California pulls out of foreclosure talks

The state of California pulled out of multi-state mortgage
negotiations with large US banks, dealing a sharp blow to
long-running efforts to secure a broad settlement over
allegations of lending abuses. California Attorney General
Kamala Harris wrote in a letter on Friday that she will pursue
her own investigation. "California was being asked for a broader
release of claims than we can accept and ... the relief
contemplated would allow too few California homeowners to stay in
their homes," Harris said in the letter to government officials
leading the talks. New York had exited the talks in August over
a disagreement about how much legal immunity the banks should
receive in any settlement. Representatives of the banks met with
Harris last week in an attempt to keep California on board. The
state has faced some of the worst default rates in the country,
with an unemployment rate of 12.1% and two million residents who
owe more on their mortgage than their home is worth. Eight of
the 10 hardest hit US cities in terms of foreclosure rates are in
California, Harris said. State and federal officials have
discussed penalties totaling roughly $20 billion from
institutions that include Bank of America, JPMorgan Chase, Wells
Fargo and Citigroup.

Public sector pensions go on a diet

To fix their persistent pension problems, some US states are
looking to reshape their retirement plans to resemble those in
the private sector. Over the last few decades, the private
sector has ditched traditional pension plans with their defined
benefits. They have been replaced with defined contribution
accounts, such as 401(k)s, in which employees allocate a set
amount each month to invest — often partly matched by employers
— and then cash out at retirement. This has left the public
sector as the main provider of defined benefit plans, which pay
employees a fixed amount each month after retiring. But pension
funds have been stung by the recent financial crisis and
recession, leaving taxpayers and political leaders agonizing over
the possibility they will be unable to afford those defined
payments. Estimates of a total shortfall range from around $700
billion to $3 trillion, due to differing forecasts of investment
returns. "If the idea is that tax revenues are down and state
budgets are crunched, and they surely are ... I think it's
worthwhile to take a step back and look at the actual costs,"
said Ilana Boivie, director of programs for the National
Institute on Retirement Security, or NIRS.

No rise in home prices till 2020?

A survey of bank risk managers says that home prices are unlikely
to recover before 2020 and mortgage defaults will persist for
years. The survey, conducted by the Professional Risk
Managers’ International Association for FICO, found that 49% of
respondents do not expect housing prices to rise back to 2007
levels for another nine years. Only 21% of respondents said they
would. The findings, which authors called “a decidedly
pessimistic outlook”, are a sharp reversal from cautious
optimism the survey respondents expressed late last year and in
early 2011. In addition, 73% of surveyed bankers say they expect
mortgage defaults to remain elevated for at least another five
years. And 46% believe mortgage delinquencies will increase over
the next six months. Only 15% of respondents expect mortgage
delinquencies to decline during that period. A large number of
respondents says they also expect to see an uptick in
delinquencies on auto loans, credit cards and student loans.
Small businesses are expected to continue face a challenging
credit environment. More than one-third of respondents forecast
an increase in delinquencies on small business loans. Bankers
also appear to be pessimistic about recovery in consumer
spending, with 64% of respondents expecting credit card usage to
remain below pre-recession levels for at least five more years.
Half of the respondents expect credit card balances to increase
over the next six months, due to higher spending by some
households and smaller monthly payments by others.

Fed will act if it needs to

The US Federal Reserve will act if the economy weakens further
and has the tools to do so, a top Fed official said on Friday.
St. Louis Fed President James Bullard said he expects the economy
to grow modestly over the next year—though the sluggish pace
leaves it vulnerable to shocks. "Should economic performance
deteriorate, monetary policy will respond," Bullard said,
according to slides of a presentation he was scheduled to make.
"The Fed is not now, or ever, 'out of ammunition'." With
interest rates near zero, Bullard said, the Fed can support the
economy through inflation and inflation expectations and asset
purchases are a "potent tool". Dealers polled by Reuters earlier
this month gave a median chance of 32% that the Fed will embark
on a third round of quantitative easing. The Fed said last week
it plans to buy $400 billion of longer-term Treasurys and sell
the same amount of shorter-term Treasurys by the end of June
2012, in an effort to lower longer-term borrowing costs. It also
said it would support the mortgage market by reinvesting
principal payments from its mortgage-related debt into
mortgage-backed securities.

Housing market has hit bottom?

The US housing market hit bottom this year and will remain flat
until 2014, when it will start to slowly recover, said Rick
Sharga, an executive vice president with Carrington Mortgage
Holdings. "We’re looking at a catfish recovery," he told
attendees at the Asian Real Estate Association of America
conference in San Francisco Friday, saying the market will bump
along the bottom for some time before starting to revive. More
than a million foreclosure actions that should have taken place
this year have not yet moved forward, and that delay pushes a
resolution of the housing market’s problems into next year and
beyond, he said, citing data from RealtyTrac, where Sharga served
as a senior vice president until this week. "We can’t expect
to see home price appreciation until we work through these
distressed assets," he said. Since 2005, there’s only been one
quarter in which US banks have sold more properties than
they’ve taken back through foreclosure, leaving a huge overhang
of real estate-owned assets that need to be cleared out.

Banks hold about 800,000 REOs, and three-quarters of those are
not listed for sale, said Sharga. Another 800,000 homes are in
foreclosure and 1.5 million loans are delinquent. This "shadow
inventory" will slow down a housing market recovery, he said, as
monthly foreclosure numbers will remain elevated through 2012 and
REO inventories will stay high through 2013. Even with the
continuing distress in the housing market, the country is not
likely to enter a double-dip recession, said Eugenio Aleman, a
director and senior economist at Wells Fargo & Co. Although US
workers have suffered as the nation has lost 9 million jobs over
a two-year period, the manufacturing and service sectors are
expanding, he noted. "The rest of the economy is not booming,
but it’s doing fine," said Aleman. Wells Fargo is projecting
that the US economy will expand over the next few years, but at
anemic rates: 1.6% this year, 1.4% in 2012 and 1.9% in 2013. "We
are standing firm," said Aleman of Wells Fargo's economic
forecast. "We are not going to go into a recession."

ECRI says recession inevitable

Weakness in leading economic indicators has become so pervasive
the Economic Cycle Research Institute now predicts a new
recession is unavoidable. "The vicious cycle is starting where
lower sales, lower production, lower employment and lower income
[leads] back to lower sales," co-founder Lakshman Achuthan
declares in the accompanying video. Whereas Achuthan said the
jury is still out in late August, the weakness in leading
economic indicators — and ECRI uses a dozen for the US alone,
he notes — has become a "contagion" that is spreading like
"wildfire." Although the recovery has been "subpar" by nearly
every measure, Achuthan refutes the idea the economy never got
out of recession in the first place. "Just because it looks and
feels a certain way doesn't mean it's a recession," he says. "You
haven't seen anything yet. It's going to get a lot worse." It's
too soon to predict just how bad it's going to get, but he
expects another spike in unemployment and further expansion of
the federal government's $1 trillion deficit. This forecast has
huge ramifications for the 2012 election and the already
struggling US consumer and Achuthan says a "mild" recession is
the best-case scenario. By now you may be wondering what
separates ECRI's recession call from the myriad other recession
calls out there. First, ECRI's primary raison d'etre is
predicting recession and recovery calls. Second, and more
importantly, The Economist reports ECRI has never issued a "false
alarm" on a recession call, meaning many of the Chicken Littles
currently declaring "the sky is falling" might actually be right
this time around.

Mortgage help for unemployed disappears

The federal government can't even give money away to help the
unemployed pay their mortgage. A $1 billion program to assist
the jobless will likely end up spending only half the funds, at
most, because so few people met the strict criteria. The Housing
Department, which had to approve the applications for the
Emergency Homeowners' Loan Program by Friday, expects that only
10,000 to 15,000 people will qualify. That's only a small sliver
of the roughly 100,000 who applied. "No one could have
anticipated how difficult the statutory requirements make it to
reach homeowners," said Lemar Wooley, a HUD spokesman. Those who
make the cut are expected to receive between $35,000 and $45,000
in aid, he said. Many had high hopes for the loan program
because it was targeting a segment of delinquent homeowners not
being helped by other federal initiatives, such as mortgage
modifications.

The initiative quickly became a quagmire of delays and
requirements, however. The rollout was postponed for months,
finally launching in late June. HUD originally gave people less
than six weeks to apply, but then pushed back the deadline to
mid-September. But it was the income and delinquency guidelines
that prevented many seemingly eligible people from getting
assistance, housing counselors say. HUD used a complicated
formula that took into account monthly payments, income and
arrears. Only 34 of the 174 homeowners who came to Tierra del
Sol Housing Corp. in Las Cruces, N.M., met the criteria, said
Rose Garcia, the agency's executive director. Some people were
turned away because they were already too far behind in their
payments or because their income fell because of a family
member's illness. "This program could have made a difference to
save people from being homeless," she said. "But it doesn't meet
people's needs." In Philadelphia, Michelle Lewis is waiting to
see how many of the 400 applications her Northwest Counseling
Service received will be approved. She fears it will be few. One
problem she ran into was that many applicants lost their jobs
more than a year ago. Under HUD's rules, the circumstance that
caused the delinquency had to have occurred within the past 12
months. The Pennsylvania loan program, which ended in June
because of state budget cuts, allowed for many more hardship
conditions so it was able to reach more people than the federal
effort, she said. "The [HUD] guidelines were so restrictive that
it knocked out a lot of otherwise eligible and worthy consumers,"
said Lewis, the agency's chief executive.