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Market News (03/31/2008)

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MADISON, Wis. (4/1/08)
* The number of Americans receiving food stamps will jump to 28 million in the 2009 fiscal year, as job losses mount, and food and energy prices soar, according to the Congressional Budget Office. That’s up from 27.8 million in 2008 and 26.5 million in 2007, and the highest total since the food-stamp program was launched in the 1960s. Federal benefit costs are forecast to increase to $36 billion in the 2009 fiscal year, from $34 billion in the 2008 fiscal year. Fourteen sates saw their food-stamp rolls hit record levels by last December, noted Stacy Dean, director of food stamp policy at the Center on Budget and Policy Priorities. One in eight residents in Michigan now receives food stamps. That state has seen a steady decline in factory jobs, as have Ohio and Illinois (The New York Times March 31) … * Assets in U.S. retirement plans have almost doubled in value over the past 10 years despite recent market downturns, according to a report by Watson Wyatt Worldwide. Assets in U.S. pension funds, 401(k)s, individual retirement accounts, and other retirement vehicles jumped to $15 trillion in 2007--from $7.9 trillion in 1997. “Retirement plans have built up strong reserves over the last 10 years, benefiting employers, employees and retirees,” said Carl Hess, director of investment consulting in North America at Watson Wyatt. The study also found that the distribution of retirement assets has shifted dramatically over the past 10 years. The percentage of assets in defined contribution plans jumped to 56% from 47%, while defined-benefit assets declined accordingly (/PRNewswire-FirstCall/ via Yahoo! News March 31) … * A regional report released Monday continued to show contraction and inflationary pressures. The National Association of Purchasing Management-Chicago said its business index increased to 48.2 in March, from 44.5 in February but still below the 50 level that indicates contraction. The prices-paid index jumped to 83.9 from 79.4, suggesting that inflationary pressures have increased. There were some bright spots in the report. Supplier deliveries jumped to 54.9 from 39.6, while employment rose to 44.6 from 33.5 (Dow Jones Newswires March 31) … * U.S. business confidence fell to a new record low during the last week of March--consistent with a recession, according to Moody’s Economy.com Survey of Business Confidence. Assessments of current conditions plunged following the recent collapse of Bear Stearns. Real-estate firms, financial institutions, and business-service companies are the most pessimistic. However, pricing pressures remain moderate despite soaring oil prices. The survey suggests that the economy will remain weak at least through the summer … * KB Home, one of the largest residential homebuilders in the U.S., reported a loss of $268 million for the first quarter, as the housing slump prompted big writedowns. “Until prices stabilize and consumer confidence returns, we believe inventory levels will remain significantly out of balance with demand,” said KB Home President/CEO Jeffrey Mezger. The first quarter included a charge of $223.9 million in writedowns related to declining home prices. The average sales price of KB’s homes fell 7% to $248,200 during the quarter (Associated Press via Yahoo! News March 28) … * Consumers could be facing higher grocery bills this year as farmers plant less corn. The Department of Agriculture predicts that farmers will plant 86 million acres of corn in 2008--down 8% from 2007. The decline is expected, as the price to grow corn increases. The slowdown in corn planting will boost corn prices, which have soared in recent years, as more corn was used in the ethanol industry (Associated Press via Yahoo! News March 31) …

News of the Competition (03/31/2008)

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MADISON, Wis. (4/1/08)
* Another state official has launched an investigation of the auction-rate bond market. Massachusetts Secretary of State William Galvin announced Friday that he is investigating New York-based Merrill Lynch, Charlotte, N.C.-based Bank of America, and Zurich-based UBS AG about how they marketed auction-rate bonds to investors. Since Feb.13, more than 60% of the auctions for the securities have failed after dealers that previously supported the market stopped bidding for bonds investors didn’t want. “My office has received calls from people who thought they were investing in safe, liquid investments only to find that they had, in fact, purchased auction-market securities that are now frozen, and they cannot get their money out,” said Galvin (Bloomberg.com March 31) … * Mergers and acquisitions bankers saw a 35% plunge in fees during the first quarter. Advisory fees declined to $8.7 billion from $13.4 billion during the fourth quarter, according to Freeman & Co. data. The value of announced mergers and acquisitions dropped to $656.2 billion in the first quarter, from $971 billion in the same period last year, according to Bloomberg News data. Weaker earnings have prompted financial firms to cut more than 34,000 employees during the past nine months. Layoffs may total more than 100,000 during the next several years, according to Jo Bennett, a partner at Battalia Winston International, a New York-based executive search firm (Bloomberg.com March 31) … * Assets under management by sovereign wealth funds surged 18% to $3.3 trillion at year-end 2007, according to a report by International Financial Services London. The surge reflected rising oil revenues and an increase in foreign exchange reserves in some Asian nations. Assets are expected to hit $5 trillion in 2010 and $10 trillion in 2015 (Dow Jones Newswires March 31) … * Citigroup is planning to split its consumer-banking unit from its credit-card business, as part of a wider reorganization plan to lower costs. Citi named Teresa Dial as global head of consumer strategy and chief executive of consumer banking in North America. Steven Freiberg will head its U.S. credit-card business. Citi also said it will create geographical regions headed by regional chief executives, as the firm shifts its focus to faster-growing regions outside the U.S. (Associated Press via The New York Times March 31) …

Hampel to IBloombergI Home equity losses affect behavior

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MADISON, Wis. (3/31/08)--The economy slipped into a recession in December, and a big driver of that is the huge losses in home equity over the last couple of years that are impacting U.S. consumer behavior, Bill Hampel, chief economist at the Credit Union National Association, told Bloomberg TV Friday. “There has been a $3 trillion decline in home equity over the past couple of years that is dampening consumer behavior,” Hampel said on the “Bloomberg on the Economy” show. He was commenting on the recent plunge of the share price for JC Penney--and the broader context of the real estate market--after the company slashed its forecast for first-quarter profits and sales. JC Penney cited weaker than-expected consumer spending for the revised forecast. Hampel was asked about the credit union perspective, regarding these developments’ effect on consumer spending cuts and declines in credit union loans issued. “We’re seeing both--credit union members are saving more and borrowing less,” Hampel explained. “Credit unions are more conservative with lending [than other financial institutions]. Even though credit unions are not involved in the subprime area, they are more leery about issuing loans.” Falling stock prices also are dampening consumer behavior, Hampel noted. Another topic broached on the show was the recent actions of the Federal Reserve. Hampel was asked if consumers will see more moves forthcoming from the U.S. central bank. “We probably will,” he responded. “The Fed had done the right thing so far. It’s been new and innovative. I see further [rate] cuts coming down the road. And the Fed doesn’t even have to worry about inflation.”

News of the Competition (03/28/2008)

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MADISON, Wis. (3/31/08)
* The Federal Reserve announced Thursday that it plans to hold public hearings on Charlotte, N.C.-based Bank of America’s proposal to acquire Countrywide Financial Corp. of Calabasas, Calif., which was the nation’s largest mortgage lender before it ran into trouble. The Fed said the hearings will consider if the acquisition will benefit the public. Consumer advocates probably will use the hearings to press for Bank of America to help out troubled homeowners. The first hearing is scheduled for April 22 at the Federal Reserve Bank of Chicago. Hearings in Los Angeles are scheduled for April 28-29 at the Federal Reserve Bank of San Francisco’s Los Angeles office (Associated Press via Yahoo! News March 28) … * American Home Mortgage Investment Corp. has been granted a three-month extension to create a bankruptcy reorganization plan. Judge Christopher S. Sontchi of the U.S. Bankruptcy Court in Wilmington, Del., gave the firm until June 2 to file its plan. The company said it couldn’t develop a plan until it completed the sale of its loan-servicing business to investor Wilbur Ross. American Home of Melville, N.Y., collapsed in August last year, as the credit crunch began. It is the second-largest mortgage lender to file for bankruptcy protection, after New Century Financial Corp. (Bloomberg.com and Associated Press via Yahoo! Finance March 28) … * Federal and state banking regulators have given Fremont General Corp. 60 days to raise new capital or sell its Fremont Investment & Loan banking subsidiary, the firm announced Friday. The Federal Deposit Insurance Corp. set a May 26 deadline for the directive. Fremont also was ordered not to increase executives’ compensation or make any payouts to affiliates. Fremont operated mostly as a mortgage lender until early last year, when regulators made the company stop originating mortgages (Associated Press via The New York Times March 28) … * JPMorgan Chase and Bear Stearns signed a collateral agreement last week in which Bear and its units agree to guarantee to repay any loans or advances made by JPMorgan. The guarantee also requires Bear to repay amounts paid by JPMorgan to Bear creditors. Earlier last week, JPMorgan announced a revision to its deal to acquire Bear after shareholders balked. The firm boosted its price to $10 a share from its initial $2 a share offer. The Federal Reserve Bank of New York will assume control of a $30 billion portfolio of Bear assets as part of the deal (The Wall Street Journal Online March 28) … * Mutual of Omaha’s Mutual of Omaha thrift unit announced last week that it is planning a big expansion into Texas. It plans to have 30 to 35 branches in big metropolitan areas within the next seven years, said Robert F. Strong, the thrift’s market president for Texas. He said the unit also may acquire small banks in the state. The firm will rely on its 82 agents in northern Texas to bring in business (American Banker March 28) …

Market News (03/28/2008)

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MADISON, Wis. (3/31/08)
* Vacation-home sales plunged 31% last year, while sales of real estate purchased for speculation declined 18% as lenders tightened standards, the National Association of Realtors (NAR) reported Friday. Vacation-home sales totaled 740,000--down from a record-high 1.07 million in 2006. Sales of investment properties fell to 1.35 million from 1.65 million. However, NAR noted that the combined total of vacation- and investment-home sales still accounted for 33% of all home sales last year--down only slightly from 36% in 2006. “Certainly, second homes are discretionary purchases and there is a natural tendency to pull back from big-ticket items in periods of uncertainty,” said NAR Chief Economist Lawrence Yun. “The other factor is the disruption in the mortgage market, with a significant tightening of credit during the second half of 2007.” NAR also reported that the median price of a vacation home fell 2.5% to $195,000 last year, while the median price of an investment property was unchanged, at $150,000 (realtor.org March 28) … * Mortgage rates were mixed last week, according to a report by Freddie Mac. The average 30-year, fixed-rate mortgage (FRM) edged down by 2 basis points to 5.85%, while the 15-year FRM rose 7 basis points to 5.34%. “Long-term mortgage rates were mixed, but relatively unchanged in the past week as the latest economic indicators came in much as expected,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “For instance, the index of leading indicators continued to fall for the fifth straight month while consumer confidence reached a 5-year low,” added Nothaft. Freddie also reported that the one-year, adjustable-rate mortgage (ARM) increased 9 basis points to 5.24% last week. A year ago, the 30-year FRM averaged 6.16%, while the 15-year FRM stood at 5.86%, and the one-year ARM was at 5.43% (MarketWatch March 28). For CUNA's Daily Financial Rates, use the link. … * The Federal Reserve announced Friday that it will offer $100 billion to banks in April. The Fed will make $50 billion available at an auction April 7, and another $50 billion at an auction April 21. The central bank already has provided $260 billion to banks through the new auction process in an effort to boost liquidity (Associated Press via Yahoo! News March 28) … * Personal income picked up last month while spending decelerated and a key inflation measure rose only modestly. Personal income rose 0.5% in February following a 0.3% gain in January, the Commerce Department reported Friday. Personal spending rose 0.1% after a 0.4% increase. The core PCE price index--which excludes food and energy--increased 2% year-over-year, matching January’s reading. “The decline in the year-over-year core PCE is important in that it supports the notion the Fed is making the right decision in cutting rates aggressively and not threatening long-term price stability,” said Lehman Brothers Economist Zach Pandl. Fed officials prefer a range of 1% to 2% for the index (Reuters via Yahoo! News March 28) … * Consumer confidence fell to its lowest level in 16 years--suggesting a recession, according to the latest Reuters/ University of Michigan Surveys of Consumers. The final confidence index for March fell to 69.5--from 70.8 in February and the lowest reading since 68.8 in February 1992. The survey said “it is now nearly unanimous among consumers that the economy has already entered a recession.” The statement noted that consumers are very worried about jobs and inflation. The final reading for one-year inflation expectations surged to 4.3% in March, from 3.6% the previous month and the highest reading since October 2005 (Reuters via Yahoo! News March 28) ... * General Motors said a month-long strike at American Axle & Manufacturing Holdings has caused auto-parts shortages that will prompt the firm to idle a Detroit assembly plant this week. The strike has resulted in the automaker idling about half of its North American workforce of 80,000 employees. American Axle is demanding big wage reductions. The auto-parts supplier has said it will shut down its five plants in the U.S. if it doesn’t win the wage concessions (Reuters via The New York Times March 28) …

News of the Competition (03/27/2008)

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MADISON, Wis. (3/28/08)
* The accountants are being blamed as possible new perpetrators in the collapse of New Century Financial, according to a five-month investigation commissioned by the U.S. Justice Department. A report by the department indicated New Century engaged in “significant improper and imprudent practices” that were allowed by auditors at accounting firm KPMG. The 580-page report indicates that e-mail messages discovered in the investigation show that KPMG auditors discovered some irregular accounting practices at New Century, but KPMG partners running the audits dismissed the concerns due to fear of losing a client (The New York Times March 27) … * American Express Co. agreed to acquire General Electric Co.’s purchasing-card services to corporations--GE Money--for $1.1 billion. The deal, expected to be completed by the end of March, comes as GE is looking to redeploy its capital in the financial services industry amid trouble in the stock markets, analysts said. Under terms of the transaction, GE, the unit’s biggest client, will become a client of American Express under a multi-year pact, according to the companies. In 1992, GE created corporate payment services to issue purchasing cards, and corporate travel and entertainment cards to employees (The Wall Street Journal March 27) ... * In efforts to protect itself against a group of departed brokers, Bear Stearns Cos. asked a New York State court to stop the brokers from allegedly trying to get the firm’s clients to conduct business with the brokers’ new employers. Bear asked for restraining orders against five of its former brokers in papers filed Wednesday. Bear alleges the brokers had inappropriately solicited business from Bear clients and had improperly taken confidential Bear information with them to their new jobs (The Wall Street Journal March 27) … * The European Commission reported Wednesday that it had begun antitrust proceedings against Visa Europe because of interchange fees charged by the card company for cross-border, consumer-payment card transactions. Visa Europe is suspected of violating European Union rules “which forbid restrictive business practices such as price fixing,” according to a statement issued by the EU. Visa Europe is owned by 4,600 banks that have issued 348 million cards. The commission, which has wide-ranging authority to regulate competition in the 27-nation EU, said the start of proceedings is not any indication of proof of guilt, and there is no specific deadline to complete the investigation (Reuters March 27) … * Citigroup Inc.’s most recent quarterly loss will be four times bigger than was originally forecast, said Meredith Whitney, analyst at Oppenheimer and Co., in a revision of her previous estimate. Citigroup is the largest U.S. bank by assets. The company may write down $13.1 billion in assets, Whitney said, including collateralized debt obligations and leveraged loans in the first quarter. Overall, U.S. bank earnings will plummet 84% in the first quarter, she added (Bloomberg.com March 26) …

Schenk to Milwaukee media Markets pain far from over

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MILWAUKEE (3/28/08)--More bad news is on the horizon for the down-sliding U.S. residential real estate market, Mike Schenk, senior economist at the Credit Union National Association, told the Milwaukee Journal Sentinel Wednesday. In the wake of federal government estimates, indicating national home sales dropped 1.8% in February, Schenk told the Wisconsin-based newspaper, “The pain and suffering are far from over.” “In the scheme of things, Wisconsin is holding up fairly well,” Schenk said. “The big reason is while house prices were appreciating, the size of the bubble was not as big here as it was in other places ... There is less of the building boom here than in these other places, much less speculation.” Nationwide, home prices have fallen about 5% on all homes--new and existing--and worst-case scenarios have them falling as much as 25%, Schenk told the paper. Price decreases will “probably go into 2009 and likely beyond that as well,” he added. Housing cycles have historically lasted eight-to-10 years--half with prices up and half down, Schenk said. However, prices rose for the 10 year-period before the current downturn, which means the cycle was twice as long as normal, he explained. “This makes me think that this is not going to be a short and sweet correction,” Schenk said. “It will be long.” With high levels of consumer debt and uncertain job prospects, psychology can also be a factor, he added. “You basically have people who are really nervous about making big commitments … They are going to start having to behave differently ... the go-go years are over,” he concluded.

Market News (03/27/2008)

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MADISON, Wis. (3/28/08)
* Gross domestic product (GDP)--the measure of the value of all goods and services produced in the U.S. and the best measure of the nation's economic health--increased at an annual rate of 0.6% during fourth quarter 2007--the slowest pace since 2002, said the Commerce Department Thursday. The reading matches analysts' forecasts, was unchanged from previous estimates, and compares to the 4.9% growth rate of third quarter. Economists are forecasting that growth in the first quarter of 2008 will be even weaker than 0.6%, and some predict a 1% drop in the GDP for second quarter. Corporate profits fell $53 billion (annualized) during the fourth quarter, the second consecutive decline. Financial industries' profits dropped $104.6 billion before taxes, even without the massive writedowns resulting from the subprime mortgage crisis. Nonfinancial industries' profits fell $30.7 billion, even including $26.6 billion in energy companies and $27.6 billion in wholesale trade. For all of 2007, the economy grew at the weakest pace in five years, increasing at a 2.2% rate adjusted for inflation. GDP grew by 2.9% during 2006 (The New York Times and The Wall Street Journal March 27) … * Initial claims for unemployment benefits dropped by 9,000 claims--a slightly deeper decline that expected--to 366,000 seasonally adjusted for the week ended March 22, the Labor Department said Thursday. Economists had expected a decline of 8,000. The previous week's level was revised downward by 3,000. The four-week moving average for initial jobless claims rose by 1,750 to 358,000, the highest level since October 2005. That compared with the previous week's four-week moving average of 356,250. Continuing claims for the week ended March 15, the latest data available, declined by 5,000--to 2.845 million from a downwardly revised 2.850 million. Jobless claim increases of more than 1,000 were reported in Michigan, Ohio and Missouri. California, New York and Wisconsin reported decreases of more than 1,000 in claims (Economy.com and The Wall Street Journal March 27) … * Americans owe a whopping $1.1 trillion on home equity lines of credit (HELOC), and banks holding HELOCs are beginning to worry that the home equity loans will be the next round in the credit crisis (The New York Times March 27). To make sure they get their money back, some banks have stopped borrowers from selling their homes or refinancing their mortgages until they pay off all or part of their home equity loans first. It is the first time lenders have resorted to such measures. While homeownership has climbed to record highs, home equity--the property's value less the mortgages against it--has fallen below 50% for the first time, according to the Federal Reserve. In December, roughly 5.7% of HELOCs were delinquent or in default--up from 4.5% in 2006, according to Moody's Economy.com. Some homes that are foreclosed have sold for less than the value of the mortgage and home equity loans. In these "short sales," lenders with first liens get dibs on the money before lenders holding second or third liens … * A recent study indicates that the U.S.--thanks to a weaker dollar-- has moved up on the list of places around the world that are the most cost-efficient. Researchers with auditing and consulting firm KPMG compared 136 cities in 10 countries in Asia, Europe and North America. The study did not include China. KPMG said survey found the U.S. to be more cost competitive than ever. In 2006, the U.S. was behind four other countries. This year, it jumped over Britain, the Netherlands, Italy and France to the No. 2 spot, behind Canada among the major industrial nations. Mexico, new to the study, was cheapest overall (The New York Times March 27) …

News of the Competition (03/26/2008)

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MADISON, Wis. (3/27/08)
* Merrill Lynch and Societe Generale each on Wednesday announced the creation of global carbon indexes that will let investors access carbon markets. “The [Merrill Lynch indexes] come in response to strong demand from our institutional, asset management, and wealth management clients who seek exposure to the rapidly growing global carbon market,” said Abyd Karmali, managing director and global head of emissions markets at Merrill Lynch. International carbon markets were worth about $60 billion in 2007 (Reuters March 26) … * Merrill Lynch and Morgan Stanley were sued Tuesday by clients who allege that the firms deceptively market auction-rate securities. They claim the financial firms misrepresent the risks of the investments, which are touted as a safe alternative to cash. The market for the securities has collapsed in recent weeks. “Morgan Stanley deceptively marketed [the securities] as cash alternatives to money market funds for investors needing liquidity and utterly failed to disclose material information,” said investor Gary Miller. Both companies deny the allegations. “The auction-rate securities market has existed for over 20 years without significant disruption until recent market events,” said Morgan Stanley in a statement (Reuters March 26) … * Citigroup announced Wednesday that it has agreed to pay $1.66 billion to settle a dispute with Enron Corp. creditors over the collapse of the energy-trading firm in 2001. “I am very proud of the value we have been able to recover on behalf of creditors,” said John Ray III, president and chairman of the board of the Enron Creditors Recovery Corp. In announcing the settlement, Citigroup denied any wrongdoing in the matter, but said it wanted to settle to avoid litigation. The collapse of Enron prompted the loss of billions of dollars for investors and wiped out the jobs and retirement funds of thousands of employees (CNNMoney.com March 26) … * Federal Reserve banks probably will accelerate their plans to shut down check-processing facilities because check use is declining, said Richard R. Oliver, an executive vice president at the Federal Reserve Bank of Atlanta and the manager of the Fed’s Retail Payments Office. Previously announced plans call for the central bank to have just four full-service processing centers by mid-year 2011, in Atlanta, Cleveland, Dallas and Philadelphia. Another 17 centers will remain open to handle only images. In comparison, there were 45 full-service centers in 2003 (American Banker March 26) …

Market News (03/26/2008)

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MADISON, Wis. (3/27/08)
* Mortgage activity rebounded last week, as refinancings surged, the Mortgage Bankers Association (MBA) reported Wednesday. The trade group’s Market Composite Index jumped 48.1% during the week ending March 21 to 965.9. The Purchase Index rose 10.6% to 403.7, while the Refinance Index surged 82.2% to 4255.2. Refinancings made up 62% of overall mortgage applications last week--up sharply from 49.7% the previous week. “The Federal Reserve acted last week to bring some stability to the mortgage-backed securities market and we saw an immediate impact with a drop in mortgage rates,” noted Jay Brinkmann, MBA’s vice president of research and economics. The average 30-year, fixed-rate mortgage (FRM) tumbled 24 basis points to 5.74% last week, while the 15-year FRM edged down one basis point to 5.23%. The one-year, adjustable-rate mortgage (ARM) inched up 3 basis points to 7.02%. Fewer borrowers are obtaining ARMs, as rates remain high. ARMs made up just 3.8% of overall mortgage activity last week, down from 7.9% the previous week (mbaa.org March 26) ... * The housing market remained weak last month, according to a Commerce Department report. New-home sales declined 1.8% to an annual pace of 590,000--the lowest level in 13 years. New-home sales were down 30% from the same month last year. The median new-home price was down 2.7% from a year earlier, to $244,100. Prices have declined amid high inventory levels. The inventory-to-sales ratio remained at 9.8 months in February--the highest level since 1981. Analysts hope the Federal Reserve’s rate cuts and initiatives to boost market liquidity will help revive the housing market and overall economy (Bloomberg.com March 26) … * Orders for big-ticket durable goods declined by 1.7% in February following a 4.7% drop in January, the Commerce Department reported Wednesday. Factory orders for machinery plunged 13% last month--the biggest decline on record. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, dropped by 2.6%--the largest decline since October. “Manufacturers are feeling the pressure from weaker demand but also rising cost of production,” said Wells Fargo Senior Economist Scott Anderson. He said the report indicates that “the economy has slipped into recession.” (CNNMoney.com March 26) … * Another student lender has backed out of the federal student-loan program. Brazos Higher Education Service Corp., one of the nation’s biggest student lenders, announced Monday that it is suspending new loans to students via the Federal Family Education Loans program for the 2008-2009 academic year. At least 26 other student lenders have exited the program, according to FinAid.org. Education Department officials are hoping that other lenders will pick up the slack. Some analysts doubt they will, however. The collapse of the auction-rate-securities market has boosted many lenders’ costs. The cost of borrowing in the asset-backed securitization market also has increased (The Wall Street Journal Online March 26) … * Most Americans plan to use their tax-rebate checks to pay off debt or boost savings, according to a CNN/Opinion Research Corp. survey. Forty-one percent of respondents said they plan to use their rebates to pay down debt, while 32% said they plan to put the funds into savings. Only 21% said they plan to spend the money. The rebates will give Americans $120 billion overall. In the past taxpayers have spent from half to two-thirds of their rebate money, noted Economic Policy Institute Senior Economist Jared Bernstein. However, he said people are more indebted today. Moody’s Economy.com Senior Economist Mark Zandi said people probably will end up spending more of the tax-rebate money than they planned. He predicts that taxpayers will spend about two-thirds of their rebate money (CNNMoney.com March 26) …

Market News (03/25/2008)

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MADISON, Wis. (3/26/08)
* Home prices posted a record decline in January. The S&P Case/Shiller Home Price composite index of 20 top markets found that home prices tumbled 10.7% over the 12 months ended in January--the biggest decline since the survey was launched in 2000. Sixteen of the 20 metropolitan areas reported declines. The poll’s 10-city composite index dropped 11.4%--the largest drop since that reading was launched in 1987. The drop is the “first national decline we’ve had,” noted index co-founder Robert Shiller. The market for lower-priced homes has been the most volatile, added Shiller, a sign of the subprime-mortgage crisis. The Case/Shiller index tracks the sale prices of the same homes. It is not seasonally adjusted (CNNMoney.com and Bloomberg.com March 25) … * Another index of home prices posted a much smaller decline last month. The Office of Federal Housing Enterprise’s (OFHEO) purchase-only home price index was down 3% on an annual basis in January. The index is seasonally adjusted. The agency only tracks homes involved in Freddie Mac or Fannie Mae financing, which until recently was capped at $417,000. “Since higher-end properties tend to experience greater price swings, the OFHEO index is seen as a conservative estimation of the true swings in the housing market,” noted Aneta Markowska of Societe Generale. Analysts expect home prices to continue declining, as rising foreclosures push even more homes onto the market (Thomson Financial via Yahoo! News March 25) … * Lenders are acquiring homes faster than they can sell them as foreclosures soar. Sales of foreclosed homes increased only 4.4% last year, while the supply more than doubled, according to a report by First American CoreLogic. About 2% of all home-mortgage loans were in foreclosure at year-end 2007--double the average rate during the last 28 years. Sales of homes owned by lenders probably will total 480,000 this year, estimates Moody’s Economy.com Chief Economist Mark Zandi. That represents 10% of all sales of previously occupied homes this year. He predicts that sales of foreclosed homes by banks will fetch about $160 billion over the next three years (The Wall Street Journal Online March 25) … * Consumer confidence plunged to a five-year low in March amid concern about rising prices, weaker job markets, and tighter credit. The Conference Board’s Consumer Confidence Index fell to 64.5 this month, from 76.4 in February. The March reading was the lowest since 61.4 in March 2003, just before the U.S. invaded Iraq, noted Lynn Franco, director of the Board’s research center. “Consumers’ outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon,” said Franco. Consumers became more pessimistic about both current and future economic conditions in March. The present situation index dropped to 89.2 from 104 in February, while the expectations index fell to a 35-year low of 47.9, from 58 the previous month. The percentage of consumers expecting fewer jobs rose to 29% from 28% (Associated Press via CNNMoney.com March 25) … * The Federal Reserve has provided a total $260 billion in short-term loans to banks since December. In its latest auction, commercial banks paid an interest rate of 2.615%--the lowest of the eight auctions the Fed has conducted so far. The central bank received bids of $88.9 billion for $50 billion in short-term loans. There were 88 bidders (Associated Press via Yahoo! News March 25) … * Almost 50% of checks written are consumer-to-business checks, according to the Federal Reserve’s 2007 Check Sample Study. At 58%, consumers are the highest percentage of check writers. At 72%, businesses are the highest percentage of check receivers. At 49%, remittance payments were the check purpose with the highest percentage. The study also found that 42% of checks were ineligible for automated clearinghouse payments under current National Automated Clearinghouse Association rules. The Check Sample Study is the third part of the 2007 Federal Reserve Payments Study …

News of the Competition (03/25/2008)

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MADISON, Wis. (3/26/08)
* A surge in problem financial institutions has prompted the Federal Deposit Insurance Corp. (FDIC) to boost staffing in its bank failure unit by 60% this year. The agency wants to add 140 workers to boost staff levels to 360 in the unit that handles bank failures. “We want to make sure we’re prepared,” said FDIC Chief Operating Officer John Bovenzi. He noted that most of the new positions will be temporary. There are already 76 banks on the agency’s problem institutions list. Since 1981, total failures each year have averaged about 13% of the number of financial institutions on the FDIC’s problem list (Associated Press via The New York Times March 25) … * The Federal Reserve Bank of St. Louis has named 18-year veteran James B. Bullard as its new president. He will take the position on April 1, replacing William Poole, who is retiring after 10 years. Bullard currently is vice president and deputy director of research for monetary analysis at the St. Louis Fed. He is also an adjunct faculty member in economics at Washington University and co-editor of the Journal of Economic Dynamics (The Wall Street Journal Online March 25) … * Two pension funds may ask a Delaware court for an emergency order to delay JPMorgan Chase’s acquisition of Bear Stearns, said a plaintiff’s attorney on Tuesday. The Police and Fire Retirement System of the city of Detroit is coordinating efforts with the Wayne County Employees’ Retirement System, said Gregory Nespole, an attorney for the Detroit fund. On Monday, JPMorgan boosted its bid to $10 a share, from $2 a share, in a bid to appease shareholders. In other news, a used T-shirt with the Bear Stearns logo sold for $151.76 online Monday. The shirt lured more than 1,600 visitors. Other Bear Stearns memorabilia are attracting interest as well, including umbrellas, coffee mugs, and cafeteria cards (Reuters via Yahoo! News March 25) … * JPMorgan Chase and UBS AG on Tuesday slashed their earnings forecasts for Merrill Lynch and said they anticipate more writedowns at the firm. “In our view, Merrill Lynch is overexposed to the credit markets, which have been challenging, especially in the areas where Merrill has been most active,” said analysts Kenneth Worthington and Funda Akarsu. Their forecast calls for Merrill to write down another $2.1 billion of subprime debt. Merrill in turn downgraded Bank of America, PNC Financial and SunTrust Banks yesterday, noting that the housing slump will continue to erode lending. “The downgrades reflect a weaker earnings outlook and a recent rebound in their prices driven by Fed rate cutting and other central banking actions, which should ease the pain, but will not preclude a deep and protracted credit cycle, in our view,” wrote Merrill Analyst Edward Najarian (Reuters via Yahoo! News March 25) … * Thornburg Mortgage announced Tuesday that it is seeking to sell as much as $1.35 billion of bonds in a private placement to raise funds needed to avoid bankruptcy. Thornburg is paying an 18% annual interest rate on the debt. The mortgage lender also is offering to purchase at least 90% of its outstanding preferred stock at a price of $5 per $25 in liquidation value. Thornburg previously announced that it changed its bylaws to let a single investor purchase up to $300 million worth of stock (Reuters via Yahoo! News March 25) …

Schenk Environment improving for home buyers

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NEW YORK (3/26/08)--Despite residential real estate posting a record drop-off nationwide in January, according to a survey released Tuesday, the home buying environment is improving, Mike Schenk, senior economist for the Credit Union National Association, told CNN.Money.com Tuesday. Home prices fell 10.7% over the last 12 months--according to the S&P Case/Shiller Price composite index of 20 key U.S. markets--to the lowest level since the inception of the index in 2000. However, because of the falling home prices, there was a modest increase in sales of existing single-family homes in January, according to a Monday report from the National Association of Realtors. Although serious economic problems are causing a decline in many U.S. home prices, the home-buying environment is improving for consumers, Schenk said. “Affordability is actually quite high,” he explained. “This is a pretty good market to consider taking the plunge. And it’s going to get better as we go forward.”

Market News (03/24/2008)

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MADISON, Wis. (3/25/08)
* Existing-home sales in the U.S. for February unexpectedly rose by 2.9% to a seasonally adjusted annual rate of 5.03 million units from January sales of 4.89 million units, the National Association of Realtors (NAR) announced Monday. It was the first gain in seven months. The national median existing-home price for all housing types was $195,500 in February--down 8.2% from $213,500 a year earlier. That drop was the largest recorded since 1968, the year NAR began keeping records. NAR Chief Economist Lawrence Yun said the gain in sales is encouraging. "We're not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing," he said on NAR's website, www.realtor.org. Single-family homes sales rose 2.8% to 4.47 million in February from an upwardly revised 4.35 million units in January, but they were 22.9% lower than the 5.80 million unit a year ago. The median existing single-family home price was $193,900, down 8.7% from February of 2007. Freddie Mac reported the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 5.92% in February, from 5.76% in January. In February 2007, the rate was 6.29% … * The Chicago Fed National Activity Index dropped to -1.04 during February from January's -0.68 in the largest single-month decline since April 2003, according to the Chicago Federal Reserve (Economy.com March 24). The index's three-month moving average, which is considered more reliable because it smoothes out month-to-month fluctuations and volatility, also posted a large decline--to -0.87 in February from -0.73 in January. The decline suggest a deepening economic downturn, said Economy.com. Revisions to data from previous months indicate the economy may have moved into a recession as early as December. Driving the drop was production-related components, which contributed -0.39 for February, compared with -0.12 the previous month. The consumption and housing components improved slightly, contributing -0.22 in February, over January's -0.24. The component, which comprises sales, orders and inventories, posted -0.08 for February … * The chance that the U.S. will enter a recession in the next six months was 62% in February, according to Moody's Economy.com (March 24). That is up from January's unrevised 60% and is the same level as seen in March 2001, when the last recession began. Since the beginning of 2008, the economy has shed 85,000 jobs, with the unemployment rate still up 40 basis points from its March 2007 low. Contributing to the recession outlook were: more unemployment claims; more pessimistic consumer sentiment; the stock market component, which fell 1.7% in February; the second consecutive month-to-month decline; less residential construction; a weaker dollar; and the overall view of the Federal Open Market Committee … * The Federal Reserve Monday offered $50 billion in a 28-day credit through its Term Auction Facility Monday. Summary auction results will be published on the website of the Board of Governors at 10 a.m. EDT today. The minimum bid amount was $5 million; bids were in increments of $100,000 ... * Soaring commodity prices and cuts in government-provided surplus items are making it harder for food banks and soup kitchens to feed the hungry--even as rising foreclosures, soaring gasoline prices, and mounting job losses increase the need for help. Donations of food via the Department of Agriculture’s surplus-commodity program totaled $58 million last year--down sharply from $242 million four years earlier. The federal government also provides $140 million worth of groceries to food banks each year, but that program’s money is buying less food, as prices soar. The production of alternative fuels from corn and other commodities has eroded agricultural surpluses and boosted prices. At the same time, the weak dollar has made food imports from the U.S. more attractive to foreign countries. Food-bank directors say they’re seeing more middle-class families seeking help, as the economy weakens. “They may be upside down on their mortgage and really one or two paychecks away from poverty,” said Deann Servos, head of Prodisee Pantry (The Wall Street Journal Online March 20) … * Job cuts are increasing significantly as the economy weakens. The number of layoffs involving 50 workers or more totaled 1,672 in February--up from 1,438 in January, according to Labor Department data. Layoffs last month involved 177,374 workers--compared with 144,111 the previous month. The manufacturing sector accounted for 28% of mass layoff occurrences and 36% of initial unemployment claims last month. Job losses are expected to continue mounting as the housing slump prompts losses far beyond the construction sector (Economy.com March 21) … * Nineteen large Wall Street banks with large writedowns and mortgage losses have slashed nearly 34,500 jobs during the past nine months, reports Bloomberg.com (March 24). That is the most job cuts since the Internet boom ended in 2001. Then, 39,800 jobs were eliminated during the same period, with 90,000 job cuts in the next two years, said the Securities Industry and Financial Markets Association. Citigroup Inc., Lehman Brothers Holdings Inc. and Morgan Stanley all have eliminated positions in fixed-income trading, securitization, asset management and investment banking, as well as some administrative and technology staff. Citigroup says it has eliminated 1.7% of its work force; Lehman, 18%; Morgan Stanley, 6.2%; and Merrill Lynch & Co., 4.5% …

News of the Competition (03/24/2008)

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MADISON, Wis. (3/25/08)
* The Federal Reserve Bank of New York said it will offer $75 billion in government securities to primary lender banks, as part of its first Treasury swap auction slated for Thursday under the Term Security Lending Facility (TSLF) announced in early March. The bank said it also will modify the type of collateral it will accept in return. The TSLF is an extension of an already existing facility at the New York Fed. Under terms of the extended facility, primary dealers can offer a wider range of collateral against Treasury securities and can also borrow for a longer term of 28 days versus overnight. Through TSLF auctions, the New York Fed has been authorized to lend up to a total of $200 billion of treasury securities. TSLF--designed to help alleviate strained financial markets--will supply banks with sparse Treasury securities in exchange for less-liquid securities (The Wall Street Journal March 20) … * Western Union Co. plans to cut 650 jobs in Missouri and Texas, it announced Thursday. The money transfer company, based in Englewood, Colo., decided to shut down almost all of its Missouri and Texas facilities. The cuts affect employees who staff call centers or run the company’s operational accounting and settlement functions. Management positions will either be eliminated or the managers will be relocated, the company said. The $60 million cost of the layoffs should be offset by savings realized within two years, the company said (St. Louis Business Journal March 20) … * The Federal Reserve Board’s discount window had issued $28.8 billion in loans to investment banks as of Wednesday, indicating that they are less averse to the stigma that has kept most of commercial banks from using the facility during the credit crunch, analysts said. The Fed opened the discount window to “primary dealers” it announced Feb. 16, departing from its prior position of allowing only commercial banks to borrow from the window. The Fed announced Sunday that it would give JP Morgan Chase $30 billion to tide it over after it agreed to purchase Bear Stearns. Lending volume for primary lenders is far greater than that of commercial banks at the discount window, analysts said (American Banker March 24) … * An investment firm, formed as a joint venture between Highfields Capital Management--a Boston investment firm--and asset manager Black Rock Inc. was to be announced Monday. Private National Mortgage Acceptance Company LLC, otherwise known as PennyMac, will attempt to raise more than $2 billion to purchase distressed mortgages at a discount, work with borrowers to restructure them, and then resell them at a profit, as performing mortgages. Rather than buying portions of mortgage-backed securities, Penny Mac intends to buy whole mortgage loans--which banks routinely owned before the mortgage securities business arrived on the scene. The firm will be closely watched because many of Penny Mac’s management are former leaders at Countrywide (The Wall Street Journal March 24) … * In an attempt to mollify angry Bear Stearns shareholders, JPMorgan Chase raised its offer for Bear, the troubled investment bank, to $10 per share Monday. The enhanced offer is aimed at winning over stockholders who said they would resist the original dirt-cheap deal made one week ago. The deal--$2 per share, or only one-fifteenth of Bear’s going market price--resulted from the prodding of the Treasury Department and the Federal Reserve. Then new offer must be sanctioned by the Fed, which initially balked at the new price. The higher offer raises the price of Bear from its initial $236 million to a sale price of more than $1 billion (The New York Times March 24) …

News of the Competition (03/21/2008)

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MADISON, Wis. (3/24/08)
* Standard & Poor’s Ratings Services announced Friday that it has revised its outlook for the brokerage industry to negative. The firm said the profit outlook for brokerages has become more tenuous because of the “increased unpredictability of business trends.” S&P said its ratings are factoring in a 20% to 30% drop in earnings for the industry, but there is a possibility earnings could decline even more. In other news, S&P on Friday revised its outlook for National City Corp. from stable to negative. “The outlook revision reflects our concern regarding National City’s exposure to the still challenged housing and mortgage markets,” said credit analyst John Bartko (MarketWatch March 21) … * Consumer and commercial lender CIT Group announced last week that it has drawn down $7.3 billion in bank credit lines to help repay debt and fund daily operations. The firm said it can’t obtain capital from other sources amid the credit rout. CIT said it also is considering selling some non-strategic assets and business lines to raise funds. Last year the company shut down its mortgage-lending operations, but retained its loan portfolio. About $9 billion of its $90 billion in assets are in subprime mortgages. CEO Jeff Peek said the firm will focus on its commercial-lending business going forward. Earlier last week Moody’s Investors Service sand Standard & Poor’s lowered some of CIT’s credit ratings, and Fitch Ratings put the firm’s ratings on review for a possible downgrade (Reuters and Associated Press via The New York Times March 21) ... * Goldman Sachs plans to cut up to 15% of its workforce in its capital markets and related support units, say sources familiar with the situation. The job cuts are in addition to the 4,000 layoffs announced in January. The cuts together represent about 10% of the securities unit’s 60,000 people. Most cuts will occur by the end of this month. Wall Street firms laid off more than 30,000 employees during the past seven months as the value of mortgage-related assets plunged (The New York Post March 21) … * Despite the subprime debacle and huge writedowns, Wall Street bonuses declined just 1.6% last year, according to a poll by WallStreetComps.com. The average bonus last year was $344,683, compared with $350,349 in 2006. Even new associates received big bonuses at several firms hit hard by the subprime crisis—including Citigroup and Merrill Lynch—which both saw their CEOs leave last year. Overall, senior vice presidents in leveraged finance received the highest average bonus—at $950,000 (Dow Jones Newswires March 21) …

Market News (03/21/2008)

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MADISON, Wis. (3/24/08)
* Mortgage insurers are making it even more difficult to obtain loans in the credit crunch. They’ve identified almost one-fourth of the ZIP codes in the country, representing about 34 states, where they won’t insure some types of mortgage loans—including those for investment or second homes, for subprime adjustable-rate mortgages, and for buyers who put down less than 3%. Subprime loans have plummeted since the credit crisis began. Such mortgages plunged 90% to $13.5 billion in the fourth quarter. Some mortgage insurers have even blackballed the entire states of California, Florida, Arizona, Michigan, Ohio, and Nevada—which have seen steep price declines and high foreclosure rates. With both lenders and mortgage insurers becoming tighter, state and federal programs often are the only recourse for subprime and first-time borrowers (Associated Press via Yahoo! News March 21) … * Many small- and mid-sized homebuilders are shutting down or on the brink of bankruptcy as buyers fail to obtain mortgages and unsold inventory piles up. In turn, many regional banks, which before were largely unscathed by the housing slump, are being hit by rising delinquencies and losses on construction loans. That could result in a credit squeeze in small towns and cities nationwide. The delinquency rate on loans to build single-family homes jumped to 7.5% in the fourth quarter—from just 2.1% a year earlier, according to research firm Foresight Analytics. About 150 banks could fail during the next three years because of the housing crisis, analysts say. And as many smaller builders go bankrupt, big national builders will dominate the industry in many markets (The Wall Street Journal Online March 21) … * Some state pension funds are purchasing mortgage-related investments as they’ve become cheaper. Funds in South Carolina and Pennsylvania are betting the investments with strong credit ratings will offer bigger yields when the credit crunch eases. “They can take advantage of the fact that other parts of the market need that short-term liquidity,” noted Allan Emkin, managing director of Pension Consulting Alliance. However, the moves aren’t likely to prompt a rebound in such securities because the states are investing only small portions of their portfolios. And many states are waiting to see how the market turns before making any mortgage-related investments (Associated Press via The New York Times March 21) … * The Federal Reserve reported last week that it loaned $28.8 billion on March 19 to the nation’s largest securities firms—its first extension of credit to non-banks since the Great Depression. The Fed is giving the firms cash and Treasury notes in exchange for mortgage-related securities in an effort to ease the credit crunch. Goldman Sachs, Lehman Brothers Holdings, and Morgan Stanley affirmed that they are testing the new lending system. Separately, the Fed announced that it has expanded the collateral eligible for its Treasury auction on March 27 to include bundled mortgage debt and securities tied to commercial real-estate loans (Bloomberg.com and Associated Press via Yahoo! News March 21) … * The Federal Reserve and Congress were too late in acting to help the economy avoid recession, according to economist Lakshman Achuthan, managing director of the Economic Cycle Research Institute. He said the Fed was too hesitant when it began lowering interest rates last autumn. The central bank since then has become very aggressive in lowering rates and introducing programs to boost liquidity. “If they had done all this in the fourth quarter, I think we’d be having a different discussion,” said Achuthan. He noted that an economic stimulus package--if enacted in the fourth quarter--would have quickly spurred spending because business inventories were low (CNNMoney.com March 21) … * The largest commodities decline in five decades could mean the Federal Reserve’s aggressive actions to ease the credit crunch have boosted confidence in U.S. financial firms. The Reuters/ Jefferies CRB Index of 19 commodities plunged 8.3% last week—the largest drop since at least 1956—as investors dumped commodities to raise cash or purchase stocks. They had snapped up gold, oil, and corn in previous weeks as an inflation hedge. “Bernanke took care of the commodity bubble,” said Ron Goodis, retail-trading director at Equidex Brokerage Group. However, Princeton University Professor Alan Blinder said the credit panic still isn’t under control even though the Fed has taken the most aggressive actions since the Great Depression (Bloomberg.com March 21) …

Market News (03/20/2008)

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MADISON, Wis. (3/21/08)
* Long-term mortgage rates tumbled this week, for the first time since February, as the Federal Reserve took actions to boost liquidity. The average 30-year, fixed-rate mortgage (FRM) declined 26 basis points to 5.87%, while the 15-year FRM fell 33 basis points to 5.27%. “Mortgage rates fell this week as various actions were taken to improve market liquidity,” said Freddie Mac vice president and chief economist Frank Nothaft. During the past week the Fed calmed market jitters by cutting rates, letting investment banks borrow funds with mortgage-backed securities as collateral, and backing JPMorgan Chase’s fire-sale acquisition of Bear Stearns. However, the one-year, adjustable-rate mortgage (ARM) edged up 1 basis point to 5.15% this week. Investors continue to demand a premium on ARMs because they have higher delinquency and default rates, noted Bankrate.com senior financial analyst Greg McBride (CNNMoney.com and Reuters March 20). For CUNA's Daily Financial Rates, use the link. … * Affluent people, not just subprime borrowers, flocked to adjustable-rate mortgages (ARMs) during the housing boom, as they sought to buy more expensive homes. About 870,000 borrowers took jumbo ARMs ($417,000 or more) from 2005 to 2007, according to Loan Performance. An estimated 8.10% of those borrowers were two or more payments behind in the fourth quarter. And 1.35% had been foreclosed, while 2.62% were in the foreclosure process. Eventually 8% of those jumbo ARMs will be foreclosed, predicts Moody’s Economy.com chief economist Mark Zandi. Susan Wachter, a professor of business at the Wharton School of the University of Pennsylvania, said ARMs made during the housing boom were “designed to fail, so you have to refinance.” But homeowners are finding it difficult or impossible to refinance with home values declining and lenders tightening credit (The New York Times March 20) … * The Big Three domestic automakers are preparing to cut costs as the economic slowdown dampens sales (The Wall Street Journal Online March 20). General Motors has pushed some capital expenses from the first quarter to later this year, while Ford plans to cut costs further, and Chrysler is cutting production at several plants. J.D. Power & Associates has slashed its forecast for vehicle sales this year to just 14.95 million vehicles—from a 15.7 million previous forecast and the lowest level since 1995 (The New York Times March 20). “The auto market is entering into a true recessionary phase, which is something we have not seen in the last 10 years,” said J.D. Powers chief economist Bob Schnorbus. Analysts predict that automakers will begin boosting incentives this year to drive vehicles out of showrooms. “We might even reach record numbers (for incentives),” said Jesse Toprak, executive director for industry analysis at Edmunds.com … * Three-fourths of Americans say higher gasoline prices have caused financial hardship for them--prompting them to reconsider their driving habits, according to a new CNN/Opinion Research Corp. survey. In the poll conducted March 14-16, 64% of respondents said they made some changes to their driving habits because of rising gas prices, and 19% said they had cut their driving enough to have a major impact on their daily lives. The median price of a gallon of regular gasoline rose to a record-high $3.285 on March 16, according to AAA. The motorist group says consumers are paying 28.3% more for gasoline now than they were at this same time last year. Gasoline demand is expected to rise just 0.3% this year—compared with 1% annual gains over the last six years, according to the Energy Information Administration (CNNMoney.com March 20) … * A key indicator of the economy’s future course dropped for a 5th consecutive month in February—the longest stretch of declines since 2001. The Conference Board’s index of leading economic indicators fell 0.3% last month after a 0.4% drop in January. The drop is “certainly reflective of a very slow economy,” noted Conference Board economist Ken Goldstein. He said the probability of a recession is high, but the data doesn’t necessarily prove that we’re already in one. In February, five of the 10 indicators were negatives—led by rising unemployment claims, declining building permits, and lower consumer expectations (CNNMoney.com and Bloomberg.com March 20) … * Companies continue to cut jobs as the housing slump and tight credit push the economy towards recession. The number of people filing first-time claims for unemployment insurance jumped by 22,000 during the week ending March 15 to 378,000, the Labor Department reported Thursday. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, jumped by 32,000 during the week ended March 8 to 2.865 million—the highest level since August 2004. That’s even higher than the surge in claims following Hurricane Katrina (Bloomberg.com and Economy.com March 20) ...

News of the Competition (03/20/2008)

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MADISON, Wis. (3/21/08)
* Three large banks--HSBC Bank USA, M&T Bank Corp. and TCF Financial Corp--have dropped out of the federal student-loan program for the upcoming academic year—the first big banks to quit the program during the credit rout. The three rank among the 50 biggest student-loan providers. They lent a total of more than $560 million of the $119.2 billion federal student loans made in 2006. Bank officials said the government’s decision to cut federal subsidies to private lenders prompted them to exit the program. Several non-bank lenders have also decided to quit the program. But with 2,000 lenders still involved, federal officials say student borrowers should still have adequate access to loans (The Wall Street Journal Online March 20) … * Citigroup, the nation’s largest bank, plans to cut more than 5% of positions at its securities unit after it recorded losses from the subprime-market collapse. Mortgage writedowns have wiped out nearly half of Citigroup’s market value since October, prompting CEO Charles Prince to lose his position. The bank already announced in January that it was cutting about 4,200 jobs. Citigroup plans to lay off 2,000 investment bankers and traders by the end of this month, The New York Times reported earlier Thursday. Vikram Pandit, Citigroup’s new chief executive, wouldn’t confirm or deny the report or say whether the layoffs are in addition to those previously announced. The world’s largest financial firms have laid off more than 30,000 employees since September as they recorded $195 billion in writedowns and losses (Bloomberg.com March 20) … * JPMorgan Chase is offering Bear Stearns employees incentives to remain with the firm after the fire-sale acquisition, a person familiar with the matter said Thursday. JPMorgan CEO Jamie Dimon met with hundreds of Bear Stearns executives late Wednesday, offering bonuses and other incentives. However, it isn’t certain that Bear Stearns employees, which own about 30% of the company, will remain with the firm. The stock acquisition is valued at $285 million—down sharply from the $7 billion the company was valued at only one week ago. The fire-sale price of only about $2 a share stunned Bear Stearns employees (Reuters March 20) … * Credit Suisse Group cautioned Thursday that harsh market conditions in March will prompt a loss for the first quarter. Its shares declined more than 10% following the surprise warning. Smaller-than-expected losses for Goldman Sachs and Lehman Brothers Holdings caused some investors to become hopeful that bank earnings were beginning to recover. Credit Suisse said it was hit by previously announced writedowns tied to the mispricing of some risky bonds, including collateralized debt obligations. Analysts said the mispricings by themselves would prompt a loss of about $1.1 billion for the first quarter (The Wall Street Journal Online March 20) …

News of the Competition (03/19/2008)

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MADISON, Wis. (3/20/08)
* Visa Inc. shares jumped more than 30% in early trading yesterday in its stock-market debut. The firm’s share price soared to $58 from its original initial public offering (IPO) of $44. Visa played up the offering before the debut, saying it expects 20% earnings growth for the next two years. The firm also noted that it carries no consumer debts on its books, making it a safe investment during the credit crunch. Several U.S. banks are big winners in Visa’s IPO, the largest in U.S. history. JP Morgan Chase is in line for a $1.25 billion payoff. Other big winners include Bank of America, National City Corp., Citigroup, U.S. Bancorp and Wells Fargo (Associated Press via The New York Times March 19) … * Goldman Sachs and Morgan Stanley are testing a new program that lets investment banks borrow directly from the Federal Reserve’s discount window using various investment-grade securities as collateral, say people at the firms. Lehman Brothers has already borrowed $2 billion under the new program, CNBC reported yesterday. A spokesman for Goldman Sachs said the firm plans to test the new program this week. Morgan Stanley chief financial officer Colm Kelleher said his company also has tested the new program (Reuters via The New York Times March 19) … * Goldman Sachs and Lehman Brothers reported Tuesday that their profits plunged in the first quarter. However, the reports cheered investors because the declines were below expectations. Goldman Sachs earned $1.5 billion during the quarter—down 53% from a year earlier. The firm wrote off about $1 billion in residential mortgages, and $1 billion in leveraged loan commitments, both within investor expectations. Lehman Brothers earned $480 million—down nearly 57% from a year earlier. The firm wrote down $1.8 billion of mortgages and loans. But those results also beat investor expectations. Both firms’ shares rose following their reports. “They took their medicine and still made money, so it was encouraging,” said Oppenheimer analyst Meredith Whitney (The New York Times March 19) … * Jumbo-mortgage provider Thornburg Mortgage announced Wednesday that it plans to try to raise almost $1 billion of capital to appease its five lenders and avert a collapse. The firm previously said its survival was jeopardized after lenders demanded more than $600 million in cash or collateral. Thornburg said a new agreement with Bear Stearns, Citigroup, Credit Suisse Group, Royal Bank of Scotland, and UBS AG calls for a reduction of margin requirements and a halt to more margin calls. The lenders will provide $5.8 billion in financing in return for Thornburg trying to raise $948 million in additional capital. The plan is “highly dilutive” to shareholders but is in the company’s long-term interest, said CEO Larry Goldstone (Reuters via The New York Times March 19) … * Top Bear Stearns executives will gain little from JPMorgan Chase’s planned acquisition of the firm. Bear’s five top officers earned more than $381 million in cash, stock and other compensation from fiscal 2004 through 2006, according to the consulting firm DolmatConnell & Partners. That’s more than the $236 million value of the proposed deal. The $2-a-share acquisition will mostly eliminate the top officers’ remaining stakes. Their stock options will be essentially worthless, and their restricted-stock units will give each man about $1 million, estimates the consulting firm James F. Reda & Associates (The Wall Street Journal Online March 19) …

SW Corporate CUs need proactive stance on cost of funds

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DALLAS (3/20/08)--Credit unions will need to take a proactive stance on their cost of funds after this week's interest rate cuts, says Southwest Corporate FCU staff. The cuts mark the sixth time since August the Federal Open Market Committee has lowered its benchmark overnight rate and the eighth drop in the discount rate. For credit unions, Tuesday's action increases the cost of liquidity at a time when most have experienced higher share growth from year-end incentive bonuses, tax refunds and principal redemptions on option-based investments, said Brian Turner, manager of advisory services for Southwest Corporate FCU. Turner told the LoneStar Leaguer (March 19) that the spread cash and consumer/mortgage loans will have increased as high as 340 and 375 basis points, respectively, as credit spreads have widened greatly over the past few quarters. Even the spread to short-term agency-issued mortgage securities will have widened to 120 to 140 basis points to cash, and it may be higher with some structures. It also emphasizes the importance of taking a proactive stance on cost of funds, Turner said. "We have been preaching since last August the need to take careful examination of both non-term share and term certificate rates going into the environment we now enjoy,” he said. “Many credit unions have been reluctant to lower their term rates for fear of lost market share. This typically inflates the overall rate environment in their competitive market place. As we enter into this new phase, there will be a time when the credit union should consider extending its funding duration in anticipation of rising rates.” Credit unions' best alternative will be to use structured-term offerings to lower their long-term cost of funds going into the next rate cycle. That will help offset the rates paid on member term certificates as their spread to borrowed funds widens, he added. Pat Gawenda, manager of asset liability management (A/LM) modeling and analysis for Southwest Corporate Investment Services' A/LM service, noted in the corporate's newsletter that quick rate cuts inject volatility and credit unions find themselves forced to keep up (eFacts 3/18). "We are in a falling-rate market," Gawenda said. "Credit unions are going to have to adjust a number of factors at a more accelerated rate than they have in the past." Gawenda predicts credit unions will have to evaluate lowering both dividend and loan rates and, at the same time, anticipate changes in liquidity. “Such a balancing act takes courage and requires evaluation by credit union management of potential impacts to the credit union’s balance sheet and earnings,” Gawenda said. The A/LM staff is “on call” to help credit union management make decisions in a volatile market, Gawenda said. “In a changing rate environment, short turnaround time and what-if analyses provide a foundation for quick actions.”

Market News (03/19/2008)

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MADISON, Wis. (3/20/08)
* In an effort to ease the credit crisis, the Office of Federal Housing Enterprise Oversight (OFHEO) lowered the capital requirements for Freddie Mac and Fannie Mae. The agency said its mandatory cash cushion (about $20 billion now) will be cut by about one-third. Those funds can be used to purchase mortgages of cash-strapped homeowners so they can refinance. Previously the regulator authorized a temporary increase in the maximum loan amount the two firms can purchase in high-cost housing markets. OFHEO estimates that both measures will let the two companies purchase or guarantee about $2 trillion worth of mortgages in 2008 (Associated Press via The New York Times March 19) … * Mortgage activity retreated slightly last week, according to the Mortgage Bankers Association (mbaa.org March 19). The trade group’s Market Composite Index fell 2.9% during the week ending March 14 to 652, as both purchase and refinancing applications declined. Mortgage rates were mixed last week. The average 30-year, fixed-rate mortgage (FRM) dropped 39 basis points to 5.98%, while the one-year, adjustable-rate mortgage (ARM) rose 23 basis points to 6.95%. Rates on 30-year FRMs have begun declining following several weeks of gains, partly because of previous Federal Reserve rate cuts and expectations that the central bank would ease further this week, noted Moody’s Economy.com (March 19). However, the research firm said the risk premium for ARMs continues to increase because of the greater perceived risk on these mortgages during the credit crunch … * Homebuilders’ confidence in the housing market was unchanged in March, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. The index held steady at 20, near the record low of 18 set in December. “A temporary home buyer tax credit, FHA modernization and GSE oversight reform are the three most important things that Congress can accomplish right now to help ensure that housing does not drag the economy into a full-blown recession,” said NAHB chief economist David Seiders (nahb.org March 18) … * The Federal Reserve’s big 75-basis point cut in the fed funds rate Tuesday is good news for cardholders, as the prime rate falls to 5.25%, says Cardtrack.com (March 19). With a median revolving credit-card balance of $6,600 and most rates linked to the prime, the average household will save about $50 during the next twelve months. Taking into account all the Fed’s rate cuts since last summer, the average household will save about $200 per year … * Americans are very pessimistic about the economy and concerned about jobs, according to the latest Reuters/ Zogby survey. The poll’s index tumbled to 87.7 in March, from 99.3 in February and the lowest level in the survey’s history. Just 40% of respondents said they felt very secure about their employment, and just 19% said they think the economy is headed in the right direction. A separate poll found that almost three-fourths of respondents believe the economy is already in recession (Reuters via The New York Times March 19) … * More than 70% of Americans say the Iraq war is partly responsible for the nation’s economic problems, according to a survey conducted by CNN/Opinion Research Corporation. The results show little support for the war in its fifth anniversary. Just 32% of respondents said they support the conflict, while 66% said they oppose it. And 61% said the next president should withdraw most U.S. troops from Iraq “within a few months of taking office.” (CNNMoney.com March 19) … * Delta Air Lines announced yesterday that it has added another $10 surcharge to domestic round-trip fares to offset higher fuel costs. Last week Delta and other carriers announced fuel surcharges of up to $50 per round trip. Crude oil jumped to a record-high $111.80 a barrel on Monday. Delta also plans to eliminate 2,000 jobs and offer early retirement and buyout packages to 30,000 of its employees (Reuters via The New York Times March 19) …

Mission FCU tells NPR how rate cut affects members

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SAN DIEGO (3/20/08)--National Public Radio (NPR) took a look at what happens to consumers' savings and loans when interest rates drop, and it turned to a San Diego-based credit union to help explain. Mission FCU Chief Financial Officer Ron Araujo was interviewed by Scott Horsley for a segment that aired Wednesday on NPR's "Morning Edition." Araujo, who watches what the Federal Reserve does and adjusts the credit union's rates accordingly for its 130,000 members, said it would take a day or two before the fed funds rate cut made Tuesday by the Federal Open Market Committee filters down to financial institutions. "You'll see rate changes on Thursday and Friday for most credit unions and banks," Araujo said, noting that rates have dropped "significantly" the past three months. The lower rates will benefit homeowners with variable or adjustable interest rates, who could see big savings when they reset, and borrowers with home equity lines of credit and car loans. The credit union has slashed its rates for car loans by two percentage points since the beginning of the year. "If you bought your dream car in January with a 6% loan, now it's time to get your dream loan," he said. Members with good credit, who pay off their credit cards monthly, will get the best deals. "Many promos are out there that allow you to transfer your balance at 0%, but this is for a select group," advised Araujo. "But these are the kinds of opportunities out there." He also discussed the down side of lower interest rates: the effect on consumers' savings. Savings accounts at the credit union earned 1% before the last fed fund rate cut. Lower rates mean that "people living on their savings and certificates of deposit are in a tough spot," he said. Savers "are looking at 2.5% to 3% return today on their certificates of deposit when they sniffed at 4% two and three months ago," he said. In addition to Araujo, NPR interviewed a member waiting for her credit card statements before determining how to rearrange her loans, and Maria Tomasello, branch manager at the credit union's Mira Mesa branch. Tomasello noted that some members are pulling funds from certificates to reinvest in higher yielding accounts on the Internet. To listen to the full interview, use the link and click on the "listen now" in the Your Money section.

Market News (03/18/2008)

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MADISON, Wis. (3/19/08)
* Following a sharp 1% increase in January, producer prices for finished goods rose by 0.3% during February, according to the Labor Department. The core index, which excludes energy and food items, rose 0.5% last month--its highest monthly increase since November 2006. February's price hike was on target with expectations. Analysts had expected a 0.3% increase in the overall producer price index and a 0.2% increase in the core index. If not for falling prices for food, inflation would have been stronger during the month. Inflation was stronger at the earlier stages of production than at the finished goods stages. Energy prices continued to rise through all areas of processing but especially so for gasoline, diesel fuel and natural gas. Prices for finished consumer foods fell 0.5% after increasing the previous five months (The Wall Street Journal and Bloomberg.com March 18) … * Residential construction decreased 0.6%--to a seasonally adjusted 1.065 million annual rate--during February, after increasing 7.1% in January to 1.071 million, the Commerce Department announced Tuesday. Originally, January housing starts were reported at 0.8% higher. The February decrease was larger than expected, even though the pace of construction was higher than expected. Year-over-year, February's housing starts were 28.4% below that of February last year. Single-family housing starts dropped by 6.7% to 0.707 million units. Total housing starts decreased by 27.7% in the Northeast--the hardest hit--while Midwest housing starts remained the same as in January. The South and West increased with 3.9% and 5.1%, respectively (Moody's Economy.com and The Wall Street Journal March 18) … * Chain stores posted their second consecutive modest gain, rising 0.4%, for the week ended March 15. According to the International Council of Shopping Centers (ICSC), the index was barely above its level of three weeks ago. Year-over-year growth was unchanged, at 1.6%. ICSC said high energy prices and an early Easter holiday were factors in the slow sales. A recent ICSC-UBS survey found a record 64% of consumers surveyed cut their spending because of high gas prices, with a record 38% cutting expenditures considerably. Growth at chain stores has topped 2% just two weeks this year, said Moody's Economy.com (March 18) … * Soaring gasoline prices will eat up a big chunk of Americans’ tax rebates. The federal government is sending more than $100 billion worth of checks to taxpayers in an effort to stimulate the economy. According to the Treasury Department, middle-income individuals without children will get about $600, while a middle-income family of four will receive about $1,670. The Energy Information Administration predicts that gasoline prices will surge by an average 40 cents per gallon this year. Assuming steady consumption, that estimate means it will cost $231 more to fuel a vehicle this year--or about one-third of a middle-income individual’s rebate. It also means a large chunk of the rebate money will be spent on oil imported from Saudi Arabia, Mexico and Canada. “The rebate goes into the tank, and then finds its way into economies far from our own,” said Economy Policy Institute senior economist Jared Bernstein (CNNMoney.com March 15) … * Global business confidence retreated in mid-March and is consistent with a U.S. recession and near-recession conditions in Europe and Canada, according to Moody’s Economy.com Survey of Business Confidence. The survey has signaled that the U.S. is in recession since late in November. Worldwide, only the Asian economy is operating at its potential. The decline in global business confidence is broad-based worldwide and industrywide, noted the poll. The results suggest that the global economy will continue to struggle during the first half of this year … * The number of U.S. households worth $1 million or more (excluding homes) rose at the slowest pace in five years during 2007, according to a report by Spectrem Group. The number of millionaire households rose only 2% to a record 9.2 million, from nine million in 2006. That’s the slowest growth since 2003, when growth was zero. The number of U.S. households worth $5 million or more increased 2% to a record 1.16 million last year--down from a 23% growth rate in 2007 and the slowest pace since zero growth in 2002 (CNNMoney.com March 14) …

News of the Competition (03/18/2008)

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MADISON, Wis. (3/19/07)
* The collapse of the subprime-mortgage market will prompt record losses for insurance firms--even more than the losses Hurricane Katrina generated. The sum of asset writedowns and credit losses already totals at least $38 billion--just shy of the $41.1 billion in claims from the Gulf Coast hurricane. That tally includes 15 publicly traded firms based in the U.S. and Bermuda. AIG, Ambac Financial, and MBIA Inc. have reported the largest writedowns linked to the mortgage markets. AIG tops the list, with $6.7 billion worth of losses from mortgage-backed securities and $11 billion in losses from credit-default swaps. Ambac already has $6 billion in writedowns, while MBIA has lost more than $3 billion (Bloomberg.com March 14) … * Countrywide Financial is attempting to block a federal investigation into the way it treated bankrupt borrowers in 300 cases in Pittsburgh and western Pennsylvania, according to The Wall Street Journal (MarketWatch March 17). The Justice Department is leading the probe into whether the firm used abusive practices to penalize homeowners in default. Countrywide denies the allegations. The Justice Department is suing the lender on similar charges in Florida, Georgia and Ohio. The company also faces charges in various bankruptcy courts nationwide that it fabricated documents, assessed unnecessary fees, and improperly threatened foreclosure in bankruptcy cases … * Moody’s Investors Service on Monday affirmed the credit rating of Lehman Brothers Holdings but lowered its ratings outlook to stable from positive, citing the firm’s real-estate holdings and the collapse of Bear Stearns as reasons for concern. Moody’s said financial-market volatility has lowered the possibility that the ceiling on its long-term debt can be increased. “Rising illiquidity across financial markets has resulted in asset concentrations on Lehman’s balance sheet that have proven to be somewhat larger than optimal for the firm,” said Blaine Frantz, senior vice president at Moody’s (The Wall Street Journal Online March 17) … * A French appeals court Tuesday released Jerome Kerviel, the former rogue trader blamed for nearly $7.7 billion in losses at French bank Societe Generale from jail (The New York Times March 18). Kerviel will be placed under judicial supervision and is forbidden to leave France during the inquiry into the losses. He also was ordered not to contact former colleagues at the bank. Kerviel, 31, had been held in La Sante prison since Feb. 8 … * Captive auto financer GMAC LLC has named Alvaro de Molina as CEO, succeeding Eric Feldstein, who will join Cerberus Capital Management. The appointment is effective April 1. Feldstein had led GMAC since 2002. GMAC suffered steep losses last year when the volatile credit market affected GMAC's mortgage lending unit, GMAC ResCap. de Molina joined GMAC in August as chief operating officer (The Wall Street Journal March 18) …

Feds lower rate means CUs earnings could rise

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MADISON, Wis. (3/19/08)--The Federal Reserve policymakers' action Tuesday in lowering the target for the federal funds rate means credit unions could see an increase in their earnings, says a Credit Union National Association (CUNA) economist. "Credit unions' earnings could rise due to the Fed's action," said Steve Rick, CUNA senior economist. In today's economic volatility, he said, "banks are more risk-averse, and the mortgage rates haven't come down. They're not making loans. The yield on assets is 6% while the money market funds earn 2% to 3%." The Federal Open Market Committee (FOMC) lowered the rate by 75 basis points to 2.25% from 3% "in an attempt to avoid a recession at all costs," said Rick. "But the costs are becoming considerable as the value of the dollar plummets; oil, gold and wheat prices reach historic highs; and inflation expectations become unmoored," Rick said. "At this point it appears a recession is unavoidable, so the Fed's actions will now help determine the degree and duration of the economic slowdown. "By lowering short-term interest rates, the Fed is helping to recapitalize financial institutions that experienced mortgage-related losses," Rick said. "Depository institutions will lower their deposit interest rates in response to the Fed's rate cut. This will lower their cost of funds faster than any reduction in their yield on assets, pushing net interest margins up. Greater earnings will allow for faster recapitalization of the financial system. Higher capital levels will encourage more lending, investment and hence economic activity," he said. "This all sounds good in theory," he told News Now. "But in practice, if depository institutions are still uncertain about the condition of the housing market, credit conditions will remain tight and the economy will struggle to regain its footing for the remainder of 2008." What should a credit union do? "Keep originating," Rick said. "Keep making loans, but do it with good underwriting. Document the borrower's income" and ability to repay," he added. In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2.5%. The fed funds rate reduction will translate immediately into lower rates for consumers and businesses when financial institutions cut their prime lending rate by a similar amount (The New York Times March 18). Economists had expected between 50 bp and 75 bp reduction, although some predicted as much as a full percentage point in the wake of a financial market rollercoaster ride this past weekend, when the nation's fifth-largest investment house, Bear Stearns Cos. was purchased at a fire-sale price Sunday by JPMorgan Chase & Co. The Fed's target for the federal funds rate, the interest that financial institutions charge each other on overnight loans was at 3%, down from 4.25% at the beginning of 2008. However, turmoil in the global market prompted an emergency three-quarter-point cut on Jan. 22 and a half-point cut eight days later--the largest reductions during a single month in more than 25 years.

Fed expected to cut rate at least half a percentage point

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NEW YORK (3/18/08)--The Federal Reserve's policymakers meet today, and some economists are calling for a rare full percentage point (100 basis points) cut in the target federal funds rate. Most economists are expecting a half percentage point cut, with another half percentage point at the next meeting in April. Economists at the Credit Union National Association have said to expect a 100-bp. cut over the next two meetings of the Federal Open Market Committee (FOMC) as the fed attempts to quell a recession, said Bill Hampel, CUNA's chief economist (News Now March 14). However, sentiment for a full percentage rate cut received a boost this past weekend when the Fed on Sunday made an unpredecented attempt to rescue U.S. financial markets from a domino effect of defaults. It did so by approving a $30 billion credit line to engineer J.P. MorganChase and Cos. purchase of Bear Stears Cos.; creating a new lending facility and lowering the rate for borrowing from its "discount" window by a quarter of a percentage point--to 3.25%. If FOMC introduces a 100 bp. cut today, the target fed funds rate would be at 2%. The Fed has not cut rates by that amount since the early 1980s, before a formal target rate was set (MarketWatch March 17).

News of the Competition (03/17/2008)

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MADISON, Wis. (3/18/08)
* JPMorgan Chase announced Sunday that it has agreed to acquire Bear Stearns for just $2 a share, or $236 million. That’s only a fraction of what Bear Stearns, which was founded in 1923, was once worth. The Federal Reserve is backing the deal, providing financing of up to $30 billion for the less-liquid assets held by Bear Stearns. The fire-sale price raised concerns about the value of other U.S. investment banks. “A $2 per share price will send a shudder through every investment bank investor in the world,” said James Ellman, head of hedge fund Seacliff Capital. Bear Stearns ran into trouble when its short-term creditors demanded repayment of outstanding debt (CNNMoney.com and MarketWatch March 17) … * Angry Bear Stearns shareholders are talking with their attorneys about potential legal claims related to the firm’s $2-a-share fire sale to JPMorgan Chase. “This is a stock that has gone from 50 to two literally overnight, and I also know of people who had assumed that the worst had passed when it closed at 30,” said attorney Ira Press. The transaction’s value is more than 90% below the firm’s Friday closing price of $30.85 per share. Attorneys say shareholders may sue the firm and its executives for securities fraud, alleging they failed to disclose the company’s real financial status (Reuters March 17) … * The cost of protecting the debt of banks and brokerages in the U.S. increased Monday after the Federal Reserve’s surprise discount-rate cut and the proposed acquisition of Bear Stearns by JPMorgan Chase for just $2 a share prompted concerns about a widening credit crisis. The cost of protecting Lehman Brothers debt with credit-default swaps jumped by 75 basis points to 525 basis points, according to Phoenix Partners Group. Washington Mutual’s credit-default swap spreads rose 11.5% to 742 basis points, said Markit Intraday (Reuters March 17) … * H&R Block announced Monday that it has agreed to sell the mortgage-servicing business of its Option One Mortgage subprime-lending unit to distressed-asset investor Wilbur Ross. Option One saw millions of dollars in losses as the subprime-mortgage crisis spread, prompting investors to push for a sale. In December, H&R Block said it planned to shut down Option One’s mortgage-origination business. “Completing this transaction will allow our company to be more squarely focused on what we’ve done best since 1955—preparing America’s taxes,” said H&R Block chairman Richard Breeden (The Wall Street Journal Online March 17) …

Market News (03/17/2008)

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MADISON, Wis. (3/18/08)
* Global investors are yanking money from the U.S. as the credit crunch extends to creditworthy borrowers--pushing the value of the dollar down even further. The dollar has declined 14.3% over the past year, according to Federal Reserve data. Global investors already began slowing their investments in the U.S. last year. Foreigners’ net acquisition of long-term bonds and stocks in the U.S. totaled $596 billion in 2007, down sharply from $722 billion in 2006, according to the Treasury Department. Many financial firms speculated in mortgage-backed securities with funds that were borrowed in Japan. “The dollar and subprime--they’re two sides of the same coin,” said Princeton University economist Hyun Song Shin. As investments purchased with money borrowed in Japan are sold and converted back into yen, said Shin, “we see both a fall in asset prices and a fall in the dollar.” (The Wall Street Journal Online March 17) … * Global stock markets plunged Monday as investors dumped both stocks and the dollar (AFP via Yahoo! News March 17). An emergency cut in the discount rate by the Federal Reserve and a deal for JPMorgan Chase to acquire Bear Stearns for just $2 a share added to the sense of crisis worldwide. Tokyo stocks tumbled more than 4% before rebounding somewhat. London lost 2.38% and Paris fell 2.3%. Global central banks began pumping money into their banking systems Monday amid concern about a worldwide credit crisis (investmentexecutive.com March 17). The Bank of England said it would offer $10.11 billion of three-day funding Monday to help bring down overnight interest rates. “Along with other central banks, the Bank of England is closely monitoring market conditions,” said the Bank of England in a statement. The Bank of Japan injected 400 billion yen on Monday, while Australia’s central bank pumped 383 million Australian dollars into its banking system … * Financial firms are facing a “new world order” following the fire sale of Bear Stearns and the Federal Reserve’s emergency weekend meeting, said research firm CreditSights in a report Monday. JPMorgan Chase on Sunday agreed to acquire Bear Stearns for just $2 a share. That compares with the firm’s $30-a-share price on Friday and a high of $172 a share in 2007. “The reality check is that there are many challenged major banks, brokers, thrifts, finance/mortgage companies, and only a handful of bona fide strong U.S. banks,” said the report. CreditSights predicts that a wave of consolidation will follow. Potential acquirers include JPMorgan Chase, Wells Fargo, US Bancorp, Goldman Sachs, and Bank of America (Reuters via Yahoo! News March 17) … * The nation’s current-account deficit narrowed last year after setting records for five consecutive years, the Commerce Department reported Monday. The improvement reflected strong growth in U.S. exports--which benefited from the weak dollar. That growth helped offset a soaring foreign-oil bill. For all of last year, the current account deficit declined to $738.6 billion, from a record-high $811.5 billion in 2006. Last year’s deficit represented 5.3% of the total economy, down from a record-high 6.2% of the economy in 2007. Still, the deficit total last year means the U.S. is borrowing $2 billion each day to finance its desire for foreign-made goods and crude oil (Associated Press via Yahoo! News March 17) … * The nation’s manufacturing sector remains weak, according to two reports issued Monday. Output at the nation’s factories, mines and utilities fell by 0.5% in February--following a 0.1% increase in January and the weakest reading since a 0.6% decline last October, the Federal Reserve reported. The Fed said much of the drop last month reflected a weather-related decline of 3.7% in utility output. Production fell 0.2% in the manufacturing sector, while the output of mines rose 0.4%. At 113.7% of its 2002 average, total industrial output was 1% higher than its year-ago level. The capacity utilization rate fell a 0.6 percentage point in February to 80.9%--the lowest level since November 2005. In another report, the Federal Reserve Bank of New York said Monday that manufacturing activity in the New York region declined to a record low in March (MarketWatch March 17). The bank’s Empire State Manufacturing index dropped to a negative 22.2, from a negative 11.7 in February …

Credit crunch is CUs opportunity to shine

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WASHINGTON (3/18/08)--The definition of a credit crunch is when even good borrowers cannot obtain credit, and today's credit crunch is an opportunity for credit unions to shine, says Credit Union National Association chief economist Bill Hampel. With the current market's fluctuations due to the subprime mortgage lending crisis, "stockholders and investors in subprime securities and hedge funds will take a beating," said Hampel, adding, "But, 'easy come, easy go.'" The weakening housing market has now pushed into the broader economy, he said. Credit unions' delinquencies increased during fourth quarter 2007 and will likely continue throughout 2008, he said. "Credit unions will likely see higher loan losses and lower net income. No doubt it will be uncomfortable. There will be an overall flight to asset quality," Hampel said, adding members will save more and borrow less, putting downward pressure on credit union capital ratios. But "credit unions should not overreact," he advised. "Their balance sheets are in good shape, and the national credit union net worth ratio is about 11.5%. Most credit unions can afford to lower savings rates much more slowly than the rest of the market," he added. "This is a good opportunity for credit unions to show what they are. It's an opportunity to shine, and grow and pick up marketshare," Hampel said. A March 13 letter to its member credit unions from the Pennsylvania Credit Union Association reinforces the point. "Credit unions are not directly dependent upon the capital markets, so now is your time to shine and grow, in terms of members, loans, and, of course, shares," said the letter. "Remember the umbrella man? He was there in challenging times, and now is the time to clearly demonstrate the credit union difference and in the process capture additional market share," said PCUA. PCUA said credit unions have excellent opportunities in these areas:
* Business lending. * Student lending. * Mortgage lending.
"Car loans may be down this year, credit cards are a competitive struggle versus the large commercial issuers, but there are opportunities galore," PCUA added.

In weekend move Fed lowers discount rate

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WASHINGTON (3/17/08)—In a rare weekend action, the Federal Reserve Board Sunday lowered its discount rate—the rate at which the central bank lends to banks--from 3.5% to 3.25% percent, effective immediately. The step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 25 basis points. The board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days. The Federal Reserve Board also voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business today, according to a release from the Fed. The board said the facility will be in place for at least six months and “may be extended as conditions warrant.” The Fed on Sunday also approved the financing arrangement through which JPMorgan will acquire Bear Stearns, reportedly for $2 per share, according to the Washington Post Sunday. JP Morgan said the Fed will provide special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets, according to the report.

News of the Competition (03/14/2008)

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MADISON, Wis. (3/17/08)
* Investment bank Bear Stearns received a bailout offer Friday by the Federal Reserve Bank of New York and JPMorgan Chase. Bear Stearns, which has posted $2.75 billion in writedowns since last year, could face a bankruptcy without some help. JPMorgan and the New York Fed said they will provide funding to the firm for an initial 28-day period, with the Fed giving funding to JPMorgan through its discount window. In a statement, the Federal Reserve said its board members voted unanimously for the bailout. The Fed said it will continue monitoring market conditions and provide further liquidity as needed. Top executives from Bear and JPMorgan were in talks Friday, and could even consider a sale of Bear to JPMorgan, said a personal familiar with the talks (CNNMoney.com and Associated Press via Yahoo! News March 14) … * Citing “the rapid deterioration in the residential housing sector in the first quarter,” Moody’s Investors Service on Friday downgraded its rating on Washington Mutual to just one notch above junk status. The outlook is negative, suggesting that another downgrade is probable over the next 12 to 18 months. The move will make it more expensive for WaMu to access capital. In January, the firm reported a $1.87 billion net loss. Moody’s said it believes WaMu will need to set aside more than $12 billion for potential losses because its remaining losses on mortgage loans will be higher than previously anticipated. The downgrade reflects the agency’s “expectations for a more severe residential mortgage credit cycle than we had anticipated at the start of 2008,” said Moody’s Credit Analyst Victoria Wagner (Reuters and The Wall Street Journal Online March 14) … * Visa Inc.’s proceeds from its initial public offering will be welcome news to its bank owners as the banking sector continues to be hammered by the credit rout. The card association plans to offer 406 million shares at $37 to $42 per share in an effort to raise $15.8 billion. JPMorgan is set to gain $1.1 billion by offering 29 million shares. Bank of America plans to sell 6.8 million shares for $265 million in proceeds. National City Corp. plans to sell 10 million shares for $390 million. Visa’s offering is expected to be the richest in U.S. history (Dow Jones Newswires March 14) … * A group of state and city governments--including Mississippi, Chicago, and Fairfax County, Va.--announced Friday that they have filed a lawsuit against 37 financial-services firms, alleging price fixing and bid rigging in the municipal derivatives industry. Firms named in the suit include JPMorgan Chase, Merrill Lynch, and Morgan Stanley. The suit claims the firms conspired to deprive the governments of funds they would have received from their municipal bond investments. It alleges the conspiracy dates back to 1992 (Associated Press via msn.com March 14) …

Market News (03/14/2008)

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MADISON, Wis. (3/17/08)
* Inflation slowed last month, making it easier for the Federal Reserve to lower interest rates again. The Consumer Price Index (CPI) was unchanged in February following a 0.4% gain in January, the Labor Department reported Friday. Food and energy prices decelerated last month. Food prices rose 0.4% following a 0.7% increase, while energy costs declined 0.5% after a 0.7% gain. Excluding the volatile food and energy categories, the core CPI was also unchanged in February, after rising 0.3% in January. The deceleration reflected smaller increases in prices for shelter, medical care, recreation, education and communication, and for other goods and services. Apparel prices declined. Over the past year, the overall CPI posted a 4% gain, while the core CPI was up a modest 2.3%. Lower oil prices and the onset of recession, which slowed consumer demand, put a lid on inflation in February, said Moody’s Economy.com (March 14). Even when oil prices were higher, core inflation remained tame, so the Fed should be able to ease further without fearing inflation … * The U.S. is now in recession, according to 71% of economists surveyed by The Wall Street Journal (March 14). Respondents say the economy will expand at an annual pace of just 0.1% in the first quarter and 0.4% in the second quarter. Nearly half say the downturn this year will be deeper than during the 2001 and 1990-91 recessions. They predict the economy will create only 9,000 jobs per month during the next 12 months. That’s down sharply from a forecast of 48,500 jobs per month in the previous poll, conducted only five weeks ago. Economists expect the unemployment rate to increase to 5.5% by the end of this year, from the current 4.8% rate. Respondents say the Federal Reserve will cut rates further during the first half of this year. Despite the downturn, they expect inflation to be running at a 2.7% rate by year end, perhaps motivating the Fed to begin raising rates again … * The U.S. is in a recession that may be “substantially more severe” than recent downturns, said National Bureau of Economic Research (NBER) President Martin Feldstein. In a speech to the Futures Industry Association meeting on Friday, Feldstein said the downturn could even be the worst since World War II. “The situation is very bad, the situation is getting worse, and the risks are that it could get very bad.” Although Feldstein predicted that the Federal Reserve will continue cutting interest rates, he said the easing may not have the same impact as in past recessions. “There isn’t much traction in monetary policy these days, I’m afraid, because of a lack of liquidity in the credit markets.” The NBER is considered the official arbiter of business cycles in the U.S. (Reuters via The New York Times March 14) … * Consumer confidence dropped to a 16-year low in March amid worries about record-high gasoline prices and weak job growth (Bloomberg.com March 14). The Reuters/University of Michigan preliminary index of consumer sentiment fell to 70.5--from 70.8 in February and the lowest level since February 1992. The reading compares with an 85.6 average last year. Consumers became gloomier about the future of the economy, even as they became less downbeat about current conditions. Consumer confidence is at a level consistent with recession, noted Moody’s Economy.com (March 14). The research firm said high energy prices, weak stock markets, falling home prices, and high debt loads will weigh on consumers going forward. Tax-rebate checks could provide some relief for consumers if they aren’t totally offset by higher energy prices … * Fed funds futures surged Friday after a better-than-expected consumer price report and problems at investment bank Bear Stearns indicated the Federal Reserve could cut rates more aggressively in March. The April contract increased as much as 97.86 from Thursday--suggesting a 100% chance of a 75-basis point rate reduction and a 46% probability of an extra 25-basis point cut. However, some economists anticipate a smaller easing of 50 basis points (MarketWatch March 14) …

Southwest Corporate CUs will need to speed up rate changes

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PLANO, Texas (3/14/08)--With the Federal Reserve continuing to cut interest rates and economic markets reacting, credit unions will need to keep abreast of the changes, according to an investment advisor. “Quick rate cuts inject volatility, and credit unions find themselves forced to keep up,” said Pat Gawenda, manager of asset/liability modeling and analysis for Southwest Corporate Investment Services (LoneStar Leaguer March 13). The Federal Reserve has not slashed interest rates during the past few decades as quickly at the central bank has cut them this year. In eight days during January, the Federal Reserve dropped its benchmark rate twice for a total reduction of 1.25 percentage points, Gawenda noted. When the Federal Open Market Committee meets again to set rates later this month, economists and Wall Street anticipate further cuts, she added. “We are in a falling-rate market,” Gawenda said. “Credit unions are going to have to adjust a number of factors at a more accelerated rate than they have in the past.” Credit unions will have to evaluate lowering both dividend and loan rates, and, at the same time, anticipate changes in liquidity, she predicts. “Such a balancing act takes courage and requires evaluation by credit union management of potential impacts to the credit union’s balance sheet and earnings,” Gawenda concluded.

News of the Competition (03/13/2008)

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MADISON, Wis. (3/14/08)
* Subprime writedowns will reach $285 billion, according to the latest forecast by Standard & Poor’s. That estimate is $20 billion higher than the forecast the ratings agency made only six weeks ago. The firm noted one bright spot. “The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation writedowns of subprime ABS,” said S&P Credit Analyst Scott Bugie. However, he also noted that the positive impact of subprime disclosures and writedowns may be offset by the continued weakening of the housing and credit markets. If wider credit spreads continue, financial firms will “suffer further market-value writedowns of a broad range of exposures, including leveraged loans.” (Reuters, MarketWatch, and The Wall Street Journal Online March 13) … * Carlyle Capital, the bond fund affiliated with private-equity firm Carlyle Group, is on the verge of bankruptcy after failing to find new financing. The company said it expects lenders to soon take possession of “substantially all” of its remaining assets. The firm’s troubles began when it was unable to meet margin calls--demands for cash to cover losses--on its portfolio of mortgage-backed securities. Carlyle has defaulted on $16.6 billion of its debt. Its remaining debt is expected to go into default soon. More funds will go under as credit lines evaporate and lenders become ever more cautious, said Justin Urquhart Stewart, co-founder of Seven Investment Management. “Lending that might have been available three months ago just isn’t there any more,” said Stewart (MarketWatch March 13) … * Shares of jumbo-mortgage lender Thornburg Mortgage plunged nearly 20% in early trading Thursday after the company said it had received a default notice from Morgan Stanley because it failed to meet a $9 million margin call. Thornburg said Morgan Stanley has or will exercise its rights under the agreement under which it lent the company $49 million. Last week, Thornburg disclosed that it received default notices from Goldman Sachs, JPMorgan Chase, Natixis Securities, and ING Financial Markets because it couldn’t meet their margin calls. As of March 6, the company had $610 million of margin calls outstanding. Thornburg has said that amount is significantly higher than its available liquidity (Dow Jones Newswires and MarketWatch March 13) … * Countrywide Financial, the Calabasas, Calif.-based mortgage lender that has agreed to be acquired by Bank of America, said Thursday that the foreclosure rate on its 9 million mortgages jumped to 1.64% in February, from 0.8% in the same month last year. Its mortgage delinquency rate surged to 7.44% from 4.48%. Countrywide has disclosed that about one-third of its subprime mortgages were delinquent at year-end 2007. The firm posted a $422 million loss for the fourth quarter. Bank of America will become the nation’s biggest mortgage lender and servicer after the deal closes in the third quarter (bizjournals via Yahoo! News March 13) …

Market News (03/13/2008)

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MADISON, Wis. (3/14/08)
* Home foreclosure filings jumped 60% in February, compared with the same month last year, according to RealtyTrac Inc. The Irvine, Calif.-based firm said 223,651 homes were in some stage of foreclosure last month--representing 1 in every 557 households. The highest foreclosure rates were in Nevada, California, and Florida. “We’re in a vicious cycle,” said Rick Sharga, executive vice president of RealtyTrac. “We’ve got depreciating home values and loans resetting at an outstanding volume just as banks are retrenching.” An estimated $460 billion of adjustable-rate mortgages will reset to higher rates in 2008, according to Citigroup. Foreclosures will be “explosive” in May and June as mortgage payments surge following resets, said Sharga (Bloomberg.com and CNNMoney.com March 13) … * Mortgage rates increased across the board this week, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) rose 10 basis points to 6.13%, while the 15-year FRM increased 13 basis points to 5.60%, and the one-year, adjustable-rate mortgage (ARM) jumped 20 basis points to 5.14%. “Average mortgage rates were up for all loan products reported,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “However, for the first 11 weeks so far this year, the 30-year fixed rate is still below 5.9%, and the average 30-year rate in January was the lowest since July 2005.” A year ago, the 30-year FRM averaged 6.14%, while the 15-year FRM stood at 5.88%, and the one-year ARM was at 5.42% (MarketWatch and CNNMoney.com March 13). For CUNA's Daily Financial Rates, use the link. … * Retail sales were weak in February, providing further evidence that the economy is in or near recession. Retail sales declined 0.6% last month following a 0.4% gain in January, the Commerce Department reported Thursday. “The basic story from these numbers is that consumer spending growth has slowed, which is consistent with our assessment that the economy is in a mild recession,” said Scott Hoyt, director of consumer economics at Moody’s Economy.com research firm. Leading last month’s decline were sales at auto dealers, gasoline stations, building-supply stores, and furniture retailers. Excluding the volatile auto and gasoline categories, sales fell 0.1% last month. That was the weakest growth in that category since April 2003, noted Hoyt. He remains skeptical about the effect tax rebates will have on consumer spending. “The rebate money could have some impact on boosting consumer spending but we have to see to what extent it will be offset by soaring energy, food, and gas prices.” He also noted that the weak job market will have a negative impact on the economy and consumer spending (CNNMoney.com and Economy.com March 13) … * Continuing unemployment claims rose to a 2 ½-year high, the Labor Department reported Thursday. The number of people continuing to collect unemployment benefits after an initial week of aid increased by 7,000 during the week ending March 1 to 2.835 million. That’s the highest level since September 2005. First-time claims for unemployment benefits were unchanged at a high level of 353,000 for the week ended March 7. So far this year, weekly jobless claims have averaged 345,500--compared with a 322,000 average for all of 2007. Analysts expect claims to keep trending upward, as the economy continues to slow (Bloomberg.com and Economy.com March 13) … * Unemployment-benefit data don’t accurately reflect the number of people out of work because too many Americans are left out of the government insurance program. Only about 37% of unemployed workers in June 2007 were receiving unemployment benefits, according to the Center on Budget and Policy Priorities. Many unemployed people are having a tough time finding new jobs and are exhausting their benefits. Benefits usually run out after 26 weeks, and nearly 18% of those unemployed in February had been out of work for longer than that time limit. In previous recessions, Congress passed extensions of unemployment benefits. Such a provision wasn’t included in the current stimulus package. Other workers fall through the safety net because they don’t quality for unemployment benefits at all. That category includes people who have to leave the workforce to take care of sick family members, and many part-time workers (MarketWatch March 13) …

Hampel Expect Fed to cut rates in two meetings

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HARRISBURG, Pa. (3/14/08)--The recession likely will extend through second quarter, followed by a consumer-led recovery related to special tax rebate checks. And the Federal Reserve is likely to cut rates 100 basis points over its next two meetings. Those were predictions Credit Union National Association Chief Economist Bill Hampel made Wednesday at a joint meeting of the Montgomery County, Delaware County and Philadelphia credit union chapters in Pennsylvania. Pennsylvania is in better shape that other regions because the local housing market is relatively steady, said Hampel, according to the Pennsylvania Credit Union Association's Life is a Highway (March 13). Hampel presented an "Economic Outlook for Credit Unions" at the meeting. He predicted the Fed would cut interest rates while continuing to fight a recession instead of focusing on inflation fears. The "psychological recession effect," where news reports continually tell consumers they are in a recession and consumers spend and save accordingly, is the biggest factor for Pennsylvania, he said. The economy, however, presents an opportunity for credit unions to reach out to members and show how they differ, he told the group. Deposits likely will increase as much as 10% this year. Banks hit by the subprime mortgage crisis are boosting fees and hiking loan rates to improve net income. Banks will be "ringing their customers" for every possible penny, he said. Credit unions with adequate net worth can afford to see their return on assets slip, and can keep their rates and fees more stable as an alternative to banks.

Underwriting real issue in mortgage woes Schenk

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MADISON, Wis. (3/14/08)--Credit unions are dealing with the mortgage crisis better than banks because credit unions kept more of their mortgage debt, did stricter underwriting, and therefore are more insulated from the problem, Mike Schenk, senior economist at the Credit Union National Association, told Medill Reports-Chicago Wednesday. “The originate-to-sell model is deeply implicated in the mess,” Schenk told Medill. However, for credit unions, “asset quality remains high.” Although not unscathed by the arrival of new mortgage products in the marketplace, credit unions used more stringent underwriting standards than many mortgage companies, and therefore, were more successful in dealing with that market segment, analysts said. “The real issue was underwriting, not the variety of loan products,” Schenk told Medill. Mortgage debt-to-income ratios at a traditional level of about 28% ensure that lenders can go to secondary markets to sell their mortgage products, Schenk said. Some lenders raised the level to 40%, and others hyper-extended it as far as 65%, he added. More lax loan-to-value ratios added to the underwriting imbroglio, Schenk told Medill. “Underwriters began to accept 100% loan-to-value ratios, rather than the traditional 80%, he said. Although credit unions also increased loan-to-value ratios, they didn’t do it to the extent mortgage brokers did, he said. Mortgage borrowers need to evaluate current loans and search for more favorable alternatives, Schenk said. “Neighborhood credit unions and banks are by and large ready, willing and able to lend,” he said. “Those looking to get out of toxic mortgages can find loans.”

News of the Competition (03/12/2008)

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MADISON, Wis. (3/13/08)
* Standard & Poor’s has joined the other two top ratings agencies in lowering the AAA bond-insurer ratings on units of CIFG Holding. Citing its “impaired franchise value,” S&P cut the ratings of units CIFG Guaranty, CIFG Europe, and CIFG Assurance North America by four notches to A+. Moody’s Investors Service and Fitch Ratings lowered the units’ ratings last week. The credit quality of bond insurers--who pay investors in the event of default--continues to weaken this year as the mortgage crisis deepens (Dow Jones Newswires March 12) ... * Citigroup has been forced into a $1 billion bailout of six internal hedge funds hit by the municipal-bond rout. Prime brokers decided to issue margin calls, as municipal-bond prices plunged, hitting the funds hard, said people familiar with the situation. Citigroup has pledged to inject $1 billion across the six funds, which have $15 billion in assets and were sold to wealthy clients under the names ASTA and MAT. About $600 million were provided last week. Citigroup already had to shore up another in-house hedge fund and several investment groups amid the credit crunch (FT.com and NYTimes.com via Yahoo! News March 12) … * French bank Societe Generale announced Wednesday that another employee has been taken into custody by the police as part of the investigation of an alleged $7 billion trading fraud. Neither the bank nor prosecutors would identify the broker. Former trader Jerome Kerviel has been under investigation since the bank announced the huge trading loss in January. His attorneys are seeking his release from jail, as the investigation continues. Societe Generale disclosed in January that it sustained large losses when it unwound $76.6 billion worth of unauthorized bets that it claims Kerviel hid via a series of fictitious transactions. Kerviel claims the transactions were authorized by supervisors (Dow Jones Newswires and The New York Times March 12) … * Freddie Mac is almost ready to search for a new chief executive officer and split the roles of CEO and chairman, said current Chairman/CEO Richard Syron on Wednesday (Reuters March 12). The firm must split the two roles as part of an agreement with its regulator before it can lower its excess capital mandate. In other news, Freddie Mac chief financial officer Buddy Piszel said the company has adequate capital to boost its single- and multi-family loan businesses (The Wall Street Journal Online March 12). In a conference with analysts, Piszel said the firm has no plans to raise additional capital … * Macquarie Mortgages USA, the U.S. mortgage unit of Australian investment bank Macquarie Group Ltd, has stopped taking loan applications. The company, which caters mostly to prime customers, cited rising funding costs and a lack of liquidity for its decision. Jacksonville, Fla.-based Macquarie said it will continue to service loans. About half the firm’s 80 U.S. employees will be eliminated, said Macquarie spokesman Alex Doughty (American Banker March 12) …

Market News (03/12/2008)

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MADISON, Wis. (3/13/08)
* Affordable housing is the latest victim of the credit crunch, as big financial institutions retreat from their participation in the federal government’s housing tax-credit program. Financial firms hit hard by the mortgage slump don’t need the tax credit as much because they have lower profits. “Fannie and Freddie and a number of the major banks are either not in the market or are reassessing” how much they might invest,” said Richard Richman, founder of the Richman Group, a low-income housing developer. The shift is occurring even as the weak economy and rising foreclosures push more people into the lower-end rental market, noted Elizabeth Hersch, executive director of the Housing Alliance of Pennsylvania (The Wall Street Journal Online March 12) … * The supply of homes available for sale in large metropolitan areas edged up in February, according to a report by ZipRealty Inc. Home listings--single-family homes, condos, and townhouses--in 29 metro areas rose 1.2% last month. Housing inventory was up 17% from the same month last year in the 18 metro areas for which Zip has comparable year-over-year statistics. Analysts say housing inventory has begun to level off at a high plateau, as some people without an immediate need to sell have taken their homes off the market. Homeowners with a need to sell have to compete with lenders unloading foreclosed homes and builders offering generous incentives to move inventory (The Wall Street Journal Online March 11) … * Mortgage activity declined last week, as interest rates rose, according to the Mortgage Bankers Association (mbaa.org March 12). The trade group’s Market Composite Index fell 1.9% during the week ending March 7 to 671.7, as a decline in refinancings offset a small gain in purchase applications. The refinance share of activity fell to 50.6% from 52.4% the previous week. The average 30-year, fixed-rate mortgage (FRM) jumped 39 basis points to 6.37% last week, while the one-year, adjustable-rate mortgage (ARM) surged 89 basis points to 6.72%. The risk premium for one-year ARMs has soared, and ARMs now top rates for 30-year FRMs by 35 basis points, noted Moody’s Economy.com (March 12). Rising ARM rates and lower refinancing volume show new caution in the mortgage market, said the research firm, reflecting recent stock-market losses and writeoffs by major financial institutions … * One-third of Americans aged 50 and over aren’t confident they’ll have enough money to retire, and more than two-thirds plan to keep working well into old age, according to a survey commissioned by SecurePath by Transamerica, a service of Transamerica Retirement Management. In another finding, 61% of respondents said the Social Security program will be their main source of income in retirement. And 70% said they already have faced a period of financial difficulty that undermined their confidence and created stress. About half of respondents said they weren’t very willing to place money in investments that are associated with risk. “The average American isn’t looking for a life of leisure or luxury,” said Will Prest, chief marketing officer at Transamerica Retirement Management. “They’re just looking to live life on their own terms and lower their stress level, but still participate.” (Reuters via Yahoo! News March 12) … * The economy probably already is in recession, but still faces higher inflation this year, according to a survey of economists by Reuters. The poll indicates a median 60% chance of recession--up from just 40% in a February survey. Respondents expect the Federal Reserve to continue cutting interest rates aggressively this year, bringing the fed funds rate down to 2% in the second quarter. Respondents predict the economy will expand by just 1.4% during 2008, and then rebound to modest 2.5% growth next year. Respondents expect the core consumer price index--excluding food and energy--to increase by an average 2.5% during the first two quarters of this year, despite weak economic growth (Reuters via Yahoo! News March 12) … * The U.S. already is in a prolonged downturn that won’t ease until next year, according to a survey of chief financial officers by the Duke University/CFO Magazine Business Outlook Index. More than half of respondents say the economy is already in recession, and 80% say a recession is likely by the end of the year. “With overwhelming CFO pessimism, we expect weak capital spending and employment in 2008,” said Survey Director John Graham. Respondents said slower consumer spending, tighter credit, the housing slump, and high energy prices are all contributing to the economic slowdown. One-third said their own businesses have been “directly” affected by credit restrictions. Three-fourths said the Federal Reserve’s rate cuts had no influence on their businesses (Bloomberg.com March 12) …

News of the Competition (03/11/2008)

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News of the Competition MADISON, Wis. (3/12/08)
* Banks’ home-equity loans are deteriorating fast, even as they cope with writedowns in other portfolios, said Fitch Ratings on Tuesday. The ratings agency cautioned that it may lower its ratings for Citigroup, Bank of America, and Washington Mutual because of the anticipated deterioration. Fitch also noted rising defaults in California and Florida. The ratings agency said delinquency rates on home-equity loans are rising quickly. “Fitch anticipates that banks will significantly ratchet up loan-loss provisions against home equity loans in 2008 and provisioning levels for 2008 will likely be much higher than 2007 overall, as deterioration in other consumer portfolios is also likely,” said the ratings agency. “Challenges in home equity lending are expected to persist throughout 2008 and into 2009.” (Dow Jones Newswires March 11) … * Fannie Mae and Freddie Mac had adequate capital at year-end 2007 to cope with deteriorating economic conditions, the Office of Federal Housing Enterprise Oversight said Tuesday. Fannie had core capital of $45.4 billion as of December--$3.9 billion above the required minimum. Freddie’s $37.9 billion in core capital was $3.5 billion higher than its minimum. The agency ordered the two government-sponsored enterprises to hold a capital cushion 30% higher than the minimum, following accounting scandals. The agency said it would consider slowly decreasing that capital surcharge if the firms meet some safety and soundness conditions (Reuters via Yahoo! News March 11) … * Wall Street will see layoffs as high as 20% as the economic crunch continues, say top executives. Wall Street has about 210,000 employees in New York state alone. The bloodletting could be as bad as the 2001-2002 downturn or even the early 1990s debacle. The reasons behind the upcoming job cuts are numerous. Investment-banking fees are down 48% from year-ago levels, and banks’ lending revenues are down 84%, according to Dealogic. Possible strategies described by top investment-bank chiefs include eliminating some technical experts while retaining bankers with the best client relationships, or furloughing associates. Cutting bonuses is another option (The Wall Street Journal Online March 11) … * A proposed bill in Maryland would let the 50 state-chartered banks and thrifts in the state collect charges they initially waived if borrowers prepay their mortgage or home-equity loans. A Maryland Court of Appeals decision had found that Provident Bankshares violated state law when it collected fees it had initially waived. Responding to that decision, the Maryland Bankers Association pushed the new bill. Lawmakers also are in favor of the bill because they worry the decision would put state-chartered banks at a disadvantage to those with federal charters. The waived fees include those for attorneys, title searches, appraisals, and taxes the bank agreed to pay for the borrowers, in exchange for borrowers agreeing not to prepay their loan within a certain time span (American Banker March 11) ...

Market News (03/11/2008)

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MADISON, Wis. (3/12/08)
* The Federal Reserve on Tuesday announced another move to boost liquidity. The new program will lend up to $200 billion of Treasuries to financial institutions for a 28-day term. The central bank set up a new Term Securities Lending Facility to lend to the firms. The companies can put up as collateral mortgage-backed securities issued by Fannie Mae and Freddie Mac. The Fed will also accept AAA-rated mortgage securities issued by banks. The central bank will lend the Treasuries via weekly auctions, beginning March 27. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject as much as $45 billion into their banking systems. Last week, the Fed said it would make as much as $100 billion available to banks in a separate program to boost liquidity. Some analysts are skeptical that the newest initiative will adequately address problems in the credit markets. “If these institutions are able to extend out more credit as a result of this, it may take more pressure off the housing market and mortgage quality,” said Moody’s Economy.com Chief Economist Mark Zandi. “It doesn’t solve the underlying problem of mortgage delinquencies and defaults,” noted Zandi, “which could at some time threaten the Triple-A securities.” (Bloomberg.com and The New York Times March 11) … * The U.S. economic slowdown will be steeper and the recovery weaker than previously expected, according to the latest Bloomberg News survey of economists (March 11). The median estimate calls for the economy to expand by just 0.3% during the first half of this year--a half point less than respondents forecast in February. The economy is forecast to expand just 1.4% for all of 2008--the weakest since the 2001 recession. Consumer spending is expected to increase a small 0.5% in the first quarter, as consumers cope with rising energy prices, falling employment, and declining home values. Respondents in the latest poll expect the Federal Reserve to lower the target for the fed funds rate by one percentage point and keep it at 2% through December. Economists put the odds of a recession occurring this year at 50%--unchanged from the February survey … * Gasoline prices rose to a new record high on Tuesday, adding to the burdens consumers already face with declining home prices and rising food costs. Gasoline pump prices rose to $3.2272 a gallon, according to AAA and the Oil Price Information Service. That’s up slightly from the $3.2265 record set last May. Analysts say soaring crude-oil prices are behind the latest increase. The declining value of the dollar also is a factor, because oil futures bought and sold in dollars are more attractive to investors when the dollar is weak. Analysts say pump prices could increase to $3.50 to $3.75 a gallon, as demand rises in the spring and summer (Associated Press via The New York Times March 11) ... * The nation’s trade deficit widened in January as crude-oil prices jumped to a record high. The U.S. trade gap rose to $58.2 billion--from a $57.9 billion shortfall in December and the highest level since November, the Commerce Department reported Tuesday. Imports rose to a record-high $206.4 billion, largely reflecting soaring oil prices. The nation’s imported oil bill rose to a record-high $27.1 billion. U.S. exports also increased--to a record-high $148.2 billion, as the declining value of the dollar made U.S. goods more attractive to foreigners. The nation’s politically-sensitive trade gap with China rose to $20.3 billion, from $18.8 billion in December (Associated Press via Yahoo! News March 11) … * The unemployment rate increased in 27 states and the District of Columbia during January, the Labor Department reported Tuesday. For the 10th consecutive month, Michigan posted the highest jobless rate--at 7.1%. However, that’s down from 7.4% in December. In Alaska, the unemployment rate rose to 6.5%, from 6.3%. Six states in all posted rates much higher than the national average rate of 5% in January. The number of jobs rose in 30 states in January, but declined in 18 states and the District of Columbia. At 20,300, California lost the most jobs. New Jersey ranked second, with the loss of 9,500 jobs (Reuters via Yahoo! News March 11) … * An estimated 26% of employers plan to increase the size of their workforce in the second quarter--down slightly from 28% for the same quarter of last year, according to a survey by Manpower Inc. Just 9% plan to cut staff, while 60% plan no change, and 5% are uncertain. The latest results show employers have become more thoughtful about hiring, but they’re not completely cutting back, said Jonas Prising, president for North America at Manpower. The survey indicates a modest slowdown in almost every industry--including construction, manufacturing, mining, education, and wholesale and retail trade (Associated Press via CNNMoney.com March 11) …

News of the Competition (03/10/2008)

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MADISON, Wis. (3/11/08)
* The Federal Bureau of Investigation (FBI) has launched a criminal investigation of Countrywide Financial Corp. for possible securities fraud, according to federal officials and financial-industry executives. The investigation is centered on whether Countrywide officials made misrepresentations about the company’s financial position and the quality of its mortgage portfolio in securities filings. People familiar with the matter said the firm’s losses may be much larger than it has disclosed. Countrywide Spokeswoman Jumana Bauwens said she wasn’t aware of such an investigation. Fifteen other mortgage lenders are being investigated by federal agents in regard to mortgage-origination fraud, conflicts of interest, and the methods they use to package mortgage-backed securities. Countrywide, which was the nation’s largest mortgage lender at its peak, has agreed to be acquired by Bank of America (The Wall Street Journal Online March 10) … * Bear Stearns’ shares plunged Monday after Moody’s Investors Service downgraded dozens of tranches of securities issued by a company trust and backed by Alt-A mortgage loans, which are between prime and subprime in credit quality. Moody’s said the ratings downgrade reflected larger-than-expected delinquency and foreclosure rates. The ratings agency downgraded 163 tranches from 15 transactions issued by Bear Stearns Alt-A Trust. Moody’s also said 78 of those tranches remain on review for a further downgrade. More than $1 trillion of Alt-A mortgages were underwritten during the last two years, according to National Mortgage News (The Wall Street Journal Online March 10) … * Creditors seized billions of dollars of collateral from Thornburg Mortgage after the firm’s auditor, KPMG LLC, raised “substantial doubt about the company’s ability to continue as a going concern.” Thornburg’s shares plunged 22% in New York Stock Exchange trading, as stockholders bet the firm would file for bankruptcy. The viability of Thornburg is notable because it specializes in mortgages to borrowers that have stronger credit ratings than subprime. Santa Fe, N.M.-based Thornburg said it plans to restate financial statements for the past two years to recognize assets writedowns that could prompt a $427.8 million charge (The Wall Street Journal Online and Dow Jones Newswire March 10) … * U.S. investment banks will see about $9 billion in writedowns during the first quarter--reflecting further leveraged-loan and mortgage-related losses, according to Citigroup Analyst Prashant Bhatia. He forecasts writedowns of $1. 6 billion at Lehman Brothers Holdings, $3.2 billion at Goldman Sachs, $2.9 billion at Merrill Lynch, and $1.2 billion at Morgan Stanley (Reuters via The New York Times March 10) … * Lehman Brothers Holdings, the nation’s biggest underwriter of mortgage-backed bonds, is cutting 5% of its workforce to cope with the economic slowdown, according to a person briefed on the matter. About 1,400 jobs will be eliminated. Lehman, which closed its subprime-lending subsidiary last year, already has cut about 3,900 jobs because of the credit crunch. Wall Street companies have eliminated more than 30,000 jobs during the past seven months, as the housing market slumped and the value of mortgage-related assets fell (Bloomberg.com March 10) …

Market News (03/10/2008)

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MADISON, Wis. (3/11/08)
* More Americans are being forced to take part-time jobs as the economy weakens. The number of people working part-time for economic reasons, not by choice, jumped by 100,000 to 4.79 million in February, according to the Labor Department. That’s up from 4.13 million a year earlier and the highest number since 1993. More people also are holding more than one part-time job because of economic need. About 1.8 million people held more than one part-time job for that reason last year--the largest number since the department began tracking the data in 1994. Analysts expect the number of part-time jobs to grow as the number of full-time jobs declines. The trend is important to workers’ economic well-being because part-time work pays about 10% to 20% less per hour than full-time work, while usually offering no health or retirement benefits (The Wall Street Journal Online March 10) … * Consumers accelerated their borrowing in January despite the economic slowdown. Consumer credit rose by $6.9 billion, at a 3.3% annual pace, to $2.525 trillion, the Federal Reserve reported Friday. Revolving credit, which includes credit cards, rose at a 7% annual pace--up from a 2.8% rate of increase in December, while non-revolving credit, which includes auto and boat loans, increased at a 1.1% annual pace, the same as in the previous month. Consumers have less ability to tap their homes for equity as the housing slump continues. “With other sources of income slowing down, consumers are shifting a greater bulk of their spending on to credit cards,” said Moody’s Economy.com Economist Andrew Gledhill. He also noted that high gasoline prices contributed to the consumer-credit increase, because most consumers use their credit cards to buy gasoline (CNNMoney.com and federalreserve.gov March 7) … * Crude oil jumped to a record-high $107 a barrel in New York on Monday, as investors bought futures because their returns outstripped those of financial markets. Hedge-fund managers and other big speculators boosted their bets on rising oil prices during the week ending March 4, according to a Commodity Futures Trading Commission report. Record oil prices mean huge profits for oil firms, a trend that has furthered Democrats’ efforts to tax oil companies. Exxon Mobil, Chevron Corp., and ConocoPhillips reported earnings of about $10 million an hour during the fourth quarter. Even some Republicans want to tax oil companies. “I don’t think you want to be politically or any other way aligned with oil companies that are racking up these kinds of profits at a time when consumers in your state are paying $3 or $3.50 a gallon for gasoline,” said U.S. Sen. John Thune, (R-S.D). The Energy Information Administration predicts that regular-grade gasoline will average a record-high $3.41 at the pump during the second quarter (Bloomberg.com March 10). * Global business confidence remains very weak, especially in the U.S., according to the latest Moody’s Economy.com Survey of Business Confidence conducted March 10. The low level of confidence in the U.S. is consistent with recession. Real-estate firms and financial institutions have the most pessimistic view of the economy, but even manufacturers and high-tech companies have become more worried. Firms continue to cut inventories, and demand for office space has weakened. Even with rising oil prices, businesses are keeping a lid on prices because demand is weak … * Wholesale inventories posted a larger-than-expected gain in January, even as sales posted the largest increase in almost four years. Wholesale inventories rose 0.8% after a 1.1% gain in December, the Commerce Department reported Monday. Sales jumped 2.7%, following a 0.5% increase and the largest gain since March 2004. The inventory-to-sales ratio, a measure of how many months it would take firms to deplete their inventory at the current sales pace, edged down to 1.07 from 1.09. Strong sales of durable goods and farm products helped boost sales during the month. Durable-goods sales jumped 2.4%, while farm-products sales soared 16.1% (The Wall Street Journal Online March 10) …

News of the Competition (03/07/2008)

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MADISON, Wis. (3/10/08)
* The Commissioner of Missouri's Division of Finance Friday closed Hume (Mo.) Bank and named the Federal Deposit Insurance Corp. (FDIC) as receiver. FDIC approved the assumption of Hume Bank's insured deposits by Security Bank, based in Rich Hill, Mo., FDIC said in a press release Friday. As of Dec. 31, Hume Bank's assets totaled $18.7 million and deposits totaled $13.6 million. At the time it was closed, Hume Bank had $1.1 million in 33 deposit accounts that exceeded the federal deposit insurance limit. Security Bank will assume $12.5 million of the failed bank's insured deposits for a premium of 4.26%. The failed bank's sole office will reopen today as a branch of Security Bank, with Hume Bank depositors automatically becoming depositors of Security … * Washington Mutual and other mortgage lenders are approaching private-equity firms and sovereign-wealth funds about cash infusions, as regulators push them to raise capital, say people familiar with the matter. Banks “are talking to everybody,” including hedge funds and private-equity firms, said a partner at a top buyout company. Regulators are pushing even strong financial institutions to shore up capital so they can continue lending. Analysts predict that banks will post tens of billions of dollars in additional losses and writedowns in the first quarter from their mortgage exposure. Insured banks and thrifts set aside a record-high $31.3 billion for loan losses in the fourth quarter, according to Federal Deposit Insurance Corp. data. That’s up from just $9.9 billion a year earlier (The Wall Street Journal Online March 7) … * Several top executives of financial firms defended their huge compensation packages before Congress on Friday. Countrywide founder and CEO Angelo Mozilo, former Merrill Lynch Chairman/CEO Stanley O’Neal, and former Citigroup CEO Charles Prince said their pay was tied to their firms’ performance. O’Neal said his pay was comparable to compensation in the broader financial sector. His former company, Merrill Lynch, posted an $8 billion loss on subprime investments in October. O’Neal said reports that he was given $161 million after he resigned were “inaccurate.” Prince left Citigroup with a compensation package of $68 million after the firm reported a 57% drop in earnings. Lawmakers criticized the big payouts. “The obvious question is how can a few execs do so well when their companies are doing so poorly,” said California U.S. Rep. Henry Waxman (D-30th). Nell Minow, editor and co-founder of The Corporate Library, testified that the pay packages given to Prince, Mozilo, and O’Neal should be returned and dispersed to shareholders (CNNMoney.com March 7) … * The collapse of the auction-rate bond market will enrich JPMorgan Chase, Goldman Sachs and other Wall Street firms even as it costs states, counties and universities $1 billion in fees. The Wall Street firms that withdrew their support from the market have offered to convert securities for a high price. That’s in addition to the high interest rates that cities and states are paying on their debt. Previously, these firms supported the market by bidding for unsold bonds. “The taxpayers are clearly losing,” said New York Comptroller Howard Weitzman. University of Maryland Professor Peter Morici noted that investment firms created the auction-rate securities. “Now that the market has exploded they’re going to force losses on their clients,” said Morici (Bloomberg.com March 7) … * Citigroup announced last week that it plans to reduce its mortgage assets by $45 billion over the next 12 months. The cut represents 20% of the value of mortgages that the bank held as of December. Citi said it hopes the retreat from mortgages will let it lower expenses by $200 million this year. Analysts expect the bank to post a loss of about $14 billion in the first quarter from debt linked to subprime mortgages. Concerned about further writedowns, many U.S. banks are retreating from their mortgage exposure (MarketWatch March 7) … * Banks borrowed less from the discount window last week, according to Federal Reserve data. Discount borrowings totaled $37 million as of March 5--down sharply from $687 million the previous week. Lending via the primary credit facility last week totaled $34 million, while seasonal credit totaled $3 million (Dow Jones Newswires March 7) …

Market News (03/07/2008)

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MADISON, Wis. (3/10/08)
* Employment declined for a second consecutive month in February, suggesting that the economy may already be in recession. Nonfarm payrolls declined by 63,000 last month following a 22,000 drop in January, the Labor Department reported Friday. Last month’s decline was the largest since a 25,000 drop in August 2003. The unemployment rate edged down to 4.8% from 4.9%, as more people became discouraged about finding jobs and left the labor force. Both the civilian labor force and the labor force participation rate declined in February. The number of people who worked part-time for economic reasons stood at 4.9 million in February--up by 637,000 over the past 12 months. The category includes people who would like to work full time, but can’t find full-time employment … * Job losses occurred in manufacturing, construction, and retail trade in February, according to the Labor Department report. Factory employment fell by 52,000 last month--bringing losses in that sector over the last 12 months to 299,000. Employment in construction fell by 39,000, and has declined by 331,000 since peaking in September 2006. Employment in retail trade fell by 34,000. In the financial sector, credit intermediation employment has declined by 116,000 since peaking in October 2007. Real-estate employment has fallen by 34,000 since June 2006. Some bright spots are health-care employment--which has increased by 360,000 over the last 12 months, and food-services employment--which has added an average 12,000 jobs per month since November … * The Federal Reserve announced Friday that it will boost the amount of money it auctions to banks this month to $100 billion in an effort to ease the liquidity crunch. The Fed will increase its March 10 and March 24 auctions to $50 billion each--$20 billion each higher than it previously announced. The central bank also announced it will make $100 billion available through weekly 28-day repurchase agreements, in which the Fed lends cash in return for assets such as Treasuries. After Friday’s weak employment report, traders increased their bets that the Federal Open Market Committee will lower the target for the fed funds rate again when it next meets on March 18 (Associated Press via CNNMoney.com and Bloomberg.com March 7) … * More than 70 counties in the U.S. will see limits for Fannie Mae- and Freddie Mac-backed mortgage loans increase to the new maximum loan limit of $729,750, as set by the economic stimulus package, according to the Federal Housing Administration (FHA). Most of those counties are in California, New York, New Jersey, Virginia, Maryland, and Washington, D.C. Interest rates on jumbo loans rose to one percentage point above the rate for smaller loans as credit tightened. The new upper limit is expected to lower that differential. The FHA estimates that about 250,000 households nationwide will benefit from the new ceiling (The Wall Street Journal Online March 7) … * U.S. households became poorer at the end of last year, as the value of real estate and stocks weakened, the Federal Reserve reported Thursday. The total net worth of U.S. households slipped to $57.72 trillion in the fourth quarter--from $58.25 trillion in the previous quarter and the first quarterly decline since 2002. The Fed also reported that Americans’ percentage of equity in their homes fell below 50% last year for the first time since 1945. Household equity dropped to a record-low 47.9% in the fourth quarter. During the last three quarters of 2007, the bank or lender owned more of the average house than the homeowner did--for the first time on record. Moody’s Economy.com estimates that 8.8 million homeowners--representing about 10.3% of homes--will have zero or negative equity by the end of March (Associated Press and Reuters via Yahoo! News and MarketWatch March 7) …

News of the Competition (03/06/2008)

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MADISON, Wis. (3/7/08)
* Merrill Lynch announced Wednesday that it plans to close its First Franklin subprime-mortgage loan unit. Merrill said it is exiting the subprime-lending business because of the deteriorating market. The company plans to eliminate 650 jobs at the unit. Merrill said it will attempt to sell First Franklin unit Home Loan Services, which handles billing and collections. Merrill purchased First Franklin from National City Corp in December 2006 at the peak of the mortgage boom. Merrill took more than $14 billion in writedowns during the fourth quarter as the value of bonds and debt backed by mortgages plunged. Other investment banks including Bear Stearns, Lehman Brothers Holdings and Morgan Stanley also have cut mortgage-related jobs since the credit crisis began in August (Reuters and Associated Press via Yahoo! News March 6) … * Ambac Financial Group said Wednesday that it plans to sell $1.5 billion in stock to help protect its “AAA” credit rating and avoid splitting the company in two. The ratings agencies are reviewing bond insurers because they’re worried they won’t have enough funds to meet a surge in claims as the mortgage market continues to falter. Shares of Ambac dropped Thursday morning after Goldman Sachs Analyst James Fotheringham said the company needs to raise a much-larger $2.5 billion to retain its credit rating. “Ambac’s highly-anticipated capital plan is not enough,” said Fotheringham (Associated Press via CNNMoney.com March 6) … * Standard & Poor’s again lowered its ratings for Washington Mutual, the nation’s largest savings and loan, and said it may cut the firm’s ratings further as mortgage-market weakness continues. S&P lowered its rating for WaMu by one notch to “BBB.” “We now believe that the severity of losses on all residential mortgages will be higher than we had thought and that the weak housing market will now be a longer cycle,” said S&P. The ratings agency predicted that loan losses and delinquencies will continue to climb. Rating downgrades have boosted the cost to insure WaMu’s debt--from 407 basis points at the beginning of the year to 560 basis points, according to Markit Intraday (Reuters via CNNMoney.com March 6) … * Mortgage demand remained weak during the past six weeks, according to the Federal Reserve’s latest Beige Book report. However, the Fed noted that refinancings surged in the San Francisco, St. Louis, New York, Richmond, Atlanta, Cleveland and Chicago districts. In another bright spot, the Chicago and Cleveland districts reported rising business-loan demand. The central bank said some districts reported flat or falling demand for other loan types, and some reported rising delinquencies for several types of loans (American Banker March 6) … * The Securities and Exchange Commission has proposed changes in regulations that would let exchange-traded funds (ETFs) be launched quickly without review by federal regulators (Dow Jones Newswires and sec.gov March 6). The proposal also would let mutual funds invest in ETFs more easily. The agency said the new rules would save sponsors the time and expense of obtaining approval, thus “eliminating a barrier of entry for new participants in this fast-growing market, while preserving investor protections.” ETF assets totaled $569 billion at the end of January--up from just $151 billion at year-end 2003, according to the Investment Company Institute (American Banker March 6). The number of ETFs jumped to 635 from 119 …

Market News (03/06/2008)

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MADISON, Wis. (3/7/08)
* Home foreclosures jumped to a record high during the fourth quarter of 2007, according to the Mortgage Bankers Association (MBA). The rate of loans entering the foreclosure process was 0.83% seasonally adjusted--topping the previous record high of 0.78% set in the third quarter. The fourth-quarter rate was 29 basis points higher than a year earlier. The percentage of loans in the foreclosure process was 2.04% of all loans outstanding at the end of the fourth quarter--up 35 basis points form the previous quarter and 85 basis points from a year earlier. “Declining home prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,” said MBA Chief Economist Doug Duncan. He cited job losses in Ohio and Michigan and overbuilding in California, Florida, Nevada, and Arizona (mbaa.org and Associated Press via The New York Times March 6) … * Mortgage delinquency rates surged during the fourth quarter of last year, according to the Mortgage Bankers Association (MBA) report. The delinquency rate--30 days or more overdue--stood at 5.82%, up 23 basis points form 5.59% in the third quarter and the highest rate since 1985. The rate was 87 basis points higher than a year ago. Subprime borrowers were the hardest hit. The delinquency rate for subprime adjustable-rate mortgages jumped to a record-high 20.02%--from the previous record high of 18.81% set in the third quarter. MBA Chief Economist Doug Duncan predicts that both delinquencies and foreclosures will continue to increase over “the next couple of quarters.” However, he said there is a bright spot for many homeowners. “Of significance … is that the rate reset issue on adjustable rate mortgages is becoming less of an issue. The 6-month LIBOR rate, the index rate used for many subprime ARMs, has come down around 2.5 percentage points since last September, greatly reducing the payment shock on many ARM resets.” (mbaa.org and Associated Press via The New York Times March 6) … * Pending sales of previously-owned homes were unchanged in January, the National Association of Realtors (NAR) reported Thursday. NAR’s Pending Home Sales Index, based on contracts signed in January, remained at 85.9. The steady reading was welcome news to analysts, who had anticipated a drop in the index. However, sales were down 19.6% from a year earlier. NAR predicts that existing-home sales will hold steady through late spring, then gradually recover during the second half of the year, as mortgages in high-costs areas become more available. “The higher loan limits for both FHA and conventional loans will increase consumer choice and provide greater access to lower interest rate mortgages in high-cost regions,” said NAR Chief Economist Lawrence Yun. “Therefore, a notable rise in home sales can be anticipated in the second half of the year.” (realtor.org and Reuters via The New York Times March 6) … * Weak economic news prompted a decline in mortgage rates this week, according to Freddie Mac. The average 30-year, fixed-rate mortgage (FRM) fell 21 basis points to 6.03%, while the 15-year FRM dropped 25 basis points to 5.47%, and the one-year, adjustable-rate mortgage (ARM) declined 17 basis points to 4.94%. “Weak economic reports that indicated declines in the job market, slowing in manufacturing and low consumer confidence drove bond yields lower this week and mortgage rates followed,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “Interest rates for 30-year FRMs are now at the same levels as they were two weeks ago, erasing last week’s upward jump,” added Nothaft. A year ago, the 30-year FRM stood at 6.14%, while the 15-year FRM was at 5.86%, and the one-year ARM averaged 5.47% (CNNMoney.com and MarketWatch March 6). For CUNA's Daily Financial Rates, use the link. … * While unemployment claims declined last week, the number of people remaining on jobless aid rose to the highest level in almost two-and-a-half years. First-time claims for unemployment benefits fell by 24,000 during the week ending March 1 to 351,000, the Labor Department reported Thursday. Continuing claims--the number of people still on the benefit rolls after an initial week of aid--increased by 29,000 during the week ended Feb. 23 to 2.831 million--the highest level since September 2005 in the aftermath of Hurricane Katrina. Analysts expect claims to continue to rise in the months ahead as weakness in the housing market spills over into other sectors of the economy (Reuters via Yahoo! News and MarketWatch March 6) …

News of the Competition (03/05/2008)

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MADISON, Wis. (3/6/08)
* The compensation targets for top executives will not be affected by subprime mortgage losses and foreclosures when cash bonuses are calculated this year, the board of Washington Mutual Inc. (WaMu) decided, according to a filing with U.S. regulators. The move basically protects the pay of Kerry Killinger, chairman/CEO of WaMu, and more than 100 other executives from the ongoing mortgage turmoil. The compensation formula that shields the top executives has irked some WaMu investors, who have seen their holdings wither as the thrift’s mortgage troubles mounted. In the last 12 years, WaMu’s share price has declined about 70%. The cash-bonus formula ‘‘could result in executive focus away from issues, particularly credit management, which we feel are critical to the success” of WaMu, said Frederick Canon, an analyst with Keefe, Bruyette & Woods in a research report. Canon predicted housing problems will result in a sharp loss by WaMu in 2008 and asked company directors to “revisit the 2008 compensation plan and make managing credit a top priority of senior management with objective rather than subjective measurements.” (The Wall Street Journal and Reuters March 5) ... * The U.S. economic future contains serious risks, Federal Reserve Board Governor Frederic Mishkin said Tuesday. This outlook is based on indications of sluggish business and consumer spending, and the possibility of a deeper housing downturn, he said. In remarks to the National Association for Business Economics, Mishkin predicted a soft first quarter that would include subdued business spending on equipment and software in the near term. Unemployment is likely to rise, but inflation--although it has risen--should be fairly well-contained in the long-run, he added (Reuters Feb. 4) … * Trading losses and writedowns of debt tied to the U.S. subprime mortgage crisis were the driving forces behind the declining profits reported by the Bank of Montreal. Canada’s fourth-largest bank’s first-quarter income dropped 27% to $258 million, or 47 cents per share from $351 million or 67 cents per share a year earlier. Credit losses and lower economic growth will prevent the company from meeting its profit targets, the bank said. Along with Bank of Montreal, Canadian Imperial Bank of Commerce and Bank of Nova Scotia are among the Canadian lenders that have seen losses due to declining credit markets engendered by escalating defaults in the U.S. subprime mortgage market (Bloomberg.com March 4) … * By implementing short-term balance-sheet maneuvers, Sovereign Bancorp Inc. is able to remain in compliance with federal thrift regulations, analysts said. On certain days, the company needs to manipulate its balance sheet to remain under a legal threshold that mandates that large commercial loans may not make up more than 10% of a thrift’s assets, said Mark R. McCollom, Sovereign’s chief financial officer. Sovereign is working with its regulator to come up with a more permanent solution to this issue, McCollum added. One possible solution includes replacing Sovereign’s thrift charter with a bank charter, which does not limit the amount of commercial loans an institution makes (American Banker March 5) …

Market News (03/05/2008)

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MADISON, Wis. (3/6/08)
* U.S. firms announced fewer layoffs last month, according to a report by the outplacement firm Challenger, Gray & Christmas. Companies announced 72,091 job cuts in February--down 3.9% from the previous month and 14.2% from February 2007. “While job cuts were down slightly, increased layoffs by government agencies and retailers provided further evidence that the impact of the housing slump is spreading beyond the housing and financial sectors,” said the report. For just the second time in the past seven months, the financial sector didn’t account for the most layoffs in February. At 6,267, the financial sector ranked third after the 6,918 layoffs announced by the retail sector and the 10,870 layoffs announced by the government and non-profits sector. “The fact that these two sectors topped the job-cut list in February is clear evidence that the slowdown has moved beyond the housing and financial industries,” said John Challenger, CEO of the Chicago-based firm. However, Challenger noted that layoffs haven’t yet approached the levels seen in the 2001 recession (Reuters via The New York Times and CNNMoney.com March 5) … * The U.S. service sector shrank less than economists forecast in February. The Institute for Supply Management (ISM) said Wednesday that its non-manufacturing index, which includes retailers, construction companies, and financial firms, registered 49.3 last month--up from a 44.6 reading in January but still below the 50 mark that indicates contraction in the sector. January was the first time since March 2003 that the index fell below 50. “Member’s comments … are mixed and remain cautious about business conditions,” said ISM Survey Chairman Anthony Nieves. An ISM report earlier this week indicated contraction in the manufacturing sector as well. That index dropped to 48.3 last month, from 50.7 in January. Another report by the Commerce Department on Wednesday also showed a manufacturing slump. Orders for factory goods fell 2.5% in January--following a 2% increase in December and the largest decline in five months. Orders for durable goods such as vehicles and airplanes plunged 5.1%, while demand for nondurables such as food and clothing edged up 0.3% (Associated Press via Yahoo! News and CNNMoney.com March 5) … * Productivity growth slowed sharply last quarter as labor costs accelerated, the Labor Department reported Wednesday. Productivity--the amount an employee produces for each hour of work--increased at a 1.9% annual pace in the fourth quarter--down sharply from a 6.3% pace in the third quarter. Unit labor costs--a measure of inflationary pressure--rose at a 2.6% pace, compared with a 2.7% rate of decline in the third quarter. For the full year, both productivity and labor costs accelerated. Productivity rose 1.8% in 2007, compared with a 1% increase in 2006. Labor costs rose by 3.1%, up from a 2.9% gain. Efficiency gains help contain inflation by allowing firms to pay workers more without boosting prices (Associated Press via The New York Times and The Wall Street Journal Online March 5) … * Mortgage activity rebounded last week, according to a report by the Mortgage Bankers Association (mbaa.org March 5). The trade group’s Market Composite Index rose by 3% during the week ending Feb. 29 to 684.9, as both purchase and refinancing applications increased. The refinance share of mortgage activity edged up to 52.4% from 52% the previous week. Mortgage rates declined last week. The 30-year, fixed-rate mortgage (FRM) fell by 29 basis points to 5.98%, while the one-year, adjustable-rate mortgage (ARM) edged down by 1 basis point to 5.83%. The one-year ARM is just 15 basis points lower than the 30-year FRM, noted Moody’s Economy.com (March 5). That’s much smaller than the typical rate differential of about 100 basis points and suggests that the risk premium for ARMs remains high … * The Organization for Petroleum Exporting Countries (OPEC) announced Wednesday that it doesn’t plan to boost production even though oil prices are at near-record highs. OPEC, which supplies about 40% of the world’s crude, said supplies are high and demand will weaken during the second quarter. The oil cartel blamed other factors for high prices, including the weak value of the U.S. dollar, speculation, and political tension--not a lack of oil. “If the prices are high, definitely they are not due to a lack of crude,” said OPEC President Chakib Khelil. “They are due to what’s happening in the U.S.” Oil prices jumped to a record inflation-adjusted high of $104 a barrel earlier this week (Reuters and Associated Press via Yahoo! News March 5) … * Corporate executives often give large blocks of company stock to their family foundations right before the stock price plunges--letting the executives claim the maximum tax deduction and avoid capital-gains taxes, according to a study by New York University Professor David Yermack. The study also found that some stock gifts probably were backdated to boost their value. “There’s a huge loophole for giving away stock without any of the restrictions that normally apply to selling stock, and that allows donors an opportunity to profit, at least on a tax basis,” said Yermack. The stock gifts occurred just after an increase in the firm’s share price and right before a large decline. Family foundations accounted for more than half of the nation’s foundations in 2005, according to the Foundation Center. “Two groups may be systematically hurt by opportunistically timed stock gifts--taxpayers and charities,” said Yermack (The New York Times March 5) …

Increased February bankruptcy filings will impact CUs

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NEW YORK (3/6/08)--Bankruptcies continued to rise in February as Americans succumbed to the weakening housing market, increasing energy prices and mounting personal debts, and that will impact credit unions, says a Credit Union National Association (CUNA) economist. Bankruptcies went up 18% from January and 28% from a year earlier, with an average of 3,960 bankruptcy petitions filed per day in the U.S. during February, according to the Automated Access to Court Electronic Records, a bankruptcy data and management company (The New York Times March 5). The American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center, says bankruptcies in February nationwide went up 15.2%. “The subprime mortgage crisis is having a spillover effect into many other credit markets,” Steve Rick, CUNA senior economist, told News Now. “U.S. households are facing increasing headwinds from resetting mortgages, higher gas prices, higher food prices and falling home prices. “The financial strain is pushing some households over the edge into bankruptcy,” he continued. “Credit unions will see higher bankruptcy numbers in 2008, pushing up loan defaults and provisions for loan loss--ultimately reducing net income and capital formation for credit unions.” Overall consumer filings totaled 76,120 in February, up from the 66,050 consumer filings recorded in January, the ABI said. The figure was also up 37.3 % from February 2007. Chapter 13 filings constituted 36.4% of all consumer cases in February, down slightly from last month. February's bankruptcy spike--the highest single month since 2005--“forecasts the start of more to come for the balance of 2008,” ABI Executive Director Samuel J. Gerdano, said on the ABI website.

News of the Competition (03/04/2008)

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MADISON, Wis. (3/5/08)
* Fannie Mae and Freddie Mac said Monday they would buy mortgages only from lenders that use independent appraisers--as a response to criticisms that home appraisers had inflated appraisal prices in recent years. This move, which is part of an agreement with New York Attorney General Andrew Cuomo, is expected to force large lenders--such as Countrywide Financial--to spin off or sell their appraisal businesses. Also, the change will create a watchdog to keep an eye on the appraisal business. The changes announced Monday will go into effect in 2009. For the past year, Cuomo has investigated the mortgage industry. Because most home loans made today are bought by Fannie Mae and Freddie Mac, the terms they decree to mortgage companies and financial institutions become de facto industry standards, analysts said. (The New York Times March 4) … * About 1.035 million homeowners have reaped the benefits from loan workouts since July, the HOPE NOW alliance announced Monday. This includes 758,000 repayment plans initiated and 278,000 loan modifications, the company wrote in a press release. The alliance is a national organization of mortgage servicing, nonprofit housing counselors and loss mitigation-focused agencies (DSNews.com March 4). Eighteen HOPE NOW servicers, covering nearly two-thirds of the mortgage industry for prime and subprime loans, provided the data. The study found loan modifications made up nearly 50% of subprime loan workouts in January, compared with 35% in the fourth quarter and 19% in the third quarter. Also, loan modifications increased 16% in January, compared with December … * Since adopting the Payment Card Industry (PCI) data security standard among merchants, MasterCard Inc. and Visa Inc. are pushing hard to extend the standard to any company that handles cardholder account data. Public response to the TJX Cos. data breach more than a year ago, which resulted in millions of credit and debit card account numbers being breached, has helped, and the attainment of compliance thresholds also has helped the push for widespread compliance. Visa announced in October that 65% of its top-tier merchants--those who generate more than six million transactions annually, up from 36% in December--had validated PCI compliance. Card companies are focusing on extending PCI’s requirements to third parties that handle cardholder account data, analysts said (American Banker March 4) … * Wachovia Corp. is attempting to achieve higher penetration of its products into two population segments: Hispanics and 20-somethings. The $783 billion asset banking company has grown its presence in several states with substantial Hispanic populations, including California, Florida and Texas. Wachovia is evaluating the effectiveness of a remittance product offered to Hispanics by its retail bank. The U.S. Hispanic population grew 26% to 44.3 million from 2000 to 2006 and is expected to triple in size through 2050. The company’s card services program will pilot a project with the social networking website Facebook to attract customers in their 20s (American Banker March 4) …

Market News (03/04/2008)

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MADISON, Wis. (3/5/08)
* Lenders should forgive portions of mortgages that are at risk of foreclosure, said Federal Reserve Chairman Ben Bernanke. In a speech to bankers in Orlando, Fla., Tuesday, Bernanke noted that subprime borrowers are about to see their mortgage rates jump by more than one percentage point. “Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households,” said Bernanke. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.” He also said mortgage-bond investors should accept “short payoffs” of mortgage loans by letting borrowers refinance at a reduced principal (Bloomberg.com March 4) … * Economists are becoming increasingly worried about the weak mortgage market and consumers’ high debt burdens, according to a survey by the National Association for Business Economics (NABE). Fifty-two percent of respondents said subprime mortgage defaults and “excessive indebtedness” are their largest concerns--up from just 32% in an August poll. At the same time, economists have become more worried about monetary policy. “Fewer respondents support the monetary and fiscal policies being implemented to address the credit situation, with more than one-third saying current monetary policy is too stimulative,” noted NABE President Ellen Hughes-Cromwick. The percentage of economists saying monetary policy is “about right” plunged to 48% in this month’s poll, from 72% in August (AFP via Yahoo! News March 4) … * Unlike consumers, corporations have boosted savings sharply during the past few years. According to Standard & Poor’s, the total cash held by companies in its 500-stock index topped $600 billion in February--up from just $203 billion in 1998. The trend towards holding bigger cash piles reflects the higher risks that firms face in today’s global market. In addition, technology companies--which traditionally hold big sums of cash--make up a bigger share of the economy today. Tech firms now represent about 45% of the economy--up from less than 30% in 1980. And today’s tech firms have bigger cash levels than they did in the past. Some analysts note that cash-rich companies could help stimulate economic growth by boosting hiring and capital investment. However, corporate spending on equipment and other capital investments has declined, even as savings have surged. Hiring also remains weak (The New York Times March 4) … * Consumer spending at chain stores remains soft, according to a report by the International Council of Shopping Centers (ICSC). Sales declined 0.6% during the week ending March 1, on a seasonally-adjusted, comparable store basis (Dow Jones Newswires March 4). Year-over-year, sales were up 2.1% in the latest week. “Consumer spending continues to struggle in a tough economic environment with consumer worry relatively high and spending muted,” said ICSC Chief Economist Michael Niemira. Many restrictions on consumer budgets and spending are dampening sales, noted Moody’s Economy.com (March 4). These include high energy prices, slower employment and wealth growth, declining home prices, and high debt burdens … * Vehicle sales were flat in February, at a 15.3 million-unit annual rate. Last month’s sales pace was far below the 16.6 million annual rate recorded in February 2007. Domestic automakers saw their market share edge down to 51.4% last month, from 52.4% in January. Sales of U.S. automakers have fallen to about 8 million--from 10 million at the beginning of 2006. With slumping sales, U.S. automakers plan to cut production in the second quarter. Ford has announced plans to slash production by 10% during the period (Economy.com March 4) …

News of the Competition (03/03/2008)

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MADISON, Wis. (3/4/08)
* Fannie Mae introduced HomeSaver Advance Wednesday as part of its HomeStay initiative to support its mortgage servicers when they provide loan workout assistance and refinancing to at-risk borrowers. The product is designed to help qualified borrowers bring delinquent mortgages current and keep their homes. Using the product, servicers can offer an unsecured personal loan that will allow a qualified buyer to cure the payment default on a mortgage loan that Fannie Mae owns or has securitized, with lower up-front costs and generally in less time. Fannie Mae expects that HomeSaver Advance will reduce the number of delinquent mortgage loans it purchases from its mortgage-backed securities trust and the fair-value losses it would record in connection with the purchases. Freddie also expects that the product will help it manage credit risk and conserve capital during the housing downturn (PR Newswire Feb. 27) … * Failure to meet $270 million in margin calls and a Citigroup analyst’s pronouncement that the company may go bankrupt has led to Thornburg Mortgage Inc. losing more than half its market value. In a Monday statement, the Sante Fe, N.M.-based company said it’s “working to meet all of its outstanding margin calls within a time frame acceptable to its lenders by either selling portfolio securities or raising additional debt or equity capital.” Thornburg’s announcement creates doubt that the company can continue to rebound from a $1.1 billion 2007 third-quarter loss that forced it to suspend lending and the quarterly dividend, analysts said. The company expects to be profitable this quarter and throughout the year, said CEO Larry Goldstone Thursday. Thornburg is a specialist in adjustable-rate loans large enough to be sold to government-sponsored enterprises Fannie Mae and Freddie Mac (Bloomberg.com March 3) … * Changes to its accounting methodology kept Freddie Mac’s $2.5 billion fourth-quarter loss from being $1.2 billion larger--or $3.7 billion, Freddie said. The changes gave a more accurate financial picture and synchronized its approach with competitors, such as Fannie Mae, the company said. Also last month, Freddie introduced a spectrum of non- Generally Accepted Accounting Principles metrics it said were developed to present the company’s financial results on an accrual basis. This creates a meaningful reflection of its activities as “primarily a buy-and-hold investor in mortgage assets,” Freddie said (American Banker March 3) ...

Market News (03/03/2008)

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MADISON, Wis. (3/4/08)
* Oil prices rose to nearly $104 a barrel Monday morning, beating the record $103.76, adjusted for inflation, set in April 1980. Prices rose to $103.95--a $2.11 increase--on the New York Mercantile Exchange. Since the year 2000, oil prices have more than quadrupled with strong demand from the U.S. and Asia outpacing the ability of the Organization of Petroleum Exporting Countries (OPEC) to increase output, said The New York Times (March 3). The policymaking cartel of OPEC is set to meet Wednesday and have indicated it would leave production levels steady, said analysts. However, with the current prices, OPEC will find it more difficult to curb production, the Times said. While prices climb to records, U.S. gasoline consumption in the past six weeks has dropped by an average 1.1% from one-year-ago levels, according to the U.S. Energy Information Administration's weekly data. That's the most sustained drop in demand in at least 16 years, with the exception of the aftermath of Hurricane Katrina, which affected gasoline refineries. According to The Wall Street Journal (March 3), Americans may be changing their gas-guzzling ways with changes in driving habits and lifestyles that could lead to a long-term slowdown in their consumption of gas … * Manufacturing in the U.S. contracted at the sharpest pace in nearly five years with its February reading of 48.3 in the Institute for Supply Management (ISM) factory index (Moody's Economy.com. The reading is down from 50.7 in January and 48.4 in December, but slightly better than economists' predictions of 48. Fifty is the dividing line between contraction and expansion, with contraction below 50 and expansion above the 50 mark. The contraction was throughout the index's components, with the prices index at 75.5 from January's 76; new orders at 49.1, down from 49.5 in the previous month; and the production index down to 50.7 from 55.2 in January. The employment index also was lower, 46, compared with 47.1 the previous month. The inventories index was down to 45.4 from January's 49.1 (Bloomberg.com and The Wall Street Journal March 3) … * Construction spending for January decreased by 1.7%--more than analysts expected--to $1,121.5 trillion--roughly 3.3% lower than one year before, according to a Commerce Department report Monday. It was the fourth consecutive decline. That compares with a decline in December of 1.3%, less than originally estimated. Private residential construction spending for January dropped 3% from a revised December estimate--to $469.7 billion, or 19.7% lower than January 2006. Wall Street analysts had expected January's overall construction spending to decline by 0.7%. The 1.7% drop was the steepest since January 1994, when spending fell 3.6% (The Wall Street Journal and Moody's Economy.com March 3) … * The U.S. economy is contracting and the rest of the global economy is weak, according to businesses surveyed in Moody's Economy.com Survey of Business Confidence (March 3). Industries most worried about business conditions were real estate firms, financial institutions and business service firms. However, previously upbeat manufacturers and high-technology companies also were more skittish, said Moody's. Confidence remained weakest in the U.S. which is consistent with a country in a contracting economy. Also, Canadian and European companies are barely expanding while Asian and South American economies aren't growing to their potential … * Fitch Ratings announced it has reduced the credit ratings of GMAC LLC and its Residential Capital mortgage-lending unit, to reflect the more challenging economic and financial environment GMAC will face throughout the year. GMAC's rating dropped one notch, to BB. Residential Capital's rating dropped two notches to BB-. ResCap remains on a ratings watch, which means another downgrade could be in the works. GMAC was removed from ratings watch, although its rating outlook is still negative. Last month, Standard & Poor's reduced the companies' ratings into junk territory (The Wall Street Journal March 3) …