From Volume 5, Issue Number 38 of EIR Online, Published Sept.19, 2006

U.S. Economic/Financial News

July Trade Deficit Sets a Record

As a searing indictment of the gross incompetence of Bush-Cheney Administration policy, the U.S. trade deficit on goods and services climbed to $68.0 billion in July, the highest monthly level ever, the Department of Commerce reported Sept. 12.

However, restricting attention solely to physical goods—excluding services—the U.S. trade deficit reached $73.4 billion in July, likewise unprecedented. For July relative to June of this year, physical goods exports fell by $1.3 billion to $85.7 billion, while imports rose $2.1 billion to reach $159.1 billion. America now imports twice as many physical goods as it exports.

Were the present trend to continue for the rest of the year—and it could get worse—it is projected that the U.S. trade deficit for goods and services would reach $776.6 billion for 2006, compared with $716.7 billion for 2005; the U.S. trade deficit only for physical goods would reach $843.4 billion for 2006, compared with $782.7 billion for 2005.

Freddie Mac SWAT Team To Deal with 'Flood of Foreclosures'

Despite the lies from Bush Administration officials that the U.S. housing market is "basically sound," and "crash-proof," the secondary housing market giant Freddie Mac is fervidly working with banks to construct a SWAT team intended to stave off the wave of housing foreclosures before they rupture the U.S. financial system. Under the headline, "Lenders Rally To Stem Foreclosures as Interest Rates Rise," the Sept. 10 Los Angeles Times wrote that "The lending business is marshalling its forces on an unprecedented scale to get in front of what could be a flood of foreclosures." Freddie Mac is coordinating. Craig Nickerson, executive VP of expanding markets at Freddie Mac stated, "We're trying to create a comprehensive safety net to help people stay in their homes. But 167,000 new families are entering foreclosure every three months, according to the Mortgage Bankers Assn. And that could just be the proverbial tip of the iceberg."

The gimmicks that Freddie Mac is proposing can't work. One such gimmick, the L.A. Times reported, is to have the huge balance a homeowner owes on a mortgage rolled over into a new loan, but at a slightly lower interest rate. However, the fact that Freddie Mac has chosen this moment to assemble such a team, demonstrates that within the home mortgage lending domain, which includes all the big U.S. banks, there are many sweaty palms ... and soiled pants.

* One of the markets that most signifies the crisis is the San Francisco Bay Area, where the average price of a new home exceeds $550,000. The Internet website reported, under the headline, "U.S. Housing Crash Continues: San Francisco Bay Area Hit Hard," that there is near hysteria in the once red-hot home market there. Among more than two dozen reasons assembled as to why the market will crash are: "82% of recent Bay Area [mortgage] loans are adjustable not fixed. This means a big hit to the finances of many owners every time interest rates go up, and this will only get worse." In addition, "Massive job loss. More than 300,000 jobs are gone from the Bay Area since the dot-com bubble popped. This is the worst percentage job loss in the last 60 years" (emphasis added). I.e., people who don't have jobs don't pay mortgages.

Foreclosures Sweep Midwest in Wake of Auto Layoffs

Foreclosures in the Metro Detroit area jumped a whopping 137%—more than double—in the first eight months of 2006, compared to last year. According to RealtyTrac, a real estate firm that tracks foreclosed properties, foreclosures rose sharply from 14,789 to 35,041, in Wayne, Oakland, Macomb, and Livingston counties during January through August, compared to the same period last year. In August, Michigan had the sixth-highest foreclosure rate, worsening from 10th in August 2005.

A mass foreclosed-home auction in the state will take place in late September, with more than 250 bank-owned single-family homes, condos, and duplexes on the auction block. The majority of the properties, about 150 in all, lie within 60 miles of Detroit.

The deindustrialized Midwest leads the nation in foreclosure rates. According to the Office of Federal Housing Enterprise Oversight (OFHEO), of the weakest 20 metropolitan area housing markets in the U.S., eight are in Michigan, and 17 are in the Midwest in other so-called "auto-wreck states."

Nationwide, 115,292 properties entered some stage of foreclosure in August, RealtyTrac reported, up 24% from July, and 53% higher than a year ago. This was the second-highest monthly foreclosure total of 2006. Homeowners unable to afford rising monthly payments on adjustable-rate mortgages, for example, are finding it difficult to sell their homes for what they owe on their mortgages or to refinance.

Five states—California, Florida, Texas, Ohio, and Illinois—accounted for half of the nation's new foreclosures in August.

Collapse of U.S. Housing Market Highlighted in Swiss Financial Paper

"Alarming Decline of Housing Market" reads the headline of a special feature in Switzerland's Neue Zuericher Zeitung. It notes that the U.S. real estate market is "spreading ever-larger worries among investors." Among the features reported are that all indices point to a slowdown, which will hit both the economy as well as the stock market; moreover construction investments in August suffered their biggest plunge in five years. Obviously, the housing market is experiencing a significant downturn, "but some sceptics rather call it a crash."

Merrill Lynch has published a chart showing a strong correlation over decades between the housing construction index of the National Association of Home Builders (NAHB) and the S&P stock market index, with the latter following by a 12-month time lag. As the housing construction index has already crashed by 50%, the outlook for the U.S. stock market is "not very promising." There can no longer be any doubt that a "bubble" has emerged in the housing market, states NZZ. It has been built on cheap central bank money, a huge increase of mortgage debt, and the widespread use of risky financial instruments. By refinancing their mortgages under such circumstances, American private households could turn their houses into ATMs. According to NZZ, U.S. homeowners cashed out $850 billion (figure not yet confirmed by EIR) by mortgage refinancings just in the second quarter of 2006, with two-thirds of the money going directly into consumption. But as interest rates rise, many mortgage debtors, in particular those with adjustable rates (ARMs), are running into trouble. The Dominion Bond Rating Service already speaks of a coming "payment shock" for home owners.

Mortgage Bankers Data Show Home-Mortgage Bubble Trouble

Data released by the Mortgage Bankers Association Sept. 14 shows major problems in the home-mortgage market. Some examples:

* More Americans are falling behind on home mortgage payments. The problem is expected to grow as adjustable rates reset higher. Homeowners with shaky credit are falling behind on payments, especially where job losses have hit local economies, e.g., in Ohio, Alabama, Tennessee, Michigan, and West Virginia. Among sub-prime credit borrowers with higher interest rates and adjustable loans resetting to higher rates, 12.2% were late paying loans in April-June. About 25% of all mortgages carry adjustable rates, and more than half of these loans are to sub-prime borrowers. Delinquencies are expected to rise over the next year, as adjustable rate mortgages (ARMs) shift to higher rates.

* Sub-prime ARM borrowers are at increased risk of entering foreclosure. They hit 2.01%, the highest number since the fourth quarter of 2003.

* Record high of home foreclosures on adjustable rate mortgages for prime borrowers in 2006. These are homeowners with good credit ratings. Their share of mortgages entering foreclosure went up to 0.27% from 0.21% three months previously. The average rate for an ARM has risen by 1% since 2005, at the same time as energy and insurance costs are rising.

House Dems Back Farm Drought Relief vs. White House

On Sept. 12, the House Democratic Caucus sent a letter to the Republican leadership, by asking for time to be scheduled in the current session "to debate and vote on emergency agricultural disaster assistance for 2005 and 2006," before the October recess. They asked for a "comprehensive agriculture disaster package." The letter points out, "Democrats have sought to provide relief several times in the House. Last Fall ... [measures were] defeated by party-line votes.... The Senate included agriculture disaster assistance [for $4 billion] in both of their emergency supplemental bills. Unfortunately, earlier this year, under pressure from President Bush's veto threat, House Republicans failed to stand up for disaster assistance," and it was eliminated.

On Sept. 6, a bipartisan $6 billion farm disaster relief bill was filed in the Senate by 12 Senators, led by Kent Conrad (D-ND), and Norm Coleman (R-Minn). It includes $4 billion to deal with the devastating impacts of the High Plains drought, and covers both 2005 and 2006. Conrad said they intend to attach this to some remaining legislation in the Senate. The previous $4 billion farm disaster relief measure, passed by the Senate, and intended for inclusion in the Defense Supplemental bill, was squashed in June by House/Senate conference, at the demand of Cheney/Bush.

On Sept. 6, White House spokesman Alex Conant responded that the administration still opposes the farm disaster relief measure, cavilling that Secretary of Agriculture Mike Johanns will wait until after the fall harvest to see if any such action is warranted.

Backing the Senate farm disaster relief are Republicans Coleman and Jim Talent (Mo); Democrats Conrad and Dorgan (ND), Nelson (Neb), Johnson (SD), Salazar (Colo), Baucus (Mont), Cantwell (Wash), Durbin (Ill), Obama (Ill), and Dayton (Minn).

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