From Volume 7, Issue 7 of EIR Online, Published Feb. 12, 2008

U.S. Economic/Financial News

Loan Workouts Outpaced by Bad Loans, Foreclosures

Feb. 7 (EIRNS)—A study by the State Foreclosure Prevention Working Group, made up of state attorneys general and bank regulators from 11 states, says that mortgage companies have stepped up their efforts to work with delinquent borrowers, but that effort is not keeping up with the rise in bad loans. According to a press release today by Ohio AG Marc Dann, the report includes information from 13 of the top 20 servicers, which provided the requested data for the month of October, 2007. These servicers (agents that collect payments on mortgage loans and transfer those payments to the investors who own those loans) represent 58% of the total subprime servicing market. AG Dann highlighted the following specific findings of the report:

Seven out of ten seriously delinquent borrowers are not receiving any assistance from their servicers in keeping their homes. The data show a large gap between the number of homeowners needing help and the number currently receiving assistance, and suggest that a rising number of loan delinquencies are outpacing the increase in servicers' efforts to help homeowners.

Servicers have increased their use of loan modifications and other home retention options. The report shows that in October 2007, only 9% of the delinquent borrowers getting help from servicers had gotten a loan modification. However, the sector is reporting currently that 45% of homeowners were being considered for loan modifications. Servicers are increasing their use of longer-term changes to the mortgage loan versus their earlier reliance on short-term repayment or forbearance agreements.

Payment resets on adjustable rate mortgages (ARMs) have not yet been a driving force in foreclosures. A significant percentage of subprime adjustable rate loans become delinquent before their loan payment rate jumps to a higher amount, which usually happens two to three years into the loan. This suggests weak underwriting, or fraud, in the origination of the loan.

Homeowners are helping themselves. Resolution of most delinquent loans in October 2007, occurred due to the homeowner catching up on back payments. That is, homeowners, not servicers, have prevented the largest number of foreclosures.

The refinance option has nearly evaporated. Historically, serial refinancing was the primary way that the mortgage business and homeowners managed delinquencies in subprime loans. Despite recent interest rate cuts, the mortgage business will not be able to refinance its way out of this crisis, absent dramatic changes in available loan "products" or a reversal in home price declines.

A Wall Street Journal article today on the Working Group's report says that it also highlights tensions between state and Federal officials. JP Morgan Chase and Wells Fargo refused to provide data to the Working Group "on the advice or direction" of the Comptroller of the Currency. The Comptroller's comments on the matter essentially say that the states should butt out of the affairs of banks which are Federally supervised, and focus only on state-regulated banks.

Even Blue Chips Dragged Down by Toxic Debt Packages

Feb. 9 (EIRNS)—It's not only school districts and municipalities which have lost millions of dollars in operating money they parked in supposedly "liquid" investment vehicles lately. Even blue-chip companies like Bristol-Myers Squibb have been affected—through auction-rate security investment vehicles that have morphed from super-safe, super-transparent investments for short-term funds, backed by such assets as government taxes, into murky securities stuffed with risky collateralized debt obligations (CDOs) tied to subprime mortgages.

According to the Feb. 18 Business Week, all went well until the credit market seized up in August 2007, and auctions began to fail for lack of bids for the debt products. This left companies unable to remove their money to use or reinvest. Bristol-Myers lost $275 million in such investments, while U.S. Airways lost $10 million. Some companies have sued the investment banks which sold them the toxic securities, notably MetroPCS, which sued Merrill Lynch after its $134 million investment seized up last year.

One high-profile suit by Springfield, Mass. against Merrill Lynch recently resulted in the reimbursement of $14 million to the city. Merrill Lynch was accused of investing city money into auction-rate securities without city consent.

Mussolini-Style Infrastructure Scheme Booed in New Jersey

Feb. 7 (EIRNS)—New Jersey Gov. Jon Corzine (D) was booed and jeered repeatedly in Monmouth County on Feb. 4, as he began a statewide tour to push his 75-year highway toll scheme to restructure the state's debt and fund infrastructure projects. The Hub, a local New Jersey paper, reported that "a crowd of over 1,000" filled the high school auditorium and an overflow room, and "booed loudly and often" as Corzine detailed his plan.

To tackle the state's $3 billion deficit, Corzine, a former head of Goldman Sachs, has turned to his banker friends for a fix. The crux of Corzine's scheme, worked out by UBS Securities LLC, creates a "quasi-independent public benefit corporation," which would contract with the state to run its three major toll roads, while increasing tolls up to 50%. Any surplus revenues would be used to pay down the state's debt, and fund statewide transportation projects. In addition to this "asset monetization" scheme, Corzine proposes to freeze spending for the next year's budget.

The rejection of Corzine's scheme by New Jersey's citizens follows the rejection of California Gov. Arnold Schwarzenegger's similar plan.

Wheat Prices Go Up, Inventories Go Down

Feb. 8 (EIRNS)—The wheat price rose to a record for a third consecutive day, on the Chicago Board of Trade, gaining the maximum increase permitted by the exchange, as the United States forecast its lowest inventories in 60 years and global demand outpaced production. The U.S. will hold 272 million bushels at the end of May, the lowest since 1948, and 6.8% less than expected a month ago, the Department of Agriculture said in a report issued today. Inventories in the United States, the world's biggest wheat exporter, will drop 40% from a year earlier. Wheat futures prices have more than doubled in the past year as supplies dwindled.

All rights reserved © 2008 EIRNS