From Volume 6, Issue 27 of EIR Online, Published July 3, 2007

U.S. Economic/Financial News

Mortgage Bust Fuels Foreclosures in Washington

June 30 (EIRNS)—On June 29, U.S. Federal regulators tightened rules for lenders issuing risky subprime mortgages, but it may be a case of too little too late to stanch the hemorrhage of foreclosures flooding the economies of many communities in the Greater Washington Area.

The new guidelines are aimed at the 8,000 federally regulated lenders, and require them to underwrite loans based on the higher adjusted loan rates, not the low "teaser" rates used now. Furthermore, lenders must give borrowers 60 days to refinance without penalty, before higher loan rates go into effect, according to today's Wall Street Journal.

According to extensive coverage in the Washington Post, the collapse of subprimes has led to growing numbers of newly homeless in areas around the nation's capital. From Leesburg to Ft. Washington in Virginia, and Howard County in Maryland, foreclosures are skyrocketing, and igniting a secondary exodus of panicked homeowners scurrying to leave before the foreclosures impact their already precarious housing values. data by zipcode for the D.C. area pinpoints the local hotspots for the meltdown:

* Fort Washington, in Prince George's County, Maryland, accumulated 80 pending foreclosures this year, twice the rate of a year ago.

* Herndon in Fairfax County, Virginia registered 75 foreclosures in one zip code, eight times last year's rate.

* Leesburg, in Loudoun County, Virginia, has seen foreclosures ten times the 2006 same-period rate.

* Howard County, Maryland had foreclosures shoot from one in 2006 to 157 from January to May of 2007.

Commerce Report Shows No End to Housing Collapse

June 26 (EIRNS)—The Commerce Department reported June 26 that new home sales fell by 1.6% last month, to an annual rate of 915,000. Rising interest rates and a glut of unsold homes on the market are feeding the worst housing crisis since 1991. "There are some pretty significant negative risks for economic growth," said Carl Riccadonna, an economist at Deutsche Bank Securities in New York, to Bloomberg. "We are not at the bottom yet in housing."

Home values in the U.S. declined 2.1% in April, from the same month a year earlier, according to a report June 26 by S&P/Case-Shiller, cited by Bloomberg. It was the fourth straight drop in the group's index, which started in 2001. Housing prices in 20 cities in April fell by the most in at least six years.

Surge in Defaults Spreading Beyond Subprime Mortgages

June 27 (EIRNS)—A new report from Standard & Poor's finds a sharp rise in late payments and defaults on Alt-A mortgage loans—those between prime and subprime—for which borrowers do not provide full documentation of income and assets. Some 4.21% of Alt-A loans bundled into mortgage-backed securities last year were 90 or more days overdue after 14 months, up sharply from 1.59% for loans from 2005 and 0.91% for loans from 2004.

Wall Street Fraud Stoked Mortgage Securities Meltdown

June 27 (EIRNS)—Lehman Brothers investment bank, the largest U.S. issuer of Mortgage-Backed Securities (MBS), issuing one-tenth of all MBSs annually, is the subject of 15 lawsuits for falsifying, doctoring, and physically altering subprime mortgages and MBS instruments. The lawsuits, and research by the Wall Street Journal, which published a feature June 27, titled, "How Wall Street Stoked the Mortgage Meltdown," lift a corner of the veil on the Mafia-like operations of the subprime mortgage industry.

In addition to having founded the modern MBS industry, and being the largest or second-largest issuer for 11 of the past 12 years, Lehman is also the 11th-largest direct subprime lender, through its BNC mortgage unit subsidiary. Coleen Columbo, a former mortgage underwriter for Lehman's BNC unit, stated that the mantra at BNC was to do "anything to make the deal work." She and five other BNC ex-employees are suing Lehman BNC, because when they complained about ongoing fraud, they were fired. A Lehman mortgage unit manager, Cedric Washington, stated that he saw a fellow manager alter a loan by forging a borrower's initials. The Journal reported that "several [Lehman mortgage] ex-employees said, brokers or in-house employees altered documents with the help of scissors, tape, and Wite-out."

In 1995, a Lehman Brothers vice president, Eric Hibbert, described the operations of a subprime lender, First Alliance Mortgage, in the following words: It is a financial "sweat shop," specializing in "high pressure sales for people who are in a weak state," where employees leave their "ethics at the door." Lehman higher-ups were so impressed that they poured $500 million into First Alliance Mortgage Alliance. Federal regulators and seven states investigated deceptive sales practices at First Alliance, and in 2003, a Federal grand jury delivered a $50.1 million verdict against it, with Lehman ordered to pay $5 million. But Lehman used such practices to drive the volume of the MBS market from $50 billion in 2000, to $503 billion in 2005, and $483 billion in 2006. Lehman issued one-tenth of all MBS instruments. Today, synarchist Felix Rohatyn operates as a senior figure at Lehman Brothers.

BAE-Linked Carlyle Group To Take Over GM Division

June 28 (EIRNS)—Carlyle Group, the private equity group closely linked to British BAE Systems, has announced a takeover of a division of General Motors. Both BAE Systems and the Swedish Bofors Defence Group, which BAE bought from Carlyle, are accused in the "scandal of the century" (see last week's EIR online, and this week's InDepth Investigation).

On the same day it announced the planned takeover of GM's Allison Transmissions division for $5.6 billion, Carlyle had to cut back a scheduled IPO of a bond investment fund, because of increasing liquidity problems on the speculative junk-bond markets. Many financial analysts are now forecasting the failure of some large private-equity leveraged takeovers, bringing on a general junk-market collapse—and Carlyle's GM takeover could well be the one to fall apart.

For the U.S. auto industry, the takeover, if it goes through, will mean seven more technologically productive and well-tooled plants, and 4,000 employees—all in the Indianapolis area—falling under the control of speculative private-equity and hedge funds, following in the footsteps of Chrysler Corp., GMAC, Delphi Corp., and scores of smaller firms. Allison Transmission also has 1,500 distributors and dealers in 80 countries.

Carlyle has a junior partner in the planned takeover, the Canada-based private-equity group Onex Corp.

Broad-Based Drop in Durable Goods Orders in May

June 27 (EIRNS)—New orders for U.S.-made manufactured goods, made to last at least three, years fell 2.8% in May, a larger drop than expected. The fall in durable goods orders was led by a 22.7% plunge in orders for civilian aircraft, the Commerce Department reported. Non-defense capital goods orders excluding aircraft, interpreted as a sign of business investment, tumbled 3%, the biggest decline since January.

SEC Investigating Almost-Frozen Securities Market

June 27 (EIRNS)—Traders in the crisis-hit mortgage-backed securities (MBS) market have begun reporting a freeze-up—a near halt in all generation of the securities known as collateralized debt obligations (CDOs)—a week after the collapse of two big Bear Stearns hedge funds trading in CDOs. With paper creation in this $2.6 trillion market having sunk to a couple of billion dollars at the end of June, the vice chairman of Loomis Sayles in Boston warned, "If investors start dumping them, oh, boy, watch out for some massive credit widening" (market slang for a sharp increase in interest rates, a credit crunch in the market). Interest rate premiums on CDOs jumped 1.5% last week.

The specter of this threat to the financial system raised its head in a Congressional hearing June 26, as Rep. Carolyn Maloney (D-N.Y.), waving that morning's Wall Street Journal, asked SEC chairman Christopher Cox if he agreed that CDOs and related securities are risky, dangerous to the financial system, opaque in value, and should be regulated. With journalists and aides suddenly taking furious notes, Cox said he lacked the authority, because these securities are not registered under the 1933 Securities and Exchange Act; but that if Congress changed that, "Absolutely," they should be regulated due to that risk. And he announced that the SEC has opened an investigation of the Bear Stearns hedge funds and 12 other cases that "relate generally to subprime."

JP Morgan analysts issued a report June 27 saying that, "We expect events surrounding warehousing liquidations [in the Bear Stearns and other cases] last week to further slow, if not halt entirely, the new issue market." The Credit Derivatives Research LLC firm reported that a large source of liquidity on global credit markets could be disappearing entirely.

Showing how widely this disintegration is spreading through markets, Barron's on June 25 reported that the $670 billion insurance firm MBIA, linked to Bank of America, had its overall credit rating under threat as a result of growing losses in MBS which it insured. Barron's noted that the company's core capital, and thereby its whole operation, could be threatened by such a credit downgrade.

All rights reserved © 2007 EIRNS