U.S. Economic/Financial News
Mortgage Bubble Pricked: Calif. Lender Tanks 'Overnight'
A California mortgage lender collapsed "overnight," leaving thousands without home financing, and leading to industry speculation that Capitol Commerce Mortgage may be the first of many fatalities of a tumultuous bond market that has pushed Treasury yields to 12-month highs. Without any advance notice, Capitol, a privately owned home lender that operated in a half-dozen Western states, announced Aug. 22 that it was going out of business. It is one of the West Coast's largest private mortgage lenders, with 700 employees and offices in California, Oregon, Washington, Colorado, Arizona, Texas, Florida, and Illinois. The company's sudden closing leaves thousands of mortgage applicants in the lurch, after locking in low rates in July and earlier this month.
According to thestreet.com, speculation in the industry is that the sharp rise in mortgage rates and bond yields over the past two months, caught the small California-based lender by surprise. Most Wall Street analysts still think the damage from rising rates will be limited mainly to smaller enterprises such as Capitol Commerce, as long as the yield on the 10-year Treasury doesn't rise much above 4.5%. (In June, it had been as low as 3.10%.) Mike McMahon, an analyst with Sandler O'Neill & Partners, said, "I would be shocked if this happened to a Wells Fargo, a Washington Mutual, or a Countrywide. The larger players are more sophisticated and have the money to employ more sophisticated hedging strategies."
On Aug. 19, Countrywide, the nation's third-largest mortgage issuer, confirmed that it was one of the main lenders to Capitol Commerce. But Countrywide said Capitol's sudden closing shouldn't have any "material impact" on its earnings.
Merrill Lynch Economist: Mortgage Re-Fi Boom Over
The mortgage refinancing boom is not only over, but "recent data suggest that activity has collapsed," due to rising interest rates, said David Rosenberg, chief North American economist at Merrill Lynch Aug. 20. As of Aug. 15, applications for mortgage refinancing have plummeted by 72% from the record high in the last week of May, to the lowest level since July 2002, according to the Mortgage Bankers Association of America, because mortgage rates have shot up. Refinancing at lower interest rates has been a source of cash that has propped up consumer spending for more than two years. Now, this stimulus "is in the process of unwinding," Rosenberg added. The average 30-year fixed-rate mortgage has jumped to 6.22%, from 4.99% in the week ended June 13. Purchase applications fell 4.9%, the MBAA said.
July Budget Deficit Tops Expectations
The Federal budget deficit for July nearly doubled over the previous year, from $29.2 billion last July, to $54.2 billion this year, according to figures released by the Congressional Budget Office Aug. 19. The deficit was larger than both the "market consensus" of $42.0 billion and the expectations of the Congressional Budget Office, which Aug. 8 predicted a $53 billion deficit for the month. Income-tax receipts fell by $10.8 billion in July. So far, in fiscal year 2003, the Federal deficit has totalled $324.0 billion, compared with $145.5 billion a year ago, as individual tax payments have dropped by 6.9%.
Western States Gas Crisis Reveals Fragility of System
Gasoline prices shot up in California and other Western states; Arizona was hit by shortages, as the gas-supply system revealed itself to be prone to breakdown, raising the specter of the previous week's massive electricity blackout. Over the past week, the state average for gas-at-the-tank has shot up by nearly 20 cents, from $1.743 a gallon (unleaded regular grade) Aug. 12, to $1.92 on Aug. 18, hitting $2.00 in some places Aug. 19. This is the biggest weekly increase in four years, exceeded only by a rise of 22.8 cents the week of March 29, 1999, when it hit $1.467. Nationwide, the U.S. average gas price rose this past week by 5.6 cents to $1.627. San Diego gas stations project $2.09 a gallon by next Aug. 26; Redding, Calif. hit $2.15 a gallon.
In Nevada, gas shot up by three cents in one day Sunday; in Arizona, Phoenix and other locations are hard hit by shortages. Gasoline prices are being raised by the hour!
"Unfortunately, we are going to see more and more of these kinds of situations because our whole system is so vulnerable," Claudia Chandler, Assistant Director of the California Energy Commission, told the Aug. 19 Los Angeles Times.
At present, there are mechanical problems at several of California's 13 gasoline refineries, which operate at near-peak most of the time. At the same time, increased volumes of gas are leaving California (which normally supplies most of Nevada too, and 60-70% of Arizona) to go to Arizona, where on July 30, a pipeline ruptured, cutting Phoenix off from fuel conveyed from refineries in El Paso, Texas. Many gas stations are now empty in Phoenix, which had obtained 30% of its supplies from Texas.
Personal Bankruptcies Surge as Debt Swells
Personal bankruptcy filings totalled more than 1.613 million in the 12 months ended June 30, the highest level on record, up 10% from a year earlier, according to the American Bankruptcy Institute. Moreover, the filings represented a whopping 30% increase over the level in 2000, the Administrative Office of the U.S. Courts in Washington said Aug. 18. At the same time, business bankruptcy filings fell 5.2%, to 37,182. Family farm bankruptcies more than doubled to 775, from 367 last year. During April-June, a record-high total of 440,257 bankruptcy petitions were filed, breaking the previous record set in the first quarter of 2003.
Freddie Mac Ordered To Fire CEO Parseghian
Freddie Mac's board ousted CEO Gregory Parseghian, following meetings Aug. 20 with regulators from the Office of Federal Housing Oversight, who demanded he step down. Armando Falcon, OFHEO director, had argued in the meetings that Freddie Mac needed a CEO who had no past ties to the mortgage finance giant's accounting fiasco, according to sources cited by the Wall Street Journal Aug. 22. In addition, Freddie Mac general counsel Maud Mater will also be replaced as soon as possible.
Parseghianwho was promoted to chief executive only in Juneplayed a key role during 2000-01 in approving and implementing trading strategies designed to circumvent new accounting rules that would have required Freddie Mac to report immediate, large profits on its derivatives holdings. These strategies, which led to accounting errors of $4.5 billion, allowed the company to meet expectations of "steady Freddie" earnings growth.
As the executive in charge of Freddie's $600-billion mortgage-loan portfolio, he personally supervised its rapid growth and use of derivatives transactions.
Bush's 'Neverland Economics' Attacked at Governors' Meet
"When all 50 state governors agree on something, there's a powerful message," wrote David Ignatius in a Washington Post op-ed Aug. 19, about the Governors' Conference in Indianapolis last week. "That's what is happening at the Governors' Conference, where they all are calling for help from the Federal government in dealing with a national fiscal crisisinvisible at the Federal level but ravaging state governments." In particular, the governors are asking Washington to cover the costs of Medicaid drugs, but the "Neverland in Washington" continues to pump the deficit while ignoring the costs of the Iraq war. Arkansas Republican Governor Mike Huckabee said 91% of his budget now goes to prisons, education, and Medicaid: "It comes down to deciding how many inmates you will release from prison, which colleges and nursing homes you will close."
'Mis-Fortune' 500 Companies Cut More Jobs; Close Plants
*Goodyear will shut its tire manufacturing plant in Huntsville, Ala., by the end of the year, leading to about 1,000 job losses. The plant shutdown was part of a tentative labor agreement reached with the United Steelworkers of America.
*Hewlett-Packard will lay off 1,300 workers in its enterprise and consulting divisions, and accelerate efforts to move some operations to India, China, and the Philippines.
*IBM laid off 600 workers and will force 3,000 employees to take a week off without pay in September, at its money-losing microelectronics division. These measure were taken "because we have not seen a turnaround" in the sector, said company spokesman Jeffrey Couture. Some 500 workers were laid off at its chip-making plant near Burlington, Vt., effective immediately, adding to the division's 1,500 job cuts last year.
*Packaging maker Sonoco Products will cut about 340 jobs and shut down 20 plants worldwide, in hopes of saving $60 million annually amid falling sales.
*Boeing laid off 1,440 employees on Aug. 22, effective Oct. 24, as part of ongoing plans to slash up to 10,000 jobs this year in its commercial jet unit. It has issued layoff notices to about 255 workers due to outsourcing much of its printing needs. Since September 2001, the aerospace giant has axed a whopping 35,410 jobs.
Nation's Food Pantries See Soaring Demand
Food pantries nationwide have been hit by an "untypical" surge in need this summer, emptying usually well-stocked shelves, and forcing temporary shutdowns, rationing, or other restrictions. During June-August, typically a slower time for emergency food requests, need has instead skyrocketeddoubling in some areasdue primarily to mounting job cuts and long-term unemployment. Many working families cannot afford to pay rent, soaring utility and medical bills, as well as for food, and now they must also scramble to buy school clothes and supplies. Combined with falling donations from corporations and individuals, plus Federal and state government cutbacks, amid growing budget deficits, pantries have had to shut down temporarily or ration food, as supplies have fallen to dangerously low levels. Agencies are issuing both frantic pleas for food donations, and dire warnings for winter, when requests really take off.
Plus, need increased after food spoiled during the Northeast blackout on Aug. 14.
*Colorado. "We're getting squeezed at both ends," lamented a spokeswoman for the Food Bank of the Rockies, as donations are down about 15%, while requests have jumped 30-60% during summerwhen the client load usually drops. At the University Hills Baptist Church, about 25% of the people seeking help each week had never been to a food bank before.
*Florida. "I'm going to run out [of food] this week," warned Boca Helping Hands food-bank executive director Joanne Szaua on Aug. 13. Szaua has been distributing about 100 more bags of groceries monthly compared to last year's level.
*Indiana. In the three weeks prior to Aug. 13, a food pantry in Pharos had to close twice each week because food was not available, due to a "drastic" increase in requests. Meanwhile, because need has doubled at the Human Services, Inc. food pantry in Shelbyville, the county director has had to dip into the "crisis fund"usually reserved to save families from evictionto buy food. Usually well-stocked until Thanksgiving, the pantry is at the bare-bones level now, despite having received government commodities in July.
*Kansas. As a record 76,000 households statewide are expected to be receiving food stamps during July 2003-June 2004, the Winfield Community Food Pantry's shelves are the barest they've ever been, amid growing requests and shrinking donations. "We've had such an increase [in requests], we're getting to where we're using up all our funds," warned director Philo Wooddell. "In areas where the food items were usually stacked up to eye level, they are now down to ankle level," said Rev. Jerre Nolte, who has been involved with the pantry for 12 years.
*Ohio. Marietta's Community Food Pantry has seen an unexpected "big jump" in July as 1,024 people were serveda level typically seen during winter, but not in summercompared to 897 in June. At the same time, the Salvation Army has seen a "great increase" in the past few months for help with utility shut-offs and eviction noticeswith many new clients working full-time. (Marietta breadlines had been featured on the Jan. 8 CBS-TV "60 Minutes" show.)
*Wisconsin. During January-June, Racine County food pantry Love, Inc. has provided food to more than 600 familiescompared to 618 families for all of 2002, even as donations are "down substantially."
|