Tishman Speyer Properties surrenders 11,227-apartment complex to creditors

The Peter Cooper Village and Stuyvesant Town complex in 2006. From Nicole Bengiveno/The New York Times

This is from The New York Times:

The owners of Stuyvesant Town and Peter Cooper Village, the iconic middle-class housing complexes overlooking the East River in Manhattan, have decided to turn over the properties to creditors, officials said Monday morning.

The decision by Tishman Speyer Properties and BlackRock Realty comes four years after the $5.4 billion purchase of the complexes’ 110 buildings and 11,227 apartments in what was the most expensive real estate deal of its kind in American history.

The surrender of the properties, first reported by the Wall Street Journal, ends a tortured real estate saga that saw the partnership make expensive improvements to the complex and then try to rent the apartments at higher market rates in a real estate boom. But a real estate downturn and the city’s strong rent protections hindered those efforts, leaving the buyers scrambling to make payments on loans due for the properties, which have been a comfortable harbor for the city’s middle class since they opened in the late 1940s.

[...]

This month, the partnership headed by Tishman Speyer defaulted on $3 billion in debt on the properties, and in the last few days secondary lenders have been calling to replace the partnership.

I am just amazed at how this huge property deal went belly up by Tishman Speyer. I've read plenty of news stories of Americans losing their homes to foreclosure due to job losses, speculation, or even just buying too much housing than they could afford. But with the souring economy potentially forcing New Yorkers out of the Stuyvesant Town and Peter Cooper complex, Tishman couldn't afford the overpriced payments when they purchased the complex at the height of the real estate boom. This story is just another example of how the over-speculation and frenzied spending during the real estate bubble is still wreaking havoc on the U.S. economy after the bubble exploded. Now the creditors have an 11,227-apartment complex that is well below the original $5.4 billion purchase value--the Wall Street Journal reports that the complex is now valued at around $1.8 billion. What is more, a number of big investors, including the California Public Employee's Retirement System, the Church of England, the Government of Singapore Investment Corp., and the Hartford Financial Services Group, that bought into this property are about to see much of their investment stake being wiped out.

Talk about a real estate disaster here.

Senate gives Obama $350 billion in bailout funds to financial industry

This is from The New York Times:

WASHINGTON — President-elect Barack Obama’s economic agenda advanced rapidly in Congress on Thursday as the Senate voted to release the second half of the financial industry bailout fund and House Democrats unveiled an $825 billion fiscal recovery plan aimed at putting millions of unemployed Americans back to work.

The Senate action, by a vote of 52 to 42, spares Mr. Obama a messy legislative fight just as he takes office and gives him a $350 billion war chest to further stabilize the financial sector. The vote came amid renewed distress in the banking industry, including further deterioration of Citigroup and a pitch for more government aid by the Bank of America.

Mr. Obama had personally lobbied reluctant senators to release the money. His top economic adviser, Lawrence H. Summers, made three visits to the Capitol and sent two letters to reassure lawmakers that the program would be better managed.

In the most recent letter, delivered shortly before the vote, Mr. Summers promised to use $50 billion to $100 billion for “a sweeping effort to address the foreclosure crisis.” He promised tough oversight and clear tracking of how the money is used, and new restrictions on executive pay at firms that receive help.

The vote was an early test for Mr. Obama, in which 6 Republicans joined 46 Democrats to release the money and keep the new administration’s agenda on track.

After personal entreaties from Mr. Obama, all but one of the seven Democratic freshmen senators voted to release the money, including Senators Mark Udall of Colorado and Tom Udall of New Mexico, who as House members twice voted against the original bailout bill.

In a statement, the president-elect applauded the outcome.

“I know this wasn’t an easy vote because of the frustration so many of us share about how the first half of this plan was implemented,” Mr. Obama said. “Now my pledge is to change the way this plan is implemented and keep faith with the American taxpayer.”

The one item I find interesting about this story is that Obama's economic adviser, Larry Summers, is promising "tough oversight and clear tracking of how the money is used, and new restrictions on executive pay at firms that receive help." We never saw that type of oversight when the Bush administration poured billions in taxpayer dollars into the Wall Street financial institutions, and the banks used that taxpayer money for everything else, except for providing mortgage relief to the nation's struggling homeowners facing foreclosure. I'm not sure if the Obama administration will be able to provide such oversight in this incredible mess that is the financial bailout, but I do hope they succeed.

Foreclosures soar to a record 1.35 million

There is not much more to say on this CNN.Com story:

NEW YORK (CNNMoney.com) -- A record 1.35 million homes were in foreclosure in the third quarter, driving the foreclosure rate up to 2.97%, the Mortgage Bankers Association said Friday.

That's a 76% increase from a year ago, according to the group's National Delinquency Survey.

At the same time, the number of homeowners falling behind on their mortgages rose to a record 6.99%, up from 5.59% a year ago, the association said.

This means that one in 10 borrowers in America are either delinquent or in foreclosure.

Many of those troubled borrowers are in California and Florida, which have among the highest delinquency rates in the nation.

The weakened economy and mounting job losses are expected to push these numbers even higher. And that will likely affect homeowners with prime, fixed-rate mortgages, which make up the vast majority of loans and have so far held up fairly well. Until now, much of the housing market's problems were concentrated in the subprime, adjustable-rate market, where homeowners with weak financial backgrounds got loans they ultimately couldn't afford.

"We have not gone into past recessions with the housing market as weak as it is now, so it is likely that a much higher percentage of delinquencies caused by job losses will go to foreclosure than we have seen in the past," said Jay Brinkmann, MBA's chief economist.

[....]

The number of homes going into foreclosure in 2008 is on track to hit 2.2 million, Brinkmann said.

All I can say is WOW! Just WOW! We are still not at the bottom of this bad housing market.

Foreclosures spiked 25 percent on year-on-year high

We've got more bad news in the housing market. From MSNBC News:

MIAMI - The number of homeowners caught in the wave of foreclosures in October grew 25 percent nationally over the same month in 2007, data released Thursday showed.

More than 279,500 U.S. homes received at least one foreclosure-related notice in October, an increase of 5 percent over September, according to RealtyTrac Inc. One in every 452 housing units received a foreclosure filing, such as a default notice, auction sale notice or bank repossession.

More than 84,000 properties were repossessed in October, RealtyTrac said.

Foreclosure rates grew 25 percent nationally over the same month of October, year-to-year. From MSNBC News.

A nasty brew of strict lending standards, falling home values and a tough economy is filtering through the housing market. By the end of the year, the company expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

The MSNBC story does provide some background information on the U.S. Treasury's $700 billion bailout program for Wall Street, even to the point of Treasury Secretary Henry Paulson saying that the $700 billion will not be used to purchase "troubled bank assets." That is just another phrase for saying all those subprime mortgages and mortgage-backed securities the banks are holding, that are currently underwater. But the interesting aspect about this MSNBC story is what is not said. The Wall Street banks have been using this U.S. Treasury bailout money for bolstering their balance sheets, buying other banks, paying big executive bonuses, and basically hoarding the bailout money. Everything else--except for making loans. The banks are facing huge problems in renegotiating loans--especially the subprime mortgage loans. According to this Yahoo News Buzz story:

Voluntary programs don't work. There are already several voluntary efforts to encourage banks and their customers to renegotiate failing mortgages on their own, such as the HOPE NOW program that regulators cite frequently as a stand-in for a real solution. But voluntary efforts are marginal at best. First of all, most banks are free to rework loans without any government urging at all. The reason they don't--big surprise--is that they often lose money. Even if the government tries to strong-arm the banks, that doesn't eliminate the loss, and CEOs still have shareholder money to safeguard. Telling stockholders that "the government said so" doesn't usually justify poor financial performance.

By the most optimistic assessment, the banking industry is reworking about 200,000 troubled mortgages a month, without government compulsion. That might sound like a lot, except there are about 5 million mortgages in foreclosure or at risk of default. So 200,000 workouts amounts to resolving 4 percent of the problem each month, assuming there are no additional foreclosures. But the economy is getting worse, not better, and intensifying layoffs are going to lead to more problem mortgages, not fewer. In recent testimony before Congress, FDIC Chairman Sheila Bair said that "some of the voluntary efforts have helped, but it has clearly not helped enough. We are falling badly behind."

A homeowner bailout would have millions of moving parts. Bailing out banks requires a lot of money and a very careful strategy, but once the Treasury Department has determined which banks to help, the process is straightforward: The government buys preferred shares in the bank, according to standardized rules. Even if the government invests in 1,000 banks, the procedure should be the same in virtually every case.

It's extremely difficult to establish standardized rules for salvaging individual mortgages. Of the 5 million problem mortgages, the majority have been "securitized," which in many cases means the loan has been carved up into various pieces representing repayment of the principal, say, or the interest payments, and then bundled up with pieces of other mortgages and sold as securities to investors worldwide. Some of those have been resold to other investors or pledged as collateral in other deals. It could take as much work to identify all the investors in a single $300,000 mortgage as it does to execute a $3 billion federal investment in a bank with thousands of customers. Now, multiply that effort by 5 million loans. Wanna manage that program? Neither does Bair or Treasury Secretary Henry Paulson.

Homeowner bailouts could worsen the problem. Even when reworking a loan might help save a home and keep the payments coming, there still might be risks to the bank--especially if it's a local bank that issued a lot of mortgages in a concentrated area. "If you suddenly tell borrowers there's a lower amount due, others may see that and stop paying," says economist James Barth of the Milken Institute. So bailing out one guy might persuade his neighbor to stop making payments, even if he can still afford to, and hope for a better deal instead. That makes banks reluctant to renegotiate in the first place, and when they do, they often ask for concessions that the borrowers reject.

One stipulation of a federal program, for example, is that in exchange for a loan guarantee, the government gets a big chunk of any future appreciation in the house, even if you don't sell for 25 years. But sharing your house with Uncle Sam is a strange proposition, and even distressed borrowers are reluctant to go along with that.

The worst loans are the hardest to track. If banks simply issued mortgages and then held onto them, as in the George Bailey days, the problem wouldn't be so complicated. In fact, the FDIC is already reworking at least 40,000 troubled mortgages at IndyMac, the big California bank it took over in July. When the loan is held by the bank that issued it, there are no downstream investors to consult, and the mortgage is usually still intact. At IndyMac, workout efforts are aggressive, because the FDIC doesn't have shareholders to answer to and it wants to fix the bank's balance sheet as fast as possible.

But the riskiest subprime loans--and especially adjustable-rate subprimes, the most "toxic" of all--aren't typically held by banks. Here's the math, according to recent analysis from the Milken Institute:

-- About 50 percent of all foreclosures involve subprime mortgages.

-- About 68 percent of all subprime mortgages are securitized.

-- About half of all securitized subprime loans are held by private institutions, rather than government-controlled entities like Fannie Mae and Freddie Mac.

That means the majority of the bad loans bringing down the housing market are controlled by the private investors whose greed and carelessness fueled the problem in the first place. And there's nothing an individual borrower can do to control who holds his mortgage. The government could help borrowers by buying up all those bad loans, at enormous expense, then essentially refinancing on terms more favorable to the homeowners. But that would amount to an egregious bailout of some of the shadiest players in the business. Even if taxpayers could stomach that, the downstream investors all have different stakes in the mortgage-backed securities they hold, with no motivation to agree to a single bailout plan. And so far, nobody in Washington has figured out a palatable way to help borrowers without also bailing out the downstream investors holding the securities, at a price the government can afford. Anybody who can solve that conundrum should contact Paulson and Bair immediately.

The big problem here is all of the subprime mortgages that are either partially floating, or are going underwater, in the market. These subprime loans have been chopped up and sold off into mortgage-backed securities to the point where no one really knows what the true value of the mortgage-backed securities are. Furthermore, the big Wall Street firms--such as American Income Group--have purchased and sold collateralize debt obligations based on these subprime mortgages, only to see these CDOs go underwater, forcing the Wall Street firms to cough up huge amounts of money to cover their own losses. The Yahoo Buzz story reports that there is around 5 million problem mortgages in the U.S. now. That is a huge number of problem loans that the banks will be forced to renegotiate. The banks are going to renegotiate these problem loans, only as a last resort.

But, with the banks holding on to a million foreclosed properties, representing almost a third of all properties for sale in the U.S. market, I think the banks are now starting to realize that it may be better to renegotiate these subprime loans in order to keep Americans in their homes, rather than having even more foreclosed homes sitting, unsold, on the banks' balance sheets. Banking executives are promising Congress that they will use the government's bailout money "to assist with rewriting residential mortgages" to American families. Citigroup has offered to ease mortgage terms for 130,000 customers, resulting in "workouts of over $20 billion of loans." And it is not just Citigroup that is modifying their loan packages:

Several of the nation’s largest banks have made similar offers to hundreds of thousands of homeowners with plans that may wind up helping a larger pool of troubled borrowers than the government’s plan to partly guarantee home loans. Roughly 1.5 million homes were in foreclosure at the end of June, the last month for which data is available, and economists expect more borrowers to default in the coming months as unemployment rises and home values fall even more.

JPMorgan Chase, which acquired Washington Mutual and its troubled loan portfolio, announced plans in late October to cut monthly payments by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners. Bank of America, which acquired the large mortgage lender Countrywide Financial, announced a similar program aimed at 400,000 borrowers as part of a settlement with state officials a few weeks earlier. And HSBC ramped up its mortgage modification effort in January, and has adjusted 61,000 mortgages so far this year.

The loan modification programs closely resemble one that the Federal Deposit Insurance Corporation put in place at IndyMac after it took over that bank in mid-July. Citi plans to reduce monthly payments by temporarily reducing loan balances and by cutting interest rates to as low as 1 percent for up to 2 years. The F.D.I.C. has said it may be able to help 47,000 delinquent IndyMac borrowers.

I think the banks are starting to realize just how bad this depressed real estate market is hitting their pocketbooks. They are saddled with a huge number of foreclosed homes that they cannot sell to cover their losses, and are watching these foreclosed homes continue to drop in value. In addition, these banks are sitting on even more subprime home mortgages that are threatening to go into default, forcing the banks to foreclose even more homes on their books--homes that they still cannot sell to cover their mortgage losses. So the banks are being forced with unappetizing choice of either renegotiating the subprime loans for those Americans that are threatening to go under, or to continue to get saddled with more undervalued, foreclosed, homes that they cannot sell in a slumping real estate market.

We may be starting to see the slow beginnings of a real estate turn-around. But such a turn-around will still take years, as the shake-out from the subprime mortgage mess continues.

Feds bail out Fannie Mae and Freddie Mac

It is time to get away from the political news and talk about some economic news. From The New York Times:

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

The drastic effort follows the bailout this year of Bear Stearns, the investment bank, as government officials continue to grapple with how to stem the credit crisis and housing crisis that have hobbled the economy. With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.

Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.

A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.

During the housing bubble heyday, banks and mortgage companies were pushing subprime loans to anyone who wanted them, regardless of credit. These subprime loans were repackaged into mortgage-backed securities to be sold to investors, who, in their incessant greed, felt that the market would forever increase. In other words, there was rampant speculation within the market. But when it became clear that the subprime homeowners could not pay the higher interest costs on their loans, the bubble crashed, banks were left with foreclosed homes that they could not sell to recoup the losses of their subprime loans, and the investors holding the mortgage-backed securities had no clue as to the true value of the homes listed in their securities. Fannie Mae and Freddie Mac control about $5 trillion in mortgages. Central banks and investors holding the $5 trillion are worried that the mortgage giants will not be able to guarantee their securities, backed by the falling home values. It is a snowball effect, tearing through the mortgage industry that issued the subprime loans, the banks putting up the money for the loans and then repackaging them into the investment securities, and finally going through the financial institutions, Fannie Mae and Freddie Mac, in selling these securities to investors.

And now, the U.S. taxpayer is picking up the tab for the incessant greed that led us into this mess.

Gramm resigns from McCain campaign post

After calling Americans a "nation of whiners," and saying that we're all in a "mental recession," it appears that former Senator Phil Gramm is leaving Republican John McCain's presidential campaign. From MSNBC News:

NEW YORK - Former Texas Sen. Phil Gramm resigned Friday from his role as Republican presidential candidate John McCain's campaign co-chairman, hoping to quiet the uproar that followed his comments that Americans had become a "nation of whiners" whose constant complaints about the U.S. economy show they are in a "mental recession."

Gramm, a past presidential candidate, made the remarks more than a week ago. McCain immediately distanced himself from the comments, but they brought a steady stream of criticism just as McCain is trying to show he can help steer the country past its current financial troubles.

Gramm said in a statement late Friday that he is stepping down to "end this distraction."

"It is clear to me that Democrats want to attack me rather than debate Senator McCain on important economic issues facing the country," Gramm said. "That kind of distraction hurts not only Senator McCain's ability to present concrete programs to deal with the country's problems, it hurts the country. To end this distraction and get on with the real debate, I hereby step down as co-chair of the McCain campaign and join the growing number of rank-and-file McCain supporters."

Gramm made the comment to The Washington Times and later explained that he was talking about the nation's leaders not the American people. Democrats claimed at the time that the Gramm comments showed that McCain is out of touch with voters' concerns over high gas prices, the struggling housing industry and the shaky economy in general.

I find it rather humorous that Phil Gramm blames the Democrats for his own "mental recession" statement. Excuse me Senator--you screwed up in admitting your delusions that we are in a mental recession and are a bunch of whiners. Now the story is coming out that YOU hurt the country in tearing down the wall between banking and investment houses, causing this entire home mortgage meltdown. And then you lobby for a big financial company to roll back legislation during the mortgage crisis. From Politico.com:

Gramm’s role in the swift and dramatic recent restructuring of the nation’s investment houses and practices didn’t stop there.

A year after the Gramm-Leach-Bliley Act repealed the old regulations, Swiss Bank UBS gobbled up brokerage house Paine Weber. Two years later, Gramm settled in as a vice chairman of UBS’s new investment banking arm.

Later, he became a major player in its government affairs operation. According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and the Treasury Department about banking and mortgage issues in 2005 and 2006.

During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.

For his work, Gramm and two other lobbyists collected $750,000 in fees from UBS’s American subsidiary. In the past year, UBS has written down more than $18 billion in exposure to subprime loans and other risky securities and is considering cutting as many as 8,000 jobs.

Gramm did not respond to an e-mail and was unavailable for comment, according to a UBS spokesman. The bank has no official position on the subprime crisis, the spokesman said, but is a member of the Financial Services Roundtable and other industry groups that are actively lobbying Congress on the issue.

Now, some housing experts and economists see Gramm’s thinking in the recent housing proposal from McCain, the Republican Party’s presumed presidential nominee. Gramm is often a surrogate for the Arizona senator, particularly in meetings focused on the economy. And McCain has hinted he’d consider the former Texas senator for Treasury secretary in a McCain administration.

Countdown with Keith Olbermann explains further Gramm's connection between his role as a lobbyist for UBS, and how Gramm killed reform legislation for the benefit of UBS and the financial industry. Countdown Part One:



And here is Countdown Part Two:



And John McCain wants to make Phil Gramm his Treasury Secretary in a McCain administration? We do not need either Phil Gramm or John McCain to continue sending this country down the toilet.

Housing continues to be a drag on the U.S. economy

I found a number of MSNBC stories that continue to show the wreaked housing market is continuing to be a drag on the slowing U.S. economy:

Mortgage rates rise to highest level in 7 weeks; Rates on 30-year mortgages continue to remain above 6 percent, making it the highest level in seven weeks. Freddie Mac reported that the 30-year fixed mortgages averaged 6.06 percent for this week, up slightly from 6.03 percent last week. It is interesting to note that while mortgage rates are remaining at above 6 percent, the Federal Reserve cut the federal funds rate down by a quarter point to around 2 percent. This is the lowest level the federal funds rate has been since late 2004. So the Fed is trying to cut the interest rate down to stimulate the economy with more business and consumer investment in order stave off a recession, potentially caused by the housing slump and credit crisis. But the banks have been stung by the credit crisis due to their own excessive lending of subprime and adjustable-rate mortgages to Americans, during the housing boom. These Americans can no longer pay the higher interest rate fees on the subprime mortgages and are forcing the banks to foreclose on these homes. The banks are sitting on a glut of homes that have fallen in value during the bust, and can no longer recoup their own losses. Hence, the banks are keeping home mortgage rates high at above six percent, perhaps as a means of recouping their losses due to the speculation in the housing market.

Home foreclosure rate continues ugly climb; The number of U.S. homes heading toward foreclosure more than doubled in the first quarter of this year. California-based RealityTrack reported that 649,917 homes reported at least one foreclosure-related filing in the first three months of 2008--up 112 percent from 306,722 during the same period last year. Among the hardest hit states were Nevada, Florida, and California. The latest tally also represents an increase of 23 percent from the fourth quarter of 2007. Bottom line here is that the U.S. housing market has not shaken out the excess caused by the subprime mortgage meltdown. There are still too many Americans with subprime mortgages or ARMs that will be going under over the course of this year.

Sales of new U.S. homes plunged in March; The Commerce Department reported that sales of new homes dropped by 8.5 percent in March to a seasonally adjusted annual rate of 526,000 units, the lowest sales pace since October 1991. The median price of a home sold in March dropped 13.3 percent, compared to March 2007.

Existing home sales fell 2 percent in March; The National Association of Realtors reported that sales of existing single-family homes and condos dropped by 2 percent in March to a seasonally adjusted annual rate of 4.93 million units. The median price of a home sold in March was $200,000, a decline of 7.7 percent from a year ago.

A couple of interesting points here about both of these MSNBC stories on the falling sales of both new and existing homes. Both median prices of new and existing homes dropped by a significant percentage--new home prices dropped 13.3 percent while existing home prices dropped 7.7 percent, when both compared to a year ago. Sales of new homes dropped by a significant percentage of 8.5 percent. These are probably newly constructed homes that home builders have probably not been able to find buyers for, and are slashing prices just to get these unsold homes off their books. Existing home sales are those homes that Americans currently own. I would say that these Americans realize that home prices are dropping, and are either pulling their homes off the market, or perhaps converting possible second homes into rental properties until home prices stabilize, or start to increase. Either way, both of these stories show that the housing market is still in the dumps.

Vacant homes for sale hit new record high; The Census Bureau reports that 2.9 percent of U.S. homes--excluding rental properties--were vacant and up for sale, compared with 2.8 percent of homes during the fourth quarter of 2007. This works out to around 2.28 million homes, up from 2.18 million homes during the same quarter of last year. More than likely, these numbers represent the foreclosed homes that the banks are sitting on, of which they can't unload to cover their losses in the subprime mortgage meltdown and credit crisis. And you can bet that the current value of these empty homes have dropped significantly, when compared to the price of the mortgages the banks gave out in selling these homes to Americans during the housing boom. It all goes back to the high 6 percent mortgage rates that banks are refusing to lower in order to cover their losses of these empty, foreclosed homes.

And finally, we have this MSNBC story;

Shiller: Housing slump may exceed Depression;

NEW HAVEN, Conn. - An influential economist who long predicted the housing market bubble cautioned Tuesday that the slump in the U.S. housing market could cause prices to fall more than they did in the Great Depression and bailouts will be needed so millions don’t lose their homes.

Yale University economist Robert Shiller, pioneer of the widely watched Standard & Poor’s/Case-Shiller home price index, said there’s a good chance housing prices will fall further than the 30 percent drop in the historic depression of the 1930s. Home prices nationwide already have dropped 15 percent since their peak in 2006, he said.

“I think there is a scenario that they could be down substantially more,” Shiller said during a speech at the New Haven Lawn Club.

Shiller’s Standard & Poor’s/Case-Shiller home price index is considered a strong measure of home prices because it examines price changes of the same property over time, instead of calculating a median price of homes sold during the month.

[....]

“Basically we’re in uncharted territory,” Shiller said. “It seems we have developed a speculative culture about housing that never existed on a national basis before.”

Uncharted territory....Wow!

Auditor allowed mortgage company to conduct “improper and imprudent practices” during housing boom

This is damning. From The New York Times:

In a sweeping indictment of one of the nation’s largest accounting firms, an investigator released a report on Wednesday that said “improper and imprudent practices” by a once high-flying mortgage company were condoned and enabled by its auditors.

KPMG, one of the Big Four accounting firms, endorsed a move by New Century Financial, a failed mortgage company, to change its accounting practices in a way that allowed the company to report profits, rather than losses, at the height of the housing boom, an independent report commissioned by a division of the Justice Department concluded.

The report is the most comprehensive and damning document that has been released about the failings of a mortgage business. Some of its accusations echo charges that surfaced during the collapse of Enron, the energy giant, which collapsed in accounting fraud almost seven years ago.

The scathing 580-page report documents how New Century lowered its reserves for loans that investors were forcing it to buy back even as such repurchases were surging. Had it not changed its accounting, the company would have reported a loss rather a profit in the second half of 2006.

The profit was important because it allowed executives at the company to earn bonuses and allay concerns that the company was healthy when in fact its business was coming apart, the report contends.

The report is the result of a five-month investigation by Michael J. Missal, a lawyer and former official at the Securities and Exchange Commission hired by the United States Trustee overseeing the New Century bankruptcy. It may allow New Century, which is in bankrutpcy, to sue KPMG.

Just as how Arther Anderson had allowed Enron to hide losses and fabricated earnings through offshore partnerships, creating the huge scandal in the energy trading market, now we have KPMG allowing New Century Financial to change their own accounting principles to report losses as profits, thus allowing company executives to earn big bonuses at the expense of shareholders. KPMG never learned the lessons of the Enron scandal in 2001--they ignored honesty and accountability for the desire of excessive greed and profit. And I bet that the New Century executives knew this in possibly demanding that KPMG allow these accounting changes to take place, or New Century will go to another of the Big Four accounting firms. And since KPMG probably didn't want to lose New Century's business, they would have accepted the changes. In a sense, the system is corrupt.

You can read the text of the report here.

Countdown--McCaint's "Economy of Ideas"

I found this Countdown story on John McCain's big housing speech. It is amazing at how little McCain knows of the U.S. economy--of which McCain even admits his lack of knowledge on the economy. And yet, here he is giving a big speech on the housing crisis in which he is asking for experts to give him ideas on how to solve the crisis. Incredible. From Countdown with Keith Olbermann:

McCain derides Fed's bailout on housing crisis, while housing bust continues on

I've been a little busy for the past two weeks engaged in some serious spring cleaning in the house--we're talking scrubbing everything down. So blogging has been light. But I've been keeping a half eye on the news, and I certainly need to start posting on the news and politics. It seems there is so much in the news today.

But for tonight, I noticed this interesting little contradiction between what is going on with the continuing housing crash, and what Republican presidential candidate John McCain had just said in a speech on the housing market. First let us look at this MSNBC News story about McCain's speech regarding the housing slump:

SANTA ANA, Calif. - Republican John McCain on Tuesday derided government intervention to save and reward banks or small borrowers who behave irresponsibly though he offered few immediate alternatives to fixing the country's growing housing crisis.

"I will consider any and all proposals based on their cost and benefits," the certain GOP presidential nominee, who has acknowledged in the past that the economy is not his strong suit, told local business leaders south of Los Angeles.

[....]

The housing turmoil has rocked Wall Street and is dominating the presidential race as the nation faces an economic downturn and the Federal Reserve has taken steps to intervene.

Over the past two days, the Fed essentially bailed out the investment house Bear Stearns and announced it has auctioned another $50 billion in short-term loans at an interest rate of 2.615 percent to cash-strapped banks to help them overcome credit problems. Since December, the Fed has provided a total of $260 billion in short-term loans to banks.

[....]

McCain said he wants to leave the door open to a wide array of proposals to address the problems and seemed to suggest he might even be open even to solutions that stray from the GOP line.

"I will not play election-year politics with the housing crisis," he said, adding he would evaluate all proposals. "I will not allow dogma to override commonsense."

But the small-government advocate and four-term Arizona senator also put restrictions on how far he was willing to go.

"I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," McCain said. "Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy."

He said any government assistance to alleviate the housing crisis must be temporary and should be accompanied by reforms that aim to make the system more transparent and accountable to prevent a repeat of the crisis. He said no assistance should be given to speculators, or people who bought houses to rent or as second homes.

Asked whether the Federal Reserve went too far in helping Bear Stearns, McCain said: "It's a close call, but I don't think so." He said he doesn't support federal bailouts unless it has catastrophic effects on the entire financial marketplace and there were indications that a Bear Stearns failure would have rippled across the entire economy.

A couple of interesting items regarding McCain's speech. First, McCain contradicts himself, saying that "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers..." But then McCain said that the Federal Reserve did not go too far in bailing out Bear Stearns, and the company's own irresponsible behavior of involving itself too heavily in mortgage-backed securities business during both the housing boom and bust. Excuse me Senator McCain--you have just rewarded Wall Street executives for their own excessive greed and irrational behavior, knowing that if they screwed up (As they have with this subprime mortgage meltdown and the financial companies writing down billions in losses), then the U.S. taxpayer will always bail them out.

Of course, it gets better. Continuing further into the MSNBC story:

McCain also said that people shouldn't be able to buy homes with little or no money down, such as the interest-only loans that banks have given the last few years. Lenders, he said, "should never insure loans when the homeowner clearly does not have skin in the game."

In other words, the Fed should not help out homeowners, who may have been enticed by predatory lending practices, for purchasing homes they could not afford, and are now losing their homes. But it is more important for the Federal government to bail out Wall Street for pre-packaging all those subprime loans into now worthless investment securities.

What do you expect from a Republican?

In more housing bust news, we've got this MSNBC News story, titled Too soon to look for housing market bottom:

Last month’s pick-up in home sales — even as prices kept falling — has some homeowners wondering if the steep housing slump may be coming to an end. But most housing market watchers say the optimism is premature — and that this spring will likely be another washout for the residential real estate market.

“There is no clear bottom yet,” said David Blitzer, chief economist for Standard and Poor’s, which tracks home prices. “We hope it comes soon. But right now it's a hope.”

Home prices, meanwhile, fell 10.7 percent in January compared to a year ago, according to the latest reading of S&P’s Case-Shiller index. Prices were hardest hit in Miami and Las Vegas, where the index fell nearly 20 percent. Of the 20 cities tracked by the index, 13 posted their biggest drops in two decades.

A separate government index showed prices falling 3 percent in January compared to a year ago. That data is derived from a smaller sample of homes with mortgages that conform to the $417,000 limits on loans sold through government housing finance agencies.

Falling prices were clearly a factor in the 2.9 percent gain in existing home sales for February. That uptick has been taken as a sign by some analysts and industry officials that the housing market may be nearing a bottom.

I'm not so sure that housing has hit bottom yet. It is going to take a couple of years to get through all the adjustable-rate mortgage interest resets of the boom, which will increase the number of foreclosed homes that banks are sitting on. And while interest rates may be low, banks are not loaning out money for home buyers unless those buyers have absolute sterling credit and a huge chunk of money for a down payment. In other words, nobody is buying homes now because nobody has any money. This housing bust is going to be a huge drag on the U.S. economy, if Americans are not buying any homes and are not buying products to furnish their homes.

This is not good.

Home foreclosures were up 79 percent higher last year

There is really not much more I can say about this CNBC story, except that the housing market is in a complete mess. From CNBC:

The number of U.S. homes that slipped into some stage of foreclosure in 2007 was 79 percent higher than in the previous year, a real estate tracking company said Tuesday.

Many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year.

About 1.3 million homes received foreclosure-related warnings last year, up from 717,522 in 2006, Irvine-based RealtyTrac said. Foreclosure filings rose 75 percent from the previous year to 2.2 million.

More than 1 percent of all U.S. households were in some phase of the foreclosure process last year, up from about half a percent in 2006, RealtyTrac said.

Nevada, Florida, Michigan and California posted the highest foreclosure rates, the company said.

The story does say that if the economy doesn't deteriorate due to some other unforeseen circumstance, then the bulk of foreclosures, those caused by adjustable-rate mortgages given to borrowers with poor credit, will be exhausted by June of this year. That may be true, but don't expect the housing crash to turn around quickly after June. Banks have almost a years' supply worth of homes on their books, and almost no one to sell those homes with their tightened credit standards--Americans who have seen their homes foreclosed are not going to be on the market soon. I think we're going to see a period where home sales are going to be very slow, with prices dropping significantly, before the demand for housing starts to pick up. I'm thinking the housing slump will last to between two to five years.

New home sales plunge by record amount in 2007

This is from MSNBC News:

WASHINGTON - Sales of new homes plunged by a record amount in 2007 while prices posted the weakest showing in 16 years, demonstrating the troubles builders are facing with a huge backlog of unsold homes.

The Commerce Department reported Monday that sales of new homes dropped by 26.4 percent last year to 774,000. That marked the worst sales year on record, surpassing the old mark of a 23.1 percent plunge in 1980.

The government reported that the median price of a new home barely budged last year, edging up a slight 0.2 percent to $246,900, the poorest showing since prices fell by 2.4 percent during the 1991 housing downturn.

The new report reinforced the view that housing is currently undergoing its worst downturn in more than two decades, with the slump threatening to surpass in some ways the severe housing recession of the early 1980s.

The housing weakness has dragged down overall growth and sent shockwaves through the rest of the economy including the financial sector, which is dealing with billions of dollars in losses in subprime mortgages. Some analysts are worried that the fallout could become so severe it will drag the entire country into a recession.

Nobody has new money to purchase new homes. Those consumers who have purchased homes during the housing bubble are now facing problems with their mortgage payments increasing due to adjustable rate mortgages, and even the declining values of their homes due to falling prices. New housing construction has dropped by almost 25 percent. New home sales have been sliding in November while existing home sales have dropped in December. Home foreclosures have jumped 30 percent in the 3rd quarter of 2007, hitting this nation's real estate market hard. And let us not forget the problems big Wall Street financial firms are having writing down all this subprime debt they have accumulated. This is a huge, long-term problem that the Bush administration has not a clue on resolving, nor do I think that the current crop of presidential candidates can offer solutions. If there is anything that is going to drag this country down into a steep recession, it will be this housing market.

It is just starting.

Bush advisor: Housing crisis may bottom out in six months

I found this little story through Americablog, and went to the source at CNBC:

The drag on the U.S. economy from a deep housing slump should ease by mid-year, paving the way for stronger economic growth, a top White House adviser told CNBC.

"The big drain on the economy for the past year and a half has been housing ... eventually that is going to bottom out and when that bottom outs, even if it doesn't expand, it will remove that negative drag on the economy," White House Council Of Economic Advisers Chairman Edward Lazear said a live interview.

"Housing has been unfortunately a negative and that should stop probably in the next six months," he said.

Lazear said the soft U.S. jobs report released on Friday, which showed non-farm payrolls expanded by just 18,000 last month, was not all bad news.

"The numbers are low, but they're mixed," he said. "We had some good news in the sense that wages were strong. We saw continued wage growth that usually reflects a tight labor market."

The only comment I can say on Lazear's prediction that the housing slump will end in six months is this:



What Lazear is not telling you is that this six-month prediction is a political prediction--six months will bring us into the mid-year of this 2008 presidential election. This is really Bush Happy-Talk--words that will keep the American people ignorant enough of the recession that is now hitting us, until after the 2008 elections, when President Bush can dump this entire economic mess to his successor, and blame the successor for Bush's failed presidency.

Morgan Stanley reports $9.4 billion write-down

This is off The New York Times:

Morgan Stanley reported the first quarterly loss in its 72-year history, heightening fears that the financial toll would keep mounting from the fast-spreading crisis in the subprime mortgage market.

The company took a $9.4 billion charge on subprime-linked investments for the fourth quarter and, in a stark reflection of its diminished status, said it would sell a $5 billion stake to a Chinese investment fund to shore up its capital.

Wall Street banks so far have reported more than $40 billion of losses as a result of the crisis in the mortgage market. Worst-case estimates put the eventual bill at $200 billion or more. The tally is likely to rise again Thursday when Bear Stearns is expected to report a quarterly loss.

The developments on Wednesday mark a stunning turn of events for Morgan Stanley, an offshoot of the Morgan banking dynasty that has counseled corporate America since the Depression. John J. Mack, the bank’s chief executive, said he took full responsibility and would forgo a bonus for 2007.

Again, it is the subprime mortgage loans that were pre-packaged into investment securities that Morgan Stanley, and the rest of Wall Street, were speculating on. Everyone was busy raking in the supposed easy money, not realizing that they were building a house of cards that has now completely crashed. Thus we've got Morgan Stanley reporting a huge loss of $9.4 billion, and this new report of Morgan Stanley selling another $5 billion stake to a Chinese investment firm "to shore up its capital." Did Morgan Stanley sell these subprime mortgage-backed investment securities to this unnamed Chinese investment firm? There is more to this story than what is now being reported.

Going back to the NY Times article:

The drastic losses may heighten speculation about the fate of Mr. Mack, who returned to the firm in 2005 after the removal of his predecessor, Philip J. Purcell. One of Mr. Mack’s signature changes was to push the firm further into trading using its own capital, an effort to emulate its profitable archrival, Goldman Sachs. His strategy worked for a while but then backfired when trades in tricky subprime-linked securities went wrong, resulting in the biggest write-down in the firm’s history.

While Mr. Mack is expected to keep his job, his compensation will plummet — one of the harshest punishments meted out on Wall Street, short of showing an executive the door. Last year, Mr. Mack made $40 million. This year he will take home about $800,000. His paycheck is particularly humiliating since Lloyd C. Blankfein, the chief executive of Goldman Sachs, is likely to receive a $70 million bonus. James E. Cayne, the chief executive of Bear Stearns, is also expected to forgo a bonus.

With all the disgust of Wall Street firms taking big losses while the CEOs are fired wearing golden parachutes, Mack has ended up being the sacrificial CEO scapegoat in losing his parachute as a result of the subprime mortgage mess. I doubt that the rest of the Wall Street CEOs will give up their excessive paycheck as the financial firms continue reporting huge losses.

Now let's get into some details on the Chinese investment firm. From the NY Times:

As for the investment from China, Mr. Mack framed the transaction not as a desperate act but as a strategic move. And he refused to concede that Morgan Stanley was a weakened firm. “We remain bullish on Morgan Stanley’s significant growth potential,” he said.

Still, the investment shows how reliant Morgan Stanley and Wall Street are on foreign funds and gives additional credence to the joke now circulating on trading floors. The joke is: “Shanghai, Dubai, Mumbai or goodbye.”

The fund, the China Investment Corporation, has agreed to purchase almost 10 percent of the company. It will have no role the management of Morgan Stanley. Citigroup recently sold a stake to a Middle East fund.

The deal marks an abrupt shift in strategy for China’s $200 billion sovereign fund and underlines the extent to which it appears to be under the direct control of the country’s leaders.

Morgan Stanley executives first began discussing an investment with the fund this summer, but it wasn’t until recently that the deal was struck. For Morgan Stanley, the terms of the deal are severe. The firm will pay annual interest of 9 percent on bonds that will be convertible into Morgan Stanley stock in 2010.

The China Investment Corporation is under the control of China’s finance ministry, with some influence as well from the People’s Bank of China, the country’s central bank. There has been discussion in the Chinese government over whether even more foreign currency should be injected into the investment fund, as the People’s Bank of China continues to accumulate $1 billion a day as it buys up dollars to prevent the value of China’s currency from rising in international markets.

I wonder if the Chinese were feeling nervous about their own investments into the subprime mortgage-backed securities, or perhaps even their own stake in Morgan Stanley investment funds, and wanted to sell those securities. Morgan Stanley couldn't sell them for the Chinese, precipitating a potential collapse here. Perhaps Morgan Stanley couldn't pay the interest payments to the worthless securities they sold to the China Investment Corporation. Either way, a harsh deal was made against Morgan Stanley, where the firm would have to pay 9 percent interest on the bonds, before they will be converted into Morgan Stanley stock in 2010. What is especially scary here is how many other Wall Street firms are also feeling such heat coming from the Chinese dragon?

Barclays to write down $2.7 billion on subprime lending

Well, it appears that the subprime mortgage mess has hit another big bank. From Marketwatch:

LONDON (MarketWatch) -- Britain's Barclays on Thursday became the latest bank to disclose write-downs from subprime lending and the related credit crunch, taking a charge of 1.3 billion pounds ($2.7 billion), a far lower provision that rumors in the markets had suggested.

From July to October, the bank's Barclays Capital investment-banking division will take write-offs and charges stemming from a combination of the impact of rating agency downgrades on a broad range of collateralized debt obligations and the subsequent market downturn, the bank said.

Bob Diamond, president of Barclays Capital, said the write-down calculations were "conservative," and outside observers largely agreed.

"This looks as close to the kitchen sink as managements are allowed to go in the IFRS (accounting rules) era," said Alex Potter, an analyst at U.K. brokerage Collins Stewart.

In the update, brought forward by two weeks, Barclays says it still has 7.3 billion pounds of exposure from unsold underwriting positions in leveraged finance and 19 billion pounds of exposure to its own, on-balance-sheet conduits. Barclays said those conduits have been able to fund themselves through issuing commercial paper.

Now the current exchange rate reports that one British pound equals $2.0483 U.S. dollars. This means that the 7.3 billion British pounds that Barclays had exposed in unsold underwriting positions equals $14.952 billion in U.S. dollars. I'm not sure if Barclays is overexposed on these unsold underwriting positions, but if the number of American home foreclosures continue to increase due to the shifting of higher interest rates on adjustable-rate mortgages, then I'm guessing that Barclays will be reporting even more losses and write-downs over the next year or so.

There is another interesting detail in this Marketwatch story:

The update goes some way to soothe rattled investor nerves over Barclays' exposure. The U.K. bank had been seen as particularly at risk since it originated many of the structured vehicles that are now encountering difficulties. It also had exposure through the purchase in March of Equifirst, a U.S. subprime lender.

Now in August, 2007, Equifirst reported that they will cut an unspecified number of jobs out of the 1,400 people employed in the North Carolina firm. Barclays purchased Equifirst in April, 2007 for $76 million--right at the point when the subprime mortgage industry was starting to collapse due to the rise in delinquencies. Barclays originally agreed to purchase Equifirst from Regions Financial Corp. for $225 million back in January 2007. Barclays may have wanted to get into the subprime housing bubble back in January 2007, and offered Regions Financial a fat price for Equifirst. But as the housing market started slowing, Barclays may have had second thoughts on the deal, or Regions Financial may have needed the money from the sale quickly, so the deal was renegotiated for $76 million. Now Barclays may be sitting on a subprime mortgage lender with billions in subprime loans that will need to be written off as losses.

One third of Americans worried about homelessness

This MSNBC story really speaks for itself, when you consider just how bad this housing bust and subprime mortgage mess is wreaking the U.S. economy. From MSNBC News:

WASHINGTON - Nearly a third of Americans have at one point worried about becoming homeless and many more are taking in friends and relatives needing a home, a survey found.

The homelessness issue has touched more than those who are living on the streets, according to a Gallup poll released Wednesday.

"People are worried even though it might not ever happen to them," said Michael Stoops, acting executive director of the Washington-based National Coalition for the Homeless. "When people read the news and read about bankruptcies, home foreclosures and auto plants being closed, they worry that they may be next."

Overwhelmingly, those polled — 92 percent — said more effort is needed across the nation to address the issue of homelessness. Thirty-five percent said the federal government should take a lead role fighting homelessness, while 25 percent identified state governments as most responsible for addressing the issue.

"It is clear from this poll that Americans are very concerned about homelessness and do not feel enough is being done to address this critical issue," said Stacey Stewart, senior vice president of the Office of Community and Charitable Giving at Fannie Mae.

Twenty-eight percent said they were concerned at one time about becoming homeless. A greater percentage, 44 percent, said they had opened their own homes to a friend or relative who faced being forced onto the streets.

The poll was conducted on behalf of mortgage giant Fannie Mae, which has grant programs that provide funding for low-income housing.

Now the MSNBC story reports that 58 percent of respondents think that the number of homeless are increasing, over that of ten years ago. However, statistics from the Department of Housing and Urban Development show a decline in the number of chronically homeless by 12 percent from 2005 to 2006, or from 175,900 to 155,600. Chronically homeless are described as continuously living on the streets for a hear, while homeless is described as living on the streets for at least four times in the past three years. HUD estimated that there were at least 754,000 homeless people in 2005. So what we're seeing here is that Americans are more fearful of becoming homeless, as they continue to be exposed to the media reports of the housing bust, the subprime mortgage mess, bankruptcies, and home foreclosures. What is more, the 44 percent of Americans who took in family and friends to their homes, who were forced on the streets, reinforces this notion that the number of homeless are rising, and increases Americans demands that the government take action in fighting homelessness. I believe that home foreclosures will continue to increase in 2008--right into the election year. Homelessness will become another big election year issue, and perhaps even a serious criticism against the Bush administration and the Republican Party if nothing is done to politically resolve the issue.

Wachovia loses $1.1 billion in securities due to housing crash

This is from MSNBC News:

NEW YORK - Another day, more writedowns on Wall Street.

Wachovia Corp. on Friday became the latest major financial institution to warn of mounting losses in the credit markets, saying the value of securities it owns that are backed by loans sank by about $1.1 billion in October.

The nation's fourth largest banking company also said it plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in the housing market in certain regions. The provision is pegged at $500 million to $600 million in excess of charge-offs in the quarter.

Wachovia shares dropped 45 cents to $39.85 in afternoon trading Friday after sinking earlier in the day to a 52-week low of $38.05.

The news heightened fears that the fallout from the subprime turmoil is spreading deeper into credit markets. It also raised questions about the bank's 2006 acquisition of adjustable-rate mortgage lender Golden West Financial Corp. of Oakland, Calif.

Wachovia is now the latest bank to get hit with the subprime mortgage crash. And since Wachovia bought out Golden West Financial, you have to wonder how much of Wachovia's loses are due to it acquisition of Golden West. Or has Golden West even disclosed their own investment position in the subprime mortgage market? How much has Golden West lost in the mortgage market?

Morgan Stanley to write down $2.5 billion

This is off The New York Times:

NEW YORK (AP) -- Morgan Stanley said Wednesday its fourth-quarter profit will be reduced by $2.5 billion in write-downs related to the ongoing credit crisis, making it the latest Wall Street investment house to admit massive losses.

The nation's No. 2 investment bank, whose shares have sagged this week on speculation it might announce a sizable write-off, said it could lose up to $6 billion if all subprime mortgage-related investments were to go bad.

So far this year, financial institutions have already suffered an estimated $55 billion of losses following a sharp increase in U.S. mortgage defaults that caused investors to avoid any securities deemed too risky.

Losses at Merrill Lynch & Co. and Citigroup Inc. caused the ouster of both their chief executives, and analysts predict more pain is in store for the financial sector.

So Morgan Stanley is taking a $2.5 billion dollar write-down due to the mortgage mess, and the losses could go as high as $6 billion. I wonder what financial institution will be next to report losses in the mortgage meltdown?

Dow drops more than 360 points

This is off The New York Times:

A bad day on Wall Street got even rougher late in the session today as the Dow Jones industrials closed down more than 360 points, a sell-off set in motion by a weak earnings report from the oil giant Exxon Mobil and concern that Citigroup’s woes may be worsening.

The Dow, down 200 points through much of the day, finished at 13,567.87, a loss of 362.14, or 2.6 percent, erasing gains from yesterday’s decision by the Federal Reserve to cut interest rates.

The Standard and Poor’s 500-stock index dipped 2.6 percent as well, or 40.94 points, to 1,508.44. The technology-heavy Nasdaq composite was down 2.25 percent.

Profit-taking and uncertainty overtook the commodities markets as well. Crude oil, which had surged over 4 percent to record levels in the past week, fell $1.04 to $93.49. The dollar, which was expected to weaken further after the Fed’s rate cut, rebounded against the euro.

A report that consumer spending slowed in September reinforced analysts’ concerns about a broad slowdown in the fourth quarter economy, spurred by surging energy costs and a recession in the housing market.

“People are getting nervous looking to the holiday season,” said Anthony Conroy, head equity trader at BNY ConvergEx Group. “Discretionary income is going to be a little bit less. People are going to be spending less because they’re paying more for oil and mortgage payments there.”

Again, it is the rising oil and gas prices, and the mortgage meltdown that has created this volatility in the stock market. In this case, it was Citigroup, which was hit with a stock downgrade after the bank wrote down $5.9 billion in assets in the third quarter after losses stemming from both "mortgage-backed securities and bad bets on asset backed commercial paper." In other words, Citygroup bought into the mortgage-backed securities, which were nothing more than the predatory adjustable-rate loans on on over-priced houses during the height of the housing boom. Now that the interest rates on the adjustable-rate loans have increased, Americans can't pay the interest on their loans, and have foreclosed. Citygroup is sitting on practically worthless paper now. Their securities are backed by the mortgages, and ultimately the foreclosed homes. But Citygroup cannot determine the value of the over-priced, foreclosed homes, since the bank will have trouble trying to sell the homes in a market that is both flooded with almost a year's supply of housing for sale, and other banks are trying to sell their own foreclosed homes to recoup their own losses. And it is not just Citygroup that is sitting on these worthless homes. Credit Suisse Group reported a $1.9 billion in write-downs and 31 percent drop in net profit. GMAC Financing is also reporting a $1.6 billion third-quarter loss due to the sub-prime mortgage mess. And finally shares of American International Group have fallen 5.6 percent to $59.57 a share, due to rumors of third-quarter losses because of the subprime mortgage mess. Shares of Citygroup stock fell nearly 7 percent to $38.51 per share. Now I'm giving a rather simplistic explanation here, but it shows the the real problems that are occurring within the financial markets, and how this subprime mortgage mess is causing havoc within the financials and with the economy as a whole. And I think it will continue for the next couple of years. First, we have to get through the entire interest rate adjustments, and interest-only loans that Americans took out the last couple of years. The interest rates on the ARMs will have to be adjusted, and Americans who can't afford to pay those loans, will have their homes foreclosed by the banks. Then the banks are going to be forced to sell those foreclosed homes in a glut market, while also tightening credit standards for Americans who want to purchase homes. And since we have a glut of homes on the market, you can be that the prices of homes are going to drop, causing these banks to write off even more losses. It is a completely screwed up system.

Home ownership declines in longest slide since 1981

This is off Bloomberg.com:

Oct. 26 (Bloomberg) -- Homeownership in the U.S. dropped for a fourth consecutive quarter, the longest decline since at least 1981, suggesting more Americans will miss their best chance of building wealth.

The proportion of households that own their residences fell to 68.1 percent in the July-September period from 68.3 percent in the prior three months, according to a report today from the Census Bureau in Washington, whose comparable records go back to 1981. The rate has been declining from a peak in 2004, which culminated a decade of gains fueled by easier lending standards and rising home purchases by immigrants and younger households.

``Owning a home in this country has been a principal source of wealth creation for low- and moderate-income people,'' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. ``In the absence of home equity, families will inevitably spend less.''

[....]

The Census Bureau report also found that a record 17.9 million U.S. homes stood empty in the third quarter as lenders took possession of a growing number of properties in foreclosure.

The figure is a 7.8 percent gain from a year ago, when 16.6 million properties were vacant, the Census Bureau said. About 2.07 million empty homes were for sale, compared with 1.94 million a year earlier, the report said.

Slowing residential construction has detracted from growth in gross domestic product for the last six quarters through June, shaving as much as 1.3 percentage point off growth in the third quarter of 2006, when the overall economy grew at just a 1.1 percent pace. Most economists forecast an extended construction drag on growth after credit tightened further in August amid subprime-market turmoil.

``If homeownership declines significantly, the implications for new-home sales could be dramatic,'' said Hatzius. With further weakness in sales, ``the drag from new-home building on GDP growth will last longer than most people have in their forecasts, perhaps, if things go badly, into 2009.''

Read this sentence again--The Census Bureau report also found that a record 17.9 million U.S. homes stood empty in the third quarter as lenders took possession of a growing number of properties in foreclosure. Is it any wonder that U.S. home ownership has had its longest slide since 1981? Subprime and predatory lending certainly fueled the increased demand in housing, and the rise in prices. The problem is that this speculation can only go so far--what goes boom, can certainly go bust. And with the increase in interest rates on the adjustable rate mortgages, those new American homeowners discovered they could not keep up with their increased mortgage payments, thus have been forced to foreclose on their homes. Banks are now stuck with a glut of empty homes on the market, where their values have been dropping below what the banks have lent out for mortgages--look at how the bank and mortgage companies are reporting big loses. Countrywide Financial reported a $1.2 billion dollar loss. Merrill Lynch reported a $7.9 billion dollar write-down. Washington Mutual reported its third-quarter profit shrank by 72 percent, and Citygroup suffered a 57 percent drop in third quarter profits as they took a $3 billion hit in losses. All of these loses are the result of the mortgage mess. And we're still not out of this housing mess.