Actual finance blog

Washington’s plan to rescue the housing market may help shore up the U.S. economy as it copes with the worst slump in the housing market since the Great Depression, but don’t look for a swift recovery.

Investor confidence has been bolstered by the government’s recent proposals, driving stock price higher since last week, and economists agree the move to provide extra funding for mortgage giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) is vital.

One unintended consequence, however, has been rising interest rates as the bond market has sold off sharply since the plan was unveiled last week. That risks muting, at least in part, the broader benefit of supporting the two mortgage finance firms.

The U.S. House of Representatives approved the housing plan on Wednesday afternoon, with the Senate expected to vote on it later.

Policy-makers and economists see the government sponsored enterprises as crucial to keeping the housing market open for business since they own or have guaranteed almost half of the $12 trillion in U.S payday advance. mortgage debt outstanding.

Financial markets’ recent loss of confidence in the GSEs led many economists to contemplate the consequences if they were to collapse, convincing many that measures being taken by Congress were necessary.

“It’s necessary and it will have positive benefits to the U.S. economy for a period while we’re in such difficult straits,” Brian Fabbri, managing director of economic research at BNP Paribas, said about the rescue package, which has also been supported by the U.S. Treasury.

“If there is no GSE Treasury help, the housing market wouldn’t just be in recession or declining, it would plunge. We wouldn’t begin to estimate how low it might go if GSEs were not able to fulfill their mission.”  

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Record gas and higher food prices drove inflation to the biggest annual jump since 1991 and fanned fears about growing pressures on consumers.

The Labor Department reading on Wednesday is another sign, along with mounting job losses and declining home prices, of the economic pain suffered by Americans as prices outstrip increases in paychecks.

The latest reading came as Federal Reserve Chairman Ben Bernanke, in testimony on Capitol Hill, was warning that inflation could pose a major drag on the economy for the rest of this year.

Retail prices were up 5% annually in June, the biggest 12-month change since May 1991 - an annual figure that was skewed by the surge in gasoline prices related to the first Gulf War.

A separate Labor Department report showed the average hourly wage up only 3.4% over the same 12-month period, meaning the typical American is having trouble keeping up with the price increases.

"The government report confirms what every consumer in America has known for months now: inflation is soaring and it’s having an adverse impact on the economy," said Rich Yamarone, director of economic research at Argus Research.

On a monthly basis, the Consumer Price Index was up 1.1% in June, after a 0.6% rise in May. Economists surveyed by Briefing.com had been looking for only a 0.7% rise.

Energy prices were up 6.6% in the month, led by a 10.1% jump in gas prices. That left gasoline prices up nearly a third from a year earlier.

But there was also pain at the grocery store for many Americans, as food prices jumped 0.8% compared to May, led by a 2.8% jump in fruits and vegetables, and a 1.6% rise in dairy and related products.

The rise left grocery prices up 6.1% compared to a year ago, with cereals and bakery products posting one of the biggest year-over-year gains, up 10.4%.

Yamarone said that he believes inflation could remain at elevated levels for the next six to nine months, even if oil prices retreat from current levels.

"I wouldn’t be surprised if we creep up to 6, 7 even 8%," he said.

The so-called core CPI, which excludes volatile food and energy prices, rose 0.3%, after a 0.2% rise guaranteed cash advance loan. Economists had been looking for another 0.2% rise. The higher than expected core reading was also troubling because that could tie the Fed’s hands in its effort to help the struggling economy.

The 12-month rise in core CPI is now up 2.4%, up from a 2.3% rise in that reading in May.

Bernanke warned lawmakers on Tuesday and again on Wednesday that inflation poses a risk for the economy.

"Rapid increases in the prices of energy and other commodities … have sapped household purchasing power even as they have boosted inflation," he said in testimony.

He also warned that spending by consumer spending, which provides nearly three-quarters of the nation’s economic activity, "seems likely to be restrained over coming quarters" and that price increases could also make businesses cautious about their own spending plans.

One measure of the economic stress on households is the so-called economic misery index - calculated by adding the 12-month inflation rate and the unemployment rate. With the jump in inflation to 5% in June from 4.2% in May, the misery index is now at 10.5, the first time it has hit double digits since 1993.

While the Federal Reserve responded to economic pain earlier this year by approving deep interest rate cuts, it’s not clear the central bank will be providing any more help to help households in the foreseeable future.

The Fed generally wants to see core inflation measures up between 1% and 2%, so the new core reading was well outside the so-called comfort zone.

Bernanke said in his congressional testimony that despite the weak outlook for economic growth, the Fed could not ignore signs of rising inflation. The Fed’s strongest measure to spur economic growth, interest rate cuts, are seen as adding to inflation pressure. 

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The Federal Reserve unanimously approved new mortgage lending rules Monday in a crackdown on shady practices - particularly those involving subprime loans made to borrowers with weak credit.

The agency made several substantial revisions to the proposed regulations it unveiled in December. Many of the changes acknowledged consumer advocates’ concerns that the rules still contained too many loopholes that would allow shady lending practices to continue.

But the Fed also made some concessions to industry executives, who feared increasing oversight would lead to less lending.

The new rules will apply to all mortgage lenders, not just those supervised and examined by the Fed. All but one requirement will take effect Oct. 1, 2009. However, board members said they will continue to work on further oversight of the mortgage industry.

"The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," said Fed Chairman Ben Bernanke. "Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers."

The proposals won’t help the millions of homeowners who’ve already fallen behind in their mortgages, but the Fed is aiming to prevent another such crisis by tightening lending standards, particularly for subprime mortgages.

Many critics have charged that under former Fed Chairman Alan Greenspan, there were few restraints during the real estate boom. They say the agency should have flexed its muscles several years ago, clamping down on unscrupulous lenders and protecting borrowers.

Consumer advocates said they were pleased with the changes, but stressed that the Fed’s action is just one in a series of steps needed to better protect borrowers from shady lenders. Industry executives, meanwhile, applauded the Fed for attempting to protect consumers while keeping in mind the need for low-cost mortgage loans.

The rules

The new rules governing "higher-priced," or subprime, loans will:

• Prohibit creditors from extending credit without regard to a consumer’s ability to repay the loan from income and assets other than the home’s value. The lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan.
• Require creditors to verify income and assets they rely upon to determine repayment ability
• Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years.
• Require creditors to establish escrow account for property taxes and homeowner’s insurance. This rule will be phased in during 2010.

The Fed changed the definition of higher-priced loans to first mortgages with rates at least 1.5 percentage points above the average mortgage rate published by Freddie Mac. Also, second mortgages with rates at least 3.5 percentage points above the Freddie Mac rate will fall into this category.

With this change, the Fed is hoping to address industry complaints that the previous definition would capture non-subprime loans as well.

Additional rules will apply to all mortgages, regardless of rate.

• Creditors and mortgage brokers cannot coerce a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees no fax payday loans. Also, they must credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan, including home improvement loans or refinancings. Currently, these estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer’s credit history.
• In advertisements, companies must include additional information about rates, monthly payments and loan features. The rule also bans seven deceptive practices, such as saying a rate is fixed when it can change.

In a nod to the brokerage industry, the Fed withdrew a proposal requiring additional disclosure of the "yield-spread premium," which allows banks to pay brokers for steering homeowners into higher-priced loans. After testing consumers, the agency found that the rule would likely not be effective. But the Fed said it would continue reviewing the issue.

Advocates for consumers and industry generally pleased

Both consumer advocates and industry executives put a full-court press on the Fed in recent months, trying to get the agency to revise its proposed rules. More than 4,500 comments were filed since the agency announced its plan in late December.

After reviewing the final rules, advocates said they felt the changes did provide additional protections for the consumers. In particular, it’s important that the Fed eliminated the requirement that borrowers prove lenders engaged in a "pattern or practice" of originating unaffordable loans since that’s very hard to do, said Brenda Muniz, legislative director of Acorn, a housing advocacy group.

Still, the Fed could have done better by completely banning prepayment penalties, as several states have done, said Deborah Goldstein, executive vice president of the Center for Responsible Lending, a consumer rights organization. She noted that people in subprime fixed-rate loans are still subject to hefty fees if they try to refinance their loans within two years.

Also, some advocates wondered why the rules won’t take effect for 15 months, and why subprime borrowers can opt out of escrowing their property taxes and homeowner’s insurance after the first year.

"It’s the first step toward better protecting consumers in the mortgage market, but not the last step," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, an advocacy group.

Industry executives, meanwhile, endorsed the changes overall, but said there still may be some areas of concern in the 419-page document. For instance, the Mortgage Bankers Association said it plans to ask its members about the elimination of the "pattern or practice" rule.

Still, the new rules will help consumers, without placing such a burden on lenders that they will have to curtail credit, industry insiders said.

"This is just the right amount of regulation," said Marc Savitt, president of the National Association of Mortgage Brokers. 

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Time Warner Inc’s discussions to merge or sell its AOL Internet division with Microsoft Corp or Yahoo Inc have taken on new urgency ahead of Yahoo’s Aug 1 shareholders meeting, a source familiar with the discussions told Reuters on Tuesday.

The structure of any deal is not immediately clear, though a combination of any of the parties is expected to redraw the landscape for advertising on the Internet.

Sources had said earlier that a deal with Yahoo would likely involve merging AOL with the Web pioneer, with Time Warner taking a minority stake in the combined company. A deal with Microsoft would likely be a sale of AOL, the sources said.

Time Warner and Microsoft declined comment. A representatives of Yahoo was not immediately available.

Time Warner’s talks come after Microsoft’s buyout talks with Yahoo fell apart, with Microsoft withdrawing its $47.5 billion bid in May payday loans. Since then the two have waged a public war of words.

Discussions with Time Warner have accelerated as both Yahoo and Microsoft view AOL as potentially beneficial to leverage their positions in the Internet marketplace, where Google Inc dominates.

AOL plans to split its dial-up Internet business and has focused on building a one-stop online advertising shop over the past two years.

Yahoo’s interest in AOL is designed to show shareholders that it could grow without Microsoft. 

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World energy use is expected to surge 50% from 2005 to 2030, largely due to an expanding population and rapid economic growth, according to a government report Wednesday.

Without any new laws restricting greenhouse gases, carbon dioxide emissions will see a similar jump, the Energy Information Administration said in its annual report on global energy markets.

Demand for new energy is led by the developing world, EIA said.

While developed countries are expected to see a 19% rise in energy use, demand for energy in the developing world is expected to surge 85%.

Oil prices are expected to range from $113 to $186 a barrel, under different price scenarios the agency modeled.

"Given current market conditions, it appears that world oil prices are on a path that more closely resembles the projection in the high price case than in the reference case," the report said.

Under the high price case, world oil use is expected to grow to 99 million barrels a day in 2030, from about 85 million barrels a day currently, as high prices limit demand.

In the medium price case, worldwide oil use is expected to jump to 113 million barrels a day, EIA said, as oil prices ease to about $70 in the next few years and new supplies come online.

The projections in the report were based on 2007 oil prices. Oil has nearly doubled in price since then.

Although the government and the oil companies say producing 113 million barrels of oil a day is possible, market skepticism has kept oil prices high over the last few years.

The International Energy Agency, a sister organization to EIA established by developed countries to counter the influence of OPEC, recently said it is revising its assumptions about oil supply. That agency said it’s likely the world will not be able to produce more than 100 million barrels of oil a day by 2030.

Others in the industry, like the oilman T. Boone Pickens, feel the world is pretty much maxed out at 85 million barrels a day.

"The key here is going to be supply," said Paul Horsnell, head of commodities research at Barclays Capital in London http://us-no-fax-payday-loans.com. "And we’re thinking closer to 100 [million barrels a day] as opposed to 115."

The report also said that rising prices are expected to decrease the use of oil and biofuels as a fuel, going from 37% of the world’s energy use in 2005 to 33% in 2030, although liquids will remain the largest single source of energy.

Production of so called non-conventional liquid fuels - things like ethanol, coal-to-liquid, heavy oil and oil from tar sands - is expected to see a big increase.

Under the medium price scenario, these unconventional fuels go from 2.5 million barrels a day in 2005 to nearly 10 million barrels a day in 2030. Under the high price scenario, these numbers could be much higher, the report said.

Without any new greenhouse gas restrictions, coal use is expected to soar - increasing 64% by 2030.

China - which the report said has doubled its coal use since 2000 - is leading the way, accounting for over 70% of new coal consumption.

China, along with India and the U.S., has huge amounts of coal, which is a cheap but dirty fuel.

Electricity generation under the medium prices scenario is expected to nearly double by 2030, the report said, fueled mainly by coal and natural gas.

But future legislation could curb those predictions. The agency noted that "the outlook for fossil-fuel-fired generation could be altered substantially by international agreements to reduce greenhouse gas emissions."

Nuclear power is expected to increase by nearly 50%, the report said, mostly in India and China.

Use of renewable energy is expected to increase nearly 70% by 2030. But much of that is due to large hydropower projects, and under current policies, renewables’ overall contribution to global energy supply remains small.  

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Malaysia's government shelved at least $1.1 billion in public works projects as soaring commodity prices forced it to spend more on food security and raised construction costs, swelling its five-year development budget.

Projects including a monorail and highway in northern Penang state will be scrapped, Sulaiman Mahbob, director general of the government's Economic Planning Unit, said in a press briefing in Putrajaya yesterday. The Southeast Asian nation will spend 230 billion ringgit ($70 billion) on roads, bridges and other works during the 2006-to-2010 period, 15 percent more than it planned earlier.

The changes “take into account additional development requirements and the increase in construction-related materials cost,'' Prime Minister Abdullah Ahmad Badawi told parliament in Kuala Lumpur today in a review of the five-year plan released today. “Development projects will also be reprioritized.''

Surging commodity prices have pushed up building costs and increased government subsidies on food and fuel, leaving Asia's governments with less to spend on public-funded bridges, roads and other works. That's limiting Abdullah's ability to regain support after his coalition lost its two-thirds parliamentary majority in elections this year.

“Given the rising project costs as well as ballooning fuel subsidies, there is a need to reprioritize the projects,'' said Lee Heng Guie, an economist at CIMB Investment Bank Bhd. in Kuala Lumpur. “They will focus on all the people-centric projects'' including food security, rural roads and housing.

Penang Monorail

Scomi Engineering Bhd. had planned to bid for the 2 billion ringgit monorail project on Penang island, a popular tourist destination. Penang, Abdullah's home, was one of five states that came under opposition control after the March 8 elections.

Malaysian Resources Corp. and Melewar Industrial Group Bhd. were also potential bidders for the monorail job cash advance loans.

Other projects put on hold include a public park in the capital Kuala Lumpur, bringing the total value of projects shelved to at least 3.5 billion ringgit.

Instead, the government will spend an additional 1 billion ringgit each for Sarawak and Sabah states on Borneo island, which provided Abdullah's coalition with the parliamentary seats it needed to retain a simple majority in the lawmaking body.

An additional 10 billion ringgit will be spent on five special investment zones Abdullah has introduced across the country. Some 3 billion ringgit will go to food security programs, and 3 billion ringgit to a strategic investment fund for the trade ministry. Spending on low-cost housing, rural infrastructure and public transport will increase.

Political Pressure

Projects that will proceed include an electrified double- tracking rail development in the north of the Malaysian peninsula led by Gamuda Bhd. and MMC Corp., and a similar line being built by Ircon International Ltd. in the south.

Growth in Southeast Asia's third-largest economy may average 6 percent a year from 2006 to 2010, Abdullah said, maintaining the estimate given at the start of the five-year plan in 2006.

Achieving the targeted growth rate would be difficult, said Lee at CIMB.

“We are in trying circumstances,'' he said. Growth may ease from the average 6.1 percent pace of the past two years, as higher domestic fuel prices and “political headwinds'' add to external risks, he added.

The government's budget deficit is forecast to narrow to 3.2 percent of gross domestic product by 2010 from 3.6 percent in 2005, compared with the 3.4 percent estimated earlier. The deficit will total 21.6 billion ringgit this year, or about 3.1 percent of gross domestic product, the central bank said on March 26.

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ATA Airlines is suing FedEx Corp. over its decision to drop the airline from its military charter team, a move ATA says forced it into bankruptcy protection and left it financially destroyed.

ATA says in a lawsuit filed Wednesday in federal court that FedEx (FDX, Fortune 500) broke contractual promises with the Indianapolis-based airline when it ousted ATA in January bad credit payday loans.

The airline says charter flights of military personnel and their families generated more than $400 million in annual revenue and were ATA’s most important profit base.

ATA abruptly ceased operations April 3. 

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The Federal Reserve will not allow inflation to get out of control and is aware of the danger that a weaker dollar could feed into higher prices, one of its top policy-makers said on Tuesday.

“We want to make sure the message is clear … that we will not countenance building inflationary expectations,” said Federal Reserve Bank of Dallas President Richard Fisher.

“We are witnessing a negative feedback loop … which is that a weaker dollar can lead to further inflationary pressures which in turn leads to a weaker dollar, et cetera, and to dampened economic activity,” he said in response to questions after a speech at the Council on Foreign Relations.

Fisher, a voting member of the Fed’s interest rate-setting committee this year, has dissented at the last three policy gatherings in favor of either smaller rate cuts than were agreed, or because he wanted no cut at all.

He said he had drawn the line at 3.5 percent, whereas the Fed has gone on to lower its benchmark overnight funds rate to 2 percent to shield the U.S americashadvance. economy from a housing crisis, and made plain he was uncomfortable with inflation expectations.

“The anecdotal evidence, the headlines that we’re reading in the newspapers, and the survey data, is not encouraging,” he told the audience.

“That worries me a great deal. It’s beginning to work its way into expectations, and when you begin to work your way into expectations, business and consumers behave accordingly and then you have a problem.

“So you want to make sure that is not encouraged and we will do the level best we can to do so,” he said. 

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ST. PETERSBURG–Russian President Dmitry Medvedev said "economic egoism" has led to what may be the worst economic contraction since the depression of the 1930s, and placed some of the blame on the United States.

The Russian leader said no single country, even the U.S., can reverse the global economic decline alone, and claimed a role for Russia in finding a solution.

"An underestimation of risks by the largest financial companies together with the aggressive financial policy of the world’s largest economy led not only to corporate losses. Unfortunately, the majority of people on the planet became poorer," Medvedev said.

"For global financial markets, 2007 was one of the hardest years in recent decades and, if experts are to be believed, the most complicated since the Great Depression of the 1930s," Medvedev said, speaking at the opening of the St. Petersburg International Economic Forum.

The Russian president said the global institutions responsible for financial regulation had "no levers" to counteract "economic nationalism," when countries’ "pragmatic interests" give way to "political concerns."

"The modern world is already globalized. And in such conditions, mistakes in the policies of individual countries, not to mention national egoism, immediately affect the situation in the entire global economy," he said.

"The disparity between the formal role of the U.S. in the world economic system and its real potential is one of the main reasons for the current crisis," Medvedev said. "As strong as the U.S. market is, and as reliable as the U.S. financial system is, they aren’t capable of replacing global goods and financial markets."

U.S. Commerce Secretary Carlos Gutierrez, attending the forum, said he didn’t think Medvedev had singled out the U.S. for criticism.

"It’s a very good point," Gutierrez told reporters. "I brought up an example of economic egoism when I talked about the Doha round of negotiations for the WTO," he said, referring to talks on the World Trade Organization. "We could help food prices to come down. We could help 500 million people to get out of poverty. Every country has to make some sacrifices."

Alexander Medvedev, deputy CEO of Russia’s energy giant OAO Gazprom, told reporters at the St low rates payday advance. Petersburg economic forum that his company will hold talks "soon" with TransCanada Corp. on a planned project from Alaska to the continental U.S., as Russia’s natural-gas exporter strives to become a global energy company.

Gazprom, which wants to enter the North American market with shipments of liquefied natural gas, agreed to supply the proposed Rabaska terminal in Quebec last month. The Russian company has already proposed joining BP PLC and ConocoPhillips’ Alaskan pipeline project that rivals TransCanada’s.

BP, ConocoPhillips and other producers yesterday bid a record $1.21 billion (Canadian) to obtain rights to drill for oil and natural gas in Canada’s arctic as record crude prices encourage exploration in remote areas.

Winning bidders paid an "unprecedented" amount for concessions in the Beaufort Sea, Mackenzie Delta and the Central Mackenzie Valley in the Northwest Territories, the Canadian government said.

In other developments on the oil front yesterday:

• Oil’s record gain of more than $10 (U.S.) a barrel Friday will likely slow global growth, the International Monetary Fund’s First Deputy Managing Director John Lipsky said. "This will add to the downward pressure on global growth," Lipsky said at the economic forum in St. Petersburg. "If you compare it to where we were back in September when we made our forecast for 2008, this would take about a full percentage point off." Crude oil rose $10.75, or 8.4 per cent, to $138.54 (U.S.) a barrel in New York.
• The record jump in crude-oil prices may have been an overreaction, Goldman Sachs Group Inc. chief economist Jim O’Neill said. "Oil is the one thing I’m really not sure about," he said in St. Petersburg.
• Leading energy-consuming countries urged oil producers to boost their output to counter soaring prices threatening the world economy, while they pledged to develop clean energy technologies and improve efficiency. The five countries – the United States, China, Japan, India and South Korea – differed, however, on how urgently oil subsidies should be phased out, with Washington backing bold movement while India and China warned of political and economic instability.

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Citigroup Inc will present plans to sell as much as $400 billion of extraneous assets when it meets with investors and analysts on Friday, a person familiar with the situation said.

Newly-installed Chief Executive Vikram Pandit, scrambling to slash Citi’s costs and assets that have been hard hit by the global credit crunch, also intends to reaffirm his promise to cut annual expenses at the largest U.S. bank by roughly 20 percent, the source told Reuters on Thursday.

Citigroup declined to comment.

The sales could amount to nearly 20 percent of Citi’s current assets, and according to the Financial Times, which first reported the story on Thursday, would take place over several years.

Although Citi has said previously that it plans to shed assets to improve its capital position, the magnitude of the potential sales struck some analysts as worrisome free credit report online.

“The only reason you’d sell off that many assets is you have a lot more losses coming than you originally thought,” said Jim Huguet, co-chief executive at fund manager Great Companies LLC, which does not own Citi shares.

Since late last year, Citi has recorded more than $45 billion of writedowns and credit losses, raised more than $40 billion of new capital including $2 billion of preferred shares this week, and slashed its dividend 41 percent.

Precisely which non-core assets are for sale is unclear, but analysts speculated that consumer finance businesses in the United States, Japan, Mexico, and Germany are possible. 

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