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.

House Committee Supports Housing Recovery Bills

The House Financial Services Committee this week favorably reported two bills dealing with the current housing crisis. The Committee supported H.R. 5579, the "Emergency Mortgage Loan Modification Act of 2008." This bill, sponsored by Reps. Castle (D-PA) and Kanjorski (D-PA), would provide a safe harbor for servicers who undertake mortgage restructuring. NAR supports this bill, and believes it will alleviate reluctance on the part of some loan servicers to write-down or otherwise modify home mortgages. The Committee also supported H.R. 5818, the "Neighborhood Stabilization Act of 2008," sponsored by Rep. Waters (D-CA). This legislation would provide $15 billion in grants and loans to states to purchase foreclosed homes, in an effort to prevent blight.

In addition, the Committee also began consideration of Chairman Frank's (D-MA) bill, HR 5830, the "FHA Housing Stabilization and Homeownership Retention Act of 2008." This bill would create a voluntary program whereby loan servicers could dramatically write-down the value of the mortgage, in return for FHA refinancing. Qualified loans would be written down to a level that homeowners could afford to repay, and FHA would insure the loan. Final Committee action on this bill is expected this week.

It is believed that some of these bills may be included in a Housing Stimulus package being crafted by the House in response to the bill passed by the Senate several weeks ago.

Housing permits signal market trend?

by Catherine Reagor - Apr. 21, 2008 06:27 PM
The Arizona Republic

Home-building permits in metro Phoenix were flat again in March as the housing market continued to search for a bottom.

Last month, 1,278 new-home permits were issued Valley-wide, RL Brown's Phoenix Housing Market Letter reports. That compares with 1,297 building permits in February and 1,370 in January.

"We think that the evidence is building that we are seeing the bottom of the new-home market in the metro Phoenix area," Brown said.

If the pace of permits stays in this range, metro Phoenix could have an annual tally of 12,000 for 2008 - the Valley's lowest level for home-building since the real-estate recession of 1990.

Interesting Distress Statistics

Survey: Owning home within reach

The Buisness Journal; April 22, 2008

By Tierney Plumb

More than half of Americans believe that owning a home is still possible for most people.

In AOL Real Estate and Zogby International's latest survey, more than 6,500 Americans were asked about an array of real estate issues -- from home ownership to housing costs, financial woes and house-hunting tactics.

Respondents stated that realizing the dream of owning a house comes at a hefty price. Forty-three percent said they spend more than 30 percent of their household budget on housing, which according to the U.S. Department of Housing and Urban Development indicates they are "cost burdened."

The financial concerns of spending such a large percentage of their budgets on housing include:

§ 22 percent of participants would lose their house or apartment with an unexpected short-term job loss.

§ 30 percent are working paycheck to paycheck to cover housing costs.

§ 30 percent of people know someone who has gone through or is being forced to sell their home due to a foreclosure.

If respondents were forced to sell their house today, the survey reveals that half would buy another home rather than rent; and roughly half would seriously consider purchasing a home through a foreclosure listing.

But the outlook on their home's current and future value is optimistic:

§ 31 percent of participants feel their home is worth more than it was a year ago.

§ •56 percent do not think their home will be worth less in five years.

§ 69 percent see real estate as a viable investment.

For those neither buying nor selling a home this year, 16 percent plan on doing a major home remodeling project, saying that any improvement can increase the value of their home in today's market.

'Jewel' community to rise at proving ground site

April 21, 2008 - 12:44AM

Sonu Munshi, EV Tribune

Developers of a prized east Mesa property say they're on track to turn 3,200 acres of dirt into a "jewel of a destination" for the East Valley.

GRAPHIC: See the proposed land-use plan

"Nothing's been done before that's quite like this in the Sonoran Desert," said John Bradley, vice president of DMB Associates, the Scottsdale developer planning to turn the General Motors Proving Ground into a shining example of 21st Century urban development.

Part-owner of the 5,000-acre proving ground, set to be vacated next year, DMB is still submitting key planning documents to Mesa.

A general plan amendment request has been filed and a rezoning application is scheduled to be filed in May. DMB also plans to request annexation of the property into Mesa.

The developer also aims to acquire the city's special "planned community zoning district" designation, allowing greater leeway for projects that include a mixture of land uses.

"That affords a certain amount of flexibility needed for something this large," Bradley said.

But with that kind of a change, encompassing residential, office and retail space, officials at the neighboring Phoenix-Mesa Gateway Airport, west of the property, want to make sure there will be no disruption to the airport.

Airport director Lynn Kusy said he's in constant touch with Mesa and DMB officials to make sure any project revisions work for the airport, too.

The existing general plan does a good job of limiting development to uses compatible with Gateway, Kusy said. Still, he said DMB's plan calls for the entire property to be given the somewhat vague "mixed-use development" designation, so it's difficult for airport officials to voice specific concerns.

"We're cautiously waiting and watching," Kusy said.

Kusy has been doing even more than that. Earlier this month, he joined DMB officials to take a look at their Verrado project, a residential community in Buckeye, and its relationship with nearby Luke Air Force Base, to get a sense of how the company is handling development there.

Bradley said DMB realizes that accommodating the airport is important, and that the city wants Gateway to succeed. He said the proving ground project would complement the area.

"So it's not just a typical industrial landscape but a vibrant zone that can accelerate growth at the airport, too," Bradley said.

Scot Rigby, project manager for Gateway-area economic development, said the city has "liked what we've seen (from DMB)."

It also shares DMB's vision of high-density residential development.

Rigby said any airport has concerns about residential areas developing nearby, but he added the construction materials used to build high-rises help reduce noise problems in the surrounding area. The city will keep flight paths and other noise issues in mind, he said.

"Some people like to live in areas with amenities, traffic and buzz," Rigby said.

District 6 Councilman Scott Somers said the city will consult with Arizona State University's Decision Theater next month as part of an ongoing study for the Gateway area, to understand the impact of flight patterns using three-dimensional models.

"That will help us understand where to place residential," Somers said.

Meanwhile, Mesa is willing to consider designating the area a "community facilities district," which would impose a special tax on individual property owners to fund shared infrastructure.

Somers said cash-strapped Mesa needs to think creatively to tap into available financial resources. It would be the first time Mesa has used the facilities district designation to pay for roads, fire stations, water and other basic facilities through bonding. Only landowners within the district would contribute to repayment of the bonds.

But Somers said there would be a need to make payments affordable for area residents, or else they may not vote for other bonds that would benefit the whole city.

Two years ago, DMB bought the land from General Motors for $265 million. Real estate firm Pacific Proving LLC owns the other 1,800 acres.

Once the automaker moves to its new facility in Yuma, DMB will start pulling out the test tracks, grade the land and begin construction for some of the commercial and residential blocks in the planned urban core.

While design plans are still pending, DMB has said it would only place a high-density urban core in the northwest part of the property, a considerable distance from the airport. Golf courses are planned on the east side.

Plans also include a business park to be placed closer to a new Gateway terminal that will be developed further east near the DMB property.

Projections for Gateway area include up to 100,000 quality jobs. The expectation is that DMB's development would help jump-start that push to bring a more urban lifestyle to east Mesa.

Bradley said residential areas would be much more dense than the city has seen. While commercial development would be intense, it's still further away in the planning process.

The ability to plan an entire 3,200 acres at once presents a rare opportunity, Bradley said.

"We can treat this as a planned community and do it over a long period of time," he said. "We can't force the market, but looking 20 years out or further, you can rest assured there will be significant commercial employment."

The idea is to drive jobs into east Mesa to reverse the current ratio of jobs to housing, which is about half what it is in the Valley as a whole, Bradley said.

"When we get on the freeways going west and north in the morning, they're full. That can't last, there's just so many freeways you can build," he said.

That will begin with developing some residential and at least two resorts, if possible, to create an attractive place to distinguish the area and drive further commercial development.

Bradley said the challenge is to see the plans come to fruition in what will be decades of development.

"The challenge is to make sure what we see in our mind's eye can be executed and accepted by the market," Bradley said.

SunTrust income drops by 44%

Business Journal

Tuesday, April 22, 2008 - 10:57 AM EDT

SunTrust Banks said net income fell about 44 percent in the first quarter, as the company continued to take a beating from the housing crisis and credit crunch and had to increase its provision for loan losses.

The Atlanta-based company reported net income of $290.6 million and earnings of 81 cents a share. That's down from net income of $521.2 million and earnings of $1.44 a share in the first quarter of 2007.

As the deterioration of residential real estate markets continued in the first quarter, the company increased its provision for loan losses to $560 million, increasing the ratio of allowance to total loans outstanding to 1.25 percent as of March 31. The increase in the allowance for loan and lease losses was also attributable to an increase in expected losses in the existing residential mortgage, home equity lines of credit and residential construction portfolios.

SunTrust also had $163.7 million in net valuation losses during the first quarter, mostly from mark-to-market valuation adjustments on trading assets and loan warehouses, and certain asset-backed securities classified as available for sale. The after-tax earnings impact of the net valuation losses was $101.5 million.

SunTrust is the fifth-largest financial institution in South Florida, with nearly $8.43 billion in deposits, 100 offices and a market share of 5.63 percent as of June 30, according to the latest report from the Federal Deposit Insurance Corp.

Statewide, SunTrust is the third-largest financial institution -- behind Bank of America and Wachovia -- with 554 offices, $33.89 billion in deposits and a market share of 9.07 percent, as of June 30, according to the FDIC.

Through sales, maturities and pay-downs, SunTrust said it has cut its exposure to these distressed assets by more than $1 billion since the end of 2007, leaving the quarter-end exposure at $1.6 billion.

Average loans for the first quarter were $123.3 billion, up 1.4 percent from the first quarter of 2007. The increase was primarily in commercial loans, as average residential real estate and consumer loans dropped due to balance sheet management strategies, while construction declined due to slowing residential building activity and company efforts to reduce exposure.

"Growth in credit costs associated with the residential real estate correction continued to take a toll in the first quarter; further, the backdrop of emerging recession fears clouds the near-term outlook," SunTrust President and Chief Executive Officer James M. Wells III said. "However, SunTrust is financially strong, with ample liquidity, adequate capital, and a solid balance sheet, and we are effectively managing through this difficult economic environment. Perhaps most importantly, we are encouraged by underlying progress in key business lines, good deposit and some modest loan growth, and the positive impact of improved expense discipline."

As of March 31, SunTrust had $179 billion in total assets.

SunTrust ended 2007 with a 99 percent drop in net income.