Politicians Overlook Role of Housing in Economic Recovery

BY ADAM QUINONES

The Chairman of the Federal Reserve today told Congress in his Semiannual Monetary Policy Review that “Households report that they have little confidence in the durability of the recovery and about their own income prospects. Moreover, the ongoing weakness in home values is holding down household wealth and weighing on consumer sentiment.”

This is not encouraging news for a rapid recovery in America.

Ben Bernanke went on to share what the Fed views as looming threats toward positive progress in the broader economic recovery: “Among the headwinds facing the economy are the slow growth in consumer spending, even after accounting for the effects of higher food and energy prices; the continuing depressed condition of the housing sector; still-limited access to credit for some households and small businesses; and fiscal tightening at all levels of government.”

The Chairman then elaborated on housing specifically, saying “The demand for homes has been depressed by many of the same factors that have held down consumer spending more generally, including the slowness of the recovery in jobs and income as well as poor consumer sentiment. Mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained. Also, many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes, the substantial backlog of vacant properties for sale, and the high proportion of distressed sales are keeping downward pressure on house prices.”

This sort of commentary isn’t surprising to housing finance professionals. The mortgage industry has been forced to endure all sorts of  “Cart Before the Horse” type regulatory reforms over the past two years which have led to conflicting interpretations of regulatory policies and an over-tightening of loan underwriting guidelines. These measures have put banks on the defensive and all but cut off funding lines to “less than perfect” borrowers, deepening the hole that has become the housing market and further reducing private investor confidence.

What is surprising though is the ongoing lack of serious attention given to housing finance reform, especially after the Fed’s repeated warnings that housing is a major headwind in the macroeconomic recovery outlook. 

Not too many folks disagree with calls for much needed GSE Reform, but there is a major disparity among the urgency of these outcries.  Some say a piecemeal reform approach is the right move to protect the long-run solvency of the banking system and mortgage finance. Others say we’re grossly overlooking the core issue facing U.S. growth prospects, a housing market on the verge of being totally sucked into a negative feedback loop.

Are politicians grossly overlooking the housing crisis as a major source of economic stagnation?

I think so. And I’m sure most industry professionals would agree with me…

———————-

U.S. bill to reform Fannie, Freddie unlikely soon
WASHINGTON, July 12 (Reuters) – The U.S. housing finance system badly needs an overhaul, but chances for winding down ailing mortgage giants Fannie Mae and Freddie Mac in the near term are remote, the top Republican on the U.S. House of Representatives Financial Services Committee said on Tuesday.

“We would like a comprehensive bill. Now, can we get a comprehensive bill? I don’t know. I don’t think so,” said Representative Spencer Bachus, an Alabama Republican who chairs the House Financial Services Committee.

Bachus said at a capital markets subcommittee markup of seven small bills relating to Fannie Mae and Freddie Mac that he is waiting on the Obama administration to introduce a formal outline of how to deal with the two mortgage giants before moving forward in the House with broader legislation.

He was sharply criticized by Representative Barney Frank, the leading Democrat on the committee, for stalling on congressional action to reform Fannie and Freddie.

“I have been hoping that we are going to get legislation to replace Fannie Mae and Freddie Mac. Now I am told by the chairman that we can’t do that — that he isn’t able to get a bill passed,” said Frank, a Massachusetts Democrat.

FRANK: GOP LACKS REFORM VOTES

The Republicans, Frank said, do not have the necessary votes to enact wider reform of Fannie and Freddie. He questioned the GOP tactic of introducing a flurry of smaller bills over the past couple of months to incrementally reduce the government’s role in the mortgage market.

Bachus said he met with Treasury Secretary Timothy Geithner and Housing Secretary Shaun Donovan in April, along with other members of his party, to discuss various proposals on housing finance reform.

He blamed the Obama administration for failing to take the lead on writing a formal reform plan for Fannie and Freddie, and said that has kept Republicans from voting on a comprehensive bill.

The Obama administration outlined ideas for restructuring the housing finance system in February, but did not call for specific legislation.

The Treasury Department unveiled three options in February for overhauling the U.S. housing finance system, and recommended selling off the loans Fannie and Freddie hold over time.

“I’m being criticized here for waiting on the administration. If they want to bring forth a comprehensive proposal, they have two or three weeks to do it,” Bachus said.

Fannie Mae and Freddie Mac are companies chartered by Congress to make financing available to support housing markets. The government took over the companies, which are known as government-sponsored enterprises, in September 2008 at the height of the financial crisis when they were hit hard by soured home loans.

More than 85 percent of new loans are backed by the government in some way, including Fannie, Freddie and the Federal Housing Administration, which does not make loans directly but insures those that meet certain standards.

The House capital markets and government-sponsored enterprise subcommittee is considering seven small bills from Republicans. The bills mainly address capping the total dollar amount of federal bailouts for Fannie and Freddie, which have cost taxpayers more than $135 billion so far this year. Any measure approved in the House subcommittee would have to be approved by the full committee, then the full House and the Senate before it could be sent to President Barack Obama to be signed into law.

Debate over the fate of the mortgage finance enterprises, which are central to the secondary housing market, is expected to spill into 2013.

——-

BOTTOM LINE: The housing market is swimming in a sea of uncertainty and won’t be on its way to recovery until some sort of concrete forward looking directional guidance is offered by an official source, good or bad! We don’t expect this mess to be cleaned up overnight, nor do we think it’s fair to expect a broad-based reform package to be implemented with one swipe of President Obama’s pen.  What we do expect is better management of expectations and a clear voice of leadership. And if the regulators are really having this much difficulty making a decision on the next move…then maybe they shouldn’t be implementing onesy-twosy patchwork regulations just to appease outcries for reform. All that does is create more confusion …which only breeds more uncertainties and adds further barriers to the home loan qualification process.

The Reds say they’ve tried to get the ball rolling and the Blues say they’re ready to act but the Reds won’t compromise. And because Republicans have a majority in the House, they don’t need to compromise. Sounds like a stalemate (Dems have control of Senate so a House bill would get shot down there). Isn’t this the same exact spot we were in last year? Yes it is. The issue has been debated and discussed over and over again, yet no SERIOUS positive progress has been made….just more political pandering and poo slinging in preparation for the 2012 elections.

WHAT A JOKE

If no serious attention is given to housing finance reform until after the 2012 elections, what are the implications on the broader economy? Is America doomed to undergo a long, slow, uneven recovery? It certainly seems that way right now.

 

U.S. Tackles Housing Slump

The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president’s re-election in 2012.

Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House.

One Crisis, Many Responses: A Timeline

Past efforts to tackle the ailing housing market.

Housing “hasn’t bottomed out as quickly as we expected,” President Barack Obama said at a White House town hall last week. Mr. Obama said housing remained the “most stubborn” problem facing the country and conceded that a raft of federal mortgage-aid programs were “not enough, and so we’re going back to the drawing board.”

Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut.

Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.

Discussions are in early stages, and there isn’t consensus around particular ideas. A spokeswoman said the president and his advisers “are always looking at new ways” to strengthen the housing market but wouldn’t disclose details. “While we continue to consider the options available to us, it would be inaccurate to say we are proposing any of these particular ideas at this time,” White House spokeswoman Amy Brundage said.

Home-buyer tax credits worth up to $8,000 in 2009 and 2010 gave a short-term boost to home sales, but demand plunged after they expired. Foreclosures have put pressure on prices and damped residential construction, traditionally an engine of job growth during economic expansions.

“As conditions change, some options that were below the line the way the market was 18 months ago might be above the line today,” said Peter P. Swire, who teaches law at Ohio State University and until last year was a top housing adviser to the White House.

Most of the administration’s housing efforts have focused on helping borrowers refinance or modify their loans to avoid foreclosure. But some economists say too many borrowers won’t be saved through loan workouts and that the administration must do more to soak up the flood of foreclosures by boosting housing demand.

President Obama’s signature loan-modification program, announced during his first month in office, has lowered payments for around 600,000 borrowers. Meanwhile, around four million borrowers are in foreclosure or have missed three or more consecutive mortgage payments. While mortgage-delinquency rates have fallen, millions more remain at risk of defaulting if they experience a payment shock because they owe more than their homes are worth.

More recent housing relief has targeted unemployed borrowers. Last week, officials said unemployed borrowers with loans backed by the Federal Housing Administration could miss up to 12 months of payments while they look for new jobs. A separate $1 billion program is set to begin providing interest-free loans of up to $50,000 for temporarily jobless borrowers this month.

Unlikely to get Congress to provide additional funds, the administration is left to examine options that it can implement without congressional consent. Fannie and Freddie, the so-called government-sponsored enterprises or GSEs, could be one policy lever. “There are a number of things that we can look at on the GSE side,” said Austan Goolsbee, departing chairman of the Council of Economic Advisers.

Last year, officials considered a range of policies that included allowing borrowers with loans backed by Fannie and Freddie to refinance more easily by relaxing fees that lenders are charged for riskier borrowers.

Others outside the administration have pushed for federal entities to lend more freely to mom-and-pop investors or to create public-private initiatives that would allow institutional investors to buy more foreclosed properties. “Because we have limited credit availability, we need investors to help soak up the supply,” said Ivy Zelman, chief executive of housing-research firm Zelman & Associates.

Fannie and Freddie also could rent, instead of sell, some of their huge inventory of foreclosed homes, which could take some pressure off prices. The firms owned about 218,000 properties at the end of March, and sold around 100,000 during the first quarter, or more than one-third of all foreclosed property sales, according to analysts at Barclays Capital. The firms could take back as many as 700,000 homes over the next year, according to estimates by economists at Goldman Sachs.

That idea has generated interest among some housing officials but could meet resistance from Fannie and Freddie’s independent federal regulator. Renting out homes hasn’t been tried on a wide scale and is “riddled with risk,” said Ed Delgado, a former Wells Fargo executive who leads the Five Star Institute, a mortgage-industry group. “Essentially you’re converting the [firms] from providing liquidity to a glorified national landlord for distressed assets.”

All these options could boost lending and attack the overhang of foreclosures, but would put more risk on federal agencies and Fannie and Freddie. The mortgage giants have cost taxpayers $138 billion and counting.

They also would require the blessing of the Federal Housing Finance Agency, which is charged with limiting losses at Fannie and Freddie. The FHFA last year refused to go along with an Obama administration initiative to reduce loan balances for certain borrowers who were current on their mortgages but heavily underwater. The agency has typically resisted programs which produce substantial, upfront losses designed to offset potentially larger but harder to quantify long-term losses.

The same skepticism that prompted advisers last year to push for giving the market room to heal on its own could prevail once again. Simply focusing on the broader economy is “one of the best things we can do for the housing market,” Mr. Goolsbee said.

Still, the high-level housing discussions are significant because Mr. Obama hasn’t put much emphasis on his housing policies over the past year. The administration has taken fire from both sides over its housing-relief plans, with Democrats saying the administration has let banks off too easily while Republicans have said the programs wasted money. The housing market could be a top election issue for voters in swing states such as Florida, Ohio, and Nevada.

 

10 Reasons I’m Canceling My Credit Cards

By BRETT ARENDS

Getty Images

The dollar bill needs you.

A growing number of merchants won’t accept cash anymore. That includes a lot of airlines, which insist you pay by credit card if you want to buy a drink or a sandwich on board. And now comes news that the U.S. Treasury is printing fewer dollars, as we move towards an all-plastic economy.

Great news for the banks. Great news for the card companies. Great news for the marketing establishment, which can now pore through our transactions and our personal lives in greater and greater detail.

Me? Call me a contrarian, or just call me ornery, but I view this with gloom. This not a step forward. It’s a step backwards. Personally, I’ve been moving the other way. I’ve cut down on my use of credit cards and debit cards. The latest news is the final push I needed to get them out of my life completely. I’m going all cash.

Here are ten reasons why.

1. I’ll spend less. A variety of scientific studies, such as this one at the Massachusetts Institute of Technology, have found that people are simply willing to spend more when they use credit cards than they do when they use cash. It’s common sense. No wonder our national obsession with shopping really took off when credit cards came on the scene. And I’ve found it personally. Last fall and winter, when I went for an extended period without carrying any plastic at all, my day-to-day spending rate absolutely collapsed.

2. The card bonuses aren’t worth it. A lot of people use their credit cards for the frequent flyer miles or other bonuses. But many of these deals are getting less valuable. Airlines are cutting back on flyer programs. And how good were these programs anyway? Schwark Satyavolu, co-founder of BillShrink, says that if you are really smart, dedicated and targeted about getting and using your bonuses, you can sometimes get very good deals. But overall, he says, deals are getting less valuable, and are increasingly focused on cards with annual fees. Most of us are doing very well if we manage to get back 2% on our cards. Compared to the extra amount you spend, that’s chicken feed.

3. Cash makes budgeting easy. Personal financial planners encourage clients to draw up budgets. It’s great advice, in theory anyway. But I have a confession: I’m just not that organized. Nor, I suspect, are lots of people. But if I go to the bank once a week and draw out a certain amount of cash, it makes the budgeting automatic. Easy.

4. Less worry about identity theft. Do you worry about handing out your card or details every time you make a purchase? I do. The banks and online merchants work hard to maintain security, but the crooks are just as inventive. And there are plenty of them. People suffer identity theft all the time. Using cash cuts down on the risk.

5. Fewer impulse purchases. One way credit cards let us spend more is that they make it easier to buy things that we don’t need, and may not even want, on the spur of the moment. And the stores are set up to encourage it they rely on sophisticated marketing science to manipulate you into reaching into your wallet. If you don’t have the money on you, you can’t splurge. If you really want the item in question, you can come back and buy it tomorrow. Chances are you won’t.

6. I can still shop online. Just because I’m using cash doesn’t bar me completely from getting online deals. Yes, I’ll have to bend a principle, but I won’t have to break it: I can buy a prepaid card in a store and charge it up with cash. Okay, so it’s plastic, but I have to pay for it in advance, with cash, and it will have a limit. (On the same principle, I can also use a prepaid card as an emergency backup if I travel).

7. Say goodbye to debt. I pay my cards off in full every month, but a lot of people don’t. They use their cards to borrow, and it’s a financial disaster. We’ve seen what the overuse of debt has done to our economy. According to Bankrate.com, the average card charges you 14% interest. Many charge a lot more. And you’re paying with after-tax dollars. As an illustration, you’d have to earn at least 16.5% on the stock market (before long-term capital gains tax of 15%) just to keep up. Good luck with that. Says New York University’s Stern School of Business, since 1928, U.S. stocks have produced an average compound return of just 9.7%. And Bankrate calculates that someone who buys a $1,000 item on a credit card charging 14% interest, and merely pays 2% of the balance each month, will end up paying $1,750 for that item. It will take 110 months to pay off the bill.

8. Privacy. Credit cards are great for tracking people. They tell you exactly what you bought, where and when. (Throw in all the data tracked by your smartphone, your iPad and so on, and we’re basically rats scurrying around in a Perspex cage while marketing strategists study our every move). I have to confess I hate it. And I love the privacy and anonymity of cash. Last week I meet my wife for lunch. But I stopped by my bank first to take out cash. It’s none of American Express’ business.

9. Cash rebuilds the link between what I earn and what I spend. I remember back when I got my first job: I started calculating how much everything I spent cost in terms of hours worked. That new CD cost two hours of my time, and so on. It was a good discipline. Credit cards weaken the link. It’s no wonder that the rise in plastic has resulted in an explosion in the numbers living beyond their means. (Is it also a coincidence that the rise of the credit card has also coincided with the collapse in unions? Before VISA, if you wanted a fancier car or vacation next year, you needed a pay raise).

10. Cash helps people I want to help. The money goes to the merchant and his suppliers. When I go into my local credit union to cash a check, I’m keeping a couple of local tellers in work. Credit cards? I’m helping finance bank executives, marketing teams and call centers in India. I am sure they are all fine people, and I wish them well. But if I had to choose, and I do, I would rather help my local merchants and credit union staff.

 

Fed Seen Buying $25 Billion a Month in Treasuries After QE2 Comes to End

By Daniel Kruger and John Detrixhe – Jun 27, 2011

The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rates low.

While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.

The central bank, which injected $2.3 trillion into the financial system after the collapse of Lehman Brothers Holdings Inc. in September 2008, will continue buying Treasuries to keep market rates down as the economy slows. The purchases are supporting demand at bond auctions while President Barack Obama and Republicans in Congress struggle to close the gap between federal spending and income by between $2 trillion and $4 trillion.

“I don’t think the Fed wants to remove accommodation in any way, shape or form,” said Matt Toms, the head of U.S. public fixed-income investments at Atlanta-based ING Investment Management, which oversees more than $500 billion. “It’s quite natural for them to reinvest cash,” he said. “That effectively maintains the accommodative stance.”

Mortgage Debt

A total of $112.1 billion of the Fed’s government bond holdings will mature in the next 12 months, 7 percent of the $1.59 trillion in Treasuries held in its system open market account, known to traders as SOMA. Replacing those securities will require the Fed to buy an average of $9.4 billion of Treasuries a month through June 2012.

The Fed also held $914.4 billion of mortgage-backed debt and $118.4 billion of debentures, the debt of government sponsored enterprisesFannie Mae and Freddie Mac, as of June 22. UBS AG, Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co. and Royal Bank of Canada say $10 billion to $16 billion will mature each month, depending on the pace of prepayments.

In a Bloomberg survey of 58 economists June 14-17, 79 percent said Fed Chairman Ben S. Bernanke will sustain the central bank’s balance sheet at current levels until the fourth quarter, compared with 52 percent in April. The Fed said June 22 its goal is to hold assets at $2.654 trillion.

Treasury 10-year yields fell to the lowest since Dec. 1 today, down from this year’s high of 3.77 percent on Feb. 9. On June 24, the two-year yield came within one basis point of the record low, set November 2010, reaching 0.32 percent.

Frustrated Fed

The yield on the benchmark 10-year note declined to 2.84 percent today, the least since Dec. 1, before settling at 2.86 percent. The 3.125 percent security due in May 2021 traded at 102 1/4 at 7:13 a.m. in New York, Bloomberg Bond Trader prices showed. Two-year yields were at 0.34 percent after reaching 0.32 percent last week, the lowest since Nov. 4.

Bernanke said at a press conference June 22 that progress bringing down the 9.1 percent U.S. unemployment rate was “frustratingly slow.”

Fed officials said the economy will expand 2.7 percent to 2.9 percent this year, down from forecasts ranging from 3.1 percent to 3.3 percent in April. It was the second time this year Fed officials lowered growth estimates. Gross domestic product expanded 3.1 percent last year.

Policy makers said they expect the world’s largest economy to grow 3.3 percent to 3.7 percent in 2012, according to their central tendency forecasts. In April, their predictions ranged from 3.5 percent to 4.2 percent.

Fear Factor

Fed officials predict an average unemployment rate of 8.6 percent to 8.9 percent in the final three months of 2011, compared with 8.4 percent to 8.7 percent projected in April. Their estimate for unemployment at the end of 2012 was in a range of 7.8 percent and 8.2 percent, compared with 7.6 percent to 7.9 percent in April.

While the Fed didn’t start a third round of quantitative easing, as some traders speculated was needed, Treasuries could gain on weakening of the economy or the European sovereign debt crisis.

“What always moves the market is fear and greed, and there’s a huge amount of fear on the economy,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $28 billion. “That’s where you want to have Treasuries.”

The conflict between Obama’s administration and Congress over increasing the government’s borrowing limit could lead to higher yields, as Moody’s Investors Service and Standard & Poor’s said they may consider cutting the nation’s AAA credit rating unless progress is made next month.

Debt Ceiling

Vice President Joe Biden’s bi-partisan deficit-reduction group has been meeting since May 5 to reach a compromise that would trim long-term deficits by as much as $4 trillion and clear the way for a vote in Congress to raise the $14.29 trillion debt ceiling. Treasury Secretary Timothy F. Geithner has said the U.S. risks defaulting if the limit isn’t increased by Aug. 2.

The 10-year Treasury note’s yield will reach 4 percent by June 2012, according to the median of 64 forecasters in a Bloomberg News survey. The last time it reached 4 percent was April 2010. Should that happen, investors would lose 5 percent on their investment, Bloomberg data show.

“Up until now, our assumption was that the risk is virtually zero of them ever missing an interest payment,” Steven Hess, Moody’s senior credit officer, said in an interview June 21. “If they actually miss a debt payment, then it’s a fundamental change.”

Record Auction Demand

So far, there’s been no lack of demand for government securities even as public Treasury debt has grown to $9.26 trillion from $4.5 trillion at the start of the financial crisis in August 2007, and $5.75 trillion when Obama took office in January 2009.

Investors have bid a record $3.01 for every dollar of debt sold by the Treasury this year, compared with $2.99 last year and $2.50 in 2009. The average 10-year yield this year of 3.32 percent compares with a 20-year average of 5.17 percent.

The Fed won’t raise its zero to 0.25 percent target rate for overnight loans between banks until the first quarter of next year, according to the weighted average forecast of 71 analysts surveyed by Bloomberg.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” Fed policy makers said in a June 22 statement. While the labor market has been “weaker than anticipated,” the impact of higher food and energy prices on consumption is likely to be “temporary,” officials said.

Inflation Expectations

Yields on 10-year Treasury Inflation Protected Securities show bond traders project an average 2.2 percentage point inflation rate during the life of the debt, up from 1.5 percentage points in August 2010, when Bernanke first indicated the central bank might resume debt purchases to fight deflation. QE2 also succeeded in driving investors into riskier assets. The Standard & Poor’s 500 Index has gained 22 percent during the period.

The Fed began its first round of quantitative easing in November 2008 after the collapse of Lehman and the central bank’s $85 billion bailout of insurer American International Group Inc. with a program to buy $500 billion of mortgage securities and $100 billion of agency debentures. In March 2009 it boosted planned purchases to include $300 billion of Treasuries and raised its target for mortgage debt to $1.25 trillion and $200 billion of government agency bonds.

Asset purchases, even at a smaller scale, “still promotes what the Fed was trying to accomplish,” said Tony Crescenzi, a money manager and strategist at Newport Beach, California-based Pacific Investment Management Co., which runs the world’s biggest bond fund. “Even with the stoppage of QE2, the fundamental forces remain intact.”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; John Detrixhe in New York atjdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

 

QE 2 Proves No Silver Bullet

By JON HILSENRATH

Federal Reserve officials have been warning for months that the controversial $600 billion bond-buying program they initiated last year wouldn’t be a panacea for an ailing U.S. economy. That’s one forecast they seem to have gotten right.

The program—known as the central bank’s second round of quantitative easing, or QE2—will end on schedule this month with a mixed legacy, having proved to be neither the economy’s needed elixir nor the scourge that critics describe.

Fed officials, who conclude a two-day policy-making meeting Wednesday, launched the program in November. They hoped it would prevent very low inflation from giving way to a Japan-style bout of deflation—a fall in the overall consumer price level that drags the economy down with it.

More

• GOP Candidates Set Sights on Fed
• Real Time Economics: A Look Inside the Fed’s Balance Sheet

They also sought to stir the economy by holding down long-term interest rates, boosting prices for stocks, corporate bonds and other financial assets. More job growth, they argued, would follow.

They succeeded in putting deflation worries to rest. But economic growth is slower now than it was when the program was enacted, the job market has sputtered after a spurt, and the financial-market impact has been a mix of good and bad. Stock prices are higher and corporate-bond yields lower, which helped growth. But prices for oil, grains, and other commodities have surged, pinching consumers.

Though Fed officials didn’t state it as a goal, another outcome of the program was likely the continued slide in the dollar, which is both a blessing and a curse for the economy. A weaker dollar makes U.S.-made goods cheaper on world markets, increasing exports, but also increases the cost of imported goods and thus feeds inflation. The dollar was on its way down before the Fed easing started and has continued on that path.

In all, the economy looks to have grown at a 2% annual rate in the first half of the year, the slowest six-month stretch of the recovery.

“You don’t want to fool yourself into thinking that the Fed has some kind of power to solve all of our problems,” said James Hamilton, an economist at the University of California at San Diego.

The QE2 program unleashed a backlash domestically and abroad. Critics say the central bank pushed up commodities prices by pumping too much money into the financial system and weakening the dollar, fueling higher inflation around the world.

Some of this criticism is likely overstated. Crude-oil prices hovered around $75 a barrel for a month after Fed Chairman Ben Bernanke made his QE intentions clear in an August 2010 speech in Jackson Hole, Wyo. Prices surged above $100 a barrel only after political turmoil erupted in the Middle East early this year.

Fed officials say commodities- price inflation is driven primarily by global demand, particularly from fast-growing economies like China.

Under the Fed’s program, it will have purchased $600 billion of U.S. Treasury securities between November and June. In the process, it is pumping money into the financial system. Fed officials argue that by reducing the supply of long-term bonds in the hands of private investors, the purchases helped to hold down long-term interest rates, easing financial conditions.

Fed officials estimate the impact of the purchases is equivalent to a 0.75-percentage-point cut in the federal-funds rate, a short-term interest rate they control and which influences other borrowing costs throughout the economy. In normal times, such a cut would be an aggressive move. But the Fed can’t cut that interest rate because it has already reduced it to near zero.

Fed officials claim credit for halting the drift toward deflation. When Mr. Bernanke made his speech, price movements in options markets suggested investors thought there was near 40% probability of deflation in the coming year, according to Barclays Capital calculations. Today, that probability is about 10%. “There was disinflationary risk that got taken off the table,” Charles Evans, president of the Federal Reserve Bank of Chicago, said in an interview earlier this month.

The program appears to have helped push stock prices higher. The day before Mr. Bernanke made his Jackson Hole speech, the S&P 500 index stood at 1047.22. It was up 4% within a week and 10% within a month. But U.S. companies probably deserve more of the credit—corporate profits were up 29% in 2010 from a year earlier, without the Fed’s efforts to juice their stock valuations.

In normal times, Fed policies work through interest-sensitive sectors such as housing. The policies benefit housing less now because the sector is already so burdened by debt.Since last August, the annual pace of starts on new home construction is down from more than 600,000 to 560,000 and home prices, as measured by the S&P/Case-Shiller home price index, are down another 3%.

Louis Crandall, a bond market analyst economist with Wrightson ICAP, said of the Fed program, “the final verdict on this was that in a period in which they felt great anxiety, they did the best they could.”

The program still has skeptics. Dan Floorness, chief financial officer of Fastenal Co., said the Winona, Minn., seller of bolts, screws and nuts, didn’t benefit from quantitative easing.

“If people have a good business need for credit and they’re worthy of being lent to, I believe they’re able to get credit whether there’s quantitative easing or not,” he said.

—Dana Mattioli contributed to this article.Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

 

Buy a New or Used Home?

REAL ESTATE

By Michele Lerner • Bankrate.com

Highlights

• Advantages of new homes: They’re clean and are easily personalized.
• Drawback of new homes: They cost more, even with builder incentives.
• You can track the value of a used home over time; fixer-uppers are cheaper.

Some homebuyers will take nothing less than a brand-new home with an untouched bathtub. Others want a home with character in an established neighborhood. Personal preferences aside, there are pros and cons to each option — buying a newly built home or buying a resale — as well as financial implications to the choice.

New home advantages

Rochelle Fitzgerald, a sales associate with Coldwell Banker Residential Brokerage’s Rockwall office near Dallas, says, “There’s no question that some people prefer that ‘new-home smell’ and the idea that no one else’s feet have been on the carpet. On top of that, many people like to personalize their home by picking out everything from the beginning.”

Some buyers focus on the more practical aspect of buying a new home because it will typically require less maintenance.

“It’s very important to some buyers to have everything new, plus they have the peace of mind that comes along with the builder’s warranty,” says Dan Kruse, broker/owner of Century 21 Affiliated in Madison, Wis.

On the financial side, builders, particularly in a slow real estate market, offer plenty of incentives to buyers.

“In a seller’s market, new homebuyers will often spend as much as 10 percent or more above the purchase price for optional features,” says Jeff Ristine, broker/owner of Weichert, Realtors: Kingsland Properties near Chicago. “Now many builders are offering free options as an incentive to buyers such as a finished basement and an upgraded kitchen. Builders are tailoring their incentives to specific buyers, so some will throw in things like initiation fees for a country club membership.”

New homes disadvantages

In spite of the added builder incentives,real estateexperts say new homes are typically more expensive than existing homes.

“Traditionally, new homes are more expensive because they are being built from the ground up,” Kruse says. “In recent years, some new homes have come down somewhat in cost because the builders have been hurt so badly by the downturn in the housing market. For the most part, though, builders try to keep price integrity and will offer closing cost assistance or upgrades rather than lower the base price.”

Upgrades and closing cost funds are typically tied to the buyer using a builder-designated lender and title company.

“I would caution buyers, at least in our market in the Chicago area, to be careful buying a new home because builders are competing againstforeclosuresand it could be long time before a new home will increase in value,” Ristine says. “Even with builder incentives, you are usually paying a premium for buying a new home, so you need to hold onto it for five years or more to build any equity.”

Fitzgerald says buyers of new homes should expect to own longer than buyers of existing homes because of differences in the rate of price appreciation.

“In a new home community, if you need to sell within a year or two, you are competing against the other homes that are still being built and can be customized,” Fitzgerald says. “Buyers will choose a brand-new home rather than a 1-year-old home, especially if the builder can offer incentives that a regular seller cannot.”

One other downside is the potential for living in the midst of a construction site for several years, particularly if the builder has slowed development due to the recession.

When to buy a new home

Realtors agree that the best values for a new home are available when the development is nearly complete.

“In years past, buyers wanted to get in early to take advantage of preconstruction pricing and a better location within the community, but now buyers want to get in late, so if you have to sell you won’t be competing with newer homes in the development,” says Kruse.

Ristine says buyers should be cautious about buying before a community is near completion, because some builders are so financially strapped that they cannot complete their developments.

Existing-home advantages

“The biggest advantage of existing homes is the maturity of the community,” Kruse says. Buyers can take a historical perspective and look at how well the homes have held their value. Plus, buyers willing to purchase a fixer-upper can more easily increase the value of their property than someone with a new home.

Fitzgerald says that buying in an established community allows homeowners to know more about the schools and neighbors before they buy.

Long-term value in new and existing homes

For most homebuyers today, the biggest concern is whether the property will hold its value. Fitzgerald says, “In 10 years, a new home purchased today is likely to have more value simply because you own a newer home designed to meet today’s standards. A new community will have newer amenities, too, including schools and shopping areas.”

Kruse and Ristine believe long-term value depends more on location than the age of the property.

“Value depends on where a home is located and how well the home has been maintained,” says Ristine. “People do like new things, but if a home has been upgraded with a new kitchen and bath it can compete very well with a new home.”

Ultimately, the decision to buy a new or existing home comes down to which a buyer values more: a maintenance-free new home or a mature neighborhood.

 

Non Warrantable Condos

About	Mortgage Financing for Non Warrantable Condos.

Company Overview

A Condo can be classified as Non Warrantable when it does not meet Fannie Mae and Freddie Mac lending requirements. For example if there is Pending Litigation involving the HOA, Delinquent Monthly HOA dues , Occupancy rate is too low, structure not fully complete, etc. Fannie Mae and Freddie Mac will not purchase mortgages on the secondary market that do not fall within their guidelines leaving very few Mortgage sources for consumers.

Description

Guidelines -80% Loan To Value -Litigation Ok -Minimum 660 Fico Score -Owner Occupied and 2nd Homes only -Purchase and Refinance -High HOA delinquency is Ok -Occupancy issues are not a problem Very Competitive Rates!

 

Wells Fargo Exits Reverse-Mortgages on Unpredictable Market

By Dakin Campbell and Laura Marcinek

June 16 (Bloomberg) — Wells Fargo & Co., the largest U.S. home lender, said it was exiting the business of reverse mortgages because of the possibility that property values will decline further, displacing as many as 1,000 employees.

“The decision was made based on today’s unpredictable home values,” the San Francisco-based lender said today in a statement distributed by Business Wire.

Reverse mortgages allow retirees to create a lifetime stream of income by tapping the equity in their homes. Lenders are repaid from the sale of the home when the borrower dies or moves. Bank of America Corp., the second-largest U.S. home lender, said in February it was retreating from the business because of “competing demands and priorities” at the Charlotte, North Carolina-based company.

“Why be in the reverse mortgage business if the equity that you’re lending, your collateral, is disintegrating?” said Terry Wakefield, a mortgage-industry consultant in Wisconsin.

Home prices slid 3.6 percent in the first quarter to the lowest level since 2003 in the S&P/Case-Shiller index of values in 20 U.S. cities.

The 1,000 employees in the business are invited to apply elsewhere in the company for jobs, according to the statement.

Wells Fargo will maintain its obligations on existing reverse-mortgage contracts, without originating new deals. The contracts represented about 1.2 percent of overall mortgage volume as of 2010, the company said.

To contact the reporters on this story: Dakin Campbell in San Francisco atdcampbell27@bloomberg.net;

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

Last Updated: June 16, 2011 15:35 EDT

 

In Florida, Banking’s Survivors Are Lending – WSJ

By RUTH SIMON

Fifty-one banks in Florida have failed since the start of 2007. Now some of the survivors are starting to make loans again.

In the first quarter, 29 banks with headquarters in Florida increased their total loan volume by at least 5% compared with the end of 2010, according to the Federal Deposit Insurance Corp.

Edward Linsmier for The Wall Street JournalInnovative Concepts Group’s Bud Taylor, left, with chef Dennis Garcia, right, and Joseph Caballero of GulfShore Bank, the company’s lender.

The modest rebound is a contrast to the overall decline of 1.7% in total loans at the nation’s 7,574 banks and savings institutions, the fifth-steepest drop in 28 years. Many banks still are struggling to overcome piles of bad loans, while some institutions with plenty of capital are having trouble finding enough eager, qualified borrowers.

In Florida, more than 200 banks are still standing. Those that aren’t crippled by past mistakes “can find some opportunities in loan demand right now,” says Richard Brown, the FDIC’s chief economist.

“We have no competitive advantage from a product standpoint,” says Joseph Caballero, chief executive of GulfShore Bank. “It’s strategy and execution,” The 3½-year-old Tampa bank’s loan portfolio grew 16% to $93.5 million in the first quarter.

Just two loans are at least 30 days past due, and GulfShore has foreclosed on only one loan. All three loans were made before Mr. Caballero arrived in 2009. He previously worked at Bank of America Corp., which holds 18% of all deposits in Florida, more than any other bank, according to the FDIC.

Old Florida National Bank, of Orlando, increased the size of its loan portfolio 5.6% in the first quarter compared with Dec. 31. Despite all the bad news since the housing bubble burst, “the dynamics for banks that can grow are very attractive,” says John Burden, Old Florida’s president. Tourism is strong, and living costs are relatively affordable.

The Florida loan-growth figures don’t reflect increases due solely to mergers and acquisitions. Texas was the only state where more banks had loan growth of at least 5% in the first quarter.

Many of the fastest-growing banks in Florida haven’t been around long. That means they made fewer loans just before the financial crisis erupted and may have been more skeptical about loan applicants than rivals were.

“We are able to look at things with a sharper eye than we might have,” says Michael Sleaford, president and chief executive of Reunion Bank of Tavares, Fla. With $142 million in assets, the bank opened its doors in October 2008 and serves physicians, potato farmers and other customers in six counties in central Florida.

GulfShore was started in 2007 by a group of local investors and made just 75 loans for a total of $25 million during the next two years. From the start, giants such as Bank of America,Wells Fargo & Co. and SunTrust Banks Inc. have been tough competitors, holding nearly half of all deposits in the metropolitan area that includes Tampa, the latest FDIC data show.

The big boys aren’t the only challenge. Last year, GulfShore sought $15 million in new capital to fuel its growth. But many investors were wary of sinking money into a small bank. GulfShore wound up with just $6.7 million. The bank now has $176 million in assets.

Most of the money came from bank directors and executives, with Mr. Caballero chipping in $400,000. GulfShore is hunting for more capital this year.

Since the economy in Florida still is weak, GulfShore rejects about half of all loan applications, usually because of insufficient cash flow or a low appraisal. Mr. Caballero said he targets lawyers, doctors and other professionals whose businesses are more resistant to bad economic times.

A new pay plan that took effect at GulfShore this year ties executive bonuses partly to the level of nonperforming assets. Loan officers are graded on sales and management of past-due loans and other credit exceptions.

Most GulfShore borrowers come through referrals from people who know someone at the bank or previously worked with Mr. Caballero or his staff. One of the bank’s directors knows Bud Taylor, president of Innovative Concept Group, a food broker in Tampa. Mr. Taylor represents big food companies in sales to hospitals, amusement parks and other institutions. Mr. Taylor initially was reluctant to do business with such a small bank. But he was impressed when GulfShore dug deeper into the company’s strategy than other banks, asking to review contracts for $6 million in seller-financed notes used by Mr. Taylor uses to buy smaller firms.

“Joe’s proposal was more competitive, because he asked more questions,” says Mr. Taylor, referring to Mr. Caballero. In October, Mr. Taylor got a $2 million line of credit from GulfShore. He said he even referred his largest rival to the bank.

Write to Ruth Simon at ruth.simon@wsj.com