Maricopa housing market 'underwater'

May 9, 2008 - 4:40PM

Salvatore Caputo, For the Tribune

Most likely the house has gone "underwater," and the owners swam away. A house is considered underwater when the debt owed on the mortgage is greater than the value of the house on the market.

This is not a huge problem for people who can make their mortgage payments and who don’t have to sell a home, but for those who have needed to sell homes since the last quarter of 2005 through today, things have been tough.

In the first quarter of 2008, there were 310 resales of homes in Maricopa at a median price of $170,000, according to a real estate report issued by Arizona State University’s Morrison School of Management and Agribusiness.

In the same quarter of 2007, there were 90 resales with a median value of $246,500 ("median" is the midpoint in a series of prices, meaning that roughly an equal number of homes sold at prices higher and lower than the median).

Paul Jepson, an assistant to Maricopa’s city manager, who has been given the task of determining how widespread the problem is, said that about 31 to 34 percent of resales in the city have been of such underwater, or "distressed" as he called them, homes.

Sales appear to be on the upswing, but as the median numbers indicate, at prices well below what owners originally paid.

One of the market casualties is Daryl Fox, a 40-ish, recently unemployed cosmetics salesman.

Foreclosure rate rising in Phoenix metro area

After his divorce several years back, Fox and his ex-wife sold their home in Chandler. It took a while to sell the house, and they had to reduce the price to find a buyer in the already-slumping Valley real-estate market, he said.

In April 2006, Fox took his half of the equity from the Chandler home and whatever other savings he had scraped up through the years and used them to pay 15 percent down on a three-bedroom home in Rancho El Dorado. The $212,000 purchase price was down from the home’s highest value.

He thought he was hitting the market at the right time, getting the most bang for his buck.

"I thought the market had bottomed out when I bought it," Fox said. That’s why he was willing to take out a 2/28 adjustablerate mortgage from Chase Bank.

A 2/28 is a 30-year mortgage. For the first two years, Fox would pay 7.5 interest on principal. After that, the interest would go up and increase the monthly payments.

Fox was willing to take a chance because he thought that in two years the market would bounce back, bringing the value of his house up and he’d be able to refinance the note before the interest rate adjusted. He did refinance right after closing, drawing the equity of that 15 percent down out of the house to finance a few renovations, he said. He owed the full $212,000 now.

"My intention was to live in that house as my primary residence, that’s why I remodeled it," Fox said.

In June 2006, Fox met Teri Parks, his future wife, at the Native New Yorker. Parks soon moved from Minnesota to Maricopa, buying a home in Acacia Crossings.

"After we were dating for a while, we got engaged and we moved in together," Fox said.

Parks’ house was the larger of the two, so it made sense for Fox to move in there and sell his place.

But the short market downturn Fox had expected turned into a free fall.

The median housing price in Pinal County "has steadily eroded from $220,000 in fourth quarter 2005 to $193,000 in third quarter 2007 and $156,160 for the current quarter," stated a report released April 29 by Jay Butler, director of Realty Studies in the Morrison School of Management and Agribusiness at Arizona State University’s Polytechnic campus in Mesa.

For Fox and others like him, this meant that a normal real estate sale was out of the question. So he tried renting the house out, hoping to hang on until it recovered value and he could sell. However, while he was paying $1,800 a month on the mortgage, the best rent he could get was $900 a month.

After spending thousands trying to hang on, Fox was staring down the barrel at foreclosure. A lawyer advised him just to walk away from the home, but he decided that he would try to sell the property in a short sale.

Fox has a buyer willing to pay $90,000 as of early May. If the bank accepts that offer, Fox could get out of the house without being foreclosed upon and the remainder of his debt would be forgiven. He’d walk away with no financial return on the biggest investment of his life, the $30,000-plus down payment and the thousands more he’d spent in monthly payments. At least, his credit would not be dinged and he could be satisfied to know that he retired the debt in an ethical fashion.

Fox said the bank told him that the house would be foreclosed upon on May 19. Even if the short-sale offer was on the table? He said he didn’t know and referred me to his real estate agent, Rita Weiss, the broker and owner of Desert Canyon Properties in Maricopa.

"I’ve spoken to Chase but they won’t tell me," Weiss said. "It could very well be that they don’t want it to go to foreclosure." She said that it typically costs a lender about $50,000 to foreclose on a property and all that the lender gets out of it is one more unsold house on its hands.

"If there’s an offer on the table, they’re going to try to make it work," said Weiss, who specializes in the Maricopa and Casa Grande markets. "There’s a flood of homes on the market. They don’t want to take back the houses.

"Forty-two percent of all houses that are actively on the market in Pinal County are either foreclosures or short sales," she said. "There are 56,000 listings in the MLS (Multiple Listing Service) right now. When we were in the big boom in 2005, there were only 8,000 houses on the market."

The law of supply and demand says that nobody will be seeing much return of value until that excess supply is sopped up.

During Maricopa’s wild growth spurt after incorporation, about 13,500 homes were built in the city, Jepson said. He based that number on cross-referencing building permits the city issued, water hookups in the city and housing completion certificates. None of them exactly match, but they seem to end up in the same general ballpark.

When Jepson said that 31 to 34 percent of the homes for sale in the Maricopa "market district" are what he called distressed, he meant they are either foreclosed-upon bank-owned homes or homes being marketed for a short sale, with the split between short sales and foreclosures at roughly 50-50.

"The bank-owned (foreclosures) are on the way down, and the short sales are on their way up," he said. That appears to be good news because it seems to indicate that an increasing number of residents in trouble with their mortgage are trying to avoid just walking away from the property.

People who walk away can’t keep up their homes, which has a ripple effect on neighbors and the city.

Arizona is now in recession

Moody's: Valley bad, but Tucson in worse shape

by Betty Beard - May. 9, 2008 12:00 AM
The Arizona Republic

The Phoenix and Tucson metropolitan areas, as well as the state of Arizona, are in a recession, economists at Moody's Economy.com have declared.

The company first concluded several weeks ago that Arizona was in a recession and, in a separate report released Thursday, said that metro Phoenix is "firmly" in one.

Industries are shedding jobs, the housing market remains tumultuous, the mortgage-delinquency rate is rising faster than the national rate and credit conditions aren't likely to improve in the near term, says the Phoenix report written by Rebecca Seweryn, a senior economist with Moody's in West Chester, Pa.

To show how far the economic malaise has spread, she says that consumer-driven industries such as retail, leisure and hospitality are shedding jobs and remain under strain, despite a temporary boost from the Feb. 3 Super Bowl.

The housing industry in particular will be a drag on the local economy, Seweryn says in her report. "As (Phoenix) had one of the largest booms in the housing markets in recent years, it is in the midst of one of the biggest corrections."

Housing-related employment is falling fast, and because it makes up more than 15 percent of employment in the Phoenix area, the impact on the economy is extreme.

Nationwide, an average of about 10 percent of jobs are related to housing.

"Phoenix was pretty flat (in job growth) during 2007 and has been contracting a little bit since the third quarter," she said in an interview.

"Tucson is worse than Phoenix. If you look at Tucson, you definitely see that employment kind of topped out in the first quarter of 2007 and has been declining since. Its (decline) is much stronger than what you see in other areas."

She also said that Yuma's economy remained "decent" and that conditions are improving in Prescott and Flagstaff.

"Flagstaff was a lot weaker. It entered the recession a lot earlier than the metro areas, but it's picking up a little bit lately," Seweryn said.

Ariz. economists concur

Some Arizona economists have been saying for months that the state had entered a recession as they watched dismal numbers continue to be released from agencies and universities.

The Blue Chip Economic Forecast, produced by the W.P. Carey School of Business at Arizona State University, surveyed economists with 16 agencies and companies in January, and 35 percent said then that the state was in a recession.

Marshall Vest, a University of Arizona economist who has been saying since December that Arizona is in a recession, said, "I think the Arizona economy is contracting, and I still don't see any signs that we are near bottom yet."

Home building continues to contract, and now, consumers face higher gasoline prices, which further reduce their other spending. That, in turn, reduces sales-tax revenues for state and local governments and causes them to slash budgets.

Vest hopes the recession will be over by the end of the year.

"It may be awhile for Arizona because of the problems in home building and the housing market," he said. "As the rest of the economy moves up, it will take us a while longer."

Scottsdale economist Elliott Pollack said, "It's going to be a tough year. There will be no full recovery until the housing is back to normal.

"That could easily be three years."

8 other states hit

Although the Moody's reports aren't an official pronouncement of a recession (that requires two consecutive quarters of a declining gross domestic product), they do offer recognition that Arizona was one of the first states to sink.

Moody's reports are written primarily for subscribers such as banks and utilities and other companies looking for economic data on an area.

Moody's reported in its April "Dismal Scientist" report that weakness is spreading across the U.S. economy and that Arizona and eight other states are in a recession. The others are California, Nevada, Florida, Michigan, Ohio, Rhode Island, Tennessee and Wisconsin.

The industrial Midwest, Northeast and mid-Atlantic areas are also at risk while "the New York metro area is at imminent risk of recession" because of cutbacks in finance and banking, the report said.

Economists usually rely on the National Bureau of Economic Research, a private organization in Cambridge, Mass., to officially pronounce recessions. But because the data is so time-consuming to gather and to verify, the bureau's pronouncements of the beginning and ending of recessions usually come six to eight months after the fact.

The Housing Crisis Is Over

By CYRIL MOULLE-BERTEAUX
Wall Street Journal

May 6, 2008; Page A23

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.

Expect a Summer Rise in Home Sales

A flat pattern in home sales activity should continue for the next couple of months before improving over the summer, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.

Lawrence Yun, NAR chief economist, said the extent of an expected recovery hinges on better access to affordable loans. “Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas,” he says. “As anticipated, we continue to look for a soft first half of the year, for both housing and the economy, before notable improvements in the second half. Some time is needed for FHA and new conforming jumbo loans to become widely available.”

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, edged down 1.0 percent to 83.0 from a downwardly revised level of 83.8 in February, and was 20.1 percent lower than the March 2007 index of 103.9.

NAR President Richard F. Gaylord says additional costs in many markets are hindering a recovery. “Our members are telling us that more buyers are looking at homes but are slow in signing contracts, and that’s contributing to the weakness in pending home sales,” he says. “In many cases buyers are waiting for greater access to affordable credit, especially in higher cost areas, but some are disappointed with what appears to be unnecessarily restrictive lending requirements. The good news this week is there is some discussion toward relaxing some of the burdensome lending practices.”

The PHSI in the Northeast jumped 12.5 percent in March to 80.8 but remains 15.4 percent below a year ago. In the South, the index slipped 0.1 percent to 84.9 and is 26.7 percent lower than March 2007. The index in the West declined 1.4 percent in March to 91.2 and is 9.5 percent below a year ago. In the Midwest, the index fell 10.4 percent in March to 74.1 and is 22.3 percent below March 2007.

Existing-home sales are projected to rise from an annual pace of 4.95 million in the first quarter to 5.82 million in the fourth quarter. For all of 2008, existing-home sales are likely to total 5.39 million, and then rise 6.1 percent to 5.72 million next year. “Although more than half of local markets are expected to see price growth this year, the aggregate existing-home price will decline 2.4 percent in 2008, driven by a relatively few markets that are very oversupplied,” Yun says. The median price is forecast at $213,700 this year before rising 4.1 percent to $222,600 in 2009.

Some areas already are seeing sales increases, underscoring that all real estate is local. In March, unpublished snapshot data shows sales in Bakersfield, Calif., and Jackson, Miss., were higher than a year ago. At the same time, price gains were noted in markets such as Buffalo-Niagara Falls, and Cedar Rapids, Iowa.

On May 13, NAR will report first-quarter data on metropolitan area home prices, covering about 150 metro areas, and state home sales. “Although some market adjustments are necessary, a downward overshooting of the housing market would cause unnecessary loss in economic output, income, and jobs,” Yun says. “It is critical to stimulate housing demand by inducing fence sitters back into the market. A home buyer tax credit on any home purchase would accomplish that.”

Here are some highlights from NAR's report:

• New-homes. Sales of new homes are expected to fall 30.9 percent to 536,000 this year before rising 10.1 percent to 590,000 in 2009. Housing starts, including multifamily units, will probably drop 29.5 percent to 955,000 in 2008, and then rise 1.3 percent to 967,000 next year. The median new-home price is estimated to fall 3.7 percent to $238,000 this year, and then rise 5.4 percent in 2009 to $250,900.

• Rates. The 30-year fixed-rate mortgage is likely to rise gradually to 6.2 percent by the end of the year, and then average 6.3 percent in 2009.

• Affordability. NAR’s housing affordability index is expected to rise 10 percentage points to 127.0 for all of 2008.

• GDP. Growth in the U.S. gross domestic product (GDP) should be 1.5 percent this year and 2.3 percent in 2009. The unemployment rate is projected to average 5.3 percent in 2008 and 5.5 percent next year.

• Inflation. Inflation, as measured by the Consumer Price Index, is seen at 3.4 percent this year and 2.2 percent in 2009. Inflation-adjusted disposable personal income is forecast to grow 1.2 percent in 2008 and 3.0 percent next year.

Source: NAR

Fannie Mae loses $2.2 billion

May. 6, 2008 08:10 AM
The Associated Press

WASHINGTON - Fannie Mae reported losses of $2.2 billion in the first quarter and the nation's largest buyer of home loans said Tuesday it would cut its dividend and raise $6 billion in new capital, with expectations that the housing slump will persist into next year.

Home prices fell faster in the first quarter than Fannie Mae had expected, the government-sponsored company said, and it will open a $4 billion share offering immediately, with the remainder being offered in the "very near future."

Fannie Mae's federal regulator, the Office of Federal Housing Enterprise Oversight, announced Tuesday that following the stock sale, it will cut the capital surplus cushion the company has to maintain by 5 percentage points to 15 percent. Another five-point cut will come in September, provided there is "no material adverse change" in the company's regulatory compliance.

The agency's director, James B. Lockhart, said capital requirements were eased because Fannie Mae has improved internal financial controls following a multibillion-dollar accounting scandal in 2004.

The company's estimated fair value of net assets as of March 31 was $12.2 billion, down 66 percent from $35.8 billion at the end of December. The huge decline was attributed to falling home prices and changes made to reflect new accounting methods. The assets are not counted toward the overall loss.

Fannie Mae's first-quarter loss contrasts with a profit of $961 million in the January-March period last year. The company reported Tuesday that the early 2008 loss was equivalent to $2.57 a share. It earned 85 cents a share a year earlier.

Wall Street analysts polled by Thomson Financial had expected the company to lose 81 cents a share in the latest period.

Following Fannie's earnings release, Moody's Investors Service downgraded Fannie's financial strength rating because of the potential for credit losses over the next two years.

Reflecting the ravages of the housing crisis, Washington-based Fannie Mae was forced to set aside $3.2 billion to account for bad loans. The losses were greatest in the hardest-hit states: California, Florida, Michigan and Ohio.

And the company said it only expects credit losses to worsen next year.

"Going forward, we expect our financial results to continue to be affected by the difficult (housing) market," Fannie's chief financial officer, Stephen Swad, said in a statement.

Revenue rose 38 percent in the first quarter, to $3.8 billion, bolstered by increases in fees that Fannie Mae charges lenders to guarantee mortgages and in interest income.

After falling 6 percent, Fannie Mae shares rose 81 cents to $28.52.

Amid the deepening housing downturn and the financial turmoil it sparked, the government has increasingly looked to Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, to step up their role and help restore stability to the market by buying up more mortgages and bundling and selling them as securities. Three-quarters of mortgage-backed securities are issued by the two companies.

In March the regulators reduced by a third the mandatory cash cushion that must be held by Fannie and Freddie, in order to free up an additional $200 billion to finance new mortgages and help existing homeowners battered by the roiling market to refinance into more affordable mortgages.

But analysts worry that the opening for Fannie and Freddie could put too much financial risk on the backs of the companies, which have taken multibillion-dollar hits from the foreclosure wave and have been hungry for capital. Critics have said that allowing the companies to take on more debt could threaten the global financial system.

On Tuesday, Fannie Mae said it would cut its dividend, starting in the third quarter, from 35 cents to 25 cents a share, freeing up around $390 million a year.

The company already had slashed the dividend 30 percent in December, when it also raised $7 billion in capital in a special stock sale.

Fannie Mae said it expects "severe weakness" in the housing market in 2008, bringing increased mortgage defaults and foreclosures.

Why Lenders Are Leery of Short Sales

This Foreclosure Alternative Helps Strapped Homeowners,
But It's Not Easy to Pull Off

THE WALL STREET JOURNAL

By RUTH SIMON and JAMES R. HAGERTY

As more people fall behind on their mortgages, lenders have been slow to take advantage of a longstanding alternative to foreclosure -- a so-called short sale.

At first glance, a short sale might seem like a win-win for everyone involved. In such an arrangement, the borrower sells the home for less than the amount owed, with the lender forgiving the difference. The sale releases borrowers from their obligations. For mortgage holders, it can be less costly than foreclosing -- and could provide protection against future price drops. For buyers, it can be a chance to buy a home at an attractive price.

Short sales -- which were rare when the housing market was booming -- can also be a good way for lenders and investors to minimize losses. They typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure, according to a recent analysis by Clayton Holdings Inc., which tracks more than $500 billion in mortgage loans monthly for investors. The costs of foreclosure can include not only legal fees, but also taxes, insurance and the expense of maintaining the home until the property is sold and repairing any property damage.

As the housing market continues to weaken, the number of short sales is edging upward. Short sales currently account for about 18% of home sales, according to the National Association of Realtors. But it can be extremely difficult to get these deals completed. Unlike a traditional real-estate sale, a short sale requires the approval of not only the buyer and the seller, but also the mortgage-servicing company. In many cases, loans have been packaged into securities -- which means that the mortgage servicer must consider the interests of the investors who own the loans.

Deals can fall apart because the mortgage company rejects the price that has been agreed upon by the buyer and seller. Long delays in getting an answer from the mortgage servicer are another obstacle.

The process can be so frustrating that some real-estate agents and home buyers have decided that a short sale isn't worth the effort. Shari Adams, a paralegal, bought a foreclosed three-bedroom house in Stuart, Fla., after she tried twice to buy a home being sold in a short sale. One deal fell through when the mortgage servicer turned down her offer after six weeks and didn't make a counteroffer. Another deal collapsed because it wasn't clear that the seller was truly facing a financial hardship.

"I basically started to run away from any home listed as a short sale," Ms. Adams says.

Low Success Rate

The success rate for short-sale offers is low, real-estate agents say. Molly Kay Hamrick, president of Coldwell Banker Premier Realty in Las Vegas, estimates that 20% of short-sale offers in the area lead to completed sales, compared with 85% for more traditional sales. Redfin, an online real-estate brokerage based in Seattle, says it represented buyers on 65 short-sale offers in the first quarter but expects only two or three to result in a completed sale.

Because so many deals fall through, Jean Manner Schwimmer of Coldwell Banker Gay Dales in Salinas, Calif., advises buyers making an offer on a short sale to put a clause in their contract that says the deposit can't be cashed until it is clear that the sale has been approved by the mortgage company and the contract has been signed.

Many borrowers walk away in frustration because it takes so long to get a response from the mortgage company to their offer. Servicers take an average of 4½ weeks to provide an answer on a potential short sale, according to a recent survey of real-estate agents by Campbell Communications, with some taking two months or more to respond. By contrast, it takes an average of less than two weeks to get a response to an offer for a property that has been foreclosed on, the survey found.

"To make the process work, you have to have a buyer who just wants that property and is willing to wait three to four months," says Beth Butler, chief operating officer of EWM Realtors, based in Miami.

Alicia and Greg Green accepted a short-sale offer in December for a home in Los Angeles they had purchased as an investment. But the deal didn't close until late March because of delays in getting an answer from the mortgage servicer, Option One Mortgage Corp. At least two offers at higher prices fell through because of delays, says Bill Etchegaray, the couple's real-estate agent.

"Luckily, we didn't lose the buyer," says Ms. Green. "I thought we would because the process took so long." The couple sold the home for $299,000, well below the $375,000 mortgage balance. They fell behind on their payments when the construction business Mr. Green owned went under. A spokeswoman for Option One pointed to the complexities of arranging short sales and said the company is pleased that the sale was successful.

Coming up with what everyone agrees is a fair price can be tricky in a soft market. "Servicers are finding that people try to low-ball the sales price knowing that the property is distressed," says Vicki Vidal, a senior director with the Mortgage Bankers Association.

Missed Opportunities

But with home prices falling in many markets, a rejected short-sale offer may wind up as a missed opportunity. Donald Schriver, owner of Assist-2-Sell Good Sense Realty in suburban Phoenix, says a homeowner he was helping late last year was offered $190,000 for his house in a short sale but was unable to win approval from his mortgage company. The borrower later decided to abandon the four-bedroom house, which was built in 2005. The house is now in foreclosure, with an auction scheduled for June. Prices in the area have continued to fall, says Mr. Schriver, who believes that the most the home would now fetch is $180,000.

A spokesman for Wells Fargo & Co., which services the loan, said the company "made several unsuccessful attempts to connect with the customer" and didn't turn down an offer for a short sale.

Some mortgage-servicing companies are tightening up on short sales because they worry borrowers are rushing into these arrangements when there are better alternatives. In March, Ocwen Financial Corp., based in West Palm Beach, Fla., told its customers it would consider a short sale only after it had talked directly to the borrowers and determined there are no alternatives for keeping them in the home.

"We are concerned that some of our customers are not given all the facts," says William Rinehart, the company's chief risk officer. "In some cases, it's represented to them that a short sale is the only solution to the problem they are in."

Part of the problem may be that many mortgage servicers were ill-prepared for the spike in bad loans. As delinquencies have climbed, they have had to scramble to add staff. Mortgage companies say they prefer other means to help borrowers, such as a repayment plan or loan modification.

Clearing Hurdles

Gathering all the information needed to evaluate a short-sale offer can take time, says Patrick Carey, an executive vice president with Wells Fargo. The loan servicer must first determine whether the homeowner really can't continue meeting the loan payments, then get an appraisal or broker's opinion of the home's value.

Mortgage servicers also try to ensure that the proposed sale is an "arm's length" transaction between two parties rather than, say, a sale to a relative on sweet terms. They must also determine whether the buyer has sufficient funds or the ability to get a loan. If all those hurdles are cleared, the servicer may still need to get approval from the investor that owns the loan and provide an analysis showing that the investor will be better off with a short sale than with another solution.

There are additional complications if the borrower has a mortgage and a home-equity loan. In that case, both parties must approve the deal -- which is a challenge when the sales price may not even be enough to cover the mortgage balance.

To minimize delays, Mr. Carey suggests that homeowners contemplating a short sale immediately call the loan servicer to get the approval process started, rather than wait for an offer.

There are some signs that the process is getting smoother. In recent weeks, some mortgage companies have begun to approve short sales for borrowers who can show financial distress but haven't yet stopped making monthly payments, says Dan Elsea, president of brokerage services for Real Estate One in the Detroit area. Until recently, servicers wouldn't even consider a short sale unless a borrower was at least 60 days late.

Fannie Mae and Freddie Mac, which own or guarantee nearly half of all outstanding U.S. mortgages, both say they are trying to streamline the short-sale process. Fannie Mae says that it plans to introduce a policy in the next few months under which real-estate brokers would be given an advance indication of the approximate minimum price that would be acceptable in a short sale, a move designed to quickly weed out offers that are too low.

Freddie Mac says it has already given its top servicers more flexibility to accept short sales for homes backed by loans it guarantees or owns. Lehman Brothers Holdings Inc., another issuer of mortgage-backed securities, also is offering incentives in some cases for servicers to arrange short sales or loan modifications.

Ariz. may lose 12,500 jobs in '08

Craig Harris
The Arizona Republic
May. 1, 2008 02:57 PM

The housing bust and a sluggish economy have made Arizona's employment market so bad that for the first time in more than a quarter century, the state is expected to lose jobs this year.

"The housing woes have hit Arizona a little harder," said Dennis Doby, Arizona Commerce Department's senior research director.

The state Commerce Department on Thursday forecast a drop of 12,500 non-farm jobs, or a 0.5 percent decline for Arizona.

The last time the state lost jobs was during the national recession of 1982, when Ronald Reagan was in the White House and Phoenix had just one professional sports franchise, the Suns. Six years ago, the state barely avoided a drop in jobs when about 100 positions were added.

Commerce officials are forecasting the Phoenix metro area will lose 9,300 jobs this year, while greater Tucson is projected to see 5,700 jobs disappear. The rest of the state is forecast to gain 2,500 jobs.

Doby said the projected overall job losses are tied to the significant decline in the construction industry, which marked 15 consecutive months of declining employment in March.

The state expects to lose 23,600 construction jobs this year after losing 15,900 jobs last year as home building plummeted because of subprime-mortgage problems and a decline in values. In the two previous years, the once-booming industry created 48,600 jobs.

Doby and Kent Ennis, the department's deputy director and an economist, said officials expect job losses to "hit bottom" in late summer or fall and then rebound by year's end.

By 2009, an extremely modest 0.1 percent job growth is projected for the state and metro Phoenix, but greater Tucson still is expected to see a decline of 0.3 percent. Those figures, however, also assume a lowering of gas prices.

Doby said Tucson has had a tougher time because its economy is smaller than Phoenix's and the state's second-largest city has been hit harder by losses in tourism.

Ennis said that overall, Arizona's job market is better positioned to rebound compared with previous economic downturns because of low interest rates for mortgages and the housing market's return to a "more realistic pricing pattern." He added that the recent federal economic-stimulus package - with some Americans receiving tax rebates this week - should provide a small boost in consumer spending.

Mari Alvarado, a Phoenix resident who teaches at Glendale Community College, said she plans to do her part by using her $300 stimulus check to buy a better TV.

"Since they want us to stimulate the economy, we can't just put it in a savings account," Alvarado said. "So we need to go out and spend it."

Ennis also said despite the projected overall job losses, natural resources and mining should see a 25 percent increase in employment through 2009. He said education and health services should see a 5.7 percent jump, while the leisure and hospitality industry may be up nearly 2 percent.

Ennis said a demand for copper mining is fueling more natural-resources jobs, but he said it's still a small industry that likely will create 3,000 jobs.

Federal and local governments are forecast to add 4,000 jobs this year and another 2,600 in 2009, but state government is not expected to add any jobs because of a hiring freeze.

The state saw its worst job creation in the 1940s, with losses recorded in 1944-46 and in 1949.

FHA Mortgage Refinance Bill Moves Ahead

The U.S. House Financial Services Committee on Thursday passed a bill that paves the way for the Federal Housing Administration to refinance $300 billion in troubled mortgages.

Lenders would have to erase a portion of the original loan in order to secure a government guarantee on future payments.

The plan would "put liquidity back in the market and not interfere with the market, I think, but help restore (it)," Committee Chairman Barney Frank says.

Democrats, who hold the majority in the House, are expected to pass the measure once it is presented for a vote next week. A Senate panel is to begin drafting a companion measure on Tuesday.

The bill will probably have a harder time in the Republican-dominated Senate.

Source: Reuters News, Patrick Rucker (05/02/2008)

Bruised Economy Limps in 1Q

Apr. 30, 2008 08:22 AM
The Associated Press

WASHINGTON -The bruised economy limped through the first quarter, growing at just a 0.6 percent pace as housing and credit problems forced people and businesses alike to hunker down.

The country's economic growth during January through March was the same as in the final three months of last year, the Commerce Department reported Wednesday. The statistic did not meet what economists consider the definition of a recession, which is a contraction of the economy. This means that although the economy is stuck in a rut, it is still managing to grow, even if slightly.

Many analysts were predicting that the gross domestic product (GDP) would weaken a bit more - to a pace of just 0.5 percent - in the first quarter. Earlier this year, some thought the economy would actually lurch into reverse during the opening quarter. Now, they say they believe that will likely happen during the current April-to-June period.

"The economy is weak but not collapsing," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "A recession can't be ruled out, although the stars are not lined up at this point to definitively say one way or the other."

Gross domestic product measures the value of all goods and services produced within the United States and is the best measure of the country's economic health. Voters are keenly worried about the country's economic problems and so are politicians - in Congress, in the White House and on the campaign trail.

White House press secretary Dana Perino said the administration was disappointed in the figures. "This is nothing to crow about," she said. "It is very slow growth, but it is growth nonetheless."

The housing situation turned more bleak in the first quarter, as record-high foreclosures dumped more unsold homes on the market, adding to builders' headaches. Builders slashed spending on housing projects by a whopping 26.7 percent, on an annualized basis, the most in 27 years. That was the biggest drag on the economy.

Consumers - whose spending is vital to the country's economic health - turned much more cautious, also restraining overall economic growth in the first quarter. Their spending rose at just a 1 percent pace. That was down from a 2.3 percent growth rate and was the slowest since the second quarter of 2001, when the United States was suffering through its last recession. Shoppers did cut spending on such things as cars, furniture, household appliances, food and clothes.

Soaring energy and food prices are walloping people's pocketbooks, leaving them with less to spend on other things. The credit crunch also has made it harder for people to finance big ticket items, such as cars and homes. And, many homeowners - watching their homes - often their single-biggest asset - slump in value, also are feeling less wealthy and less inclined to spend.

Another report from the Labor Department Wednesday showed that workers' compensation - including wages and benefits - grew 0.7 percent in the first quarter, the slowest pace in two years. Many economists were expecting a 0.8 percent rise. The report suggests that the weak labor market is making employers a bit less generous with their compensation.

Businesses, meanwhile, cut back spending on equipment and software at a 0.7 percent pace, the most since the final quarter of 2006. And, they trimmed spending on commercial construction at a 6.2 percent pace, the most since the third quarter of 2005.

However, businesses boosted their investment in building up stocks of supplies in the first quarter, a big force adding to GDP. Exports of U.S. goods and services, which increased at a 5.5 percent pace, also helped first-quarter growth. U.S. exports are being helped by the falling value of the U.S. dollar, which makes U.S. made goods and services less expensive to foreign buyers.

Spending by the government was another factor helping out GDP in the first quarter. That spending rose at a 2 percent pace for the second quarter in a row.

To bolster the economy, the Federal Reserve is expected to lower a key interest rate by one-quarter percentage point to 2 percent later Wednesday. That would mark a more moderate-sized rate reduction after a recent string of hefty cuts. Many economists believe the Fed, which started dropping rates last September, may be nearing the end of its rate-cutting campaign because policymakers don't want to aggravate inflation. Those rate reductions, which take months to affect economic activity, can sow the seeds of inflation down the road.

An inflation measure linked to the GDP report showed that prices grew at a rate of 3.5 percent in the first quarter, down from a 3.9 percent pace in the prior quarter.

Another gauge showed that the core prices excluding food and energy rose at a rate of 2.2 percent in the first quarter. That was a lower than the 2.5 percent pace registered in the fourth quarter but still outside the Fed's comfort zone. The upper level of the Fed's inflation tolerance is 2 percent.

Gas and food prices, however, have moved higher since the start of the year, adding to inflation pressures. Gasoline prices, which have recently set new record highs, have climbed to $4 a gallon in some parts of the country.

A growing number of economists believe the economy is in a recession and is indeed contracting now.

Under one rough rule, if the economy contracts for six straight months it is considered to be in a recession. That didn't happen in the last recession - in 2001- though. A panel of experts at the National Bureau of Economic Research that determines when U.S. recessions begin and end uses a broader definition, taking into account income, employment and other barometers. That finding is usually made well after the fact.

During the first three months of this year, job losses neared the staggering quarter-million mark. The unemployment rate has climbed to 5.1 percent and is expected to move higher in the coming months.

Fed Chairman Ben Bernanke, earlier this month, acknowledged for the first time that a recession this year was possible.

President Bush on Tuesday said the country was dealing with "difficult times." Bush said he understood Americans' anxiety over soaring gas prices, record-high home foreclosures and other economic woes.

The government's $168 billion economic-stimulus package - including tax rebates that started flowing to bank accounts on Monday - should help energize the economy in the second half of this year, the Bush administration and Federal Reserve officials say. Democrats in Congress insist more relief needs to be provided, including additional unemployment benefits to cushion the pain of joblessness. The administration has resisted, saying the rebates and other stimulative efforts should be sufficient once they fully kick in.

First gay retirement village coming to Valley

Hadley Mick, Tribune

The nation’s first resort-style, gay retirement community plans to open in Surprise in the late summer or early fall of 2009.

Marigold Creek, a retirement community aimed toward gays, lesbians and their friends and family, has already reported keen interest from buyers, said Deborah Purvis of the Missouri-based real estate group, Out Properties.

Purvis said the community will include 210 units, ranging from single-family homes, patio homes and condominiums.

“The community will be set up with village-style streets so people can easily say hello to each other when they are walking around,” Purvis said.

Within the community will be a dog park, walking trails, concert area and a clubhouse that will have a media room, bar, cabaret and swimming pool, Purvis said.

“I came to the Valley and fell in love with Surprise,” she said. “It’s a new and emerging community with a commitment to diversity that I believed would be a great home for Marigold Creek.”

Terri Crane, a resident of Surprise for three years, agrees with Purvis’ assessment of the area. Crane said she is all for the gay community to be able to have a place to call home.

“My sister is gay and to be honest, I think that the gay community is friendlier and easier to talk to than most other people,” Crane said.

While Crane welcomes the gay and lesbian community to the area, some people shrug off the idea.

“I don’t think it’s a bad or good thing,” said Bill Bleavins, an 80-year-old resident of nearby Sun City for 12 years. “I’m really indifferent about them.”

In February, Purvis had real estate agents from the Valley join her for a party to spread the word about Marigold Creek. She also launched a Web site that she said receives 400 to 500 page views a day. And she sent out approximately 550,000 e-mails to the gay community advertising the development.

“The unexpected attention from the media has also marketed our community to even more people,” Purvis said.

John Morant, a resident of Surprise for nine months, said Marigold Creek chose to build in Surprise because of the more accepting, laid-back community.

“They don’t bother me and I don’t bother them,” Morant said.

Morant said there may be a negative reaction from the retirement communities that also call Surprise home, but he believe it will all settle down once Marigold Creek is finished.

“The gay community have their own rights,” Morant said. “They can do whatever they want to do.”

Study: Planning will determine future of SE Valley, Pinal

Lynh Bui and Kerry Fehr-Snyder
The Arizona Republic
May. 1, 2008 12:00 AM

The southeast Valley and Pinal County are on the verge of becoming either a giant cul-de-sac or part of a thriving megalopolis incorporating Phoenix and Tucson, a consultant's study will show today.

The East Valley Partnership-sponsored report says the region needs to build four new freeways, push for a new stand-alone college or university and encourage more hospitals if it is to enter a mature and sustainable adulthood after years of explosive, sprawling growth.

The report, conducted by nationally renowned planner John Fregonese, will be unveiled at an East Valley Partnership business and government luncheon at the Arizona Grand Resort. Of the roughly 7.5 million people expected to pour into metro Phoenix by 2060, one-third of those residents are likely to call Pinal County and the southeast Valley home.

One million of those could live on the 275 square miles of Superstition Vistas, a swath of state land sandwiched between Queen Creek, Florence, Apache Junction and the Superstition Mountains.

The Vistas is an area larger than Gilbert, Mesa, Tempe and Chandler combined.

The expanse of undeveloped desert is a prime chance to stray from Arizona's typical model of bedroom-community sprawl, proponents say. Roads, employment centers, trails and other infrastructure all could be laid out by a Superstition Vistas committee, which would include state, Pinal County and East Valley Partnership representatives.

Once that planning is done, the land would be sold to developers.

It also would be divided into political subdivisions. Although there is no guarantee that those entities will follow the plans laid out for the area, Vistas backers say such advance work can prevent cities playing catch-up with growth, as has been the case throughout the Valley.

"We want to understand how we do good planning so we reserve the right-of-way for roads and know where to put amenities and hook up trails so you don't have to go back over and destroy and rebuild," said Pinal County Supervisor Sandie Smith. "We're looking for something that's not more of the same."

And more of the same right now is pretty grim. About half of the county's workers drive to the western edge of Pinal County or to neighboring Pima or Maricopa counties to work. There are about 260 jobs for every 1,000 residents in Pinal, compared with 585 in Maricopa County.

Commutes along Hunt Highway, the major road out of Pinal County, surpass the one-hour mark during rush hour.



"When you take a look at the catalysts in the East Valley, the potential is exciting but the work that needs to be done is staggering," said Roc Arnett, East Valley Partnership president and chief executive officer.

Arnett said the study's findings are part of the business and political group's ongoing discussion about the region's future, promise and potential peril.

"It's up to the body politic," Arnett said. "Do we leave things as the status quo or do we move ahead?"

Arnett warned that traffic patterns are one of the area's biggest challenges.

"If we just put traffic in and out, it (the region) just becomes a cul-de-sac," he said.

But of the four freeways planned between now and then to alleviate traffic bottlenecks, none is yet funded by the Maricopa Association of Governments, the region's planning group.

Arizona Department of Transportation Director Victor Mendez recently said his agency will run out of money to build freeways by 2015 and that only money to maintain existing roads will be available.

Handling road construction and other issues will determine whether the southeast Valley and Pinal County become a model for smart growth or one of the country's fastest-growing region chokes to death from poor planning.

With rising gas prices and heightened talk of global warming, the pressure is on to build more self-contained communities rather than relying on commutes to Phoenix and Tucson for employment, entertainment and education.

Fregonese, the planner, determined that northern Pinal County and the southeast Valley could grow into an environmentally friendly region with strong employment centers, diverse housing, quality schools and recreation access.



Fregonese knows the importance of good planning. He has worked on several regional planning projects across the country, including Portland's Metro 2040 Growth Concept, a model that cities and towns all over the U.S. use when trying to craft balanced communities with measured growth.

"Places that have looked ahead have been the ones that have been successful," Fregonese said, adding that Chicago is about to celebrate its 100th anniversary of its regional-planning document.

Consumers to benefit differently from cut

Stephanie Armour and Sandra Block
USA Today
May. 1, 2008 12:00 AM

The Fed's interest-rate cut on Wednesday, its seventh since September, could bring different benefits to different consumers.

The average rate on a home-equity line of credit, for example, fell to 5.7 percent last week from 7.3 percent in January, Bankrate.com said; the average on a home-equity loan was 7.73 percent.

Those rates move in direct response to Fed cuts, so they could fall further this week.

Other effects on consumers:


• Possible relief ahead for savers. As is usually true when the Fed cuts, savers with certificates of deposit will see lower rates, though their discomfort could end soon if the Fed halts its rate cutting.

"We are at or near the bottom on CD yields," McBride said.

"If the Fed moves to the sidelines, that will be the first good news savers have had in a long time."

Last week, the average 1-year CD rate was 1.93 percent, Bankrate.com said. But to try to draw more deposits, some financial institutions are dangling much higher rates, McBride said, so savers should shop around.


• Some credit-card holders win. Consumers with variable-rate credit cards could benefit, because those rates also tend to move in lockstep with the Fed, McBride said. But the lower rates will be restricted to those with top-notch credit.

Saddled with losses from other consumer loans, banks have sharply raised rates for customers considered risky, even if they've paid their bills on time and have decent credit.


• Easing payments for some subprime borrowers. Many subprime loans are ARMs that impose much higher payments once they reset.

Nearly 90 percent of subprime mortgages issued from 2004 to 2006 charge low rates that rise rapidly after a year or two, the Center for Responsible Lending said.

A majority of subprime mortgages are tied to the three-month LIBOR (the London interbank offered rate). That rate has dropped from 5.4 percent in July 2007 to 3 percent in April.

For many prime borrowers, too, Fed cuts have meant lower resets on their ARMs.

Before the housing boom peaked in 2005, many buyers were able to buy homes by taking on ARMs that carried low payments that would escalate once the rates reset. And 2008 marks a peak when a huge chunk of those loans will reset; many loans that originated in 2006 reset this year.

Mortgage Insurers: Defaults Drop

Daily Real Estate News May 1, 2008

The Mortgage Insurance Co. of America (MICA) says there are signs more homeowners are recovering from their financial issues and paying their mortgages on time.

"In the past month, cures – or borrowers once headed for foreclosure but now back on track – have risen slightly," says Suzanne Hutchinson, an executive vice president at the trade group.

In March, there were 50,585 cures reported, a 5.5 percent increase from February and 42.6 percent over the number of cures in January, when defaults rose to a record high.

Defaults on privately insured U.S. mortgages still remain high with 58,131 insured borrowers at least 60 days late on payments. That’s up from 42,362 – 37.2 percent – from a year ago, but down from February figures. The March figures marked the first time in four straight months that there had been fewer than 60,000 defaults, according to MICA.

Fed cuts rates again and hints at pause

Central bank cuts rates for seventh time since September, but sees less risks of slowdown, suggesting this may be last cut for a while.

NEW YORK (CNNMoney.com) -- The Federal Reserve cut its key interest rate by a quarter percentage point Wednesday, but the central bank's statement signaled it may be the last rate cut for at least a while.

The cut took the federal funds rate, the key overnight rate at which banks loan money to one another, to 2%. It had been at 5.25% as recently as September, when the Fed started slashing rates in an effort to spur the economy and keep the nation out of recession.

The fed funds rate, as it is more commonly known, is a benchmark for home equity lines of credit, credit cards and other consumer loans as well as the prime rate used for short-term business loans.

The Fed's statement repeated earlier ones about how rate cuts up to this point should help to spur the economy and lessen the risk of a downturn. But the central bank removed the following language form the current statement: "downside risks to growth remain."

The absence of that phrase, along with the new comment in the statement that "uncertainty about the inflation outlook remains high" led some experts to believe the central bank is signaling it is ready to pause on rates for some time.

Pause seen...but for how long?

"They haven't closed the door to further cuts, but they've shut it part way," said Mark Zandi, chief economist for Moody's Economy.com. "They're saying they believe they've done enough."

Stocks initially surged following the Fed announcement but wound up giving up all their gains and finished the day lower, a possible sign that investors are still worried about the weak economic environment. The government reported earlier Wednesday that the economy grew by just 0.6% in the first quarter.

Fed policymakers are not set to meet again until June 24 and 25, the longest gap in its calendar of meetings this year.

Zandi said he believes a pause is the proper policy for the Fed to take at this point.

"I think they've done a lot," he said. "They sense the financial system is on firmer footing. The economy is still weak, but the pace of decline doesn't seem like it's accelerating."

But Keith Hembre, chief economist for First American Funds, believes further weakening of the U.S. economy could cause the central bank to start cutting once again later this year or early in 2009.

"The Fed has certainly done a lot so far," he said. "But I think six months down the road we'll find that the economy is not rebounding as we've anticipated and the Fed will have to move rates lower."

That is what happened during the last period of Fed rate cuts, when it lowered rates throughout 2001, taking the fed funds rate down to 1.75%.

Then it kept rates on hold through most of 2002, before cutting again in November of that year and once more in June 2003. Rates were at 1% following that cut.

Fed may need to raise rates to fight inflation

Rich Yamarone, director of economic research at Argus Research, doesn't think rates will get to that level again. In fact, he believes the Fed's next move will be to raise rates to combat building inflationary pressures. He points out that the real fed funds rate, which is the fed funds rate minus the inflation rate, is now negative 1.27%.

"Policymakers know all too well that when real rates are negative for an extended period of time, inflation pressures rise swiftly and dramatically," said Yamarone, who added that the Fed might start raising rates as soon as December.

There have been growing complaints that the Fed's aggressive rate cuts this year have been a key to why food and oil prices have skyrocketed lately. The fact that the Fed has cut rates while central banks in Europe and Asia have mostly kept rates steady has led to a weakening of the dollar. That, in turn, has driven up commodity prices.

"The Fed will be reluctant to cut any further, because inflation remains elevated, and they do not want inflationary expectations to increase," said Arun Raha, senior economist for Swiss Re.

Once again, two of the presidents of Fed district banks who sit on the rate-setting Federal Open Market Committee -- Richard Fisher of Dallas and Charles Plosser of Philadelphia -- voted against the rate cut, as they did at the March 18 meeting when the Fed cut rates by a half-point.

The statement said those two members preferred no change in rates. But the two of them joined other members in voting for a quarter-point cut in the discount rate, the rate at which the Fed lends money to commercial banks.

First Published: April 30, 2008: 2:20 PM EDT

Bank of England signals worst is over

By Chris Giles and Gillian Tett in London
Published: April 30 2008 23:58 Last updated: April 30 2008 23:58

The correction in the credit markets has gone too far, the Bank of England says, in a signal that it believes the worst of the global crisis could be over.
The bank’s twice-yearly Financial Stability Report, issued on Thursday, says the credit markets “overstate the losses that will ultimately be felt by the financial system and the economy as a whole”. The view represents a big departure from its 2006 and 2007 warnings that risk was underpriced. It added that financial institutions would soon come to see that some assets now “look cheap”.
John Gieve, deputy governor, said: “While there remain downside risks, the most likely path ahead is that confidence and risk appetite will return gradually in the coming months.”
In becoming the first big official institution to offer a cautiously optimistic outlook for the financial sector, the bank shrugs off indications of falling house prices, noting that most households have lots of equity in their homes. Figures from Nationwide Building Society on Wednesday showed the first annual fall in house prices for 12 years, with values in April 4 per cent down on their peak six months earlier and 1 per cent lower than a year earlier.
The optimistic outlook also contrasts strongly with last month’s publications from the International Monetary Fund.
It estimated that financial sector losses so far had mounted to $945bn, a figure the Bank of England described as “misleading” because it “confuse[d] true credit losses and losses implied by market prices”.
Its report argues that if current market prices are to be believed, they imply “unprecedented” levels of default on mortgage-backed assets. Some 76 per cent of US subprime mortgages sold in the first half of 2007 would default with a loss of 50 per cent on each of these impaired mortgages if market prices were correct, the bank calculated.
Instead, it thinks there will be no defaults on triple A-rated subprime mortgage-backed securities even with a continued decline in US house prices, making these securities far too cheap in the market at the moment and causing banks to suffer unnecessary losses based on marked-to-market accounting. It said the market prices therefore reflected uncertainty about eventual losses, greater investor aversion to such uncertainty and illiquidity in the markets.
Rick Watson, head of the European Securitisation Forum, says: “This isn’t just a confidence issue, although that is an important issue, but is an institutional structure issue.”
The Bank of England’s insistence that assets are fundamentally mispriced will raise the question again of whether authorities should step in to buy up mortgage-backed securities themselves. The bank says that if investors do not reappraise risks and start buying again, there is a moderate risk of a much sharper slowdown.