Friday, October 30, 2009

New Federal Guidelines on Commercial Loan Modifications

The FDIC released new guidelines for banks to use when modifying commercial loans.

They are calling the new program "Mod in a Box." With apologies to Spalding Gray, the name is clever.

The central new issue here is the level of accounting risk afforded loans that are underwater. In the past, loans lacking full collateral would be classified as "high risk." Now, the process is not so fast.

The more I look at the details the more it all looks like a gimmick to me but it will keep a whole bunch of banks solvent and that right now is everyone's goal.

You can read the actual FDIC guidelines by going here.

Robert J. Abalos, Esq.

Thursday, October 29, 2009

Geithner Says Commercial Real Estate Woes Won't Spark Financial Crisis

I'm very happy that Mr. Geithner thinks the current commercial real estate crisis won't trouble the broader economy.

But here is what Mr. Bernanke said about subprime mortgages and the broader economy in 2007, just about the very same time the proverbial what hit the proverbial fan.

I agree with both men that the financial damage from increasing commercial real estate loan defaults and equity writedowns will fall hardest on the smaller community and regional banks, not the money center institutions so much. But this does not mean escaping a crisis, and likely it would mean having to bail out dozens or hundreds of institutions rather than a few "too big to fail" firms if balance sheets continue to deteriorate as they are now.

Robert J. Abalos, Esq.

When Has a Recovery Not Really Recovered?

Do you remember Bill Clinton and what the meaning of the word "is" is?

Well, today in Washington we have announced that while the economic "recovery" is underway the economy itself has not yet recovered.

In fact, Mr. Obama says the economy "has a long way to go to fully recover" from the financial trials and tribulations of the last few years.

Let's be real.

The only thing propping up the U.S. economy right now is Mr. Bernanke's balance sheet at the Fed. Right now the amount of liabilities is $2.2 trillion and growing.

All the other news from the financial fronts is grim. Even yesterday's announced decline in new home sales spooked the market. I've been looking at the early numbers and it looks like it's going to be an awful Christmas for the retailers too.

So, simply put, when is a recovery recovering for real estate investors?

When national income rises in a real and sustainable way, free of accounting gimmicks and Mr. Bernanke's spending sprees. Because when people have more income they can afford to buy homes, carry mortgages, and go shopping.

Robert J. Abalos, Esq.

Monday, October 26, 2009

Capmark Bankruptcy Just Another Bank Failure This Weekend

I have been saying for years that the commercial real estate market is the big bubble waiting to burst. The mortgage underwriting and lending standards here make what happened on the subprime side look prudent, even old fashioned.

The news about Capmark today is important, even devastating to many.

But I want to also remember the small local community banks that were taken over by the FDIC this weekend and lots of other weekends during 2009.

Lots of small banks around the United States are still going to fail because of bad commercial real estate loans.

Over one hundred have failed already this year. Seven more this past weekend.

Most won't get attention, just a blurb in the newspaper or online someplace, a quick mention that a bank that has served a community for fifty, or eighty, or a hundred or more years has just been taking over by the FDIC.

Here is the official FDIC list of failed banks. How many do you know?

The big money center bank stocks won't budge much on the news. But small towns across America will be devastated.

Who is going to lend money on real estate in a town where the previous local bank that knew the area best just went bankrupt?

Robert J. Abalos, Esq.

Capmark Files for Bankruptcy With $21 Billion in Debt

By Dawn McCarty

Oct. 26 (Bloomberg) -- Capmark Financial Group Inc., the lender owned by companies including Goldman Sachs Group Inc. and KKR & Co., filed for bankruptcy protection after posting a second-quarter loss of about $1.6 billion.

The company listed consolidated debt of $21 billion and consolidated assets of $20.1 billion as of June 30, according to Chapter 11 documents filed yesterday in U.S. Bankruptcy Court in Wilmington, Delaware. Forty-three affiliates also sought protection.

Capmark, based in Horsham, Pennsylvania, is one of the largest U.S. commercial real estate finance companies, with more than $10 billion in originations, according to Moody’s Investors Service. The company, formerly known as GMAC Commercial Holding Corp., services more than $360 billion of debt. It has struggled as the default rate on commercial mortgages held by U.S. banks more than doubled to the highest since 1994.

“The Capmark bankruptcy reinforces that, in the case of institutions with large concentrations in commercial real estate, current disruptions to the market have the potential to impact their viability,” said Sam Chandan, president and chief economist of Real Estate Econometrics LLC, a commercial real estate consulting firm in Manhattan.

Capmark asked a bankruptcy judge to approve the sale of its loan-servicing and mortgage business to Warren Buffett’s Berkshire Hathaway Inc. and Leucadia National Corp. for as much as $490 million. Higher bids would be sought at an auction. The deal was announced Sept. 2, the same day Capmark said it might file for bankruptcy.

‘Saved or Sold’

“All the businesses will be saved and continue with Capmark or will be sold as going concerns for full value,” attorney Martin Bienenstock, a partner at Dewey & LeBoeuf LLC in New York, which is handling the bankruptcy case, said in an e- mail.

Capmark provides mortgage financing and portfolio management services for investors in apartment buildings, offices, industrial property, shopping centers and malls. Unlike real estate investment trusts, Capmark’s core business isn’t holding property, according to its Web site.

Capmark and its units owe $7.1 billion to the 30 largest creditors without collateral backing their claims, according to court documents.

The three biggest are Citibank NA, as administrative agent under the $5.5 billion credit agreement, with a claim of $4.6 billion; Deutsche Bank Trust Co. Americas, as trustee for the 5.875 percent senior notes and the floating senior notes due 2010, with claims of $1.2 billion and $637.5 million, respectively; and Wilmington Trust FSB, as successor trustee for the 6.3 percent senior notes due 2017, with a claim of $500 million, according to court papers.

Late Payments

Capmark filed for bankruptcy following a drop in revenue from loan origination, servicing and its portfolio, said Chandan, who is also an adjunct professor at the Wharton School at the University of Pennsylvania in Philadelphia.

As of June 30, $4 billion in loans were late by 60 days or more, out of a total portfolio of $24.1 billion in securitized or owned mortgages, according to Capmark’s most recent quarterly report. That was up from late payments on $1.52 billion in loans out of a $26.9 billion portfolio as of Dec. 31.

Commercial property values in the U.S. have plunged since 2007 as employers cut jobs and the recession reduced demand for offices, retail space and rental apartments. The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the decline to almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

Unleased Space

U.S. office vacancies are at a five-year high, apartment vacancies are at a 23-year record, and retail centers are showing the greatest share of empty store-fronts since 1992, according to real estate research firm Reis Inc. All that unleased space makes it harder for landlords to pay their mortgages to lenders such as Capmark.

Property investors including New York developer Harry Macklowe, whose trophies included Manhattan’s General Motors Building, and Tishman Speyer Properties LP, which controls the Chrysler Building and Rockefeller Center, are being affected by plunging values and a dearth of credit.

Losses from commercial real-estate lending pose the biggest threat to U.S. banks as the loans deteriorate, leaders of Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and Office of Thrift Supervision told the Senate Banking Committee earlier this month.

Capmark had its senior unsecured ratings lowered to C from Caa1 by Moody’s Investors Service Inc. after the announcement of the potential sale, release of the operating results and restructuring efforts, according to a Sept. 9 credit opinion published by Moody’s.

‘Substantial Losses’

“Unsecured lenders and bondholders, either in a default or restructuring scenario, would experience substantial losses,” Moody’s said.

KKR, the New York-based private-equity company run by Henry Kravis and George Roberts, wrote the investment in Capmark down to zero as of March 31 of this year, according to data provided by KKR’s publicly traded investment vehicle.

Andrea Raphael, a spokeswoman for Goldman Sachs, declined to comment on the status of her firm’s investment in Capmark.

The case is In re Capmark Financial Group Inc., 09-13684, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Tuesday, October 20, 2009

Home Prices to Fall Over 10% in 2010

The article below on the continuing downward spiral of home prices is another great indication of Mr. Bernanke's economic recovery which he takes credit for at every opportunity.

I'm sure a third straight year of declining home prices, including yet another double digit decline, is a sure sign the economy has improved.

You see, for me an "economic recovery" means more people will have jobs and house prices will stop falling and even rise in value.

Apparently it means something else to others.

If you think I'm being facetious, please ask Mr. Bernanke what he is.

Robert J. Abalos, Esq.

Homes: About to get much cheaper

  • On 11:07 am EDT, Tuesday October 20, 2009

If you thought home prices were bottoming out, you may be wrong. They're expected to head a lot lower.

Home values are predicted to drop in 342 out of 381 markets during the next year, according to a new forecast of real estate prices.

Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.

In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years -- though it underestimated the scope.

Mark Zandi, chief economist with Moody's, agreed with Fiserv's current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said.

In fact, those areas with high concentrations of foreclosure sales will experience the steepest drops, according to Fiserv. Miami, for example, is expected to be the biggest loser. Prices are forecast to plunge 29.9% by next June -- after having already fallen a whopping 48% during the past three years.

If Fiserv's forecast holds, Miami real median home price will tumble to $142,000 by June 2011.

In Orlando, Fla., the second-worst performing market, Fiserv anticipates a 27% price collapse by June 2010, followed by a less severe drop the following year. In Hanford, Calif., prices are estimated to drop 26.9% and continue falling 9.5% in 2011; in Naples, Fla., they're expected to fall 26.8% and then flatten out.

Other notable losers include Las Vegas, where prices have already fallen 54.6% and are expected to lose another 23.9% by June 2010. In Phoenix values have already collapsed by 54% and could fall another 23.4%. In both cities, Fiserv anticipates the losses to continue into 2011, but they will be less than 5%.

Prices had stabilized

The latest forecast is at odds with the past few months of the S&P/Case-Shiller Home Price index. That report has given hope that most housing markets may have already stabilized because the composite index of 20 cities rose in May, June and July. Nationally, it found that home prices have gained 3.6%.

Brad Hunter, chief economist for Metrostudy, which provides housing market information to the industry, however, expects a change in fortunes, however.

"I'm afraid Case-Shiller may be just a temporary reprieve," he said.

He pointed out that the tax credit for first-time home buyers helped support prices during the three months of Case-Shiller gains. By the end of November, the credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, according to estimates by the National Association of Realtors. But the market assistance ends when the credit expires on Dec. 1.

Hunter also sees a new wave of foreclosure problems coming from higher priced loans and prime mortgages. He expects a high failure rate for option ARM loans that were issued to prime customers so they could buy homes in bubble markets, such as California and Florida. In those areas, prices for even modest homes had skyrocketed.


A handful of metro areas will buck the trend, according to Fiserv. Six markets will remain flat, and 33 will actually post gains. The biggest winner will be the Kennewick, Wash., metro area, where home prices have ramped up 8.9% over the past three years and are expected to increase another 3.4% by June 2010.

Fairbanks, Alaska, prices are anticipated to rise 2.5%, while Anchorage will climb 2.1%. Elmira, N.Y., prices may inch up 1.8%.

The nation's biggest metro area, New York City, will underperform the nation as a whole over the next two years, according to Fiserv. Prices, which have already fallen 21.7% to a median of $375,000, are expected to fall 17.4% by June 2011.

Home values in the nation's second largest city, Los Angeles, have fallen 43.3% since June 2006 to a median of $313,000. They are expected to dive another 20.2% over by June 2010, and then start to climb in 2011. Chicago prices, which have fallen 25.2% to $227,000, will drop only 4.1% over the next 12 months and then starting to climb.

The Detroit metro area now has the dubious distinction of having the lowest home prices in the country. Prices have dropped 51.7% to a median of $50,000. They're expected to fall another 9.1% and then stabilize.

Monday, October 19, 2009

More Evidence of Mr. Bernanke's Economic Recovery?

Yet another housing bailout on the way

Obama administration unveils plan to prop up state and local agencies that which provide mortgages to first-time and lower-income homebuyers.

By Tami Luhby, senior writer

NEW YORK ( -- Just as federal officials seek to wind down many bailout programs, the Obama administration announced Monday yet another initiative to prop up the housing market.

Administration officials unveiled a plan to aid state and local housing finance agencies, which provide mortgages to first-time and lower-income homebuyers and enable the development or rehabilitation of rental properties. Officials declined to put a pricetag on the program, but said there would be no cost to taxpayers.

"This initiative is critical to helping working families maintain access to affordable rental housing and homeownership in tough economic times," said Treasury Secretary Tim Geithner.

Under the initiative, the Treasury Department, along with Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), will purchase housing bonds issued by the finance agencies. This will give the groups the funding needed to make new loans. Also, the government will provide a temporary credit program to allow the agencies to refinance their existing bonds to more favorable terms.

The measure will enable housing agencies to lend to hundreds of thousands of families and enable the development or rehabilitation of tens of thousands of rental units, administration officials said. The agencies operate in all 50 states and in many cities.

The agencies will pay fees to participate in the program, which officials say will cover its cost. They are still working with the agencies to determine the extent of support needed. Earlier news reports said the initiative could cost as much as $35 billion.

The finance agencies have had a tough time funding mortgages since the bond markets went haywire last year. As a whole, they are operating at only 20% to 25% of their usual capacity, with some groups halting their lending completely, said Susan Dewey, president of the National Council of State Housing Agencies.

While the administration says the program comes at no cost to taxpayers, the Treasury Department is ultimately responsible if an agency defaults on its debt payments.

The agencies have a good track record. They generally make 30-year, fixed-rate mortgages and require full documentation. The delinquency rate on agency mortgages is comparable to that of prime loans given to homeowners with good credit backgrounds, according to administration officials.

While the government is starting to pull back its support of the banking industry, officials said it is too early to tell when it will withdraw from the housing market. Congress is considering extending an $8,000 tax credit for first-time homebuyers, which ends next month.

The credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, by the end of November, according to estimates by the National Association of Realtors. To top of page

Wednesday, October 14, 2009

Profiting from Eminent Domain: Heads I Win, Tails I Win

When I read news stories like the one below I can only think of Sun Tzu and his advice that every battle is won before it is fought.

If you owned land near this project in Brooklyn, you were a winner.

The project was going to get built. The only question was at what cost?

The owners of property in this area reaped a fortune. Let's face it. This area in Brooklyn twenty years ago was a slum, the poster child for economic redevelopment or what they used to call in the 1960s "urban renewal."

You could have bought this land for next to nothing.

Now, with the state committed to building large public projects there the land isn't cheap anymore, especially thanks to the power of eminent domain looming over everything, forcing deals where many would have never happened.

There is an old axiom that says nothing so sharpens the mind as a date with the gallows.

Same is true when eminent domain is lurking about. Quick deals get done and they are often extremely profitable. As I say, it pays to buy the very best land at fair prices, something quite reasonable in situations like this which are really more like merger arbitrage in strategy than outright land banking.

Robert J. Abalos, Esq.

NY court hearing challenge to arena land-taking

ALBANY, N.Y. — Homeowners and businesses resisting the forced sales of their properties for an arena and real estate development in Brooklyn will tell New York's top court that it's unconstitutional for a state agency to order them out.

The Court of Appeals is hearing oral arguments Wednesday afternoon over developer Bruce Ratner's proposed $4.9 billion, 22-acre Atlantic Yards project. The project includes a new arena for the New Jersey Nets, office towers and apartments. Ratner is the Nets' principal owner.

Businesses and homeowners are challenging the Empire State Development Corp.'s power to force them out. They say the state constitution authorizes the use of eminent domain for public purposes, not enriching others.

Lower courts have upheld the project.

Sunday, October 11, 2009

One Third of All Mortgage Applications Denied

The mainstream media will talk a great deal about how the number of mortgage applications is soaring.

What they don't tell you is that one-third of all those applications are denied.

It takes two ingredients to make a bull market:

1. Cheap money
2. Loose lending standards

Thanks to Mr. Bernanke we have #1.

We don't have #2 and won't for a long time. Why?

Because banks and lenders aren't stupid. Conditions for making loans are awful. Rising unemployment, massive loan defaults, and let's not forget inflation and the disaster of borrowing short and lending long when interest rates will likely explode in a few years. If I was a lender I'd be hoarding cash now and building reserves to ride out the bad months still to come---and likely rejecting lots of new loan applications.

Robert J. Abalos, Esq.

Report: 1 in 3 Loan Applications Denied

WASHINGTON — Nearly one in three borrowers who applied for a mortgage last year was denied as lenders kept their standards tight as the mortgage crisis accelerated, the government reported Wednesday.

In its annual look at mortgage practices among lending institutions, Federal Reserve said the denial rate for all home loans was about 32 percent last year — about the same as in 2007, but up from 29 percent in 2006. The denial rates for blacks and Hispanics were more than twice as high as the rate for white borrowers.

The report highlights massive changes in the lending industry after the housing market bust. Overall loan applications were down by a third from a year earlier, and were half the level in 2006.

Loans backed by the Federal Housing Administration soared to 21 percent of all loans made last year from less than 5 percent in both 2005 and 2006.

For black borrowers, more than half of all loans were FHA-insured, more than triple a year earlier. For Hispanics, that number shot up to 45 percent, more than four times as high as in 2007. That was troubling news for consumer advocates.

"I'm hard-pressed to believe that many of those borrowers couldn't have been served by the private sector," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington. "It implies that the industry has shut down in serving this population."

High-priced loans with rates at least 3 percentage points above the rate for prime loans, shrunk to nearly 12 percent of the market from a high of 29 percent in 2006. But that figure mainly reflects unusually low interest rates during the recession, the report said, and understates the disappearance from the market of high-priced subprime loans made to borrowers with poor credit.

Last year, about 17 percent of blacks and 15 percent of Hispanics got high-priced loans, compared with about 7 percent of whites. Even controlling for factors that might widen that discrepancy, there still a gap of almost 8 percentage points between the number of blacks and whites who got high-cost loans.

The mortgage industry says lenders are not discriminating by race, and are making adjustments based on borrowers' risk profile — such as their credit score and the size of their down payments.

"You still have a certain degree of risk-based pricing in the market," said Jay Brinkmann, the Mortgage Bankers Association's chief economist.

Lenders also scaled back dramatically on the amount of so-called "piggyback" mortgages, in which borrowers used second mortgages to avoid making a 20 percent down payment. Those loans have virtually disappeared from the market: Only 98,000 were made last year, down from 1.3 million annually in 2006.

The data, collected from nearly 8,400 lenders, is required under the Home Mortgage Disclosure Act of 1975.

Friday, October 9, 2009

Cheap and Easy Credit Gone for Good for the Middle Class

From The Wall Street Journal today:

NEW YORK -- Karen King owes nearly $36,000, more than she's ever earned in a year.

All day long, bill collectors call. She hunts for a second job, sometimes skips meals, and stays with other family members at a grandfather's crowded apartment, trying to get out of debt and turn her life around.

She largely holds herself at fault. "Years ago, I lived for now. It was so stupid," the 28-year-old says. "It's depressing, but I can't live that life anymore." Now, she says, "I basically want to live for the future."

The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent.

But the financial crisis and recession have reversed what some economists dubbed the "democratization of credit," forcing a tough adjustment on both low-income families and the businesses that serve them.

"We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans," says Ronald Mann, a Columbia University law professor. Now, "it will be harder for families at the bottom of the income ladder to get credit cards," he says.

The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show. Mortgage defaults also occur with greater frequency among the lower incomes.

For families with incomes between about $20,500 and $37,000, the ratio of debt to assets rose from 14.4% in 1998 to 18.5% in 2007 -- more sharply than the increase in the overall population -- according to the Fed's Survey of Consumer Finances. In addition, a full fifth of defaults and delinquencies on first mortgages have been by borrowers earning under $30,000, the highest rate among income groups, according to data from Equifax and Moody's

The democratization of credit began decades ago. Federal legislation in the late 1970s required banks to avoid discriminatory lending and meet the needs of local communities, spawning a wave of home buying and entrepreneurship in lower-income neighborhoods. The rate of homeownership in families with incomes in the bottom two-fifths rose to nearly 49% by 2001 from below 44% in 1989, according to Fed data analyzed by Mr. Mann at Columbia.

Credit-card borrowing took a similar path. One cause was a 1978 Supreme Court decision that let banks charge whatever interest rate was legal in the state where their card operation was headquartered. The ability to charge higher rates made it more profitable to offer cards to risky borrowers. Adding oomph to both credit-card and mortgage lending was the growth of markets where lenders could sell their loans.

By 2007, 35% of Americans in the bottom two-fifths of income had a credit card with a balance, up from just over 21% in 1989. And use of these cards increased. Their median balance on the cards, adjusted for inflation, grew 180% over that period for people in the bottom fifth of income and 80% for those in the next higher fifth.

When the recession struck, banks that had eagerly wooed new credit-card customers reversed course. "Rather than keeping accounts that have high loss potential and limited revenue opportunity, the mission becomes to close out those customers' active lines and drive them off the books," said a report from TowerGroup, a research firm. By June 2009, banks were closing credit-card accounts at a rate of 14% or 15% annually, double the rate of a year earlier.

Government policy, in some ways, has reinforced lenders' business imperative to pull back. A new credit-card law limits banks' freedom to raise interest rates without 45 days' notice. Anticipating this and other changes, card companies took aim at delinquent accounts and shed customers deemed most at risk of default, says Chris Stinebert, president and chief executive of the American Financial Services Association, a trade group. "Banks and credit issuers are looking at their own debt and trying to collect as much as they possibly can," he says.

Backers of the card legislation say one goal is to erect some obstacles to both the lending and the borrowing excesses of recent years. Treasury Secretary Timothy Geithner, testifying before Congress in July, said: "We now know that millions of Americans were...unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education."

All this means a new reality for consumers like Ms. King. Most of the credit cards she had were maxed out by 2004. She would sometimes just let the bills pile up and not pay the minimum. "I would start paying it, and then my sister almost got evicted from her old apartment, or my grandfather decided he couldn't pay the rent. They needed help," she says.

Later, the store cut her work hours. As she fell further behind, issuers canceled her credit cards and handed the debts over to collectors. Ms. King's credit score slid to 576, a level that deems her a high-risk borrower.

Last fall, wanting to buy gifts for her mother and sister and clothes for a young niece, she applied for credit and was rejected at Macy's and Dress Barn, finally getting a card with a $250 limit at the Children's Place.

Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate's degree from a community college -- loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather's two-bedroom apartment, where her mother, uncle and sister also live.

Ms. King's father died when she was four, and her mother reared her and two siblings. A basketball star in high school, she was the first in the family to pursue higher education. She got her first credit card when she began college and was working at a fast-food restaurant. But, she says, she never learned how to mind a budget.

Legislation passed this year will require that when banks issue a credit card to someone under 21, a parent or guardian must co-sign and have joint liability.

Out of college and working at the shoe store, Ms. King kept up a busy social life, eating out several times a week and going to movies -- even as the collectors called. But she lost the shoe-store job in January, and then learned that a prospective new employer had rejected her after running a credit check. Fearing her credit record would trip her up again and again, she resolved to fix her financial mess.

Gone are dinners at Red Lobster and Olive Garden and purchases like new basketball shoes. She has a part-time job as a tour-bus driver that pays $13 an hour plus tips. She held a second part-time job, in telemarketing, for several months, but it was on suburban Long Island, and getting there, using both the subway and a commuter train, finally became too much. She now is looking for a second part-time job closer by.

One day, when the subway to her tour-bus job was rerouted, she had to take a taxi. She watched the meter anxiously the whole way, groaning when she had to hand over a $12 fare.

With the aid of a financial counselor provided by a nonprofit, Ms. King is applying triage to her debts. "First, I want to take care of all the little things," she says, "and then the student loans."

When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person's credit report when it is settled for a partial payment.

She rejected any idea of a bankruptcy filing for the same reason. "It takes forever to come off" the credit report, she says.

To help people like her, several American cities have added financial counseling centers. In New York, their clients' average debt is $18,000, and half have incomes under $10,000. Counselors work with families to follow a budget, imposing choices they may not have had to make in years.

On a warm day, Ms. King ducked into a bodega, H&M Madison Express. She allowed herself a bottle of water, skipping a snack, unlike in the old days.

Decisions like that add up, said the bodega's manager, Hekmat Mustafa. Until 11 months ago, he accepted credit cards, but with fewer customers using them he stopped, to avoid a monthly fee and small fixed fee on each tiny purchase.

"The rise I see now is in food stamps, even from teenagers," Mr. Mustafa said. The number of food-stamp recipients was up 22% in June from a year earlier.

As he spoke, two customers walked in, both to buy individual cigarettes for 50 cents. Not long ago, he said, they would have bought a pack, for $9.

At the other end of the retailing spectrum, Sears Holdings Corp. last year began promoting its lay-away program to enable credit-deprived families to continue to shop.

In Ms. King's world, she says, "all of my friends are going through the same thing I am."

It looked that way at a cookout she held in late summer -- potluck, to save costs. Her younger sister, Janice, said she was also awash in debt, from medical expenses and a bad shopping habit. She has a part-time job at a supermarket. Their mother, also named Janice, left her apartment amid mounting utility bills and moved in with her father and daughters. She is trying to pay off $5,000 of debt so she can rebuild her credit and get an apartment of her own.

A 22-year-old friend, Norman Broggin, lost his job at the same shoe store as Ms. King in the spring. He said he had no money to socialize anymore. Looking around at the laughing group, he said it was the first time they had been together in a long while. Before, "we would hang out every weekend," he said. "Get a drink at a nice bar, eat dinner at a nice restaurant. We don't do anything anymore."

Some are turning to wherever they can for credit. A publicly traded pawnshop chain, EZCorp., reported a 37% rise in revenue in the second quarter. "With credit limited and other options disappearing, there are people looking for somewhere they can get emergency cash," said David Crume, president of the National Pawnbrokers Association.

Cash-strapped workers have long obtained advances through "payday loans," available at storefront lenders for fees that equate to high annual interest rates. Even that move is not so easy now. "More customers are walking in the door, but turndowns are up," said Steven Schlein, a spokesman for the payday-loan industry's trade group, the Community Financial Services Association of America.

Federal Reserve data show that the use of credit cards has been eclipsed by use of debit cards, which don't entail a loan.

Sometimes, in spare moments between work and commuting and budget calculations, Ms. King flips through a photo album that records her old life: house parties, birthdays, pro-basketball games.

"I was a social person, I had interest in a lot of things," she says. "I had dreams. Now I'm just paying off the past."

Thursday, October 8, 2009

REUTERS: U.S. Housing Market Still Hasn't Bottomed Yet

Roubini says housing market hasn't bottomed

NEW YORK (Reuters) - U.S. housing prices may still fall more than 10 percent, killing an incipient recovery, as demand from first-time home buyers fades, leading economist Nouriel Roubini said on Thursday.

Roubini, one of the few economists who accurately predicted the magnitude of the financial crisis, said massive losses in commercial real estate loans will add to the problem, forcing banks to raise more capital.

"The stress is moving from residential mortgages that are still in deep trouble, to commercial real estate, where they are just starting to recognize that they're going to have massive, massive losses," Roubini of RGE Global Monitor told reporters after a presentation for a World Economic Forum report on the global financial system.

U.S. home prices rose for the third straight month in July, raising hopes the market is stabilizing after a three-year plunge.

A first-time buyer credit of $8,000, which is set to end on November 30, has jump-started housing activity this year and has helped reduce a massive inventory of unsold homes.

While the number of unsold houses may have bottomed out, prices are poised to fall further, increasing pressure on the economy again, Roubini said.

One of the main risks next year may be from losses on some $2 trillion in outstanding commercial real estate loans, the economist predicted.

"Half of this is in medium-sized and smaller banks, and even in the larger ones. Most of these losses are not recognized because they're keeping the loans at face value on their books," he said, forecasting that U.S. and U.K. banks will need to raise more capital when those writedowns are made.

Still, Roubini sees a greater chance of a U-shaped economic recovery in developed economies, with a 20 percent to 25 percent chance of a double-dip.

"If it's a U-shaped recovery, China, Asia, and emerging markets will do fine. If there is a double dip, the consequences will be severe for everybody."

The Wall Street Journal Hits a Home Run with This Economic Analysis

The worst recession since the Great Depression has left a scorched landscape that will weigh on the labor market and the broader economy for years to come, according to economists in the latest Wall Street Journal forecasting survey.

The 48 surveyed economists, not all of whom answer every question, expect the economy to bounce back from four quarters of contraction with 3.1% growth in gross domestic product at a seasonally adjusted annual rate in the just-ended third quarter. Expansion is seen continuing through the first half of 2010, though at a slower rate. But the massive downturn has left an open wound in the labor market that will take years to heal. On average, the economists don't expect unemployment to fall under 6% until 2013; unemployment in September hit 9.8%

"Never before has business shed so many workers so fast, so many people failed to find work who are looking for work, and so many dropped out of the labor force as in the current circumstance," said Allen Sinai at Decision Economics.

Growth may have returned, but it has yet to bring jobs with it.

The tough road for the labor market was underscored by Thursday's report on weekly applications for unemployment insurance. The Labor Department reported that initial claims for unemployment insurance fell 33,000 to 521,000 in the week ended Oct. 3rd. The number of people collecting unemployment insurance also fell, but remained above 6 million. The decrease in continuing claims likely reflects people exhausting their unemployment benefits after several months of looking for work in vain. "We expect the improvement to remain a very slow one, and therefore for the household sector to be contending with a weak labor market for quite some time," wrote Joshua Shapiro, chief U.S. economist with research firm MFR Inc. , in a note to clients.

On average the economists expect the unemployment rate to peak at 10.2% next February. But even once the employment situation stops getting worse, economists expect recovery to come slowly. It took just 14 months for the unemployment rate to rise from 5.8% to its current level. On average, the economists say it will take nearly four years for the rate to drop below 6% again.

In the meantime, the unemployed will be loath to spend or borrow. They are less likely to move and are more likely to default on mortgages and loans.

"The recovery in employment will be slow," said Diane Swonk at Mesirow Financial. "It could take until 2014-15 before we see a 5% handle on unemployment again, which is forever in politics."

Indeed, persistently high unemployment could prove to be a political hot potato not only for the 2010 midterm elections for Congress but even the 2012 presidential election. Lawmakers are already considering new measures to boost hiring, such as a tax incentive for employers, but in the wake of the $787 billion stimulus, additional government spending has become politically charged.

While nine of the 46 economists who answered a question on the subject supported tax cuts for employers and seven backed tax incentives for hiring, nearly a third of the respondents said that the government shouldn't do anything. Just four said that the government should boost spending.

"It's time to let the business cycle take over," said Stephen Stanley of RBS.

The existing stimulus has raised concerns about the deficit, with almost three-quarters of the respondents saying that taxes will have to be raised on Americans making less than $250,000 at some point over the next six years.

The situation also is complicated for the Federal Reserve, which has to decide how to pull back from its extraordinary interventions in the market and when to raise interest rates from their current level between 0% and 0.25%.

The economists don't expect the central bank to raise rates at all until sometime around August 2010 amid continued high unemployment. Most economists say the Fed can wait as too little inflation remains a bigger risk than too much, at least over the next year or two.

There also is concern that the economy will deteriorate as the government and the Fed begin to unwind stimulative measures. The housing bust was the key driver of the downturn, and economists said higher mortgage rates and a withdrawal of Fed support for the mortgage-backed securities market are two of the three biggest potential destabilizing influences on a nascent recovery on the sector. Rising unemployment rates were the third. Some economists are worried that the economy will take another leg down some time over the next twelve months, leading to a so-called "double-dip recession."

"A double-dip recession would be lethal," said Nicholas S. Perna of Perna Associates.