Foreclosure filings up 120%

There were 220,000 homes lost to bank repossessions in the second quarter, and the annual forecast for 2008 will have to be revised upward.

By Les Christie, CNNMoney.com staff writer

July 25, 2008: 5:09 AM EDT

NEW YORK (CNNMoney.com) -- Foreclosures continue to soar, with 220,000 homes lost to bank repossessions in the second quarter of this year, according to the latest statistics from RealtyTrac, an online marketer of foreclosed homes. That's nearly triple the number from the same period in 2007.

There were a total of 739,714 foreclosure filings recorded during that three month period, up 14% from the first quarter, and up a whopping 121% from the same period in 2007. That means that out of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

"Most areas of the country are seeing at least some increase in foreclosure activity," said RealtyTrac CEO James Saccadic. "Forty-eight of 50 states and 95 out of the nation's 100 largest metro areas experienced year-over-year increases in foreclosure activity."

Because foreclosure filings are growing so quickly, RealtyTrac will have to reevaluate its foreclosure forecast for the year, according to spokesman Rick Sharga.

"We've been saying foreclosures will total 1.9 million to 2 million this year," he said. "But midway through the year, we're already at 1.4 million so we're going to be raising our projections."

And there is more bad news: Bank repossessions are up as a proportion of total filings, representing 30% of the notices issued during the quarter, up from 24% a year ago.

"I don't think that's a surprise if you look at the general conditions out there," said Brian Bethune, chief financial economist for Global Insight. "There have been six straight moves of weaker employment this year. The ongoing problems in the housing market are compounded by a generally weaker economy. Foreclosures won't go down until we start to see employment move up again."

Sun Belt front and center

California's Central Valley remains ground zero for foreclosure filings. Stockton, which is just east of San Francisco, had the highest rate of foreclosure filings of any metro area, one for every 25 homes. That's seven times the national average.

Riverside/San Bernardino, which is east of Los Angeles, had the second highest rate in the nation with one filing for every 32 households. Las Vegas, Bakersfield and Sacramento rounded out the top five.

Detroit continued to suffer more than any other non-Sun Belt area, with one filing for every 66 households. And several Ohio cities were also hard hit, led by Toledo (one in 92 households), Akron (one in 93) and Cleveland (one in 108).

On the other hand, there were a handful of metro areas that remained relatively unscathed. Honolulu, at one filing for every 1,331 households had the lowest rate of all, followed by Allentown, Penn. (one for every 972) and Syracuse, NY (one for every 880).

At the state level, Nevada had the highest rate with one filing for every 43 households, while California had the highest total number of filings - 202,599.

The report came as more negative news for the housing market this week. On Thursday, a report form the National Association of Realtors revealed that existing home sales had declined again as the number of homes for sale continued to rise. On Tuesday, a government agency reported home prices registered another drop in May.

All this is happening as Congress struggles to pass a housing rescue bill that will make FHA-insured loans available to many at-risk borrowers. That bill, even if signed this week, will not take effect until October.

One of the sponsors of the bill, Barney Frank (D -- Mass.), released a statement on Thursday in which he encourages lenders and mortgage servicers to delay taking action against delinquent borrowers before the new law takes effect.

"I am urging the mortgage servicers to hold off on foreclosures in applicable cases," he said, "so borrowers can take advantage of the program."

Bad Move, says Jim Rogers

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent and lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17. Freddie Mac fell 64 cents, or 8.3 percent, to $7.11 in New York Stock Exchange trading, while Fannie Mae fell 52 cents, or 5.1 percent, to $9.73.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.

`Solvency Crisis'

Billionaire investor Soros said today that Fannie Mae and Freddie Mac face a ``solvency crisis,'' not a liquidity one, and that their troubles won't be the last financial disruption, Reuters reported.

``This is a very serious financial crisis and it is the most serious financial crisis of our lifetime,'' Soros told Reuters in a telephone interview. ``It is an idle dream to think that you could have this kind of crisis without the real economy being affected.''

`Going Bankrupt'

Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''

Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

The Federal Reserve separately authorized the firms to borrow directly from the central bank.

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.

Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''

Thanks a lot

July 11, 2008

U.S. Weighs Takeover of Two Mortgage Giants

By STEPHEN LABATON and STEVEN R. WEISMAN

WASHINGTON — Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

The officials also said that such a step would be ineffective because the markets already widely accept that the government stands behind the companies.

The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation. But in recent days, enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans.

A conservatorship or other rescue operation would be the second time in four months that the Bush administration has stepped in to engineer a rescue to prevent the financial system from collapsing. Last March, it forced the sale of Bear Stearns to JPMorgan Chase to avert a bankruptcy of that venerable investment house.

Officials have also been concerned that the difficulties of the two companies, if not fixed, could damage economies worldwide. The securities of Fannie and Freddie are held by numerous overseas financial institutions, central banks and investors.

Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.

The markets showed fresh signs on Thursday of being nervous about the future of the companies. Their stock prices continued a weeklong slide, hitting their lowest level in 17 years. The debt markets, meanwhile, pushed up the two companies’ cost of borrowing — their lifeblood for buying mortgages.

The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books.

Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds.

In recent weeks, the companies have spiraled downward, undermined by declining confidence in their future and shaken by sharp declines in their assets as the housing markets have continued to slide and foreclosures have risen.

In the last week alone, Freddie has lost 45 percent of its value, and Fannie is off 30 percent. Expectations of default at the companies have also risen; it costs three times as much today to buy insurance on a two-year Fannie bond as it did three years ago.

Analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional shares, which would dilute their value for current shareholders.

Despite repeated assurances from regulators about the financial soundness of the two institutions, financial markets have concluded that by some measures they are deeply troubled.

Freddie, for instance, is technically insolvent under fair value accounting rules, in which the company puts a market value on assets as if it had to sell them now.

Although Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the chairman of the Federal Reserve, passed up invitations by lawmakers on Thursday to seek legislation to deal with the crisis, officials said that the administration had been privately considering a government takeover should the markets continue to turn against the companies.

At a hearing of the House Financial Services Committee on Thursday, both Mr. Paulson and Mr. Bernanke were guarded, carefully trying not to say anything that could further erode confidence in Fannie and Freddie. They both said that the regulator of Fannie and Freddie had found that they were, in the words of Mr. Paulson, “adequately capitalized,” meaning that they had sufficient cash and other assets to withstand the turbulence in the markets.

“Fannie Mae and Freddie Mac are also working through this challenging period,” Mr. Paulson said.

Neither official would address a question posed by Representative Dennis Moore, Democrat of Kansas, who asked whether the failure of either institution would pose a risk to the financial system.

“In today’s world I don’t think it is helpful to speculate about any financial institution and systemic risk,” Mr. Paulson said. “I’m dealing with the here and now, and the important role that they’re playing and other financial institutions are playing.”

Mr. Bernanke said that Fannie and Freddie “are well-capitalized in the regulatory sense” but added that they, and other major financial institutions, needed to raise their capital levels further.

Despite repeated denials by officials in the Bush and prior administrations, financial markets have long assumed the government would stand behind Fannie Mae and Freddie Mac in times of difficulty, both because they are integral to the housing and financial markets and because the companies have a line of credit to the Treasury.

But Congress set that credit more than 38 years ago, long before the companies rose to such size and prominence, and its limit, $2.25 billion for each, has become a tiny fraction of the companies’ overall debt.

Some analysts have begun to propose that the Fed also permit the two companies to borrow from it, as Wall Street investment banks began doing after the rescue of Bear Stearns. But there is no indication that the Fed is contemplating such a move.

On Thursday, the rapid sell-off of shares of Fannie Mae and Freddie Mac came after a former central banker made comments that the companies might not be solvent, and an analyst at UBS issued a report critical of Freddie Mac.

The turmoil also shook the debt of the companies, with one main measure indicating that their cost of borrowing has risen to the highest level since mid-March, when the government rescued Bear Stearns. Throughout the day, senior officials sought to reassure the markets about the financial health of Fannie and Freddie.

Later in the afternoon, James B. Lockhart, the regulator who oversees the two companies, issued a statement that his agency was carefully watching the companies’ “credit and capital positions” and said that they were adequate to get through the current turmoil.

Fannie Mae issued a statement saying that it remained financially strong.

“Our company has raised more than $14 billion in capital since November 2007, including $7.4 billion most recently in May,” the company said. “As our regulator has stated, and has reiterated in public statements this week, we are adequately capitalized.”

Sharon McHale, vice president for public relations at Freddie Mac, said: “Our regulator has emphasized that we have continued to maintain the highest capital rating, and we are in the market every day. We’ll continue to do so.”

Shares of Freddie Mac plunged more than 30 percent and Fannie Mae’s more than 20 percent in the first hour of trading on Thursday. By the close of trading, Fannie shares had fallen nearly 14 percent, and Freddie shares had dropped 22 percent. It was the second straight day of declines for the companies.

While their stocks trade on the New York Stock Exchange, Congress created the two companies to promote housing, and the marketplace has long come to believe that they would be bailed out should they become insolvent. They hold a far lower level of capital than banks do. In recent years, they have both suffered from accounting scandals and management shake-ups.

Neither Mr. Paulson nor Mr. Bernanke, at the hearing on Thursday, would answer a question about whether Congress needs to give the regulators more tools to deal with the possible insolvency at either company.

“I don’t think we should be speculating or talking about what-if’s with any particular institutions, and so with Fannie or Freddie, what I’m emphasizing is that the tool that I want is the reform and the reform legislation that would inject confidence into the marketplace,” Mr. Paulson said, referring to a measure that would revamp the oversight of the companies.

The problems of the two companies spilled onto the campaign trail on Thursday when Senator John McCain, the presumptive Republican nominee for president, said he supported federal intervention to save Fannie or Freddie from collapsing.

“Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail,” Mr. McCain said during a stop at the Senate Coney Island Restaurant in Livonia, Mich. “They are vital to Americans’ ability to own their own homes. And we will do what’s necessary to make sure that they continue that function.”

Jason Furman, the economic policy director for the Democratic presidential campaign of Senator Barack Obama of Illinois, said that Mr. Obama “believes the Bush administration’s willful neglect of warning signs in housing, in financial markets and in the job market, have compromised the nation’s housing finance system.”

“The challenges facing Fannie and Freddie are part of the broader weakness in our economy,” Mr. Furman said.

Senator Charles E. Schumer, Democrat of New York and chairman of the Joint Economic Committee, said that the markets should rest assured that the mortgage giants have a “federal lifeline” and would not be allowed to fail — though he said he thought a government rescue would not be needed and should be a last resort.

The Fat Lady is warming up

July 10 (Bloomberg) -- U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions almost tripled as deteriorating property values and higher payments on adjustable mortgages forced more people to give up their homes.

More than 252,000 properties, or one in every 501 U.S. households, were in some stage of foreclosure, RealtyTrac Inc., an Irvine, California-based seller of default data, said today in a statement. Nevada, California and Arizona had the highest foreclosure rates.

``The foreclosure problem is getting worse and will stay with us well into the next decade,'' Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, said in an interview. ``The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you've got negative equity, and you're more likely to give up your house if you're deeply underwater.''

About $3.5 trillion in homeowner equity has been wiped out since the spring of 2006, when housing prices were at their peak, Zandi said. Home prices fell the most on record in April, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas. June was the second straight month in which more than a quarter million properties received foreclosure filings, RealtyTrac said. Filings fell 3 percent from May.

`Faster Pace'

``The year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle,'' James Saccacio, chief executive officer of RealtyTrac, said in the statement. Bank repossessions, which increased 171 percent in June, are rising at a ``much faster pace'' than default notices and auction notices, he said.

About 53 percent of borrowers with subprime loans, those with poor or incomplete credit histories, will have negative equity in their homes at the end of the year, and the number will rise to 63 percent in 2009, New York-based analysts at Credit Suisse led by Rod Dubitsky said in an April 23 report.

Rising mortgage defaults and auctions of foreclosed properties are adding to a glut of unsold homes and prolonging the deepest housing slump since the 1930s. Efforts by the U.S. Congress to insure as much as $300 billion in refinanced mortgages and save up to 2 million borrowers from foreclosure can work only by ``slowing down or reversing home price declines and equity deterioration,'' Credit Suisse said.

Nevada had the highest foreclosure rate for the 18th consecutive month. One in every 122 households was in some stage of foreclosure, more than four times the national average, and 3,133 properties in the state were seized by lenders, said RealtyTrac. The company has a database of more than 1.5 million properties and monitors foreclosure filings including default notices, auction notices and bank seizures.

California, Arizona

California ranked second, with one filing for every 192 households, 2.6 times the national average, and had 20,624 properties seized by banks. Arizona ranked third at one in 201 households, almost 2.5 times the national average, and had 4,297 bank seizures.

Florida, Michigan, Ohio, Colorado, Georgia, Indiana and Utah also ranked among the 10 states with the highest foreclosure rates.

California had seven of the 10 U.S. metro areas with the highest rates, including the top three. Stockton, in the state's central valley, was first with one in every 72 households in a stage of foreclosure, followed by Merced, about 110 miles east of San Francisco, with one in 77 households, and Modesto, near the Sierra Nevada mountains, with one in 86 households. Riverside-San Bernardino ranked fifth, Vallejo-Fairfield was seventh, Bakersfield was eighth and Salinas-Monterey was tenth.

`Beyond the Sprawl'

``The housing beyond the sprawl is going to suffer another serious leg down because of high oil prices,'' Peter Navarro, professor of economics and public policy at the University of California at Irvine, said in an interview. ``A lot of people went out there to get cheaper homes, but this is going to take a big bite out of their mortgage.''

Cape Coral-Fort Myers and Fort Lauderdale, Florida, ranked fourth and ninth, respectively, and Las Vegas was sixth among metro areas with the 10 highest foreclosure rates.

California had the most total filings for the 18th consecutive month, increasing 77 percent in June from a year earlier to 68,666. Florida was second at 40,351 filings, an increase of 92 percent, and Ohio was third at 13,194, an increase of 11 percent.

New York filings increased 22 percent from a year earlier to 5,367, with one in every 1,473 households in a stage of foreclosure, the 32nd highest rate.

New Jersey filings rose 5 percent. The state had one in every 695 households in a stage of foreclosure, the 14th highest rate.

FBI Announces Mortgage Probe

Posted By: Michael King

Reported By: Kevin Rowson

ATLANTA -- Federal agents are calling Metro Atlanta, but for all the wrong reasons. When it comes to mortgage fraud, you have a good chance of becoming a victim in Georgia.

In Washington, the FBI announced Operation Malicious Mortgage -- which has already made several hundred arrests.

Atlanta was the number one area in the country for mortgage fraud a few years ago. Today it is number six, but that is still not good enough as local FBI officials announced on Thursday.

The FBI in Atlanta has arrested more than 60 people in the past four years -- over 100 have been prosecuted in Atlanta's federal courts.

You've seen the sketches, you've seen the neighborhoods torn apart by over-inflated homes.

"We've had whole neighborhoods of all kinds from inner city low income neighborhoods to the nicest golf course gated communities just be devastated by mortgage fraud," said US Attorney David Nahmias.

On Wednesday, seven arrests were made in a mortgage fraud scheme that gutted a $3 million condo complex in DeKalb County.

The people who rent there and the people who live in any neighborhood racked by fraud are the immediate victims. The FBI says the problem is growing, and so are their efforts to stop it.

"Efforts are underway to redirect investigative resources within the FBI to the named cities most dramatically impacted by this and to secure additional resources in the upcoming budgets," said FBI Special Agent In Charge Greg Jones.

The people involved in mortgage fraud range from straw buyers to closing attorneys to brokers to appraisers to loan officers and real estate agents. What they are slowly learning is that the penalties can be a deterrant -- as much as 30 years in federal prison.

"That's more time than Bernie Evers got for Worldcom or Jeff Skilling got for Enron," Jones said. "And that word got out in the legal community and we think it has some effect that deter people in these schemes."

worldwide

---

April 14, 2008

Housing Woes in U.S. Spread Around Globe

By MARK LANDLER

DUBLIN — The collapse of the housing bubble in the United States is mutating into a global phenomenon, with real estate prices swooning from the Irish countryside and the Spanish coast to Baltic seaports and even parts of northern India.

This synchronized global slowdown, which has become increasingly stark in recent months, is hobbling economic growth worldwide, affecting not just homes but jobs as well.

In Ireland, Spain, Britain and elsewhere, housing markets that soared over the last decade are falling back to earth. Property analysts predict that some countries, like this one, will face an even more wrenching adjustment than that of the United States, including the possibility that the downturn could become a wholesale collapse.

To some extent, the world’s problems are a result of American contagion. As home financing and credit tightens in response to the crisis that began in the subprime mortgage market, analysts worry that other countries could suffer the mortgage defaults and foreclosures that have afflicted California, Florida and other states.

Citing the reverberations of the American housing bust and credit squeeze, the International Monetary Fund last Wednesday cut its forecast for global economic growth this year and warned that the malaise could extend into 2009.

“The problems in the U.S. are being transmitted to Europe,” said Michael Ball, professor of urban and property economics at the University of Reading in Britain, who studies housing prices. “What’s happening now is an awful lot more grief than we expected.”

For countries like Ireland, where prices were even more inflated than in the United States, it has been a painful education, as homeowners learn the American vocabulary of misery.

“We know we’re already in negative equity,” said Emma Linnane, a 31-year-old university administrator.

She bought a cozy, one-bedroom apartment in the Dublin suburbs with her fiancé, Paul Colgan, in May 2006, at the peak of the market. They paid $575,000 — at least $100,000 more than it would fetch today. “I sometimes get shivers thinking about it,” Ms. Linnane said, “but I’ll let the reality hit me when I go to sell it.”

That reality is spreading. Once-sizzling housing markets in Eastern Europe and the Baltic states are cooling rapidly, as nervous Western Europeans stop buying investment properties in Warsaw, Tallinn, Estonia and other real estate Klondikes.

Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop.

In New Delhi and other parts of northern India, prices have fallen 20 percent over the last year. Sanjay Dutt, an executive director in the Mumbai office of Cushman & Wakefield, the real estate firm, describes it as an erosion of confidence.

Much of the retrenchment seems to be following the basic law of gravity: what goes up must come down. With low interest rates helping to inflate housing bubbles in many countries, economists said the confluence of falling prices was predictable, if unsettling.

This is not the first housing downturn to cross borders, but its reverberations have been amplified by the integration of financial markets. When faulty American mortgages end up on the books of European banks, the problems of the United States aggravate the world’s problems.

Consider Britain, which had one of Europe’s most robust housing markets, with less of an oversupply than in Ireland or Spain. Then last summer came the subprime crisis across the Atlantic.

Within two months, mortgage approvals dropped 31 percent, compared with the previous year. And by March, average housing prices had fallen 2.5 percent, the largest monthly decline since 1992.

“The boom in house prices was actually much bigger here than in the U.S.,” said Kelvin Davidson, an economist at Capital Economics in London. “If anything, people should be more worried than in the U.S.”

Britain has one of the most developed home-financing industries, not far behind that of the United States. The amount of outstanding mortgage debt, as a share of total economic output, is higher there than in the United States, according to a study by the International Monetary Fund.

“The U.K. followed the U.S. into never-never land, pushing mortgages out the door, believing that prices would go up forever,” said Allan Saunderson, the managing editor of Property Finance Europe, a newsletter for investors.

Still, the problems in Britain pale next to those of Spain and Ireland. Residential investment accounts for 12 percent of the Irish economy and 9 percent of the Spanish economy, compared with 5 percent in Britain and 4 percent in the United States, according to the I.M.F.

The glut of housing has brought new construction to a standstill, driving up unemployment and dimming the prospects for two of Europe’s stellar performers over the last decade.

“We’re waking up from the property dream and finding ourselves in a situation where prices are falling in Spain for the first time,” said Fernando Encinar, a founder of Idealista.com, a real estate Web site.

In Spain, more than four million homes were built in the last decade, more than in Germany, Britain and France combined. Average house prices tripled in parts of the country, as Spain’s torrid economy attracted immigrants and Northern Europeans snapped up holiday homes along the Costa del Sol.

Now, though, thousands of those houses stand empty. The I.M.F. estimates that property is overvalued by more than 15 percent. With mortgages drying up and prices swooning, speculators who once viewed Spanish property as a no-lose proposition are confronting hard reality.

In 2005, Julian Felipe Fernandez bought three small apartments, as an investment, in a huge development being built outside Madrid. He paid 100,000 euros as a deposit for the units, and now he is eager to sell them to avoid having to taking on a costly mortgage. But with the market stalled, Mr. Fernandez’s asking price is what he paid for them.

“Three years ago, it looked like I would be able to flip them for a nice profit before they were finished,” he said. “I just want to get them off my hands, to get rid of this headache.”

If he unloads them, he will be lucky. Enric Bueno, head of marketing for Ibusa, a real estate company in Barcelona, said his firm was closing six or seven sales a month, compared with 40 a month a year ago.

“Things are really bad,” Mr. Bueno said. “If this goes on for five years, we won’t make it.”

Economists have been busy cutting their growth forecasts for Spain, with a few saying that it may stagnate this summer. BBVA, a leading Spanish bank, forecasts that unemployment will rise to an average of 11 percent this year, from 8.6 percent in 2007.

Such cutbacks are well under way in Ireland, where the taxi drivers complain that their ranks are being swollen by laid-off home builders. The housing collapse has brought an abrupt end to more than a decade of pell-mell growth that earned Ireland the nickname “the Celtic tiger.”

Today, the mood in this country feels like a wake, and not an Irish one. Average house prices fell 7 percent last year, the most in Europe, according to the Royal Institution of Chartered Surveyors, a British real estate group. They are likely to fall by a similar amount this year.

After a 16-year boom that was interrupted only briefly after the Sept. 11 terrorist attacks, Ireland has the most overvalued housing market among developed countries, according to the I.M.F. In its recent economic outlook, the fund calculated that prices are 30 percent higher than they should be, given Ireland’s economic fundamentals.

For many Irish, accepting that reality is like passing through the seven stages of grief. Some homeowners are still in denial, brokers said, asking $5 million for houses worth no more than $4 million. But developers have begun cutting prices for smaller apartments like the one owned by Emma Linnane.

“Last year was our ‘wake up in the middle of the night with sweat pouring down your face’ period,” said David Bewley, a director at the Lisney real estate agency. “Now we’ve grown up.”

Not all the omens are negative. Mr. Bewley said houses were selling again, albeit for 25 percent less. Ireland has not yet suffered widespread incidences of defaulting mortgages or foreclosures in this downturn, in part because lenders have not been as aggressive as those in the United States.

But some worry that the housing meltdown could spoil Ireland’s recipe for success. Like Spain, it attracted lots of foreign workers, many of whom came for well-paying jobs in the construction industry. That fueled the Irish rental market, which has remained buoyant and been a source of income for Ireland’s many real estate speculators.

“If the immigrants go back home, will this hurt the rental market?” asked Ronan O’Driscoll, a director in the Dublin office of Savills, a real estate firm. “If that happens, it would definitely cause foreclosures.”

It’s all part of the culture we have…

Marlborough - During one frigid day last month, Code Enforcement Officer Pam Wilderman took a call from an anxious Milham Street resident, who reported that an uncontrolled flow of water was pouring out from a neighbor’s home.

Wilderman, police and firefighters rushed to the scene, and the Water Department shut off the home’s water supply.

Later, Wilderman found out that the home – purchased seven years ago for $438,000 – had been foreclosed. Its former residents had left town without shutting off the water.

Today neighbors are facing the prospect of the home being abandoned and unkempt for a long time.

“Now there’s a potential mold problem,” Wilderman said. “Nobody can live in it until it’s been properly inspected and mitigated.”

In upscale as well as downtrodden neighborhoods around Marlborough and Hudson, foreclosures have been on the rise, causing anguish for the neighbors as well as the homeowners and stressing community services. Wilderman said she and other city services visited nine foreclosed properties in November alone.

“The problem is not just in French Hill,” she said. “It’s hitting all over the city. More and more people are just walking away from their homes when they’re foreclosed.” And until a new owner takes possession, she added, “nobody pays attention to the house.”

ForeclosuresMass, a web site that tracks foreclosures by community, reports that 111 Marlborough properties started the foreclosure process over the last six months. They include properties on Lincoln Street, Boston Post Road, Leoleis Drive, Priscilla Drive, McGee Avenue, Conrad Road and many other locations. ForeclosuresMass says that only 27 Massachusetts communities have more foreclosures than Marlborough.

In Hudson, ForeclosuresMass reports 28 properties have started the foreclosure process in the last six months, ranking it 65^th in the state in the number of foreclosures. The properties are on Manning Street, Richard Road, Stow Court, Davis Road and other locations.

Banker and Tradesman, a publication that tracks real estate sales and foreclosures, reports that foreclosures nearly quadrupled in Marlborough between 2005 and 2007, to 59 last year. In Hudson, the number of foreclosures went from 1 in 2005 to 23 last year.

People who are watching the process blame financial institutions who misled unsophisticated buyers, and starry-eyed homeowners who bought more than they could afford with no money down.

Marlborough Savings Bank Vice President Jeff Dale said some recent immigrants have sought refinancing help from his bank after they secured risky mortgages from other sources. The bank has a loan officer, Paula DiGregorio, dedicated to helping Spanish-speaking people who are burdened with now-unmanageable mortgages.

“A lot of people got into sub-prime mortgage situations where they financed 95 or 100 percent of their properties,” Dale said. “Now, what they owe is equivalent to 105 or 120 percent of what their property is worth, and there’s very little we can do in cases like that.”

“We help as much as we can,” said Dale. “But if people are ‘upside down’ in a loan – owing more than a home is worth – we can’t do very much.”

Dale blames unscrupulous lenders who prey on lower-income people. “You can’t sell a $300,000 loan to someone who’s making $15,000 a year,” he said.

Vince Valvo of The Warren Group, which publishes Banker and Tradesman, said that foreclosure trends in Marlborough and Hudson mirror that around the state and the country. While all types of neighborhoods are hit, Valvo said that poorer neighborhoods tend to suffer the most.

“In communities with lower income residents and neighborhoods with older homes, we tend to see more of these foreclosures,” Valvo said. “Lower income residents have tended to take out riskier loans, that later reset at rates that they can no longer afford.”

But he added that people of all income levels have lost homes that they could not afford in the first place.

“People who decided to really stretch and buy the biggest house they could afford with as little down as possible are also in trouble,” Valvo said. “It could be the guy down the street driving the Lexus. He’s got a pool and a car but he’s in debt up to his ears.”

“It’s all part of the culture we have…that it’s our right to be living not just in a home, but a home with granite countertops, three bathrooms and tons of garage space,” Valvo said.

City Councilor Peter Juaire, whose ward includes some of Marlborough’s less wealthy neighborhoods, also agrees that the problem cuts across economic lines.

“Marlborough is a combination of white collar and blue collar, and we all know that the economy is not in the best condition,” said Juaire. “People are losing their jobs, after they bit off more than they could chew when they bought their homes. Some who bought an adjustable rate are now getting hit with a $300 a month increase. Their costs for gas and fuel are also going up. Everything’s going up except salaries.”

And both Wilderman and Juaire agree that foreclosures have led to more troubled properties and, in turn, troubled neighborhoods.

“Some people just walk away after their homes are foreclosed,” said Juaire. “If they don’t winterize, the pipes can break. Sometimes the home gets vandalized.”

Wilderman said she has seen first-hand how neighbors suffer from a neglected, foreclosed home. She took a complaint a year ago about a crowded home on Ridge Road, which she described as a “solid, middle class Cape Cod type neighborhood where everybody keeps up their yard.”

After the home changed hands, “there was suddenly a lot of traffic going in and out of it,” Wilderman said.

“I found out that the owner of the home had been able to purchase a $340,000 home with no money down,” she said. “The very next day he closed on another house on Barnard Road for $500,000, again with no money down.

“Now tell me that person didn’t know what he was doing. Both of those homes ended up in foreclosure within 18 months.”

STIMULUS PLAN A SCAM TO BENEFIT THE RICH

Higher loan limits will lead to Fannie Mae, Freddie Mac bailout

Sean Olender

Sunday, February 3, 2008

Congress is about to sell us the biggest fraud in American history.

It's been highly touted as an economic stimulus bill that will help millions of Americans - and has the backing of both President Bush and House Speaker Nancy Pelosi. In the coming year, individuals would receive rebates of up to $600 and families up to $1,200. There are other goodies, too, including tax write-offs for small businesses and an expansion of the child tax credit.

But, as the old adage goes, nothing comes for free. As part of the bill, Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750 - the first step toward a massive financial disaster in which taxpayers will end up paying through the nose.

Here's how we got to this point. Domestic and international investors hold hundreds of billions of dollars in bad debt, because U.S. investment houses sold them junk securities based on often fraudulent mortgages. Many of these mortgages were sold to unqualified buyers under terms that made widespread foreclosures a certainty once the housing market began to fall.

Investment banks and bond rating agencies sat down and tried to figure out how to describe Americans with insufficient incomes and little for a down payment as great credit risks on loans too big for their incomes. The new rules focused on credit scores, because it was a good excuse to avoid looking at income and down payment, factors that would have restricted this moneymaking fiasco.

Now, thanks to Congress, junk bond investors will be able to pawn off their bad debt to Fannie and Freddie, instead of suing the big investment houses for ripping them off. This shift will certainly doom Fannie Mae and Freddie Mac, so don't be surprised if we, the taxpayers, have to bail out poor Fannie and Freddie - to the tune of more than $1 trillion.

Why more than $1 trillion? If Goldman Sachs is correct in its recent projections that home prices in California are going to drop 35 to 40 percent, the state's losses alone would top $2 trillion, because California has a disproportionate number of jumbo loans. The irony here is that the collapse in housing prices could make Fannie insolvent even without raising the loan limit. Increasing Fannie's limit is like going on a spending spree with your credit cards because you know you are going to file for bankruptcy in a few months. Only here the taxpayer is left holding the bag. Our children will pay interest on this debt in perpetuity. It is our debt. It is inescapable.

In the coming months, Fannie and Freddie will buy up mortgages based on old, fraudulent appraisals and on loans with bogus inflated incomes. Unfortunately, many of these loans will still default.

But that's just the start. Brace yourself for another wave of faxes, phone calls and junk mail urging you to refinance at only 1 percent. With zero new regulation, the same bad actors that caused this crisis can once again inflate property appraisals and begin a new cycle of fraud.

There are firms that rent assets to people to help them fraudulently qualify for a mortgage - like loaning them money to keep in their bank account for a couple months so they can fool the lender with documented savings that evaporate the day after the mortgage is signed. Another popular ruse: The borrower pays an employer to pay him a lot of money in a fake job for a month or two so he can show a fat paycheck in his loan docs. Some real estate agents and mortgage brokers actually refer buyers to these services.

Contrary to popular myth, Fannie holds a lot of subprime debt, option ARM debt and other dodgy securities. Fannie and Freddie owned or guaranteed almost 45 percent of all mortgages in America last year. BusinessWeek noted in 2007 that Fannie and Freddie have "moved more prominently into low-documentation loans, which require little or no proof of the borrower's income." Expansion of Fannie and Freddie's reckless lending is exactly what Congress wants because it's plausibly deniable. Teary-eyed lawmakers can take to the airwaves a year from now and declare: "We had no idea Fannie could go under, but we can't cut and run now. We have to bail out Fannie and Freddie for the good of America! It's going to be a tough slog, but you're getting used to those, no?"

Those same lawmakers won't mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury.

I've spoken with borrowers who stopped making mortgage payments seven or more months ago. None has received a default notice. Defaults may be much higher than banks are letting on. The data lags are growing suspiciously long. Nobody knows what's going on. Seven months without making a single payment! Will Fannie guarantee those loans because they aren't in formal default yet? Nobody wants to know, because if they know, they might be called to testify next year. That's why lawmakers want to raise the limits now and ask questions later.

This shortsighted plan poses a terrible risk to every American taxpayer, especially retirees, because Social Security money will be needed to bail out Fannie and Freddie. And even if you live in high-priced San Francisco, Los Angeles or New York - and stand to benefit from the increased loan limit - this is a horrible fraud on you, too, because raising the limit to $730,000 risks a systemic crisis that will cost far more than any temporary rebate check.

In support of the economic stimulus bill, Bush will have to face "working American families" and explain that some of their tax money is going to be spent guaranteeing $730,000 mortgages on $1 million homes. It's like some sort of upside-down communism where the poor pay the rich welfare. Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi ... well, that's called "helping the economy."

I can imagine the president's radio address playing in the heartland: "We have some families with million-dollar homes on the coasts who are really hurting and so we need you, the working families of America, to stand together with them and help them avoid the kind of home price depreciation that might leave them without a new Lexus for years."

I guess Congress' hope is that median-income families will be too busy using their rebates to buy much-needed groceries to notice that the rich folk are getting way with a new scam.

Several months ago, economist Nouriel Roubini of New York University's Stern School of Business suggested that the housing market has been effectively nationalized. At first it seemed crazy, but now it's fairly obvious. In August alone, Fannie and Freddie increased their loan portfolios by $62 billion, and the Federal Home Loan Bank by $110 billion. That total of $172 billion would come to just over $2 trillion annually - not much less than the entire federal budget.

Everyone seeking a loan, securitizing a mortgage, and buying or selling a mortgage security will now be dealing, in one way or another, with the U.S. government. This type of intervention is very expensive and will eat everything in its path, including Social Security.

If we're going to have a government-financed intervention, it should be to make sure that Social Security benefits go to those who paid for them, that the poor are fed and housed, or that the army of uninsured receive health benefits. If, as they say, we don't have enough money for those important things, then I think we don't have enough money to bail out banks and bond investors.

Don't let me down, my fellow Americans. Let's vote out anyone0 who dares to vote for this scam.

Sean Olender is an attorney in San Mateo. Contact us at insight@sfchronicle.com.

GA #2 in bankruptcies

By CARRIE TEEGARDIN
The Atlanta Journal-Constitution
Published on: 01/29/08

Thousands of Georgians facing economic woes have given the state a dubious ranking: the second-highest personal bankruptcy rate in the nation.

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In 2007, bankruptcy courts statewide processed one personal bankruptcy filing for every 65 households, according to statistics compiled by the National Bankruptcy Research Center. Only in Tennessee was personal bankruptcy more common, with one filing for every 59 households.

"The economy is just so bad that that is spurring bankruptcies," said Rich Thomson, a partner at Clark & Washington, Atlanta's largest bankruptcy firm. "We have record numbers of foreclosures every month."

Bankruptcy filings across the nation were up significantly in 2007, and Georgia was no exception. Bankruptcy courts statewide processed 48,227 personal bankruptcy filings last year, an increase of 24 percent over the 2006 total, according to the research center.

In a comparison of the total volume of filings, irrespective of the rates, Georgia also stood out. Only California and Ohio had more 2007 filings than Georgia did.

Georgia has routinely landed near the top of the bankruptcy rankings in recent years. Experts cite a variety of forces, ranging from a slate of creditor-friendly laws, to the state's entrepreneurial spirit to a booming real estate market.

"Many of the things that make Georgia a wonderful place to live also make it potentially vulnerable to spikes in bankruptcy filings," said Jack Williams, a professor at Georgia State University's law school.

The penchant of Georgians to start their own businesses enriches only a minority of the folks who set out to be their own boss.

"Most new businesses fail, that's simply the nature of the beast," said Williams, currently the resident scholar at the American Bankruptcy Institute.

When small businesses go under, that often results in a personal bankruptcy filing as well.

Georgia also stands out for a healthy real estate market that was buoyed in part by reliance on subprime mortgages, Williams said. Those mortgages have much higher failure rates than lower-interest prime mortgages.

The state's attractiveness to young retirees may also be playing a role, Williams said. These are people who are at risk for health problems and vulnerable to bankruptcy if they have no health insurance coverage.

"The folks in the 55 age group and above are the fastest-growing segment of bankruptcy filers," Williams said. "Georgia has a lot of folks who fit in that age group."

Thomson, the bankruptcy attorney, said Georgia's foreclosure laws also push up the number of bankruptcies. Georgia allows one of the fastest foreclosure processes in the nation. The process is fast here, in part, because Georgia allows "non-judicial" foreclosures, meaning that foreclosures can proceed without the approval of a judge.

"Georgia is definitely a creditor-rights state and the non-judicial foreclosure process certainly spurs a lot of bankruptcies," said Thomson, the bankruptcy attorney.

Filing for bankruptcy protection automatically halts a foreclosure sale and gives the homeowner more time to cover overdue mortgage payments.

"Many, many people are able to keep the house" as a result of filing for bankruptcy, Thomson said.

Most people facing a foreclosure file for Chapter 13, which allows consumers to hold onto their house and car, but requires that they repay a portion of their debts. Chapter 13 filings are more common in Georgia than Chapter 7, a liquidation in which most debts are wiped out, but so are all of a consumer's assets that aren't protected by exemptions.

Congress attempted to cut down on the number of bankruptcy filings with reforms that took effect in October 2005. Bankruptcy filings skyrocketed right before the law was enacted, then fell dramatically right after the law was implemented.

But the numbers have been steadily rising since. Overall consumer filings across the country hit 801,840 last year, up 40 percent from the 2006 totals, according to the research center. Experts expect economic problems to fuel another big year in 2008.

Although bankruptcy has become commonplace in states like Georgia, it's still a difficult step for many consumers, Williams said.

"Go down to the court and watch people file these petitions and go through their examinations and talk to them," he said. "You will realize that there is still a tremendous stigma and I'm not just talking about the 10 years it floats on your credit history report. I'm talking about people who really feel horrible about the fact that they are in the situation."

For many, Williams said, bankruptcy could have been avoided if American consumers had a better grasp on the basics of budgeting and debt — and especially preparing for difficult times.

"Many of us are vulnerable," he said. "We're one job layoff or reduction in work hours or disease or illness or accident away from bankruptcy, because we haven't saved for the rainy day."

National Median Realestate Drops first in 40 yrs

Existing Single-Family Home Sales Drop
Thursday January 24, 10:22 am ET
By Martin Crutsinger, AP Economics Writer Sales of Existing Single-Family Homes Drop in 2007 by Largest Amount in 25 Years WASHINGTON (AP) -- Sales of existing homes fell in December, closing out a horrible year for housing in which sales of single-family homes plunged by the largest amount in 25 years. The median home price dropped for the entire year, the first time that has occurred in four decades.

The National Association of Realtors reported that sales of single-family homes and condominiums dropped by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.

For the year, sales of single-family homes were down by 13 percent, the biggest drop since a 17.7 percent plunge in 1982. The median price for a single-family home dropped 1.8 percent to $217,000.

That was the first annual price decline on records going back to 1968. Lawrence Yun, the Realtors' chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.

The new figures underscored the severity of the slump in housing, which has been battered for the past two years after enjoying a boom in which sales set records for five consecutive years.

The housing bust has sent shock waves through the entire economy as defaults have risen, resulting in multibillion-dollar loses for big financial firms whose investments in subprime mortgages have gone sour.

There is a concern that the housing and credit troubles could be enough to push the country into a full-blown recession. After global stock markets experienced a sharp sell-off earlier this week, the Federal Reserve announced a bold three-quarter point cut in a key interest rate and held out the promise of more rate cuts to follow.

The Bush administration and congressional leaders are trying to quickly wrap up negotiations on a stimulus package in an effort to boost consumer and business confidence.

For December, sales were down in all regions of the country. Sales fell by 4.6 percent in the Northeast, 1.7 percent in the Midwest, 1 percent in the South and 2.1 percent in the West.

The inventory of unsold homes dropped by 7.4 percent, raising hopes that backlogs that had hit record levels were starting to be reduced, a key factor necessary to prompt a rebound in the market.

While Yun said he expected sales to start to rebound this spring, other analysts said housing is likely to remain in the doldrums throughout most of 2008, reflecting in part the credit crunch, which has caused lenders to tighten their standards, making it harder for prospective buyers to qualify for loans.

In other economic news, the Labor Department said Thursday that the number of laid off workers filing claims for unemployment benefits fell for a fourth straight week, dropping by 1,000 to 301,000.

Many economists cautioned that they still expected layoffs to start rising in coming weeks, reflecting the sharp economic slowdown that has taken place.

The economy, after racing ahead at an annual rate of 4.9 percent in the July-September quarter, probably slowed to a weak 1 percent rate in the final three months of 2007 and may even fall into negative territory in the current January-March quarter.

A recession is often defined as two consecutive quarters of falling economic output. Many economists believe the risks of a full-blown downturn are roughly 50-50.

The growing worries about the economy in an election year have captured the attention of President Bush and congressional leaders who are working to put together a $150 billion economic stimulus package that will include tax relief for households and businesses in an effort to bolster economic activity.

The drop in unemployment applications to 301,000 for the week ending Jan. 19 left total claims at the lowest level since 300,000 were recorded during the week of Sept. 22.

For the week of Jan. 19, 36 states and territories had increases in claims while 17 had declines.

The biggest increase occurred in California, up 27,194, an upsurge blamed on higher layoffs in construction and service industries, and Florida, with an increase in layoffs of 8,496, which was attributed in part to higher layoffs in construction. California and Florida have been particularly hard hit by the housing slump.

Global Melt Down

Jan. 21 (Bloomberg) -- Stocks plunged in Germany, Hong Kong, India and Brazil, and U.S. index futures dropped on mounting speculation that the global economy is slowing and company defaults will rise.

Europe's Dow Jones Stoxx 600 Index fell the most since the Sept. 11 terrorist attacks and sank into a bear market, as Allianz SE and BNP Paribas SA slid. Hong Kong's Hang Seng Index had its biggest drop in six years after BNP Paribas said Bank of China Ltd. may write down overseas securities by $4.8 billion because of losses from U.S. subprime mortgages. Citigroup Inc. retreated in Frankfurt.

The MSCI World Index slipped 2.4 percent to 1,402.75 at 2:44 p.m. in London, extending its decline from an Oct. 31 record to 17 percent. India's Sensitive Index lost the most since 2004, while Germany's DAX slid the most since March 2003. Futures on the Standard & Poor's 500 Index sank 3.4 percent. Trading in the U.S. is closed today for Martin Luther King Day.

``It's the worst I've ever seen,'' said Johan Stein, who helps manage the equivalent of about $14 billion at Nordea Asset Management in Stockholm. ``The financial system is in terrible shape, and no one knows where this will end.''

Today's declines follow the worst week for U.S. stocks in five years after President George W. Bush's $150 billion plan to revive the economy and expectations of interest-rate cuts failed to allay recession concerns.

The risk of European companies defaulting soared to a record today on speculation credit-rating cuts at bond insurers including Ambac Financial Group Inc. may trigger forced asset sales. European Central Bank council member Nout Wellink said economic growth in the region may slow more than policy makers had expected.

Market Crisis

``This is a stock-market crisis,'' said Alberto Roldan, head of research at Inverseguros SVB in Madrid. ``Investors believe that neither a government package nor a huge rate cut is going to help evade a recession in the U.S.''

White House spokesman Tony Fratto said in Washington today the government doesn't comment on daily market moves.

``We're confident that the global economy will continue to grow, and that the U.S. economy will return to stronger growth,'' Fratto said in an e-mailed message.

The Stoxx 600 slid 4.1 percent, extending its drop from a 6 1/2-year high on June 1 to 22 percent. A decline of more than 20 percent is the common definition of a bear market. The gauge earlier fell as much as 5.8 percent, which would have been the biggest drop in six years. France's CAC 40 lost 4.9 percent. The U.K.'s FTSE 100 sank 3.6 percent, and Germany's DAX slid 6 percent.

Volatility Climbs

The VDAX-New Index, a benchmark gauge of European stock- market volatility, surged as much as 39 percent, the most since 2001. The measure of expected price swings for stocks is derived from prices paid for options on Germany's DAX.

The MSCI Asia Pacific Index lost 3.7 percent. Australia's S&P/ASX 200 Index slumped for an 11th day. Hong Kong's Hang Seng Index lost 5.5 percent. Japan's Nikkei 225 Stock Average dropped 3.9 percent as the Finance Ministry cut its evaluation of five of 11 regional economies as housing investment fell and employment worsened.

The MSCI Emerging Markets Index, a global benchmark, sank 5.4 percent, extending its retreat from an October record to 19.7 percent.

Brazil's Bovespa index slid 5.2 percent, the most since February 2007. Russia's Micex Index declined 7.5 percent, the biggest drop since June 2006.

Canada's Standard & Poor's/TSX Composite Index fell 4.1 percent.

Allianz, Europe's biggest insurer, tumbled 8.4 percent to 122.01 euros. BNP Paribas, France's second-biggest bank, sank 6.1 percent to 65.15 euros. ING Groep NV, the biggest Dutch investment bank, declined 7.6 percent to 21.66 euros.

`Sharp Contraction'

``The market is finally catching on to the fact that a recession will lead to a sharp contraction in earnings,'' said Jane Coffey, head of equities at Royal London Asset Management, where she helps oversee about $11 billion. ``We need to see more aggressive changes to forecasts before investors become more positive about looking through the downturn.''

Swiss Reinsurance Co. decreased 8.5 percent to 69.9 Swiss francs. UBS AG cut its share-price estimate for the world's largest reinsurer to 80 francs from 88, citing the probability of more investment losses related to credit-market problems.

``We see on-going downside risk to earnings and stock performance until we have better visibility,'' London-based analysts including Ben Cohen wrote in a report to investors.

Bank of China

Bank of China, which has the largest holdings among Asian banks of U.S. subprime mortgages, slid 4.7 percent to HK$3.43. The bank may write down 17.5 billion yuan ($2.4 billion) for the fourth quarter of 2007, and an equal amount for this year, Dorris Chen, a Shanghai-based analyst at BNP Paribas wrote in a note on Jan. 18.

Commonwealth Bank of Australia, the country's second largest, dropped 2.5 percent to A$51.89. National Australia Bank Ltd., the nation's largest, declined 2 percent to A$35.55.

Morgan Stanley raised its 2008 forecast for loan-loss charges at the country's major banks by 26 percent, analyst Richard Wiles wrote in a note today, citing a deteriorating global economy and ``the difficulty faced by some companies in refinancing maturing debt.''

Citigroup, the biggest U.S. bank by assets, dropped 3.6 percent to $23.56 in Frankfurt. JPMorgan Chase & Co., the second- largest U.S. bank by market value, slid 3.2 percent to $38.30 also in Frankfurt trading.

The slump has made stocks cheap by historical standards. Europe's Stoxx 600 is valued at 11.1 times its companies' profits, the lowest since at least 2002, according to data compiled by Bloomberg. The 1,953-member MSCI World has a price- earnings ratio of 14.3, the cheapest since at least 1998.

Rio Tinto

Rio Tinto Group, the world's third-biggest mining company, dropped after BHP Billiton Ltd. failed to make a new offer. Rio, defending a hostile $108 billion takeover bid from rival mining company BHP, fell 6.6 percent to 4,392 pence.

BHP may not make a new offer before the Feb. 6 deadline set by the U.K.'s Takeover Panel, the London-based Times newspaper reported. The BHP board has not met to discuss a new bid, the newspaper said, after its initial three-for-one all share offer in November was rejected.

Samantha Evans, a BHP spokeswoman in Melbourne, declined to comment. Rio spokeswoman Amanda Buckley also declined to comment.

Cleveland Sues Big Banks

Cleveland Mayor Frank Jackson took aim at Wall Street on Thursday with a lawsuit against 21 major investment banks that he said have enabled the subprime lending and foreclosure crisis here.

The one-of-a-kind suit, filed in Cuyahoga County Common Pleas Court, accuses venerable institutions such as Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo of creating a public nuisance.

Jackson contends the companies irresponsibly bought and sold high-interest home loans. The result: widespread defaults that depleted the city's tax base and left entire neighborhoods in ruins.

City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.

"To me, this is no different than organized crime or drugs," Jackson said in an interview with Plain Dealer reporters and editors. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."

A city spokeswoman said the companies, which are based across the country, were not given advance notice of the suit, which was submitted late Thursday and assigned to Judge Peter Corrigan.

Cleveland is the second major U.S. city this week to sue over the ills of subprime loans.

On Tuesday, Baltimore sued Wells Fargo, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites - a violation of federal law.

The Baltimore and Cleveland efforts are believed to be the first attempts by large cities to recover losses blamed on the foreclosure epidemic, which has particularly plagued Ohio.

But Cleveland's suit is even more unique because the city has based its complaints on a state law that relates to public nuisances. The suit also is far more wide-reaching than Baltimore's in that it targets the investment banking side of the industry, which feeds off the mortgage market.

Investment bankers at these companies buy subprime mortgages from lenders, then sell mortgage-backed securities to investors. It is a legal practice, known as securitization, that became increasingly popular during the housing boom earlier this decade.

Jackson and city Law Director Robert Triozzi said Cleveland should have been excluded from the frenzy. They pointed to housing prices that remained relatively flat as real estate values jumped elsewhere, as well as a manufacturing downturn and widespread poverty.

The suit claims that even though these issues were well documented, investment bankers continued to feed loans to hungry investors at the expense of borrowers buried in interest.

"Ultimately, they're responsible," Triozzi said of the investment banks. "They knew the economic conditions in which they were operating here. They decided that didn't matter."

Joshua Cohen, a partner with Cohen Rosenthal & Kramer LLP, will lead a team of outside lawyers assisting the city.

Cohen is perhaps known best for representing Cleveland Browns season ticketholders in a class-action lawsuit that brought a $3 million settlement after Art Modell moved the football team to Baltimore. His Cleveland law firm has five attorneys, setting the stage for a David-versus-Goliath court battle.

"There is no doubt, in terms of the resources, there is going to be somewhat of a disparity - a big disparity," Cohen said. "We're confident in our theory and what we have alleged. We knew exactly what we were taking on."

Maureen Harper, a spokeswoman for the mayor, said the city won't pay outside attorney fees unless a settlement or favorable verdict is reached.

Triozzi acknowledged the lawsuit, with its unique nature and 21 large defendants, could move slowly. He also expects the banks will request the case be moved to federal court.

"I understand fully what we are up against here," the law director said. "We would not be doing this if we did not believe we had a sound legal argument to stand on."

Jackson, asked if long litigation would be worth the city's time and money, replied: "We're in this for the long haul. I trust Director Triozzi will tell me when to hold them or fold them."

Judge Corrigan will have to decide "how far up the food chain" to go in determining responsibility, said Cleveland State University Law professor Kathleen Engel, an expert on mortgage-backed securities. She believes the city can make a case against the investment bankers.

"These loans were defective products," said Engel, co-author of "Turning a Blind Eye: Wall Street Finance of Predatory Lending," an article that appeared last year in the Fordham Law Review. "They were continuing to finance products that they knew were defective and could have devastating consequences for the city of Cleveland."

The suit accuses some companies without pinning them specifically to Cleveland loans. Engel said making the link will be easy because most, if not all, investment banks had some stake in the market.

The suit may draw the interest of national law firms willing to help Cohen, Engel said.

Ohio Attorney General Marc[hgo: cq: ] Dann also is considering a state lawsuit against investment banks. Dann said he is investigating "some of the very same people" identified in the city's suit.

Dann said a state filing is months away and probably wouldn't be submitted as a public-nuisance case. But he commended Jackson and Triozzi's "creative" approach.

"There's clearly been a wrong done, and the source is Wall Street," Dann said in a phone interview. "I'm glad to have some company on my hunt."

Home Sales Plunge, Feed Recession Fears

Friday December 28, 2:22 pm ET
By Jeannine Aversa, AP Economics Writer New-Home Sales Plunge to Lowest Level in More Than 12 Years, Heighten Recession Fears WASHINGTON (AP) -- The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.

The slump worsened even more than most analysts expected, heightening fears that the country might be thrust into a recession.

New-home sales tumbled 9 percent in November from October to a seasonally adjusted annual sales pace of 647,000, the Commerce Department reported Friday. That was the worst sales pace since April 1995.

"It was ugly," declared Richard Yamarone, economist at Argus Research. "It is the one sector of the economy that doesn't show any signs of life. It doesn't look like there is any resuscitation in store for housing over the next year," he said.

The housing picture turned out to be more grim than most anticipated. Many economists were predicting sales to decline by 1.8 percent to a pace of 715,000.

By region, sales fell in all parts of the country, except for the West.

In the Midwest, new-home sales plunged 27.6 percent in November from October. Sales dropped 19.3 percent in the Northeast and fell 6.4 percent in the South. In the West, however, sales rose 4 percent.

Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.

"I think you can classify what we are seeing in the housing market as a crash," said Mark Zandi, chief economist at Moody's Economy.com. "Sales and home prices are in a free fall. The downturn is intensifying."

The median sales price of a new home dipped to $239,100 in November. That is 0.4 percent lower than a year ago. The median price is where half sell for more and half for less.

On Wall Street, the grim home sales report added to investor angst. The Dow Jones industrials were off 40 points in afternoon trading.

Would-be home buyers have found it more difficult to secure financing, especially for "jumbo" mortgages -- those exceeding $417,000. The tighter credit situation is deepening the housing slump. Unsold homes have piled up, which will force builders to cut back even more on construction and look for ways to sweeten the pot to lure prospective buyers.

"A lot of borrowers are being disqualified for loans. If you can't qualify for a mortgage the game is over. For those who do qualify, it takes longer to get loans," said Brian Bethune, economist at Global Insight.

The housing market has been suffering through a severe slump following five years of record-breaking activity from 2001 through 2005. Sales turned weak as did home prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn't afford.

Problems in housing are expected to persist well into 2008 -- a major election year.

The housing and mortgage meltdowns have raised the odds that the country will fall into a recession. And, the situation has given Democrat and Republican politicians-- including those who want to be the next president -- plenty of opportunities to spread blame around.

The economy's growth is expected to have slowed sharply to a pace of just 1.5 percent or less in the final three months of this year. Former Federal Reserve Chairman Alan Greenspan recently warned that the economy is "getting close to stall speed." The big worry is that the housing and credit troubles will force individuals to cut back on spending and businesses to cut back on hiring and capital investment, throwing the economy into a tailspin.

To help bolster the economy, the Federal Reserve has sliced a key interest rate three times this year. Its latest rate cut, on Dec. 11, dropped the Fed's key rate to 4.25 percent, a two-year low. Many economists are predicting the Fed will lower rates again when they meet in late January.

"The risks are as high as they've ever been during this expansion that started in late 2001 that the economy will fall into a recession," said Bethune. "The odds are now nudging up close to the 50 percent mark."

New-home sales report: https://www.esa.doc.gov/ei.cfm

The Bear Flu: How It Spread

A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster

by David Henry and Matthew Goldstein

When the subprime mortgage market began to unravel late in 2006, global bond markets barely flinched. But when two Bear Stearns (BSC) hedge funds collapsed in June, the event sparked a global credit crisis that has yet to ease. New evidence sheds light on how those hedge funds—and their managers—became star players in the subprime bust, the biggest financial disaster in decades. The revelations also show how other players in the mortgage market adopted the Bear funds' tactics, collectively building a financing structure with many of the hallmarks of a pyramid scheme.

The legal consequences are still unfolding. In recent weeks securities regulators and federal prosecutors have stepped up their investigations into the two funds, probing the fuzzy math used to value the underlying assets, the aggressive sales pitches that portrayed the funds as safe, and frequent trades with other Bear-managed portfolios. On Dec. 19, Barclays (BCS), which lent one Bear fund hundreds of millions, filed a lawsuit alleging fraud over misleading statements about the portfolio's health. Says a Bear spokesman: "We believe that any such lawsuit is unjustified and without merit."

Investigators also are asking why Ralph R. Cioffi, the funds' top manager, moved $2 million of his own $6 million investment in the hedge funds into another fund in early 2007 while simultaneously raising cash for the funds, trying to sell them to Cerberus Capital Management, and telling investors they couldn't redeem their shares until the end of June. People familiar with the situation at Bear stress that Cioffi, who left the firm the week of Dec. 10, was simply investing in a different Bear fund with which he was involved. Cioffi's lawyers did not return e-mails or calls seeking comment.

A CDO Called Klio

It's too soon to tell whether authorities will find any wrongdoing. But a BusinessWeek analysis of confidential hedge fund reports and interviews with lawyers, investors, and securities experts reveals just how pivotal a role Cioffi's funds played in the mortgage market's dramatic rise, dizzying peak, and disastrous fall.

The analysis shows Cioffi and his team developed a novel investment product to attract money-market funds—a new class of investor—to the mortgage market. Their innovation, a particularly aggressive form of collateralized debt obligation, or CDO, became the building blocks of the industry's push to keep growing for longer than it otherwise would have. After the market turned, it became clear the Cioffi money machine contributed to much of the $10 billion-plus in writedowns that Citigroup (C) and Bank of America (BAC) revealed in November. Fresh evidence also suggests Cioffi's team may have engaged in self-dealing by using the new CDOs to buy assets from the funds, artificially boosting returns. Citi and Bank of America declined to comment.

At the center of it all was the new breed of CDO pioneered by Cioffi and his team to tap into the $2 trillion universe of money-market accounts in which individuals and corporations stash their spare cash. Cioffi's CDOs, initially branded "Klio Funding," were entities that sold commercial paper and other short-term debt to buy higher-yielding, longer-term securities. The Klios were a win-win proposition for money-market funds. They paid a higher interest rate than the usual short-term debt. And investors didn't need to worry about the risky assets the Klios owned because Citigroup had agreed to refund their initial stake plus interest, through what's known as a "liquidity put," if the market soured. Cioffi engineered three such deals in 2004 and 2005, raising $10 billion in all.

What did Citigroup get for guaranteeing the Klios? For one thing, fees. The Klios were also a ready buyer of Citi's own stash of mortgage-backed securities and other debt. Citi probably never imagined it would have to make good on those guarantees because the underlying assets had the highest credit ratings.

Cioffi used the money from each deal to purchase billions in mortgage-backed securities and pieces of other CDOs for his three Klios. He bought many of the assets directly from the two Bear hedge funds he managed. The move also supplied the hedge funds with cash.

A Pyramid Structure

The Klios had another powerful feature: They allowed the Bear funds to lock in longer-term financing. Typically, hedge funds borrow for short periods of time, usually just days or weeks. Under the terms of the Klio deals, Cioffi could use the money for at least a year without having to worry that it would disappear overnight if the market got volatile. He discussed that advantage in an Apr. 25 call with hedge fund investors, boasting that the funding wasn't subject to market fluctuations.

The Klio structure spread rapidly as other hedge funds, CDO managers, and banks, including Barclays, Bank of America, and Société Générale, followed Cioffi's lead. From 2004 through 2007, Wall Street raised some $100 billion through these innovative CDOs, essentially creating a whole new way for the industry to finance risky subprime loans. That success, in turn, inspired copycat products such as structured investment vehicles, which also sold short-term debt. At their peak, in February, 2007, SIV assets hit $300 billion. Barclays declined to comment, but the company announced on Nov. 15 losses from CDO investments that it had been forced to take on its books. A Société Générale spokesman said it has transferred all of its risk to a large, global financial institution.

In hindsight, CDOs and SIVs served as a foundation for a pyramid-like structure that Yale University economist Robert J. Shiller says occasionally arises from bull markets. As new investors arrive to the party, they bid up prices, boosting returns for those who got in earlier. The big gains attract more investors, and the cycle continues—as long as the players don't try to take out their money en masse.

The mortgage-market system played out much the same way. The new type of CDO lured a different tier of investors: money-market funds. The flood of fresh money made it even cheaper and easier for buyers to get mortgages. That, in turn, drove up home prices, holding off defaults and foreclosures. The process enriched the people who bought earlier in the boom and triggered more speculation.

"An Incestuous Relationship"

The complexity of the Klios and their ilk only encouraged lax lending practices by putting too much distance between the borrowers and the ultimate holders of their debt. Since the Klios offered a refund policy, money-market managers didn't have to worry about whether home buyers would pay back their loans. Their investments were protected even if the owners eventually defaulted on their mortgages.

Indeed, as the bubble inflated, there was little incentive for the array of middlemen collecting fees—mortgage brokers, real estate appraisers, bankers, money managers, and others—to do the proper checks. The lack of oversight likely contributed to the rampant fraud on some underlying loans, says S. Kenneth Leech, chief investment officer of bond-investing firm Western Asset Management. "Nobody wanted to take the punch bowl away from the party," adds Charles Calomiris, a professor at Columbia Business School. "They were all making fees."

Now investigators are trying to determine whether Cioffi and his team crossed legal lines. The Klios provided the Bear hedge funds with a ready, in-house trading partner. Their financial reports, which were reviewed by BusinessWeek, show many months in which the Cioffi-managed Klios traded only with the Cioffi-managed Bear funds. For example, in April, 2006, one Klio CDO bought $114 million worth of securities from one of the Bear funds. Such trades, says Steven B. Caruso, an attorney who represents several Bear hedge fund investors, may be "indicative of an incestuous, self-serving relationship that appears to have been designed to establish a false marketplace."

If that's why the trades were made, the maneuvers could have falsely boosted the hedge funds' returns—and the fees Cioffi and his team collected. In an e-mail to Cioffi and co-manager Matthew Tannin cited in a legal filing, Raymond McGarrigal, another executive at the Bear funds, gushed about the Klio setup, writing that "one of the great things we've done is allow the Klio to buy assets from the hedge fund." Lawyers for Tannin and McGarrigal declined to comment.

The End of an Era?

Amid the market turmoil earlier this spring, Cioffi hoped the Klios would work their magic once again. In April, as losses at the funds began mounting, Cioffi set up another CDO, High Grade Structured Credit CDO 2007-1, which issued short-term paper and offered investors a money-back guarantee from Bank of America. Cioffi had raised nearly $4 billion by late May, making it the biggest CDO of the year, according to Thomson Financial (TOC).

Just as before, Cioffi used the money to buy assets from the hedge funds, perhaps to prop up the portfolios, which by then were on the brink of collapse. In an April conference call with the hedge funds' investors, Cioffi said the new CDO was part of his plan "to get the funds back on track to generate positive returns." It didn't work. Just weeks after the deal for the CDO closed, the Bear funds imploded, wiping out $1.6 billion of investors' money. (The fund into which Cioffi moved $2 million, Bear Stearns Structured Risk Partners, was up 6.5% as of Nov. 30.)

By autumn the practice of using CDOs to raise cash was dead. Money-market funds had stopped buying the short-term debt, and the credit markets were frozen. That forced Citigroup and Bank of America to make good on their guarantees to investors in Cioffi's CDOs, triggering big losses at the two banks.

The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession. As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.

Henry is a senior writer at BusinessWeek. Goldstein is an associate editor at BusinessWeek, covering hedge funds and finance.