Housing and Economic Recovery Act of 2008

H.R. 3221, the “Housing and Economic Recovery Act of 2008,” passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the bill on July 30, 2008. The bill includes the following provisions:

• GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• FHA Reform – including permanent FHA loan limits at the greater of $271,050 or 115% of local area median home price, capped at $625,500; streamlined processing for FHA condos; reforms to the HECM program, and reforms to the FHA manufactured housing program. The downpayment requirement on FHA loans will go up to 3.5% (from 3%). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• Homebuyer Tax Credit - a $7500 tax credit that would be would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan).

• FHA foreclosure rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.

• Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.

• VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.

• Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision is effective from October 1, 2008 through September 30, 2009.

• GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.

• Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.

• National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.

• CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.

• LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.

• Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.

Bad economy halts all state land sales

by Michael Clancy - Jul. 29, 2008 10:48 AM
The Arizona Republic

The State Land Department has halted almost all land sales "for quite some time," a state official said.

The last attempted land sale, for a small parcel in northeast Phoenix on July 9, drew no interest.

Several previous sales attracted no bidders, including large parcels in or near the desirable Desert Ridge area of northeast Phoenix.

The State Land Department controls almost all undeveloped land in north and northeast Phoenix. It hoped to begin selling land north of Pinnacle Peak by now. That land, several Desert Ridge parcels and other pieces of land are now tentatively scheduled for sale in 2009.

Department officials have blamed the decline in interest on the economic downturn and the housing crisis.

No auctions are scheduled for August.

In September, only three small right-of-way auctions are scheduled.

In October, the State Land Department has scheduled three right-of-way sales, two in Pinal County and one in Pima. It has scheduled a 5-acre land sale to a church in Sierra Vista.

Beyond October, nothing is scheduled.

"You will not see us bringing new parcels to auction for quite some time," Deputy State Land Commissioner Jamie Hogue said after the failed auction this month.

The fiscal year that just ended had several parcels in northeast Phoenix and elsewhere that failed to sell.

Mark Winkleman, state land commissioner, said the department is continuing to talk to land owners about relieving their obligations.

Mutual of Omaha banks open

Firm glad of First National takeover opportunity, chance to make its mark in Southwestern region

by Russ Wiles - Jul. 29, 2008 12:00 AM
The Arizona Republic

The banking industry is slogging through its worst year in well over a decade and the Southwestern real-estate market remains in the dumps, yet Arizona's newest player is betting on better times ahead.

Mutual of Omaha Bank became one of the state's top 10 banks virtually overnight by purchasing deposits and certain assets of First National Bank, after regulators closed the Scottsdale firm Friday in a transaction that will leave depositors fully protected.

"We're just so excited," said Jeff Schmid, chairman and chief executive officer of the Nebraska-based bank. "We're going to look back on this in five years and be so happy."

Mutual of Omaha takes over a network of 28 branches, including 15 in Arizona and the rest in California and Nevada.

The firm had no previous operations in those states yet recognizes the growth potential in the region. Mutual of Omaha had started exploring ways to enter the Southwestern region around the start of the year, before First National's financial problems escalated.

"This couldn't have happened at a better time for us," Schmid said.

He predicted that Mutual of Omaha will retain most former First National employees.

"The fact we're a new player here has a huge upside because it means we need everybody," Schmid said.

After the Office of the Comptroller of the Currency closed First National and appointed the Federal Deposit Insurance Corp. as receiver, First National's staff temporarily became employees of the FDIC. But most of them will transition to Mutual of Omaha Bank, starting with customer-service representatives and extending to loan officers, information-technology staff and others.

"The most important thing at the moment is to make customers feel good," Schmid said.

He said Mutual of Omaha will honor the yields on deposit accounts offered by First National. He said customer activity was low after the news broke late Friday. Now that the status of depositors has been resolved, "we're sensing some money is moving back in," he said.

Schmid said his firm was especially interested in Community Association Banc, a First National unit that caters to the banking needs of homeowner associations.

"That supercharged our interest," he said. "We can brand that big time."

Schmid and other Mutual of Omaha executives can afford to be upbeat. The bank, founded last year, is too new to have much exposure to the subprime-mortgage debacle and resulting fallout. It also has a big-pocket parent in Mutual of Omaha, a 99-year-old insurer.

In fact, Schmid said that Mutual of Omaha Bank will become an active mortgage lender, adding that the firm not only will retain all of First National's Arizona branches but may add some.

He indicated Mutual of Omaha hasn't yet decided what to do with First National's headquarters in north Scottsdale. Nor has the firm named a top Arizona-based executive.

Schmid isn't the only one expressing optimism for banking in Arizona.

"Long term, the Arizona market still has very good demographics," said Robert Sarver, head of Western Alliance Bancorporation, whose Alliance Bank of Arizona unit recently posted a 25 percent profit increase for the second quarter while generating a record amount of new loans.

"The current economic environment has created challenges, but the disruption in the marketplace also creates opportunities," he said.

Sarver said the short-term outlook for banks here will be heavily influenced by lingering real-estate weakness. But he cited favorable signs such as firming prices for new homes, a stable number of listings and improving sales figures.

"I think we're seeing the beginning of the bottom on the residential side," he said.

Bank failures are expected to keep rising this year and possibly into 2009 or 2010. Still, the pace of failures has been below past periods of stress in the financial industry, such as in the late 1980s and early 1990s.

"We're not out of the woods yet," said Herbert Kaufman, a finance professor at the W.P. Carey School of Business at Arizona State University. He cited the possible failure of a much larger bank as a development that could seriously rattle the financial markets.

"It's a precarious time," Kaufman said. "But barring that, we see some signs of stabilization in credit and housing."

Kaufman said he supports the government lifeline to Fannie Mae and Freddie Mac as well as Federal Reserve efforts to lower interest rates and generally provide more liquidity.

"The unprecedented cooperation among Congress, the White House and the Fed has been appropriate and welcome," he said.

Feds shut largest Ariz.-based bank

First National to be taken over by Mutual of Omaha

by Russ Wiles - Jul. 26, 2008 12:00 AM
The Arizona Republic

First National Bank, the state's largest locally based bank and a specialist in lower-quality mortgages, was closed by regulators Friday, a victim of problem loans and the lingering real-estate slump.

The bank failure will cost the Federal Deposit Insurance Corp.'s insurance fund an estimated $862 million.

However, a smooth transition for First National customers and employees is expected. First National's deposits were purchased by Mutual of Omaha Bank, a subsidiary of Mutual of Omaha.

All 28 First National offices, including 15 in Arizona, will open under the Mutual of Omaha name on Monday. First National's other branches are in Nevada and California.

In the meantime, depositors can continue to write checks, make ATM withdrawals and use debit cards. Jim Nolan, spokesman for Mutual of Omaha Bank, said it will honor deposit yields and other account terms for the immediate future.

Scottsdale-based First National Bank ranked eighth in size among banks doing business in Arizona, with 2.6 percent of statewide deposits.

It is the sixth bank failure of 2008 and the first involving an Arizona institution since 2002. It was just the second Arizona banking failure in the past 16 years.

Friday's announcement ends a decadelong odyssey for First National, which rode Arizona's economic boom to become the largest independent bank here, only to collapse even faster.

The announcement was another bright-neon sign that the nation's housing slump and subprime-lending woes have come home to roost.

Multiple offers

On Friday, the Office of the Comptroller of the Currency closed First National, and the FDIC was named receiver.

The FDIC opened bidding for its deposits on July 23 and received multiple offers.

"There was a lot of interest in this bank," said David Barr, an FDIC spokesman, currently in the Valley with other agency officials.

Mutual of Omaha Bank bought all insured and uninsured deposits, meaning former First National Bank customers face no risk of loss from the failure. It was only the second time in the past 10 bank closings that another firm bought all deposits.

Two weeks ago, after the collapse of California's IndyMac Bank, regulators didn't find a suitor to take over assets of that firm, leaving the status of some uninsured depositors in limbo.

Mutual of Omaha Bank also will acquire $200 million in other assets from First National.

The estimated $862 million to be covered by the FDIC insurance fund reflects other assets and liabilities not assumed by Mutual of Omaha Bank.

"That's basically what they were in the hole," Barr said of First National.

Technically, the transition affects First National Bank of Nevada, into which First National Bank of Arizona was merged four weeks ago, as well as a California bank, First Heritage. All were units of Scottsdale-based First National Bank Holding Co.

"We've got temporary signs and banners for Monday with the new identification," Nolan said.

Nolan said no near-term staffing changes are likely. First National counted roughly 1,000 workers, mostly in Arizona.

In a news release, the FDIC emphasized First National Bank isn't connected to another bank with a similar name, National Bank of Arizona, a unit of Zions Bancorporation.

At its peak early last year, First National employed more than 2,200 people, including 1,300 in Arizona.

But the firm reported a $140 million loss in the first quarter, along with mounting delinquencies and charge-offs, and a worsening capital position. Its fate was sealed by an inability to find a white knight.

In a July 15 interview with The Arizona Republic, President and Chief Executive Officer James Claffee said the firm was in serious discussions with two unnamed potential investors, one a bank and the other a private-equity firm, to shore up a serious capital deficit caused by mortgage losses.

At the time, Claffee clung to hope First National could recover but cited difficulty in attracting a suitor.

A First National spokeswoman reached Friday night said the firm's principals have no current comment.

Raymond Lamb was the driving force behind First National throughout its 10-year history. Lamb owned more than 80 percent of the shares in the privately held company.

A veteran banker with nearly 40 years in the business, Lamb bought his first bank at age 29, in North Dakota.

He spent most of the next couple of decades running banks in the Midwest and New Mexico before turning his attention to Arizona and the Southwest.

He founded the company with the 1998 purchase of Laughlin National Bank, then started a sibling bank in Arizona in 1999.

The company later added a bank in California.

4 key areas

The entire enterprise, called First National Bank Holding Co., focused on four key areas: commercial loans, construction loans, small-business loans and mortgages. Lamb and other top executives stressed personal service and an ability to make quick, local decisions on lending, a slap at the large national banks that dominated and continue to dominate the landscape here.

He tried to create a "heritage" company that would last for generations. Lamb appointed sons Phillip and Patrick and daughter Elizabeth to senior management positions.

"Frankly, we have a lot of families working here," he said in a 2005 interview.

"We really want this bank to last for generations, where people feel secure that we won't merge with someone bigger and have their lives screwed up," he said back then.

Bank executives didn't see the approaching train wreck in the real-estate and credit markets.

"I don't see a bubble," said former president and CEO Gary Dorris, also in mid-2005.

Dorris, who retired earlier this year, at the time described the real-estate boom as different from a prior steep downturn in the 1980s.

"(Back then), you had credit chasing deals, and loans were made above the present value of the real estate," he said at the time. "Today, banks are requiring more equity from participants. Our company typically would require 20 to 30 percent equity from a developer."

First National's fortunes quickly began to unravel in late 2006 and early 2007.

A specialist in lower-quality "Alt-A" mortgages, the company eventually was hit with lawsuits alleging it had failed to document borrower qualifications on bad loans that were sold to Wall Street investors.

In April 2007, it announced the first layoffs in company history, affecting more than 200 workers, including 53 in Arizona.

Four months later, First National decided to close its national wholesale-mortgage operation and let more than 540 people go.

Office vacancy rate jumps in Chandler

by Luci Scott - Jul. 23, 2008 10:35 AM
The Arizona Republic

The office-leasing market for Class A space in Chandler has slowed, and vacancy rates have nearly doubled from a year ago. But the city is still considered one of the healthier markets in the Valley, a key to competing for companies that create local jobs.

The vacancy rate is 12 percent compared with 6.8 percent a year ago, said Christine Mackay, Chandler's acting director of economic development.

Potential tenants are still looking, but with different attitudes.

They want to see a building completed before they will even look at it, Mackay said. "They're definitely saying, 'I want to touch it, feel it, walk around in it.' "

Developers also are luring tenants by putting completed spec suites within their buildings to display the possibilities.

Mackay said tenants want to see a building completed before they sign a lease because they have more choices today.

"Before, product was flying off the shelf," she said. "Now definitely we're moving back more into a tenant market."

Many tenants are not waiting the traditional 90 to 120 days to move in, said Michael Myrick, a vice president at Grubb & Ellis/BRE Commercial.

"The key now is to move in immediately," he said.

Even with the higher vacancy rate, Chandler is still one of the healthier markets in the Valley, Myrick said.

It ranks near areas with the lowest rates, including 11 percent in midtown Phoenix and 10.4 percent in the area around Phoenix Sky Harbor International Airport.

"Overall, (Chandler) is a healthy market compared to others in Phoenix," Myrick said.

Myrick said medical offices are the strongest segment of the market.

There are virtually no medical-office vacancies around Chandler Regional Medical Center, Mackay said. The key for medical offices, however, is where they're built.

"As fast as they can build them, they sell or lease them ... as long as they're near a provider such as a hospital or urgent care center," Mackay said.

Medical-office condos in neighborhoods, however, are moving more slowly.

"Location is everything in that market," she said.

In fact, any office space is leased sooner if it's near the Santan Freeway or Loop 101, Mackay said.

"People are really not interested in looking at office product not on those freeway corridors," she said.

Compared with the rest of metropolitan Phoenix, the Chandler office market is doing well.

"A surprise to most people is that north Scottsdale is not faring very well," Myrick said. One reason is that Chandler has more affordable housing.

"Chandler is a bedroom community, where north Scottsdale ... has a lot of second homes and vacation homes," he said.

Also, CEOs live in north Scottsdale and most employees commute from elsewhere in the Valley. Chandler has many companies in which executives and employees all live in Chandler, Gilbert or Queen Creek, he said.

"They don't need a Scottsdale address; they don't need to be near the airport. They want to be close to their home," Myrick said. "It's a different mind-set."

High gas prices are having an impact, too, meaning that companies are paying more attention to their location in relation to where their employees live, he said.

"Overall in the long term, I think Chandler will remain a vibrant and healthy office market," he predicted.

He cited the city's growth and the boost offered by the completion of the Santan Freeway.

Chandler Echelon is under construction on the southwest corner of Loop 101 and the Santan Freeway. Phase I is a 180,000-square-foot office building with structure parking. Phase II is two hotels, and phase three is another 180,000-square-foot office structure.

Across the street, Park Place is under construction. The first phase will be a 250,000-square-foot office project.

Further east, Opus West is constructing a second 90,000-square-foot office building in the Chandler Airpark. Its first building was recently fully leased by Ottawa University and CDW, a technology sales and service company.

Those new large tenants brought the vacancy rate down, said Mark Krison, a broker with C.B. Richard Ellis. Another relatively new tenant is Pearson, an educational software developer that moved into a new five-story building at Loop 101 and Ray Road.

Despite more vacancies, rental rates aren't dropping, Mackay said.

The rates range from $15 a square foot for the lower-end space up to $28.50 for Class A.

In the past decade, the office market has mushroomed, Mackay said. In 1998, the total space in Chandler was 900,000 square feet. Now it's 5.1 million square feet.

10 Cities Where Cost of Living Is Growing Fast

Forbes magazine looked at inflation in the 40 largest metro areas in the U.S. to see where prices were rising fastest.

The numbers were supplied by the Bureau of Labor Statistics and Moody’s Economy.com and reflected changes between January and June 2008.

Resetting mortgages, rising food prices and runaway fuel costs are the biggest sources of the pain.

Here are the top 10 cities with the highest annual inflation rates.

1. Seattle, 5.82 percent
2. Dallas, 5.82 percent
3. Washington, D.C., 5.74 percent
4. Miami, 5.71 percent
5. Portland, Ore., 5.68 percent
6. San Jose, Calif., 5.61 percent
7. Milwaukee, Wisc., 5.61 percent
8. Tampa, 5.60 percent
9. Phoenix, 5.44 percent
10. Los Angeles, 5.41 percent

Source: Forbes, Matt Woolsey (07/18/2008)

Congress Ready to Nix Seller-Financed Loans

Congress is expected to pass a housing package this week that eliminates seller-financed mortgage programs.

Under these programs, nonprofit organizations finance the down payment for buyers, then home sellers repay the organizations. Millions of people have bought homes this way, but the Federal Housing Administration says the foreclosure rate on these transactions is four times higher than it is on its other transactions.

The Senate version of the housing bill banned seller financing; the House version did not. Negotiators crafting a compromise bill have agreed to follow the Senate’s position, which is also supported by the Bush administration.

"No insurance company can sustain that amount of additional costs year after year and still survive," Brian D. Montgomery, the FHA commissioner, said in a recent speech.

But supporters of this kind of assistance say the system may have its problems, but because it is vital to low- and middle-income buyers, it should be fixed, not abandoned.

Source: Washington Post, Dina ElBoghdady (07/22/2008)

City's financial scrutiny of developers limited

by Luci Scott - Jul. 18, 2008 06:32 AM
The Arizona Republic

Chandler now has two commercial projects where construction has stopped: the Chandler Piazza mixed-use development on Frye Road east of Loop 101 and the better-known Elevation Chandler high-rise next to the mall.

People driving by these abandoned sites can't help but wonder what the city's role is in scrutinizing developers more closely before projects are approved.

However, experts say as long as development projects are privately financed, cities lack the authority to demand financial details.

If there is some sort of public component like a partnership with the city or an economic development incentive that gives a city a stake, "then absolutely, there would be the due diligence in terms of making sure there were enough financial resources available to do the project," said Ken Strobeck, executive director of the League of Arizona Cities and Towns.

But if it's a private development, such as Elevation or Piazza, the city can only regulate zoning, issue building permits and perform inspections.

"We don't have any authority at all to go in and say, 'Show us your balance sheet before you begin this project,' " Strobeck said.

Chandler Piazza is planned as an 18-acre mixed-use project at Frye Road and Ellis Street. Work stopped there in May.

The developer, E.J. Pospisil, CEO of Scottsdale-based Momentum Commercial Real Estate, said in June he was reorganizing the financing. He blamed a slow leasing market for the work stoppage.

Doug Ballard, Chandler's director of planning and development, said he is especially concerned about Chandler Piazza because particleboard used for the walls is exposed to the elements and won't last long without deteriorating.

Elevation Chandler was planned as a high-rise hotel topped by luxury condominiums. Work stopped there in April 2005 and developer Jeff Cline has had a series of financial problems since. The project is in bankruptcy but has a potential buyer.

Chandler ranks No. 30 on 'Money' magazine's list

by Megan Boehnke - Jul. 17, 2008 12:38 PM
The Arizona Republic

Chandler's high tech industry, booming Fashion Center and, of course, the Ostrich Festival helped land the city on Money magazine's top 100 "Best Places to Live" list.

Chandler came in at No. 30, two spots behind neighboring Gilbert, and 17 spots ahead of Scottsdale. Peoria, the only other Arizona city on the list, came in at 55.

In its formula to determine the nation's top cities, the magazine considered education, crime, weather, housing, job growth and quality of life factors such as nearby entertainment and shopping.

The magazine's only complaint in its write-up on Chandler: weak public transportation, citing incomplete local bus routes.

Southeast Valley becoming more affordable

by Kerry Fehr-Snyder - Jul. 16, 2008 01:59 PM
The Arizona Republic

As housing prices continue tumbling, it's getting easier to afford a home in the Southeast Valley, a new study says.

ASU Repeat Sales Index

The index tracks repeat sales of the same home over time, using a pair of sales to gauge price changes. This helps control for differences in location, house characteristics and market conditions.

Existing home prices

Existing home values are being dragged down by foreclosures, which are resulting in discounted sale prices for other resale homes. Foreclosures are accounting for 20 to 30 percent of all re-sold homes, compared with 5 percent in a more typical housing market.

Home prices fell 18.4 percent in April compared with the same month a year ago in the Southeast Valley. The percentage decline matches that of the overall metro Phoenix's drop. "The accelerating rate of decline suggest the house prices have a long way to climb and that things will get worse before they get better," the report concludes.

• Mesa: down 18.5 percent.

• Chandler: down 15 percent.

• Tempe: down 12.1 percent.

• Gilbert: Not available.

City affordability

The ASU Repeat Sales Index also evaluates affordability.

An affordability index of 100 means that a household with the median income for the area can afford a median-priced home in that same area at the going interest rate of 6 percent. The higher the index number, the more affordable a home is because it means a buyer earns more than the median income needed to buy a median-priced house.

• Tempe: 79.

• Mesa: 93.

• Ahwatukee, as part of Phoenix, had an affordability index of 98.

• Chandler: 108.

• Gilbert: Not available.

Bernanke: Economy still sliding

Testimony emphasizes elevated inflation risks

by Jeannine Aversa - Jul. 16, 2008 12:00 AM
Associated Press

Federal Reserve Chairman Ben Bernanke told Congress on Tuesday that the fragile economy is facing "numerous difficulties" despite the Fed's aggressive interest-rate reductions and other fortifying steps.

Testifying before the Senate Banking Committee, Bernanke sounded another warning that rising prices for energy and food are elevating inflation risks. This problem looms even as officials try to cope with persistent strains in financial markets, rising joblessness and housing problems.

The situation, he said, poses "significant challenges" for Fed policymakers as they try to chart the best course for keeping the economy growing, while making sure inflation doesn't dangerously flare up. All the economy's problems - including slumping home values, which threaten to make people feel less wealthy and less inclined to spend in the months ahead - represent "significant downside risks" to economic growth.

Over the rest of this year, the economy will grow "appreciably below its trend rate" mostly because of continued weakness in housing markets, high energy prices and tight credit conditions, Bernanke said.

On the economic front, inflation has remained high and "seems likely to move temporarily higher in the near term," Bernanke warned.

Indeed, before Bernanke delivered his twice-a-year comprehensive economic assessment to Congress, the Labor Department reported wholesale prices jumped 1.8 percent in June.

That left inflation rising over the past year at the fastest pace in more than a quarter-century.

Righting wobbly financial markets is key to getting the economy back on track, he said.

"In general, healthy economic growth depends on well-functioning financial markets," Bernanke said. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority," he said.

Strengthening regulatory oversight of Fannie and Freddie, Bernanke said, is "job one." Congress is moving ahead on a broad housing rescue package that includes provisions to tighten regulation over the two companies. Bernanke said legislative efforts to help stabilize the housing market - the biggest threat to the economy - are of vital importance.

Growth for the year will be sluggish - at best 1.6 percent growth - but not as bad as previously forecast, helped by the government's $168 billion stimulus, including rebates.

Lender rescue to cost taxpayers

Fannie, Freddie could need up to $20 bil in capital; FDIC could lose up to $8 billion on IndyMac failure

by Martin Crutsinger and Alan Zibel - Jul. 15, 2008 12:00 AM
Associated Press

Now that the federal government has thrown a lifeline to mortgage giants Fannie Mae and Freddie Mac, taxpayers could be on the hook for billions more if the crisis of confidence spreads.

On Monday, there were encouraging signs for the rescue plan, but also signs of concern that the plan won't be enough, notably on Wall Street, where shares of the two companies slumped further.

Other banks are already teetering: National City Corp. shares fell nearly 15 percent on rumors of financial trouble, even though it said it was experiencing no unusual depositor or creditor activity, and Washington Mutual Inc.'s shares fell 35 percent amid worries about whether it had enough cash to handle the mortgage market downturn. WaMu said that it did.

Worried customers lined up Monday to pull cash out of their accounts at IndyMac Bank, seized on Friday by the federal government.

Critics said they fear the Fannie-Freddie rescue will make more bailouts inevitable by sending a message that some institutions are too big to fail, thus encouraging risky behavior.

"It sends the wrong message to the world," said Joshua Rosner, managing director of the research firm Graham, Fisher & Co. in New York.

As long as more homeowners default on mortgages, losses to financial institutions will mount.

The losses already exceed $400 billion, and some analysts believe they will top $1 trillion before the housing carnage is over. By comparison, Congress has authorized $650 billion so far to fight the Iraq war.

The Bush administration and the Federal Reserve announced an emergency-rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages, almost half of the nation's total.

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.

The Fed announced it would allow Fannie and Freddie to get loans directly from the Fed, a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

House Financial Services Chairman Barney Frank, D-Mass., predicted Congress would grant approval for the extended line of credit as part of a broader housing measure that President Bush could sign by the end of next week.

Monday began well for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions and raised $3 billion in short-term securities.

Fannie and Freddie stock rose early in the day but gave up the gains. Fannie closed down about 5 percent, at $9.73; Freddie closed down about 8 percent, at $7.11.

Meanwhile, hundreds of worried customers lined up Monday to pull their money out of IndyMac bank, seized by the government Friday in the second biggest bank failure in U.S. history.

The Federal Deposit Insurance Corp. estimated that the largest failure since the collapse of Continental Illinois in 1984 would cost between $4 billion and $8 billion out of the agency's $53 billion fund.

Brian Bethune, chief U.S. financial economist at Global Insight, called the troubles at Fannie and Freddie a "potentially dangerous turn of events" for the U.S. economy.

He said they needed to be addressed quickly with an infusion from the government - read "taxpayers" - of as much as $20 billion in new capital for both institutions.

Right now, the Treasury can extend up to $2.25 billion in loans each to Fannie and Freddie. Officials refused to discuss what the new limit might be but dismissed one report of a $300billion limit as too high.

Treasury officials also said buying Fannie and Freddie stock would be a last resort.

Analysts say the economic risks of doing nothing are just too great.

"If the government hadn't moved, and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous," said Mark Zandi, chief economist at Moody's Economy.com.

If the lenders were unable to play their huge roles in financing new mortgages, the housing market would only suffer more, he said - not to mention the turmoil for the financial institutions around the world that invest in Fannie and Freddie's debt securities.

Critics have warned for years that Fannie and Freddie had grown too large without a large enough financial cushion.

"They have been allowed to grow out of control to the point where they must be backed by the U.S. government," said Peter Wallison, a senior fellow at the American Enterprise Institute. "We have just ... allowed ourselves to become hostage to these two institutions."

After run on IndyMac, others could face 'walk'

by Robin Sidel, David Enrich and Jonathan Karp - Jul. 15, 2008 12:00 AM
Wall Street Journal

The federal government's seizure of IndyMac Bank is deepening worries among executives, regulators and consumers about the U.S. banking industry.

Banks and thrifts are struggling against a rising tide of bad loans, and it is becoming clear that some lenders won't be able to escape.

While fewer banks are expected to fail than the 834 that went under from 1990 to 1992, it may take several years for battered financial institutions to work through bad loans and replenish depleted capital.

Those gloomy scenarios could be avoided, however, if the U.S. economy and housing market rebound soon.

But for now, as the turmoil worsens, signs are emerging that consumers, who generally thought little about the safety of their deposits when times were good, are having some second thoughts.

More likely than the kind of exodus of depositors that quickly sank IndyMac is what some bankers are describing as a slow-motion "walk on the bank," which could cripple financial institutions already weakened by credit problems.

The Federal Deposit Insurance Corp. insures deposits of up to $100,000 per depositor per bank, or $250,000 for most retirement accounts, including any accrued interest. But a surprising proportion of deposits exceeds those limits.

The percentage of uninsured deposits has doubled since 1992, climbing to about 37 percent of the nation's $7.07 trillion in deposits, according to an analysis of data reported to the FDIC; the figures also include large corporate and institutional deposits, such as payroll accounts.

The FDIC will bear the bulk of the financial burden of IndyMac's failure, predicting that its collapse will cost the deposit-insurance fund between $4 billion and $8 billion, possibly making it the costliest bank failure ever.

If an expected surge in bank failures materializes, other financial institutions, which pay assessments to the FDIC to capitalize the fund, may be forced to provide more money.

"There will be increased failures, but it still will be within the (realm) of what we can handle, will handle," FDIC Chairman Sheila Bairsaid. "No insured depositor has ever lost a penny of insured deposits."

Fed, Treasury boosting efforts to help Fannie Mae, Freddie Mac

by Jeannine Aversa - Jul. 14, 2008 12:00 AM
Associated Press

The Federal Reserve and the Treasury Department announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.

The steps are intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit-market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent interest for any borrowed funds - the same rate given to commercial banks and big Wall Street firms.

The Fed, in a statement, said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current $2.25 billion line of credit to each company should it need to tap the credit.

Paulson also wants authority to make an equity investment in the companies if needed.

"Fannie Mae and Freddie Mac play a central role in our housing-finance system and must continue to do so in their current form as shareholder-owned companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."

The Treasury's plan also seeks a "consultative role" for the Fed in any new regulatory framework eventually decided by Congress for Fannie and Freddie.

The Fed's role would be to weigh in on setting capital requirements for the companies.

The White House, in a statement, said President Bush directed Paulson to "immediately work with Congress" to get the plan enacted. It also said it believed the plan outlined by Paulson "will help add stability during this period."

But investors may not be as sanguine, according to Chris Johnson, an investment manager and president of Johnson Research Group in Cleveland.

Stocks of financial institutions "are going to get clobbered," he predicted. "It is a situation where regulators and the government are trying to play catch up, and that means everything is not discounted in the stock prices yet."

The Dow Jones industrials on Friday briefly fell below 11,000 for the first time in two years, and Johnson expects shares of investment banks and regional banks could fall even lower as investors react to this weekend's developments.

Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States.

The announcement marked the latest move by the government to bolster confidence in the mortgage companies.

A critical test of confidence will come this morning, when Freddie Mac is to auction a combined $3 billion in three- and six-month securities.

Fannie was created by the government in 1938 to provide more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans.

It moved from government to public ownership in 1968; Freddie was started in 1970.

Sunday's announcements are likely to raise new criticism that the government should have moved sooner to rein in the two companies, especially since investors widely assumed they would be bailed out if they got into trouble.

The government denied it, but what was seen by investors as an implicit guarantee of support allowed Fannie and Freddie to borrow at rates only slightly higher than the Treasury's - and lower than their banking competitors'.

"This really blows away the notion of an implicit guarantee," independent banking consultant Bert Ely said of the Treasury's plan to ask Congress to allow it to make equity investments in Fannie Mae and Freddie Mac. "It suggests a greater concern about how these companies are doing. It says the problems are deeper. It gets to the solvency of the companies, not just the liquidity."

Paulson's goal is to get his plan attached to a sweeping housing-rescue package.

The House and Senate have each passed bills, and a final package has to be hammered out. The centerpiece of the legislation is to help strapped homeowners avoid foreclosure, but it also contains provisions to revamp oversight of Fannie Mae and Freddie Mac.

Officials from Treasury, the Fed and other regulators worked in close consultation throughout the weekend after growing investor fears about the companies' finances sent their shares and the overall market plummeting last week.

Shares of Fannie Mae plunged 45 percent last week and are down 74 percent since the beginning of the year. Freddie Mac shares fell 47 percent last week, 77 percent this year.

A senior Treasury official said any increase in the line of credit or investment would be at the secretary's discretion.

The official, who spoke on condition of anonymity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday."

The Fed's offer of funds is viewed as a temporary backstop until Treasury can get its plan in place. The collateral they would have to pledge is narrower than what commercial banks and Wall Street firms must pledge for emergency-lending privileges.

Freddie Mac Chairman Richard Syron said Sunday that preliminary second-quarter results show that his company had "a substantial capital cushion"; Fannie Mae President and CEO Daniel Mudd said he believes the steps could send a calming message.

Defaults push U.S. mortgage giants to knees

by Tom Raum - Jul. 13, 2008 12:00 AM
Associated Press

WASHINGTON - The last thing the White House and the rest of the country needed in these economically trying times was another financial crisis.

But they got one.

The Republican administration and Democratic-run Congress now are facing the possibility that mortgage giants Fannie Mae and Freddie Mac, once staid and stable, could need a bailout or even go under.

Their default would send shock waves through financial markets already distressed.

It also would drive the U.S. economy further into recession territory and make it even harder for people to obtain mortgages or refinance their homes.

Under that dark cloud, politicians of both parties rallied behind the two companies Friday, expressing confidence and calling their role in the housing market essential.

Yet if their financial health continues to deteriorate, the government may have little choice but to take them over or bail them out. Or a combination of both.

The two government-chartered, shareholder-owned companies own or guarantee more than $5 trillion of home loans - roughly half of all the mortgage debt that is outstanding in the United States.

Their role has become even more crucial as home prices keep falling and mortgage defaults keep rising.

With stocks of the mortgage giants swooning, President Bush and Treasury Secretary Henry Paulson on Friday sought to ease concerns that Fannie and Freddie were headed for insolvency or a government takeover.

"Today, our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," Paulson said. "We are maintaining a dialogue with regulators and with the companies."

A short while later, Bush told reporters that Paulson had briefed him about financial markets and "assured me that he and (Federal Reserve Chairman) Ben Bernanke will be working this issue very hard."

"Freddie Mac and Fannie Mae are very important institutions," Bush added.

Bush, the first U.S. president with an MBA degree, may have been assured, but investors apparently weren't.

They dumped stocks in response to the woes of Freddie and Fannie, pushing the Dow Jones industrials at one point below the 11,000 mark for the first time in two years before recovering slightly.

The two companies' stocks now are at their lowest levels in 16 years, down 80 percent from just a year ago.

Congress set up the companies to ensure that money for home loans would be available. The companies buy mortgages, turn them into securities and sell them to investors.

They also hold some mortgages in their own portfolios.

Because Fannie Mae and Freddie Mac were sponsored by the federal government and deemed to be nearly risk-free, they have been able to borrow money at slightly below-market rates.

"These are companies with a solid business plan. They are fundamentally well-run companies, but are the victims of the broad financial downturn. There's been a huge loss of value there," said Peter Morici, an economics professor at the University of Maryland and former chief economist at the U.S. International Trade Commission.

"My feeling is that, as long as they can meet their obligation, they shouldn't be taken over."

Because they were deemed safe, stable and chartered by the government, Fannie Mae and Freddie Mac have less restrictive requirements for cash reserves than other financial institutions.

They have no explicit government backing despite their charter, but there was always an assumption that the government would bail them out if necessary.

While most of the mortgages they hold are fixed-rate loans to borrowers with good credit, the housing downturn has been so severe that they have sustained gigantic losses in their loan portfolios because of foreclosures - about $11 billion during the past few months - pushing them closer to the financial brink.

And because their stock prices have plunged so far, they are hard-pressed to raise fresh capital on their own.

William Poole, the former St. Louis Fed president, this week said that Fannie and Freddie were technically insolvent.

Under a 1992 law, if either becomes heavily undercapitalized, it can be placed into a "conservatorship," a partial federal takeover.

"There's no good news here for the housing market or for the broader economy," said Mark Zandi, chief economist at Moody's Economy.com.

Zandi said he doesn't think the two mortgage companies are at the point of default.

"Yet, the pessimism is so dark, it can become self-fulfilling," he said.

The government can do a range of things short of a takeover: It could lend money to the two companies; it could buy their stock; it could make the implied government guarantee an explicit one with a big line of credit.

These are the kinds of things, presumably, Paulson and Bernanke will be exploring in the coming days in "working this issue very hard," as Bush said.

Templar: Smith sells new vision of Mesa

July 12, 2008 - 7:30PM

Le Templar, Tribune Columnist

Just a month in office, Mesa Mayor Scott Smith already is staking his legacy on his hometown shedding its image as an enormous bedroom community.

Smith has launched a campaign to transform attitudes inside and beyond City Hall, to rethink how Mesa approaches zoning and business recruitment, and to emphasize assets rather than weaknesses.

From coffee-shop chats to formal speeches, Smith is talking about Mesa in ways that just haven't been heard from the mayor's office in years. And people are noticing the difference.

"It is refreshing and positive. The mayor really needs to be out there championing the city," said Greg Marek, a commercial sales agent for Central Arizona Real Estate. "We haven't had that in a long time."

Marek was among 300 business people who paid $15 each to munch on sausage-and-egg sandwiches Tuesday morning and then hear a challenge from Smith to engage the city's political leadership in plotting a new economic path.

Be loyal to your home city, Smith told the crowd. Put Mesa first when expanding or searching for new partners. In return, Smith said, City Hall will strive harder to support existing businesses - both large and small.

Smith has shown a strong belief in Mesa's potential while revealing a fear the city has spend too much time dreaming and too little working on the basics.

"What I got out of it, more than anything, is they are truly committed (to business development), not just talking about it or thinking about it," said west Mesa native Jackson Wright, who works for the family advertising firm Larry John Wright Inc.

Smith has made it clear he believes a certain rigidity and narrowness of vision at City Hall has been holding Mesa down. Right now, he's spending political capital to rally the city's powerful and elite to embrace more flexibility and to allow property developers more options.

What he hasn't addressed yet, but will have to at some point, is what to do when new ventures require unfamiliar changes to Mesa's physical environment. There are plenty of people in this city of 450,000 who like the concept of a bedroom community - quiet, low-density neighborhoods and strip malls. Let someone else endure the noise and the traffic and the busy-ness of employment centers.

Those residents need to pay attention when Smith says the city has to evolve or it will strangle slowly from its budget problems.

"I think Mesa residents need to take a look at projects, not just at 'how does this affect my life,' but how do they affect the future of Mesa," Wright said.