Housing rescue on track to pass Senate by Saturday

The Senate cleared the last hurdle Friday to passing a housing rescue aimed at sparing hundreds of thousands of homeowners from foreclosure and bolstering troubled mortgage giants Fannie Mae and Freddie Mac.
By: JULIE HIRSCHFELD DAVIS: AP: Associated Press
The 80-13 test vote showed broad support for the election-year package and put it on track to pass the Senate by Saturday. The White House says President Bush will sign it, having earlier dropped a threat to veto it over $3.9 billion in neighborhood grants.

The bill — regarded as the most significant housing legislation in a generation — is designed to help an estimated 400,000 homeowners escape foreclosure by letting them refinance into more affordable loans backed by the Federal Housing Administration.

It was set to clear Congress as a private company reported that the number of households facing the foreclosure process more than doubled in the second quarter of 2008 compared with a year ago. Irvine, Calif.-based RealtyTrac, Inc., said that 739,714 homes received at least one foreclosure-related notice during the quarter, or one in every 171 U.S. households.

"The American people can begin to see they're going to get some relief and some help from their Congress," said Sen. Christopher J. Dodd, D-Conn., the Banking Committee chairman.

The plan gives the Treasury Department power to spend unlimited amounts to prop up Fannie and Freddie, should they need it, to calm investor fears about their financial stability at a time of rising foreclosures and falling home values. Treasury Secretary Henry M. Paulson calls the authority a "backstop" which he has no intention of using.

Paulson's request for the emergency power helped forge a bipartisan deal on the legislation, which also creates a new regulator with tighter controls on the government-sponsored mortgage firms — something Republicans have long sought.

Democrats also won key concessions as part of the compromise, including a permanent affordable housing program to be financed by Fannie and Freddie profits and the $3.9 billion in grants for buying and fixing up foreclosed properties in neighborhoods hit hardest by the housing crisis.

Many conservative Republicans are vehemently opposed to the foreclosure rescue, which they call a bailout of irresponsible homeowners and unscrupulous lenders. They are equally furious about the help for Fannie Mae and Freddie Mac, companies they say enjoy lavish profits in good times and wield their outsized political clout to resist regulation while depending on the government to bail them out should they falter.

Sen. Jim DeMint, R-S.C., was single-handedly delaying a final vote on the package until Saturday unless Democrats allowed a vote on barring the two firms from lobbying and making political contributions.

Dodd called Republican efforts to delay the measure's passage "tragic" given how many people are losing their homes each day.

More than three-quarters of Republicans voted against the measure when it passed the House on Wednesday.
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Confessions of a Subprime Lender: 3 Bad Loans

Subprime lender reveals scams and bad loans.
By: Les Christie: CNNMoney.com
A mortgage lender talks about scams and bad loans he was part of.

In his new book, author and ex-lender Richard Bitner owns up to some of his worst mistakes, offering an inside look at how his firm issued bad mortgages.

Richard Bitner opened his own mortgage shop in 2000, and had the good fortune to bail out of the business in 2005, before the housing crisis hit.

He saw the shoddy lending practices that got us into this crisis first hand, and has chronicled them in his book, "Confessions of a Subprime Lender." By the time he quit, said Bitner, "Lending practices had gone from borderline questionable to almost ludicrous."

He and his two partners ran Dallas-based Kellner Mortgage Investment, a small subprime lender that issued about $250 million in loans annually. The firm worked through independent mortgage brokers, and then sold the loans it closed to investors or to larger lenders, such as Countrywide Financial, which was recently bought by Bank of America.

Bitner, like so many other subprime lenders, was drawn to the field by the fat profits it promised - these loans paid three to five times more than prime loans. But, says the 41 year-old married father of two, he also took pride in the idea that he was helping people with damaged credit become homeowners.

Still, things eventually got out of control.

The Last Straw

One of Bitner's last clients, which he says was turning point for him, was Johnny Cutter and his wife Patti, from South Carolina. The deal illustrated what had become the fundamental problem with subprime lending: Nobody was bothering to determine whether borrowers could actually afford to make their payments. And so the Cutters, like millions of others, became a foreclosure waiting to happen.

"What really got to me," said Bitner, "is that we [usually] put people in positions to not fail. This loan didn't fit that."

The Cutters wanted a loan to buy a newly built, 1,800 square-foot house, but had been turned down for a mortgage twice because of bad credit. After that, they scrimped for three years and saved enough for a 5% down payment.

But, they still had only $2,200 in combined net monthly income, poor credit and employment histories, almost zero savings and no history of even paying rent. Their mortgage payment, property taxes and insurance came to $1,500, leaving them just $700 a month for all other expenses.

Patti fell ill right after the closing and the couple never made a single payment. Since the Cutters defaulted immediately, Kellner Mortgage was contractually obligated to buy the loan back from the investor it was sold to. That was a huge expense for the small lender.

When Bitner reviewed the loan to find out where his company went wrong he was shocked to see that, technically, no mistakes were made.

Neither the borrower nor the mortgage broker did anything dishonest or fraudulent to obtain the loan. The home's appraised value was correct, and the income stated on the application was accurate.

But the fact was that the Cutters simply didn't have enough income to handle this mortgage - the loan never would have been approved a few years earlier.

Their debt-to-income ratio was 54%, way higher than the 36% that most mortgage lenders recommend. But Kellner Mortgage made the loan because the firm knew that loose investor guidelines meant that the mortgage could be resold, at a profit of course.

"We were ultimately driven by the investor guidelines," said Bitner. "If it fit we closed the loan. It was an indication of how far the industry was willing to go."

In the end, the Cutter deal cost Kellner Mortgage $90,000.

Pump and Dump

In another highly regrettable deal, Bitner's company was simply scammed.

A criminal crew found a house, bought it for $140,000, and then resold it to a straw buyer for way more than it was worth - $220,000. To get a mortgage, the buyer used an appraisal for an entirely different, and much more valuable, property.

"The broker, buyer, appraiser, and realtor all conspired to perpetrate this fraud," said Bitner. Indeed, just about all the documentation was falsified.

The group collected the $220,000, and, minus their $140,000 outlay, disappeared with $80,000.

Kellner Mortgage wasn't aware of any problem until the investor that bought the loan set about investigating when it went unpaid. The investor sent Kellner a letter detailing the ruse and demanding that Bitner's firm make good on the loan.

Said Bitner, "You read through this letter and you see that the income statement was phony and the appraisal was on another house and you say to yourself, 'Am I a moron?'"

That cost the company about $100,000.

The Whole Truth

Of course, brokers dying to make deals also played a big role in pushing bad loans. Often they withheld or misrepresented information lenders needed to accurately assess a loan's risk.

"With so much money involved, people were willing to fudge to make deals work," Bitner said.

The Robinson's broker was a perfect example. The couple, who were divorcing, wanted to refinance their home, which had increased in value, and to take out $25,000 of that added home equity as cash. The plan was that Mrs. Robinson would keep the house and Mr. Robinson would get the cash.

Although the Robinson's told their broker about their split, the broker chose to not inform Kellner Mortgage of that detail, which would have been a deal breaker. Mrs. Robinson could never qualify for the mortgage based on her income alone, and indeed she defaulted soon after the loan went through, costing Bitner's company $75,000.

While dishonesty was rampant, the mortgage brokerage industry also suffered from plain incompetence. Many of the new brokers flooding the industry just knew the basics.

Bitner said his loan coordinator at Kellner, Annie Nguyen, once told him, "I had a loan officer ask me if we really needed an appraisal before closing. I thought he was joking."

Clearly, he wasn't.

The lack of professionalism, the crazy loans, the finagle factor and the open fraud finally drove Bitner from the business. Although he escaped the worst of the mortgage meltdown, the company he founded did not; it folded in early 2007.

You can find it memorialized on the Implode-O-Meter, an online list of mortgage lenders that have shut down since late 2006. Look for number 44.
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Fed adopts plan to curb shady mortgage practices

The Federal Reserve has adopted rules to give home buyers more protection from the types of shady lending practices that have contributed to the housing crisis and propelled foreclosures to record highs.
By: JEANNINE AVERSA: AP Associated Press
Chairman Ben Bernanke and his central bank colleagues approved a plan Monday that would crack down on dubious lending practices that have hurt many of the riskiest "subprime" borrowers — people with tarnished credit histories or low incomes.

In that regard, the plan would:

• bar lenders from making loans without proof of a borrower's income.

• require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.

• restrict lenders from penalizing risky borrowers who pay loans off early. Such "prepayment" penalties are banned if the payment can change during the initial four years of the mortgage. In other cases, a penalty can't be imposed in the first two years of the mortgage.

• prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value. The borrower need not have to prove that the lender engaged in a "pattern or practice" for this to be deemed a violation. That marks a change — sought by consumer advocates — from the Fed's initial proposal and should make it easier for borrowers to lodge a complaint.

"Rates of mortgage delinquencies and foreclosures have been increasing rapidly lately, imposing large costs on borrowers, their communities and the national economy," Bernanke said.

"Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower," he added.

For all mortgages, the plan would require advertising to contain additional information about rates, monthly payments and other loan features, and it would curtail certain deceptive or misleading advertising practices.

Other practices also would be clamped down on. Lenders, for instance, have to credit a mortgage payment to the homeowner's account on the day it is received. And, brokers and others are forbidden from "coercing or encouraging" an appraiser to misrepresent the value of a home.

Consumer groups initially complained that the new rules are not strong enough. Lenders worry they are too tough, could limit mortgage options for people and made it harder for some to obtain financing.

The new lending rules may not get a test for some time because there are fewer home buyers these days, given all the problems in the housing and credit markets. Also, some of the shady practices — along with some lenders — have not survived, felled by the mortgage meltdown.

"Clearly this is closing the barn door after the fact," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business. Yet, she said, "this is a very important move. It absolutely will make a difference going forward."

Much will hinge on effective enforcement.

The plan would apply to new loans made by thousands of lenders, including banks and brokers. It would not cover current loans.

Those different lenders fall under a patchwork of regulators at the federal and state levels. So it will be up to each of these authorities to enforce the new provisions.

Fed Governor Randall Kroszner, the central bank's point person on the new rules, said the Fed's goal was to protect borrowers from unfair or deceptive practices while also not impeding the flow of credit.

The Fed's rules, he said, should "better protect consumers, while preserving their access to credit as they make some of the most important financial decisions of their lives."
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Government shuts down mortgage lender IndyMac

IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.
By: Alex Veiga: AP Associated Press
Office of Thrift Supervision steps in and closes IndyMac Bank; FDIC takes over operations.

IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.

The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

The Office of Thrift Supervision said it transferred IndyMac's operations to the Federal Deposit Insurance Corporation because it did not think the lender could meet its depositors' demands.

IndyMac customers with funds in the bank were limited to taking out money via automated teller machines over the weekend, debit card transactions or checks, regulators said.

Other bank services, such as online banking and phone banking were scheduled to be made available on Monday.

"This institution failed today due to a liquidity crisis," OTS Director John Reich said.

The lender's failure came the same day that financial markets plunged when investors tried to gauge whether the government would have to save mortgage giants Fannie Mae and Freddie Mac.

Shares of Fannie and Freddie dropped to 17-year lows before the stocks recovered somewhat. Wall Street is growing more convinced that the government will have to bail out the country's biggest mortgage financiers, whose failure could deal a tremendous blow to the already staggering economy.

The FDIC estimated that its takeover of IndyMac would cost between $4 billion and $8 billion.

IndyMac's collapse is second only to that of Continental Illinois National Bank, which had nearly $40 billion in assets when it failed in 1984, according to the FDIC.

News of the takeover distressed Alan Sands, who showed up at the company's headquarters in Pasadena, Calif., to find out when he could withdraw his funds.

"Hopefully the FDIC insurance will take care of it," said Sands, of El Monte, Calif. "I'm also kind of kicking myself for not taking care of this sooner, sooner as in the last couple of days."

A couple of dozen customers could be seen outside the building, reading fliers handed out by FDIC staff. The agency set up a toll-free number for bank customers to call.

IndyMac Bancorp Inc., the holding company for IndyMac Bank, has been struggling to raise capital as the housing slump deepens.

IndyMac had $32.01 billion in assets as of March 31.

A spokesman for the lender referred media queries to the FDIC.

The banking regulator said it closed IndyMac after customers began a run on the lender following the June 26 release of a letter by Sen. Charles Schumer, D-N.Y., urging several bank regulatory agencies that they take steps to prevent IndyMac's collapse.

In the 11 days that followed the letter's release, depositors took out more than $1.3 billion, regulators said.

In a statement Friday, Schumer said IndyMac's failure was due to long-standing practices by the bank, not recent events.

"If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today," Schumer said. "Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs."

The FDIC planned to reopen the bank on Monday as IndyMac Federal Bank, FSB.

Deposits are insured up to $100,000 per depositor.

As of March 31, IndyMac had total deposits of $19.06 billion.

Some 10,000 depositors had funds in excess of the insured limit, for a total of $1 billion in potentially uninsured funds, the FDIC said.

Customers with uninsured deposits could begin making appointments to file a claim with the FDIC on Monday. The agency said it would pay unsecured depositors an advance dividend equal to half of the uninsured amount.

During a conference call with reporters, FDIC Chairman Sheila C. Bair said the agency would cover all insured deposits and then try to recover its costs by selling IndyMac's assets.

"We anticipate trying to market the institution as a whole bank," Bair said. "How much money we derive from that will depend on who gets paid what."

Holders of unsecured IndyMac debt may not fully recover their investment, Bair said.

"Generally if a creditor is secured, they are at the top of the claims priority," she said. "If they are unsecured, they're pretty low on the claims priority and probably will take some type of haircut with this, but we have not had a chance to do a thorough analysis to know ... how extensive those losses will be."

IndyMac spent the last two weeks trying to reassure customers that it was not near default.

On Monday, IndyMac announced it had stopped accepting new loan submissions and planned to slash 3,800 jobs, or more than half of its work force -- the largest employee cuts in company history.

In the letter to shareholders, IndyMac Chairman and Chief Executive Michael W. Perry said the drastic measures were made in conjunction with banking regulators to improve the company's financial footing and "meet our mutual goal of keeping Indymac safe and sound through this crisis period."

The plan was supposed to generate roughly $5 billion to $10 billion per year of new loans backed by government-sponsored mortgage companies, Perry said at the time.

But the run on its deposits ultimately short-circuited the strategy, prompting regulators to take action Friday.

Associated Press writer Raquel Maria Dillon in Pasadena contributed to this report.

FDIC IndyMac page: http://www.fdic.gov/bank/individual/failed/IndyMac.html

Toll-Free Customer line: 1-866-806-5919.
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Fannie, Freddie woes hit the nation's homebuyers, owners

The Fannie Mae and Freddie Mac turmoil could mean higher rates for new borrowers, and the impact may not end there...
By: Les Christie: CNNMoney.com
The fate of Fannie Mae and Freddie Mac may be hanging in the balance but many mortgage borrowers already find themselves struggling to find affordable loans.
Because of the turmoil surrounding Fannie and Freddie, recent borrowers are likely paying nearly 10% more in monthly mortgage payments than they would have.

The added cost stems from an erosion in confidence in Fannie and Freddie, according to Mark Zandi, chief economist for Moody's Economy.com.

Fannie and Freddie borrow money in the bond markets to pay for the mortgages they buy from lenders and then sell to hedge funds and other investors. Their cost of borrowing that money has now gone up, and that filters down to lenders who have to charge more to borrowers.

"It does have an impact on mortgage interest rates," said Richard DeKaser, chief economist for National City Corp. "It will be more expensive for Fannie and Freddie to acquire mortgages and that will ripple through the market."

And mortgages are not only getting more expensive for ordinary borrowers but they're also harder to obtain as lenders tighten up their standards.

"Some lenders are really pulling in their horns," said Steve Habetz, a Connecticut mortgage broker. "They're getting scared. They're demanding really clean loan applications with every i dotted and every t crossed."

What is happening now is compounding the damage which has already devastated the housing market.

The troubles for Fannie and Freddie could even affect current mortgage borrowers since they put the housing rescue bills that Congress has been agonizing over for months in jeopardy, according to Zandi, who has testified before the Senate on aspects of the bills.

Congress has upped the value of the loans Fannie and Freddie can buy, as well as the total dollar amount they can hold.

And a bill in the Senate calls for an expanded effort by the Federal Housing Administration to insure risky mortgages. Fannie and Freddie are being called upon to cover the potential cost to taxpayers. Now their weakened position calls into question their ability to do so.

"The ability of [Fannie & Freddie] to become more aggressive in extending credit, which is what the policy makers hoped and planned for, may be compromised," he said. "It could further delay any housing recovery."
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BofA: Expect large home-price declines

BofA sees additional 15% drop in real estate prices.
Inman News
Bank of America expects home prices will fall an additional 15 percent nationwide and 20 percent in California, Chief Executive Officer Ken Lewis said in an interview with the Los Angeles Times.

Lewis, who has been under fire for Bank of America's decision to acquire troubled mortgage lender Countrywide Financial Corp., said that loan losses at Countrywide are on the high end of Bank of America's projections in January, when the deal was announced. But the all-stock deal -- valued at $2.5 billion when it closed July 1 -- will be profitable from the get-go, Lewis claimed, with huge potential for growth when housing markets recover. Although Bank of America had initially considered using Countrywide's widely recognized brand name, it will phase it out early next year, Lewis said.

Bank of America has previously said it plans to lay off 7,500 employees as part of the merger, and engage in workouts or loan modifications with 265,000 borrowers (see story). Bank of America also inherits lawsuits against Countrywide filed by attorneys general in Illinois, California and Florida.

Freddie Mac reports little change in mortgage rates
Rates on 30-year fixed-rate mortgages rose slightly during the week ending July 10, averaging 6.37 percent with an average 0.6 point, Freddie Mac said in its weekly Primary Mortgage Market Survey. That's up from 6.35 percent a week ago, but lower than the 6.73 percent average a year ago.

The 15-year fixed-rate mortgage this week averaged 5.91 percent with an average 0.6 point, down from 5.92 percent a week ago and 6.39 percent a year ago.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.82 percent this week, with an average 0.6 point, up from 5.78 percent last but down from 6.35 percent a year ago. One-year Treasury-indexed ARMs averaged 5.17 percent this week with an average 0.5 point, unchanged from a week ago and down from 5.71 percent a year ago.

Policy center reports home-price impacts on wealth
The Center for Economic and Policy Research, a nonpartisan think tank, reports that if home prices hold steady through 2009 the median household headed by those 45-54 next year will have 24.7 percent less wealth than the median household group in this age range five years earlier. That's according to a study by the group, "The impact of the Housing Crash on Family Wealth." The study also found that if real house prices drop 10 percent, the median household headed by those 45-54 will experience a 34.6 percent loss in wealth compared with the median for this group in 2004, while households in the 18-34 range will lose 67.6 percent. If prices fall 20 percent, families in the 55-64 segment will experience a wealth loss of 49.6 percent compared to the same segment in 2004.
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Home Supply Fell Over Past Year

The supply of homes available for sale in 18 major metropolitan areas in June was down 2.4% from a year earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif.
By: JAMES R. HAGERTY: WSJ.com
Inventory totals in June were about even with those a month earlier in those areas.

The data cover listings of single-family homes, condominiums and town houses on local multiple-listing services in those areas. It was the first decline for the 18 markets since Zip began collecting the inventory data in mid-2006.

See the housing inventory by metro area or the past 18 months.

Zip said inventory totals in June were about even with those a month earlier in the 18 metro areas.

Though the supply of homes listed for sale has leveled off after soaring in recent years, it remains plentiful. Nationwide, about 4.5 million previously occupied homes were listed for sale at the end of May, according to the National Association of Realtors. That is enough to last nearly 11 months at the current sales rate, the trade group says. The market is considered roughly in balance between supply and demand when the inventory is enough to last around six months.

The Zip data don't include New York. But Miller Samuel Inc., an appraisal firm based there, says there were 6,869 cooperative apartments and condominiums available in Manhattan at the end of June, up 31% from a year earlier. Manhattan has remained one of the nation's strongest markets but is cooling as Wall Street firms shed employees.

The figures from Zip and the Realtors probably understate the supply of homes because not all foreclosed properties that lenders are trying to sell are listed on multiple-listing services.

Integrated Asset Services LLC, a Denver-based company that helps banks value and sell foreclosed homes, said its index shows that the median U.S. home price in May was down 3.2% from April and down 20% from May 2007.

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The Weekend Guide! July 10 - July 13, 2008

What to Do This Weekend!
The Weekend Guide for July 10 - July 13, 2008.

Full Article:
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Fed's Loans to Wall Street May Prevent Raising Rates

The Federal Reserve may hold off on its first interest-rate increase since 2006 until policy makers judge that financial markets are stable enough to allow the central bank to withdraw its lending backstop for Wall Street.
By: Scott Lanman: Bloomberg.com
The Fed may have a hard time justifying higher borrowing costs as long as a temporary program for emergency lending to nonbanks remains in place, economists said. Raising rates while at the same time removing securities dealers' access to direct loans from the central bank would also be a double hit to markets that officials probably want to avoid.

The timing difficulty, along with continued strains in credit markets, means traders may be mistaken in estimating the odds of a rate boost by year-end at 74 percent. Fed Chairman Ben S. Bernanke said today officials may extend securities dealers' access to loans into 2009 as long as emergency conditions remain.

``As long as there is the kind of turmoil that's in place, that's another indication that they're going to have a great deal of difficulty'' raising interest rates ``in the short run,'' former Atlanta Fed research director Robert Eisenbeis said in an interview with Bloomberg Television.

Bernanke, who prompted expectations for a rate increase when he said last month the Fed would ``strongly resist'' a rise in inflation expectations, spoke today on regulation at a conference in Arlington, Virginia. He added that the Fed is working with the Securities and Exchange Commission and investment banks ``to increase the firms' capital and liquidity buffers.''

Emergency Powers

The Fed started the PDCF in March, invoking its powers under ``unusual and exigent circumstances'' to forestall a collapse in confidence after the near-bankruptcy of Bear Stearns Cos.

New York Fed President Timothy Geithner, who spearheaded the central bank's rescue of Bear Stearns, said June 9 that the Fed's emergency measures would be in place as long as markets remained distressed. Persistent credit strains may leave officials unwilling to end the PDCF in September, after they said March 16 it would last for ``at least'' six months.

``We think they'll wait until 2009'' to raise rates, said Brian Sack, who used to head the Fed's monetary and financial market analysis group before he joined Macroeconomic Advisers LLC as senior economist in Washington. Successfully dealing with an end to the Primary Dealer Credit Facility is ``a hurdle for credit markets to get past before the Fed will likely start tightening,'' he said.

Credit Strains

Credit-default swaps on Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley debt are trading close to their highest since March. The contracts let investors bet on the risk that a company will default on its bonds.

Another gauge of financial stress watched by the Fed has also remained elevated. The difference between the overnight indexed swap rate, a measure of what traders expect for the Fed's benchmark rate, and three-month interbank loans in dollars was 0.78 percentage point yesterday, about the same as the start of May.

In addition, commercial-bank loans outstanding have dropped to their lowest level since March, Fed statistics show. That will ``put a severe stranglehold on economic growth,'' said former Fed governor Lyle Gramley.

Raising rates in such an environment ``would be a very risky strategy,'' said Gramley, now senior economic adviser at Stanford Group Co. in Washington. ``I don't think they're going to do that, and I think markets have been premature in jumping to that conclusion.''

Reductions Halted

The Federal Open Market Committee on June 25 kept its target rate for overnight loans between banks at 2 percent, ending a series of seven reductions since September.

Futures prices on the Chicago Board of Trade indicate investors place 47 percent odds the Fed will raise the benchmark rate to at least 2.25 percent at or before the Sept. 16 meeting. That probability is 74 percent for the end of the Dec. 16 FOMC gathering.

``They're going to pick one instrument at a time to tighten policy,'' predicted New York-based Merrill Lynch economist Drew Matus, who used to work at the New York Fed.

While nothing would prevent the Fed from taking such action, increasing the cost of credit while at the same time lending to Wall Street may spur criticism the central bank is misusing its emergency authority.

First Since 1930s

The Fed is only supposed to lend to nonbanks under emergency circumstances when no other ``adequate'' credit is available. The PDCF and the Fed loans to secure Bear Stearns's takeover by JPMorgan Chase were the first extension of funds to nonbanks since the 1930s.

Richmond Fed President Jeffrey Lacker and Philadelphia Fed chief Charles Plosser have already criticized the PDCF for raising the danger of future financial crises by increasing incentives for firms to take on more risk.

The PDCF was one of three tools the Fed introduced since December to combat the credit crisis. The central bank has a $200 billion program of lending Treasuries to the primary dealers in U.S. government bonds. The Fed also auctions $75 billion of cash loans to commercial banks every two weeks.

``If those tools work, then monetary policy can go back to addressing what it should be addressing, which is inflation,'' John Ryding, the founding partner of RDQ Economics in New York who used to work as an economist at Bear Stearns and at the Bank of England, said in an interview with Bloomberg Radio. ``The problem is, I think it's clear, that there's still a lot of fragility in the system.''
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California Senate passes mortgage default warning bill

The legislation, SB1137, would require lenders to give homeowners more - and earlier - warnings that their home loans were heading toward default.
By: Marc Lifsher: Los Angeles Times.com
The first major bill designed to help prevent more home foreclosures in California won final passage from the state Senate on Wednesday and was sent to the governor, who was expected to sign the measure into law.

The legislation, which passed on a 32-8 vote, would require lenders to give homeowners more - and earlier - warnings that their home loans were heading toward default. The bill, SB1137, would take effect immediately once it had the signature of Gov. Arnold Schwarzenegger.

The bill also gives renters more time to find a new place to live when they are being evicted because their landlord is losing the property.

A third provision authorizes local governments to force lenders to maintain property that is sitting empty after a foreclosure.

"SB1137 will make a difference right away," said the author of the bill, Senate President Pro Tem Don Perata (D-Oakland).

"This legislation is an important piece of the puzzle of how to best protect California homeowners and communities from the fallout from the nation's mortgage crisis," Perata said.

Schwarzenegger, who this year persuaded state-licensed lenders to voluntarily help homeowners get out from under costly adjustable-rate mortgages, welcomed the Perata bill.

"This bipartisan legislation provides one more tool by giving borrowers the critical time needed before a foreclosure to work with their lenders," Schwarzenegger said.

Schwarzenegger's approval became all but certain after protracted negotiations between Perata and his backers - mainly labor unions, community activists and advocates for fair lending practices - found common ground with lobbyists for the banking and real estate industries.

The finished product, said Susan DeMars, executive director of the California Mortgage Bankers Assn., provides borrowers with relief "without arbitrarily limiting access to credit or discouraging investments that are needed to restore liquidity to California's housing market."

Passage of the bill came just after the state Department of Corporations released its latest monthly lenders survey, which contained mixed news on the real estate front.

On the positive side, the state reported that the number of loans being modified each month to require lower payments jumped 49% from January to May, when 8,686 so-called workouts of loan terms occurred.

But that progress did little to stem the number of monthly foreclosures, which rose by about 5% to 13,622 during the same five-month period.

Perata and Assembly Speaker Karen Bass (D-Los Angeles) said they hoped that Wednesday's passage of the foreclosure-prevention bill would create momentum to resurrect a handful of related measures that had been killed or watered down in the Senate two weeks ago.

Bass said she was focusing on key portions of AB1830 by Assemblyman Ted Lieu (D-Torrance).

"We are developing an effective package of bills to submit to the governor in August," Bass said.

An earlier version of Lieu's bill addressed three problems linked to sub-prime loans, which were typically made to borrowers with blemished credit who couldn't qualify for traditional fixed-interest-rate loans.

It sought to prohibit stated-income loans, which allow people to qualify for mortgages without proving they have the income to make the monthly payments.

Lieu's bill also would have banned less-than-interest-only loans, whose principal increases with each monthly payment, and pre-payment penalties that make it expensive to pay off loans before they reset to a higher interest rate.

Mortgage bankers contend that negotiations are moving toward an agreement with Lieu and Democratic leaders on AB1830.

California lawmakers, they cautioned, need to be careful that any new law is in harmony with new sub-prime mortgage regulations that are expected to be issued in Washington this summer by the Federal Reserve.
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Mortgage ruling could shock U.S. banking industry

... "Class certification of rescission claims would saddle the mortgage lending industry and ... But an adverse ruling for borrowers would cut off an important remedy. ...
By: Gina Keating - Analysis: Reuters.com
A lawsuit filed by a Wisconsin couple against their mortgage lender could have major implications for banks should a U.S. appeals court agree that borrowers can cancel their loans en masse when their lenders violate a federal lending disclosure law.

The case began like hundreds of others filed since the U.S. housing boom spawned a rise in sales of adjustable rate loans. Susan and Bryan Andrews of Cedarburg, Wisconsin, claimed that lender Chevy Chase Bank FSB (CCX_pc.N: Quote, Profile, Research, Stock Buzz) had hidden the true terms of what they believed was a good deal on a low-interest loan.

In their 2005 lawsuit, the couple said the loan's interest rate had more than doubled by their second monthly payment from the 1.95 percent rate they thought was locked in for five years. The interest rate rose well above the 5.75 percent fixed-rate loan they had refinanced to pay their children's college tuition.

The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs.

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial Corp (CFC.N: Quote, Profile, Research, Stock Buzz) mortgages originated under "unfair or deceptive practices."

'MASSIVE CLASS SUITS'

The mortgage banking industry already faces pressure from state and federal regulators, who have accused banks of lowering underwriting standards and forcing some borrowers, through fraud, into costly adjustable loans that the banks later bundled and sold as high-interest investment vehicles.

The loans have caused serious instability in the financial sector, as mortgage interest rates adjusted upward and borrowers began defaulting at a significant rate starting in 2007, drawing lawsuits from investors and homeowners.

Federal appeals courts disagree over whether class-wide rescission under the Truth in Lending Act is available, said attorney Christine Scheuneman, whose firm represented Chevy Chase at the district court.

"If class treatment is found to be available for rescission ..., given the current crisis not predicted in 2005, the result all over the country could be massive class suits," said Scheuneman, a partner at Pillsbury Winthrop Shaw Pittman LLP.

The Truth in Lending Act, a 1968 federal law designed to protect consumers against lending fraud by requiring clear disclosure of loan terms and costs, lets consumers seek rescission, or termination, of a loan and the return of all interest and fees when a lender is found in violation.

Should the 7th U.S. Circuit Court of Appeals agree with Judge Adelman, banking industry associations predict "confusion and market disruption" as banks curtail lending further.

"Class certification of rescission claims would saddle the mortgage lending industry and secondary market with billions of dollars of class action exposure for supposed violations of TILA that do not give rise to any actual damages," the financial services associations wrote in an amicus brief.

But the Andrews' attorney, Kevin Demet, said lenders want to scare the judiciary into banning class action rescissions because they were unable to convince Congress to do so in the 1990s.

"If (banks) get relief (from the appeals court), it's activist judges trying to give them what they could not get legislatively," said Demet, of Demet & Demet of Milwaukee, Wisconsin.

Consumer advocates said the banks would have "no more or no less" liability for the tainted mortgages if the court found in favor of the Andrews plaintiffs.

But an adverse ruling for borrowers would cut off an important remedy. Borrowers would "lose the opportunity to use rescission to save their homes from foreclosure or to rescind their mortgages and refinance into affordable ones," the Center for Responsible Lending, the National Consumer Law Center, Public Citizen and AARP Foundation Litigation wrote in an amicus brief filed in the case.

Both sides said the case will likely be decided by the U.S. Supreme Court.
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INSTANT VIEW: Fed holds rates steady

The Fed's moderately hawkish statement accompanying its decision to leave interest rates unchanged signals the central bank may raise interest rates later this year, an analyst says.
Reuters
The U.S. Federal Reserve held a key interest rate steady on Wednesday and voiced greater concern about inflation, taking a step down a road that could lead to higher borrowing costs.

KEY POINTS:

* The decision by the U.S. central bank, announced at the end of a two-day meeting, leaves the benchmark federal funds rate at 2 percent.

* It was the first time the Fed has held rates steady at a policy-setting session since embarking on a series of rate reductions in September to put a floor under an economy hit hard by a housing downturn and credit crisis.

COMMENTS: GREG SALVAGGIO, VICE PRESIDENT OF TRADING, TEMPUS CONSULTING, WASHINGTON:

"It's a bit more hawkish than people were whispering about. Certainly, the Fed's saying that the upside risks to inflation have risen has taken the market a bit off guard. This should be longer-term bullish for the dollar. Whether it can hold gains today remains to be seen. There are obviously some buyers coming into the market now, with people looking to grab the euro at cheaper levels there. But beyond that move, it should be dollar supportive."

ROBERT DYE, SENIOR ECONOMIST, PNC FINANCIAL SERVICES GROUP, PITTSBURGH, PENNSYLVANIA:

"The Fed presented a more balanced assessment of risks and there's no change in policy for the time being. They obviously had to signal that they would continue to keep a watchful eye on inflation, but we expect them to continue to hold rates steady over the summer months and through the end of this year, contrary to the prediction of the fed funds futures market."

WILLIAM LARKIN, PORTFOLIO MANAGER, CABOT MONEY MANAGEMENT, SALEM, MASSACHUSETTS:

"The bond market is selling off, but I thought the statement was pretty positive for bonds because they said that they thought growth and inflation were going to moderate."

"But most people see inflation (will) be a chronic problem as long as energy prices stay high."

STEPHEN SCHORK, EDITOR OF THE SCHORK REPORT, ENERGY NEWSLETTER, PHILADELPHIA:

"If we begin to see further dollar strength take some of the wind out of the bulls' sails, it will have a negative impact on oil prices." TOM KNIGHT, ENERGY PRODUCTS TRADER, TRUMAN ARNOLD, TEXARKANA, TEXAS:

"I don't expect the Fed decision to keep rates unchanged to do much for energy futures. Crude futures are still trading in range. We've fallen below $132 and drifting back higher... we will likely end at the middle of the range."

JOE MANIMBO, CURRENCY TRADER, RUESCH INTERNATIONAL, WASHINGTON:

"The Fed made a moderately hawkish statement, signaling that the Fed may actually go ahead and raise interest rates later this year. That would obviously help the dollar."

MARKET REACTION:

* BONDS: U.S. Treasury debt prices extended losses

* CURRENCIES: U.S. dollar gains, and then reverses the initial move as the euro bounces back above $1.56

* STOCKS: U.S. equity indexes add to gains

* RATE FUTURES: Fed fund futures choppy on FOMC decision, split on prospects for August fed move.
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Will Sleepy Larchmont Wake Up as Next Robertson?

Rent hikes driving out area merchants.
By DANIEL MILLER: Los Angeles Business Journal online
A landlord’s desire to attract national chains has rattled merchants in sleepy Larchmont Village.

When real estate investor Albert Mizrahi paid $23 million for four buildings on sleepy Larchmont Boulevard last year, longtime retailers and residents began to worry.

They wondered if Mizrahi, who took months to assemble the 20,000-square-foot portfolio, would jack up rents and drive away longtime businesses, possibly changing the character of the quaint retail district by adding more national franchises as tenants.

So far this much is clear: Rents are up in Larchmont Village and several of Mizrahi’s tenants have already closed shop, with a few more likely to leave the shopping district between First Street and Beverly Boulevard.

What’s less clear: whether the nearly 90-year-old Hancock Park-area neighborhood is headed for wholesale changes, or if it’s simply in line for more of the modernization it has weathered in the past.

“The retail needs to be updated,” said Mizrahi, who offers no apologies for renting his new properties for $10 to $15 per square foot, about double the rest of the village. “They are afraid to change – any change whatsoever.”
Of course, in L.A., business owners have some reason to wonder when a shopping district appears on the cusp of change.

Not far away, on Robertson Boulevard, what was once a quaint neighborhood retail district with reasonable rents has been transformed in a chi-chi hangout for celebrities, replete with luxury boutiques, tourists and paparazzi.

However, if Larchmont is headed in that direction, the changes will not come easily.

Mizrahi’s efforts to give the street a facelift come as the city is considering a zoning regulation that would trim Larchmont Village’s 45-foot building height limit to 35 feet and limit street frontage for each business to 50 feet. Such limitations wouldn’t prevent national luxury retailers from opening on the street, but they might discourage some.

On June 19, the Los Angeles Department of City Planning held a public meeting to discuss the regulation, introduced by Los Angeles City Councilman Tom LaBonge last fall. The proposal could come before the City Council for a vote by year’s end.

“I am proposing certain restrictions that would preserve the character of the street, which is wonderful,” said LaBonge, a regular on the street who is on a first-name basis with many of the business owners. “Larchmont is the model street of Los Angeles for local retail.”

Concerns heightened

In fact, it was not Mizrahi’s purchases that spurred the community to reassess its retail character or advocate the zone change. Instead, it was last fall’s shuttering of La Luna Ristorante, which closed after a dispute with its landlord about a rent increase. There are only 75 storefronts on the blocks-long district.

“At that point the local community decided they needed to pay more attention to the character of the street,” said John Winther, manager of Coldwell Banker’s two Hancock Park offices and president of the Larchmont Boulevard Association, which represents business owners.
That concern was only heightened when Larchmont Hardware, Larchmont Village Jewelers and Melissa Levinson Antiques closed their shops after Mizrahi purchased their buildings.

And more departures are on the way. Mizrahi said that two tenants at his 123 N. Larchmont Blvd. building – Silver Lining, a picture framer, and Floret, a florist – cannot afford his new rental rates and will leave.

The owners of both businesses declined to comment.

“The neighborhood has always been good to businesses along here,” said Linda Lennon, co-owner of Village Heights jewelry and gift store, who does not rent from Mizrahi. “The neighbors support the village and it is not the greatest economy but it’s pretty steady. If Mr. Mizrahi thinks it’s going to be another Robertson Boulevard or Grove I don’t see anyone being comfortable with that.”

The stretch of Robertson Boulevard between Third Street and Beverly Boulevard was long a haven for hip, up-and-coming clothing designers. But in the last few years, luxury retail chains such as Chanel have opened. They are often patronized by young Hollywood starlets like Lindsay Lohan, followed by paparazzi.

The radical changes have allowed landlords to raise rents dramatically, which has forced out many locals tenants over the last two years. Robertson landlords even buy out the leases of their tenants so that the retail space can be leased to a national tenant for a much higher price. For example, in February the Horn women's boutique closed after the owner, Susanne Zenker, sold her lease back to the landlord. The landlord has leased the space to eye wear chain Luxottica. On Robertson, rental rates are in the $25-$28 range, per square foot per month.

Mizrahi, who also owns property in Santa Monica, said that despite the departures on Larchmont, he does not envision transforming the area into another Robertson. He called Larchmont perhaps the best retail district in Los Angeles and he “tried to buy as much as (he) could.” But he added the street doesn’t have a good retail mix, with too many coffee houses and children’s stores.

Mizrahi said he’d like to see more stores that cater to adults and freely admits he would lease space to national tenants – but maintains they would need to come up with concepts that jibe with Larchmont’s small-town charms.

“I saw it like a diamond in the rough, where it just needed a little bit of shining up,” said Mizrahi, who has leased space to Wachovia Corp. for a bank branch that will open this fall. It will be the fourth national bank in the district, providing little comfort to critics.

But Mizrahi has defied expectations, telling the Business Journal he backs the proposed regulation changes – which local business owners uniformly support. Still, there is a suspicion among some that he’s likely only paying lip service to calm fears.

“I was surprised, but not necessarily encouraged,” said Edie Frere, owner of Landis Gifts & Stationery, who lives in the area and grew up nearby. “For a guy who has rented to a bank I assumed he’d want to rent big spaces to big people.”

Indeed, the regulation changes would limit Mizrahi’s ability to remodel his properties at 107, 123, 150 and 227 N. Larchmont Blvd. into multistory retail destinations. But that doesn’t mean he couldn’t bring in smaller national boutiques.

“Gucci and Pucci. That’s not what this neighborhood is about,” said Frere, who does not rent from Mizrahi but said she couldn’t afford his asking rents.

Blue blood

On a recent afternoon, children rode scooters slowly down the sidewalk in Larchmont Village while diners waited to be seated outside several pleasant cafes.

Winther said the street is reminiscent of idyllic Mayberry from “The Andy Griffith Show” fame. Others say the street resembles the commercial district of a picturesque New England town – fitting for an area that is adjacent to Hancock Park, one of Los Angeles’ older neighborhoods.

But Mizrahi and his Charles Dunn Co. Inc. leasing agents appear to disagree with what the local community wants out of the shopping district. Mizrahi said locals “aren’t leaving enough money on that street,” adding that the street needs to support the community so that locals don’t go “somewhere like the Beverly Center because you can’t buy a belt” on Larchmont.

Charles Dunn leasing agent David Aschkenasy, who grew up nearby on June Street, said that he remembers about 10 to 15 years ago when several national retailers came to the street. At first, locals were unhappy with the new Blockbuster Video, Starbucks and Jamba Juice, among other businesses. But locals came to enjoy the new shops.

“People settled down and started using the products,” he said. “While people are scared of the unknown right now, I think they will be pleasantly surprised.”

Meanwhile, Mizrahi is making upgrades to his buildings as his agents seek out new tenants. He said he’d like to bring a restaurant into the 3,000-square-foot space at 107 North Larchmont, an attractive old home that formerly housed the jewelry store and antique shop.

He is also upgrading the structure of the 150 North Larchmont building, which used to house the hardware store. Mizrahi said he bought four residential tenants out of their leases on the second floor of the building and is converting those units into office space.

In fact, the story of the close of 82-year-old Larchmont Hardware on Dec. 31 encapsulates many of the issues at hand. It was a place that Frere said she shopped at least twice a week.

But Mizrahi said that the store was paying “way below market rent” and it wasn’t making money. He said store owner Russ Wilson was offered a smaller space but decided to close up and focus on running his West Hollywood hardware shop.

“The community loved the store and supported it, but they were also going to Home Depot,” Mizrahi said.
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California: Sales Rise as Home Prices Bottom

As foreclosures push down California housing prices, first-time home buyers surge into the market.
By: Alex Veiga: REALTOR®Magazine
The California median home price fell 30 percent in May, the sharpest decline in 20 years, since DataQuick Information Systems began keeping records.

The drop in home prices has sparked a home-buying rally that's beginning to reverse more than two years of monthly year-over-year sales declines.

"Inland markets hit hardest by foreclosures and falling prices are now the most likely to post higher sales than last year," says Andrew LePage, a DataQuick analyst. "These communities have been attracting first-time buyers, first-time move-up buyers and investors."

Richard Cosner, president of Prudential California Realty, says buyers of homes whose prices have declined in the last 18 months from $400,000 to $200,000 must compete with multiple bidders.

"For the first-time homebuyers and for that bottom tier of homes, we've found what the bottom of the pricing is," Cosner says.
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