• Home ::
• Fundamental ::
• Analysis Reports ::
• Daily Global Commentary

• Send
• Print
• Add To
• Rss

Daily Global Commentary

f9eea41b-1e39-4216-a00b-e0a9c86cd230

1

0

Stopping Home Foreclosures Is At the Top of the Agenda

Thu, Dec 4 2008, 22:55 GMT
by Northern Trust Economic Research Department

Northern Trust

Stopping Home Foreclosures Is At the Top of the Agenda

There is a strong consensus for policy actions to prevent home foreclosures which is a change in focus from liquidity and solvency of financial institutions – the main thrust of policy actions in the past sixteen months. Chairman Bernanke summarized in his speech today the various programs that have been initiated to address foreclosures but stressed that more is necessary (FRB: Speech--Bernanke, Housing, Mortgage Markets, and Foreclosures--December 4, 2008).

“A number of initiatives have attempted to address the problem of unnecessary foreclosures. Working in collaboration with the Treasury Department, the Hope Now Alliance, a coalition of mortgage servicers, lenders, housing counselors, and investors--led by Faith Schwartz, a member of the Fed's Consumer Advisory Council--has produced a set of guidelines that participating servicers have agreed to use as they work to prevent foreclosures. In addition, servicers in the Alliance agreed to delay foreclosure proceedings if an alternative approach might allow the homeowners to stay in their home. Recently, in conjunction with the FHFA, the coalition announced that its members will adopt a streamlined modification program for certain loans that they service for the GSEs. This program will closely follow the one that the FDIC has introduced for modifying the loans in the portfolio that it took over from IndyMac.11

The Federal Reserve has also been actively supporting efforts to prevent unnecessary foreclosures. Through the System's Homeownership and Mortgage Initiative, we have conducted studies on housing and foreclosures, provided community leaders with detailed analyses to help them better target their borrower outreach and counseling efforts, and convened forums like this one to facilitate the exchange of ideas and the development of policy options. Taking advantage of the Federal Reserve's nationwide presence, the twelve Reserve Banks have sponsored or co-sponsored more than 100 events related to foreclosures around the country since last summer, bringing together more than 10,000 lenders, counselors, community development specialists, and policymakers. A particular focus of the Fed's efforts has been the mitigation of the costs to communities of high rates of foreclosure. For example, we have partnered with NeighborWorks America on a neighborhood stabilization project and helped them develop responses to community needs as well as train local leaders.

Beyond these efforts, two government programs to facilitate loan modifications have been authorized, both through the Federal Housing Administration (FHA). The FHASecure program has provided long-term fixed-rate mortgages to borrowers facing a rise in payments due to an interest rate reset. Another, more recent program, dubbed Hope for Homeowners (H4H), allows lenders to refinance a delinquent borrower into a new, FHA-insured fixed-rate mortgage if the lender writes down the mortgage balance to create some home equity for the borrower and pays an up-front insurance premium. In exchange for being put "above water" on the mortgage, the borrower is required to share any subsequent appreciation of the home with the government.”

Chairman Bernanke mentioned that aggressive action in form of write-downs of principal would be necessary and he also described various new options to stop the rapid pace of foreclosures and concluded as follows: “Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy. More needs to be done.” (Emphasis added.)

Michael H. Krimminger, Special Advisor for Policy, Office of the Chairman; Federal Deposit Insurance Corporation on Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and Efforts to Mitigate Foreclosures, echoed some of Bernanke’s observations in his testimony today. Mr. Krimminger noted that by the end of 2009 more than 4.4 million non-GSE mortgages are expected to become delinquent. He went on to indicate that a streamlined procedure will be necessary to address mortgages that have been securitized. He also predicted that over the next two years 4 to 5 million mortgage loans will enter foreclosure. He outlined a loss sharing proposal to promote loan modifications and prevent foreclosures. Details of his proposal can be read here: FDIC: Speeches & Testimony - 12/04/2008.

The Treasury Department’s Kashkari noted today that they are evaluating various proposals that address how to reduce foreclosures. Representative Barney Frank is scheduled to follow-up with Mr. Kashkari with hearings next week. The main conclusion from speeches and testimonies today is that policy measures will be taken in the near term to reduce home foreclosures. Chairman Bernanke aptly summarized the crux of the macroeconomic problem: “Declining house prices, delinquencies and foreclosures, and strains in mortgage markets are now symptoms as well as causes of our general financial and economic difficulties. These interlinkages imply that policies aimed at improving broad financial and economic conditions and policies focused specifically on housing may be mutually reinforcing. Indeed, the most effective approach very likely will involve a full range of coordinated measures aimed at different aspects of the problem”

Fed actions as of last week to buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Federal Home Loan Banks and purchase up to $100 billion of debt issued by these agencies has resulted in a sharp drop in mortgage rates. The 30-year fixed rate mortgage averaged 5.53% for the week ended December 5, down from 5.97% last week, following a high of 6.36% for the week ended October 31 (see chart 1).

Weekly Update from Labor Market Is a Persistent Reminder of the Dire Situation

Initial jobless claims fell 21,000 to 509,000 during the week ended November 29. The 4-week moving average stands at 524,500, the highest since December 1982 (see chart 2)

Continuing claims, which lag initial claims by one week, rose 89,000 to 4.087 million and the four-week moving average is 4.00 million, also a 26-year high (see chart 3). The insured unemployment rate moved up to 3.1% from 3.0% in the prior week. The news from the labor market is markedly gloomy. Today, AT&T announced layoffs of 12,000, 4.0% of its work force, and DuPont indicated that it is cutting 2,500 jobs. The monthly tally of employment conditions for November will be published tomorrow. A 6.7% unemployment rate (vs. 6.5% in October) and a loss of 300,000 jobs are predicted for November after a decline of 240,000 payroll jobs in October.

Europe: Historic Rate Cuts Suggest a Dismal Outlook For 2009

The Bank of England (BoE), the European Central Bank (ECB), and Sweden’s Riksbank all slashed their policy interest rates this morning, and all cited the same reasons – that demand conditions have deteriorated markedly, and that inflation is likely to undershoot their respective medium-term targets. Even after the drama of this morning’s moves, rates are likely to go lower in 2009, particularly in the Euro-zone.

The Riksbank led off the day with the most aggressive move, slashing its repo rate a whopping 175bps to 2.0%. Only three months ago the Swedish bank was fretting about inflation and hiked its policy rate 25bps to 4.75%. Since then, the world has changed. As the Riksbank put it this morning, there has been an “unexpectedly rapid and clear deterioration in economic activity since October.” The repo rate has been lower in recent years – at 1.50% in the second half of 2005 – but today’s move was the biggest interest rate shift in Sweden since the repo rate was introduced in 1994, and the largest policy cut since September 1992, when the then-marginal rate was slashed by 450bps in the midst of a financial crisis. The bank said it expected the repo rate to remain at 2.0% through 2009, but if current inflation and growth trends continue, further easing is likely in the first half of next year.

Next to announce was the BoE, which lopped 100bps off its base rate, taking it to 2.0%. Again, the headline writers have rushed to make the historical comparisons: The last time rates were this low was back in 1951; at 2.0%, the policy rate is now effectively equal to its lowest since the BoE was founded in 1694; the last time the bank cut from 3.0% to 2.0% was October 1939 as WW2 was getting underway. In its subsequent statement, the bank emphasized that the economic downturn has gathered pace and that demand is now so weak there is a “substantial risk” of undershooting the 2.0% CPI inflation target. It also warned that “further measures” might be needed to return lending to normal levels. The minutes of today’s meeting will be released December 17, and may give some sense of whether the policy makers envisage even lower rates in 2009. For now, the comment about “further measures” suggests the bank is deeply concerned about renewed problems in the interbank market.

After these dramatic moves, the ECB’s 75bp reduction in its refi rate was almost bound to disappoint, even though it was the largest easing in the bank’s ten-year history and came on top of two previous 50bp cuts. In his subsequent press briefing, Governor Trichet noted that the reduction was a consensus – i.e., not unanimous, implying that some members are still hesitant about the effectiveness of marked easing. Trichet also spoke of “exceptional uncertainty,” the recent intensification and broadening of market tensions, and the likelihood that domestic demand will be “very sluggish” in coming quarters. And, he noted that the ECB staff now project real GDP growth of around 1.0% in 2008, falling to between zero and -1.0% in 2009, with growth risks to the downside. Although the Governor would not be drawn on the outlook for rates next year, a negative growth forecast all-but guarantees further easing in Q1 2009.

• Download Full Forex Commentaries

Published on  Thu, Dec 4 2008, 23:12 GMT