eight books and numerous studies on bankruptcy. In public testimony, she has accused creditors of deliberately luring consumers into taking on unsupportable amounts of debt.

Many of Ms. Warren’s views about debtor responsibility remain controversial, as does the reputation she earned as a sharp-elbowed ideological infighter when she was the top staffer on a congressional bankruptcy commission a decade ago.

The oversight panel is supposed to assess the bailout fund’s impact on financial markets, its transparency and whether it is helping to stem rising foreclosures. The panel has reported that the Treasury overpaid for shares in the nation’s big banks, and that banks so far haven’t used bailout money to prevent foreclosures.

The Bear is in control

Feb. 20 (Bloomberg) — Stocks in Europe and Asia retreated, sending the MSCI World Index lower for a ninth day, and U.S. stock futures fell as companies from Anglo American Plc to Bridgestone Corp. indicated the recession is deepening.

Anglo American tumbled 13 percent as the mining company suspended its dividend and share buybacks. Bridgestone, the world’s largest tiremaker, fell 7.4 percent after saying profit will slide 71 percent this year. JPMorgan Chase & Co. declined 2 percent in Germany as Meredith Whitney forecast some banks won’t continue to pay their existing dividends.

The MSCI World Index decreased 1.2 percent to 780.76 at 11:35 a.m. in London, extending its nine-day retreat to 11 percent. Japan’s Topix Index fell to its lowest level since 1984, while Europe’s Dow Jones Stoxx 600 Index slid to a five-year low.

Sentiment “is staggeringly bad,” said Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd. in London. “There is renewed pressure on equity markets.” Brewin Dolphin oversees about $24 billion.

Futures on the Standard & Poor’s 500 Index slid 1.4 percent. U.S. stocks dropped yesterday, sending the Dow Jones Industrial Average to a six-year low, as concern about rising credit-card defaults dragged financial shares to the lowest level since 1995.

Treasuries rose, heading for a second straight weekly gain, while the yen climbed against the dollar and euro as investors bought the currency as a refuge.

The euro also dropped against the dollar. European Central Bank President Jean-Claude Trichet said at a conference in Paris that the global credit crisis poses a “serious challenge” to the financial system and economic policy makers around the globe.

$1.1 Trillion

The MSCI World has tumbled 51 percent since the start of last year as credit-related losses at financial firms worldwide climbed to $1.1 trillion and Europe, the U.S. and Japan fell into the first simultaneous recessions since World War II.

The gauge of 23 developed countries extended its retreat this month as companies from Electricite de France SA to Diageo Plc posted disappointing results and U.S. Treasury Secretary Timothy Geithner failed to convince investors that his plan to rescue U.S. banks will work.

Europe’s Stoxx 600 fell as much as 3.2 percent to 177.61, a level not seen since April 2003, as UBS AG tumbled. The MSCI Asia Pacific Index lost 2.1 percent, led by Qantas Airways Ltd. after Moody’s Investors Service cut its debt rating.

Anglo American

Anglo American sank 13 percent to 1,078 pence. The company will cut 19,000 jobs to retain cash after metal prices collapsed. Full-year net income fell to $5.2 billion from $7.3 billion a year earlier, Anglo said.

Cie. de Saint-Gobain SA, Europe’s biggest supplier of building materials, and Lafarge SA, the world’s largest cement producer, each said they will sell 1.5 billion euros ($1.9 billion) in shares to shore up finances eroded by slowing construction markets.

Saint-Gobain slid 14 percent to 23.95 euros. Net income dropped 7.3 percent last year. The global economic crisis makes the 2010 targets set in 2007 “obsolete,” the company said.

Lafarge said cost-cutting initiatives will be extended to help save 200 million euros in 2009. The shares slipped 2.2 percent to 36.02 euros.

“We’re at the low point of the economic cycle and companies are trying to clean things up,” Vincent Juvyns, a strategist at ING Investment Management in Brussels, which oversees about $476 billion worldwide, said in a Bloomberg Televison interview. “We’ll see more and more capital increases across industries.”

Europe’s manufacturing and service industries unexpectedly contracted at a record pace this month as consumers held back on spending and companies postponed investments.

U.S. Banks

JPMorgan slipped 2 percent to $20.18. Whitney, the financial industry analyst who left Oppenheimer & Co. to start her own firm, said on CNBC Television she doesn’t expect the banks she covers to continue paying dividends at their current levels.

Whitney in October 2007 predicted Citigroup Inc. would cut its dividend amid writedowns and credit losses, triggering the steepest tumble in the company’s shares since September 2002. The New York-based bank slashed the dividend by 41 percent three months later.

Whitney said she would be a seller of Citigroup at its current level. The shares slipped 4 percent to $2.41 in Germany.

Bridgestone sank 7.4 percent to 1,251 yen after saying net income will probably fall 71 percent to 3 billion yen ($32 million) this year as demand for new cars wanes.

Continental AG, Europe’s second-largest car-parts maker, slipped 1.4 percent to 13.07 euros. Michelin & Cie., the world’s second-biggest tiremaker, dropped 1.6 percent to 27.37 euros.

Saab Automobile

Saab Automobile filed for protection from creditors after parent General Motors Corp. said it will cut ties with the Swedish carmaker following two decades of losses. GM slipped 3 cents to $1.97 in Germany.

Porsche SE slid 7.9 percent to 33.58 euros. The maker of the 911 sports car was rated “underweight” in resumed coverage at Morgan Stanley with a price estimate of 10 euros.

UBS tumbled 16 percent to 10.72 francs after Switzerland’s largest bank was sued by the U.S. government to force disclosure of as many as 52,000 American customers who allegedly hid their Swiss accounts from tax authorities.

Qantas, Australia’s largest carrier, slumped 4.3 percent to A$1.675 after Moody’s lowered its long-term debt rating to Baa2, the second-lowest investment grade, from Baa1 because of plunging air-travel demand.