by Calculated Risk on 2/27/2008 03:11:00 PM

Nouriel Roubini, Professor of Economics at at the Stern School of Business, NY University testified to the House of Representatives’ Financial Services Committee: The Current U.S. Recession and the Risks of a Systemic Financial Crisis

Thanks to Dr. Roubini for the kind mention!

by Calculated Risk on 2/21/2008 11:16:00 PM

From Edmund L. Andrews and Louis Uchitelle at the NY Times: Rescues for Homeowners in Debt Weighed (hat tip SC)

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com.

This article is mostly about the various bailout plans being proposed. But there is this comment (something I've been meaining to mention) on the impact of the housing bust on mobility in the U.S.:

People cannot move easily to jobs in other cities if they have to sell their homes at a loss.

I haven't seen the new Economy.com estimate, but I think the 8.8 million number might be a little high. However it is definitely in the ballpark. The 10.3 percent is of total homes including second homes (see here for data). I think a better number would be the percent of owner occupied homes with mortgages: 8.8 million underwater of the 51.2 million owner occupied homes with mortgages (see here) is about 17% of homeowners with mortgages are underwater according to Economy.com.

by Tanta on 2/21/2008 02:21:00 PM

This is certainly innovative:

The Office of Thrift Supervision is preparing a plan to help mortgage borrowers who owe more than their homes are worth and to discourage them from abandoning those properties, agency officials said yesterday.

Under the regulatory agency's proposal, still in its early stages, these borrowers would refinance into government-insured loans that cover the current value of their homes. The refinancing would pay part of what's owed to the original lender. For the remainder, the lender would get what the plan's backers call a "negative equity certificate." The lender could redeem the certificate if the home is eventually sold at a higher price. . . .

The proposal was briefly mentioned at a regular quarterly news briefing. More details should emerge over coming weeks, Petrasic said. The plan has been extensively analyzed internally and is now being discussed with policymakers and industry officials, he said.

The plan would separate a troubled mortgage into two parts. The first would cover the current fair-market value of the home and would be refinanced by the Federal Housing Administration. The remainder would be issued to the original lender as a certificate.

If the borrower eventually sells the home, the FHA mortgage would be paid off first. Remaining cash would be applied to paying off the value of that certificate. Anything left over would go to the borrower.

If there's not enough profit to pay off the certificate, the original lender would take a loss, which makes this proposal a gamble. However, the plan anticipates that there would be a market where these certificates are traded. That means the lenders could sell them immediately to offset some of the loss or hold them with the hope that they will appreciate, said Jaret Seiberg, an analyst at Stanford Policy Research.

The certificates would likely trade for small amounts, maybe $2 for every $100 in home value, and the amounts would increase as the housing market strengthens, Seiberg said.

But there are still many political and logistical hurdles.

This plan has not been vetted by the White House, Congress or other policymakers. The FHA declined to comment on the specifics except to say it is "regularly looking at new ideas and actively exploring ways to expand the eligible pool of creditworthy borrowers FHA can serve."

Whether investors will embrace the idea depends on many details that aren't resolved, Seiberg said. But it could be a way for lenders to cut their losses. "It beats foreclosure," Seiberg said. "These certificates enable [investors] to share in the upside if the housing market recovers."

For borrowers, avoiding foreclosure means they get to keep their homes and reduce damage to their credit.

"What we tried to do is figure out the best way to create market incentives for all the parties involved," Petrasic said.

That's a real twist on the idea of taking back a lien on a property to recapture any future equity. Apparently, only the FHA mortgage would be a lien against the property, with the certificate being an obligation of FHA? It certainly surprises me that the OTS feels confident it can work out the legal kinks with that quickly enough to make a difference.

by Calculated Risk on 2/02/2008 05:51:00 PM

From the Daily Mail: The return of negative equity:

Thousands Credit ratings agency Experian have drawn up a map showing which areas of the country are most at risk from a fall in prices.

It found that in some parts of Britain, the average mortgage debt is more than 90 per cent of local property prices.

This leaves owners vulnerable to negative equity ...

The financial regulator, the Financial Services Authority, has warned tmore than a million families are in danger of losing their homes in the next 18 months.

Negative equity limits mobility, prevents homeowners from selling, refinancing, or borrowing from their homes in case of an emergency. So it shouldn't be a surprise that negative equity is also highly correlated with foreclosures.

Also in the UK, the WSJ reports: Citigroup Cuts Off Some U.K. Credit Cards

In a sign of more consumers losing access to loans, Citigroup Inc. has told some 161,000 credit-card customers in the U.K. that they can use their cards until the first week of March and then they'll no longer be able to tap the New York bank for credit.