Actual finance blog

Gas prices zoomed higher in states along the Gulf of Mexico as workers on offshore oil rigs abandon ship ahead of Hurricane Gustav which became a category 4 storm on Saturday.

Meanwhile, the national average price of gasoline crawled up for a second day in a row. A gallon of regular unleaded gas rose by about a penny to $3.682 a gallon overnight, according to the motorist group AAA.

The price increase was most dramatic in Mississippi, where the statewide average for unleaded gasoline rose about 4 cents a gallon on Saturday. Gas rose by about 5 cents a gallon in the coastal cities of Biloxi, Gulfport and Pascagoula, said AAA.

Gas also rose by about 4 cents a gallon in Louisiana. Alabama saw a daily increase of about 3 cents. In Texas prices rose more than 2 cents, and in Florida prices rose by more than a penny, according to AAA. In New Orleans, gas prices rose by just over 4 cents a gallon. All of these areas are dependent upon oil rigs in the Gulf of Mexico as a major part of their oil supply.

In comparison, gas prices declined overnight in New York, New Jersey, California, states that are not directly dependent on the Gulf.

"Prices are more affected down South, while New York is supplied through [New York] Harbor," said Fred Rozell, oil analyst with the Oil Price Information Service.

Rozell said these increases are particularly painful to Mississippi, not just because the price increases are the most dramatic there, but because it’s a state where people tend to have less discretionary income.

"I think some of those areas are going to get hit hard again and it’s really going to squeeze people," said Rozell.

Get ready for high gas prices: The price increases are likely to continue, said Rozell, partly because of the storm, and partly because of recent increases in wholesale gasoline prices, which tend to lead retail prices http://payday-faxless.com. Rozell expects prices nationwide to increase by 10 cents a gallon over the next five to seven days, or by 15 to 25 cents in the Gulf Coast states.

Hurricane Gustav smashed into the Dominican Republic and Haiti on Thursday, killing more than 50 people and causing extensive flooding. The storm headed west and whipped into Jamaica at midday on Friday. The storm crashed through the Caymans and Cuba as it headed for the Gulf of Mexico. It built into a category 3 hurricane and now threatens to smash into New Orleans and the surrounding region early next week.

If the storm continues along its projected course, it could threaten the 4,000 drilling platforms and 33,000 miles of pipeline in the Gulf Coast, which sends 1.3 million barrels a day to the Gulf Coast’s 56 refineries.

"We are seeing [gas price] increases here that are based on the possibility that there may be some supply dislocation," said Peter Beutel, oil analyst with the firm Cameron Hanover. "That would affect supply close to the affected area, as opposed to anywhere else." 

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Japan unveiled a stimulus package with $18 billion in fresh spending to shore up its flagging economy on Friday as figures showed that inflation has spiked to its highest in nearly 11 years, denting consumer spending.

Measures in the package span discounts on expressway tolls to assistance to farms and help for part-time workers to find better jobs. Funds are also earmarked for better medical care, ecological technology, housing loans and education, according to the Cabinet Office.

Economists are skeptical that the package will help revive Japan’s economy, which shrank 2.4% at an annual pace in the second quarter.

And critics call it a publicity stunt to lift Prime Minister Yasuo Fukuda’s dismal approval ratings.

"This is just reckless spending," Yukio Hatoyama, leader of the main opposition Democratic Party, said on nationally televised news. "The package is aimed at getting voters’ attention in anticipation of the next election."

All told, the value of the programs involved comes to $107.5 billion. Aside from the $18 billion cash infusion, most of the package consists of non-spending measures such as lower road tolls and loans to businesses.

Friday’s package did not include tax breaks, but cuts will be considered in the future, the government said.

Masamichi Adachi, senior economist for JP Morgan Securities in Tokyo, called the new spending a "drop in the bucket" compared to Japan’s total gross domestic product of about $4.6 trillion.

"It’s definitely positive, but to what extent (is the question)," he said.

July economic figures released Friday painted a mixed picture of the Japanese economy. Industrial production rose modestly, but the outlook is choppy. The jobless rate fell and retail sales rose. Household spending declined but not as steeply as expected.

The rapid acceleration in inflation was the most alarming of all the indicators released.

Japan’s core consumer price index, which excludes fresh food prices but includes energy, rose 2.4% in July, the quickest pace in almost 11 years, the Ministry of Internal Affairs said.

While Japan’s economy is indeed slowing, many economists see the downturn as mild, with little risk of the sort of deep recession that crippled the country in the 1990s.

"We’ve been calling this a ’shallow recession,’ and the data today tend to support that view," Adachi said low fee cash advance. "But that doesn’t mean they point toward a quicker recovery either."

The Bank of Japan, meanwhile, is unlikely to tighten monetary policy in response to inflation, even though July’s figure surpasses the central bank’s inflation target range of 0-2 percent. Last week, policy board members kept the key interest rate unchanged at 0.5%.

So-called core-core inflation excluding food and energy rose a modest 0.2%, indicating that huge price gains have yet to permeate all sectors.

Merrill Lynch (MER, Fortune 500) economists Takuji Okubo and Masayuki Kichikawa said earlier this week that current inflation appears to be a short-term trend.

"Going forward, whether core measures of CPI excluding food and energy would show signs of inflation would be the key factor in determining (the Bank of Japan’s) actions," they said.

Overall CPI was up 2.3% in July, while core CPI for the Tokyo area rose 1.5% in August.

Among other key economic data, Japan’s industrial production in July was up 0.9% from the previous month on a seasonally adjusted basis, posting the first rise in two months on higher output by makers of cars and electronics.

"Improved external demand for products of those industries in July seemed to be in the background of their industrial production gains," said UBS (UBS) economist Akira Maekawa in a research memo.

The news cheered investors, who helped push the benchmark Nikkei 225 stock index up 2.9% Friday. Stronger-than-expected economic growth figures in the U.S. in the second quarter - up 3.3% at an annual pace - also lifted sentiment.

The outlook for industrial production looks uneven. The Ministry of Economy, Trade and Industry said it expects production to fall 2.9% in August before increasing 3.4% in September.

Japan’s unemployment rate fell from 4.1% to 4% in July.

Meanwhile, spending by Japanese households slipped 0.5% from a year earlier but was more robust than anticipated. Hotter weather spurred sales in items like air conditioners and certain types of food, Maekawa said.

Retail sales in the country rose 1.9% in July from the previous year, the government said. 

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Several major U.S. refiners said early checks on Monday showed their facilities were unharmed by Hurricane Gustav, but at least two others were said to be considering dipping into the U.S. Strategic Petroleum Reserve to keep operations going after the storm shut down key waterways.

Gustav weakened to Category 2 before roaring ashore near Port Fourchon, Louisiana, on Monday, potentially sparing the kind of damage that the region’s platforms, rigs and refineries suffered at the hands of more powerful Katrina three years ago.

Offshore operators said remote sensors indicated that major platforms remained where they were moored before the storm, although Shell, the region’s largest producer, said it may take three to five days to restore production.

Energy companies had to shut in all 1.3 million barrels of U.S. offshore oil production — a quarter of U.S. output — as well as 7.06 billion cubic feet per day in natural gas supply, or nearly all of the 15 percent of national production the Gulf provides, as Gustav ploughed through the region.

By late Monday night, Gustav had subsided to a tropical storm, with winds of 60 miles per hour (96.5 kph), as it moved inland across Louisiana.

U.S fast cash advance loan. crude stood at $111.07 a barrel by 12:15 a.m. EDT, about 33 cents below trading levels late on Monday, when prices slumped $4 on easing concerns about Gustav, which had been called the biggest threat to the sector since 2005’s devastation.

Thirteen refineries with a combined capacity of 2.67 million barrels per day (bpd) — 15 percent of the country’s total — were shut by late Monday, but early signs suggested many had been spared.

Valero Energy Corp said an initial check of its 250,000 barrels per day (bpd) refinery at St Charles, Louisiana, refinery showed no significant structural damage from Gustav, and that the plant had electrical power. 

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Mortgage finance giant Freddie Mac on Wednesday reported a much bigger-than-expected loss, slashed its dividend and warned of more problems ahead for the battered housing and credit markets.

Company executives, in a sobering forecast about the nation’s housing woes, said nationwide home prices are likely to drop another 7% to 9%. Those declines, and other problems in the economy, are likely to cause additional losses on the $1.8 trillion worth of single-family loans that Freddie guarantees or owns.

"Today’s challenging economic environment suggests that the housing market is far from stabilizing," Freddie Mac CEO Richard Syron said during a conference call.

Syron and other Freddie executives sought to assure investors that the company is prepared to ride out the difficulties.

But investors were unconvinced. Shares plunged 19% in afternoon trading. The decline also dragged shares of Fannie Mae (FNM, Fortune 500), which operates in the same business as Freddie and is set to report quarterly results on Friday, down 15%.

Early Wednesday, Freddie (FRE, Fortune 500) reported that it lost $821 million, or $1.63 a share, in the second quarter. Analysts surveyed by Thomson Reuters had forecast it would trim its loss to 41 cents a share from the $151 million or 66 cents-a-share it lost in the first three months of the year.

A year ago, the company earned $729 million, or 96 cents a share.

Freddie also announced that it would cut its quarterly dividend to 5 cents a share or less, subject to a final decision by its board, from 25 cents a share in an effort to save capital. Losses have strained Freddie’s capital, and the dividend cut should save the company more than $500 million a year.

Freddie’s year-to-date losses of nearly $1 billion are far below the $3.7 billion it lost the second half of 2007 as it took charges for the value of its loans portfolio. The current losses are driven by the rapidly rising costs of loan defaults and rising provisions for future losses that are certain to rise.

"While we may be roughly half way through the eventual decline, we are still in the early stages of realized defaults," said Patricia Cook, the company’s chief business officer. "Most of the expected losses are yet to be realized."

Since the start of 2007, Freddie’s portfolio of single-family home loans suffered credit default costs of nearly $2 billion. Three months ago the company estimated that those defaults could end up costing between $15 billion and $20 billion during the life of the loans.

But with steeper home price declines now being forecast, and the increasing rate of mortgage foreclosures and delinquencies, Freddie expects those costs to go higher - to as much as $42 billion in what it says is a worst-case scenario.

Freddie officials said the company should have enough capital to deal with even those worst-case losses, once it goes ahead with plans to raise $5 billion in additional capital.

"We have the wherewithal and the earning power to manage through this period," said Buddy Piszel, its chief financial officer.

Freddie said its estimated core capital slipped to $37.1 billion at the end of the quarter from $38.3 billion at the end of March 500 fast cash. That capital level is about $2.7 billion above the level it agreed to meet with its federal regulator.

Provisions for credit losses more than doubled to $2.5 billion from $1.2 billion in the first quarter. The reason: increases in the delinquency and foreclosure rates of the mortgages Freddie owns and guarantees, as well as the continued declines in home prices.

Those provisions for credit losses caused the company to lose $1.4 billion on the guarantees it makes on loans for single-family homes - about triple the $458 million loss on that line in the first quarter. The company made $129 million on those guarantees in the year-ago period.

The company saw losses soar even though its net interest income, the difference between interest paid and interest income soared to $1.5 billion from $793 million a year ago, due to lower interest costs for the firm in the just completed quarter.

That rise in net interest income was more than offset by the $3.3 billion hit in investment activity due to the reduced estimated value of its holdings. That’s up from a loss of $540 million a year earlier.

About $1 billion of the most recent investment loss was caused by the decline in the value of Freddie’s mortgage securities, which are backed by subprime mortgages or so-called Alt-A home loans made to borrowers who did not provide full or any verification of income or assets.

Freddie and Fannie Mae (FNM, Fortune 500), which were set up by the government to provide funding for the mortgage markets, have become the primary source of capital for banks and other lenders making home loans. They are seen as crucial to the recovery of the housing and credit markets.

But investor anxiety about the firms has driven shares of Freddie down by 66% between June 16 and Tuesday’s close, while Fannie shares lost nearly half their value during the same period. It also prompted Congress to pass a rescue measure for the firms, allowing the Treasury Department to loan them an unlimited amount of cash and even buy their shares if necessary.

Syron was asked Wednesday if Fannie and Freddie, known as government sponsored enterprises or GSEs, can continue to operate in a way that both helps the housing market and makes the profits that shareholders demand. He said he believes they can continue to serve both missions going forward, despite these losses.

"I don’t think we’re at a point that the model doesn’t work anymore," he said. "I think we are a point where the model is more stressed."

"I think virtually everyone, including our critics, would say that this would be an extremely ugly mortgage market if you didn’t have the GSEs in it," Syron said. 

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The Federal Reserve’s proposed rules for credit card lenders could lead the banking industry to lose at least $10.6 billion in interest annually, JPMorgan Chase & Co. said in a letter to regulators, citing a study.

In May, the Federal Reserve and other regulators proposed steps to end what they called "unfair and deceptive" practices in the credit card industry. The rules aim to protect people from having their interest rates raised arbitrarily, among other practices.

In a letter sent Monday to the Fed’s board of governors, the Office of Thrift Supervision and National Credit Union Administration, JPMorgan’s Chase Bank subsidiary said the proposed regulation, if finalized, "is likely to have profound effects on Chase’s operations and financial results."

The bank also said the proposal will negatively affect the credit card asset-backed securities market by reducing the amount of secondary market capital, and make credit less available to customers.

Chase cited data collected from a group of banks, including Chase itself, on a confidential basis by the law firm Morrison & Foerster LLP. Morrison & Foerster could not comment on the data Tuesday, or on how many banks participated.

The cumulative impact for the participating banks would be at least $10.6 billion in lost annualized interest, Chase said in its letter, signed by Associate General Counsel Andrew T. Semmelman.

The bank said those industry losses would likely result in a nearly 12% increase in annual percentage rates to an average of 16.58%; a $1.1 trillion reduction in total credit lines to consumers; and tighter standards that would stop $11 billion in new accounts from being booked each year.

In addition to restricting rate hikes on cards in certain situations, the Fed’s proposed rules aim to limit the imposition of inadequate time restraints on consumers, and the practice of allocating all payments to balances with lower interest rates when a borrower has balances with different rates.

On Monday, the chairman of the Senate’s investigations subcommittee said he supports the Federal Reserve’s proposed restrictions on credit card practices - but that he believes there should be more.

Sen cash advance. Carl Levin, D-Mich., wrote in a 13-page letter to the Fed that it should expand its rules to end or restrict such practices as charging interest for debt paid on time; interest on transaction fees; fees levied on consumers paying their bills on time; and billing amounts that force consumers to pay four or five times their original debt.

Back in March, JPMorgan Chase (JPM, Fortune 500), at the behest of the U.S. government, bought the ailing investment bank Bear Stearns Cos. when it appeared to be near collapse. 

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In the Mexican town of Tarimbaro, construction has stopped on new homes, so sales at a hardware store are half last year's total. A butcher who slaughtered a head of cattle a day now slays two a week. And Rocio Rangel feeds her son and daughter bread and coffee for dinner.

Rural Mexican towns are suffering as money transfers from relatives working north of the border dry up, the result of a weak U.S. economy. Remittances equaled 2.7 percent of gross domestic product last year and are Mexico's second-biggest source of dollar flows after oil exports.

“My children need more than this, but we don't have anything,'' said Rangel, 36, whose husband hasn't sent funds home from Florida in nine months.

Shrinking transfers, inflation at a three-year high and a peso that has appreciated 10 percent this year are eroding the purchasing power of Mexico's poor, the 35 percent of the population that can't afford basics such as clothing, housing and health care. Residents who depend on funds from abroad are cutting back on spending because of weakness in U.S. industries such as construction, the biggest employer of Mexico's migrants.

In the first half of this year, remittances fell 2.2 percent to $11.6 billion, the first decline for the period since Mexico's central bank began tracking the data in 1995. For the entire year, the bank forecasts they will drop as much as 3 percent.

Remittances grew only 1 percent in 2007 to $24 billion after a record 39 percent expansion in 2003.

Danger for Calderon

The dwindling flow of cash this year may shift support from President Felipe Calderon to the opposition Party of the Democratic Revolution, which attracts lower-income voters.

“The worse the economy is, the better'' the PRD will do, said Daniel Lund, president of consulting group Mund Americas in Mexico City. The party's former presidential candidate Andres Manuel Lopez Obrador refused to recognize a razor-thin defeat to Calderon in the 2006 election and set up his own quasi- government that opposes the president's initiatives.

Lopez Obrador, whose campaign pledge was “the poor come first,'' promised to reduce privileges for the business elite. Calderon is backed by the business community, who endorse his efforts to promote free trade and boost private investment.

An increase in popularity for Lopez Obrador “is the great danger'' for Calderon, said Gabriel Casillas, an economist at Banco UBS Pactual in Mexico City. “It's a priority for the presidency to try to prevent him from gaining more support.''

Diversified Exports

So far, the economy is benefiting from diversified exports and Calderon's plan to spend 2.5 trillion pesos ($250.7 billion) in public and private funds on infrastructure projects during his six-year term, creating construction jobs, building ports and expanding roads payday loans. The government estimates GDP expanded 3 percent in the second quarter.

In May, Calderon announced a program to boost aid to more than 5 million of Mexico's poorest families by 22 percent to 655 pesos a month. His goal is to shrink extreme poverty, defined as families unable to pay for a basket of basic foodstuffs, by 30 percent in the next five years. In 2006, 10.6 percent of the population was in the lowest income group.

Tarimbaro Mayor Baltazar Gaona Sanchez said Calderon's anti-poverty program benefits only about 6 percent of the townspeople and isn't having a significant effect. Residents work mainly in agriculture, growing corn, tomatoes and onions.

“There's still a lot lacking,'' he said. The economy of the municipality, which is 200 kilometers (124 miles) west of Mexico City, “has sunk,'' he said. “There are a lot of people who come to ask for help to eat.''

`No Work'

Maria Sebastiana, 50, who lives about an hour away in the town of Zinapecuaro, said her husband was fired from his construction job in Oregon and hasn't sent money to her since November. Still, her pregnant daughter's boyfriend has left for the U.S. in search of employment to support the couple and their child. “Here, there's no work,'' Sebastiana said.

In the San Fernando Valley of Los Angeles, Mexicans who once had full-time construction jobs are now looking for day employment on street corners, said Antonio Bernabe, day-laborer organizer at the city's Coalition for Humane Immigrant Rights.

“They are living in very poor conditions, eating noodle soups at 25 cents each,'' Bernabe said.

Only half of Latin American immigrants in the U.S. said they sent money home in February, down from 73 percent two years ago, according to a survey released in April by the Inter- American Development Bank.

Agustin Garduno, wearing a paint-stained sweatshirt, said he sleeps in cars and on floors at friends' houses because he can't afford rent. As noon approaches and no contractors have pulled up to the corner of Van Nuys Boulevard and Oxnard Street looking to hire, it will be the fifteenth day he has gone without work.

“If you gave me a ticket, I'll go back to Mexico because here, there's nothing,'' said Garduno, 48, who used to make $1,300 a month and now makes about $500.

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The Senate on Saturday overwhelmingly passed a landmark housing bill that will offer up to $300 billion in loans for troubled homeowners and establish a government rescue plan for mortgage finance giants Fannie Mae and Freddie Mac.

The House passed the bill on Wednesday just hours after President Bush reversed his long-standing vow to veto the bill. Bush is expected to sign it soon.

The legislation, one of the most far-reaching on housing in decades, marks the centerpiece of Washington’s efforts to address the nation’s housing meltdown.

"This legislation won’t perform miracles. But as others have said, it’s a step - and I hope an important step - to putting our nation on the road to economic recovery," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee and a principal author of the bill.

Following the vote, Dodd said he will meet on Tuesday with representatives from the Treasury, the Federal Reserve, the FDIC and the Department of Housing and Urban Development to discuss how the legislation can be implemented as quickly as possible. "I’m not going to tolerate a slow walk," he said.

Though the Senate vote was 72 to 13, the bill was not without its staunch opponents.

Sen. Charles Grassley, R-Iowa, the leading Republican taxwriter, had supported earlier versions of the legislation but objected to the rescue plan for Fannie and Freddie. "This bill has fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street," Grassley said.

The White House also objected to parts of the bill, including aid to states to buy foreclosed properties. But White House Press Secretary Tony Fratto said the measures concerning Fannie and Freddie are "urgently needed now … President Bush will sign this bill when he receives it, despite our concerns with some provisions."

The bill has two principal objectives: to offer affordable government-backed mortgages to homeowners at risk of foreclosure, and to bolster Fannie and Freddie with a temporary rescue plan and a new, more stringent regulator.

Provisions in the 700-page bill that would most directly affect consumers and communities include:

Increase the Federal Housing Administration’s role. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes’ current appraised value.

The cost of the new FHA program - which would begin on Oct. 1 and be in place for just a few years - would be funded by fees from Fannie and Freddie, along with fees paid by both lenders and borrowers.

While the bill authorizes the FHA to insure up to $300 billion in loans, the CBO estimates that the agency is only likely to insure up to $68 billion and help keep roughly 325,000 people in their homes. Those estimates were based on the CBO’s assessment of who is likely to qualify under the program and accounts for a certain number likely to default anyway.

(Here are more details on this provision.)

Establish a stronger regulator for the GSEs. The new regulator will have a greater say over how well funded the two government sponsered enterprises (GSEs) are - a major concern in the markets that has sent stocks in both companies plunging.

Permanently increase "conforming loan" limits pay day loans. The bill would permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to a maximum of $625,500 from $417,000.

The FHA maximum loan limits for high-cost areas would also increase to $625,500. Higher loan limits will make it easier for borrowers to get mortgages, because they’re more likely to be traded if they are considered conforming.

Create home-buyer credit. The bill includes a tax refund for first-time home buyers worth up to 10% of a home’s purchase price but no more than $7,500.

The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.

Bar down-payment assistance for FHA loans. The bill eliminates a program that has allowed sellers to provide down payment assistance.

The bill would also increase to 3.5% from 3% the down payment requirement for borrowers getting FHA loans.

Create an affordable housing trust fund. The bill establishes a permanent fund to promote affordable housing. The fund would be paid for by fees from Fannie and Freddie.

Give grants to states to buy foreclosed properties. The bill would grant $4 billion to states to buy up and rehabilitate foreclosed properties. The funding had been opposed by the White House, which said it would benefit lenders and not homeowners.

Concerns over whether Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) will have enough money to weather future losses in the housing market sent shares plummeting in recent weeks. Since the beginning of June, Fannie’s stock price has dropped 57% and Freddie’s plummeted 66%. For the past year, they’re both down roughly 85% as of the end of trade on Friday.

Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.

To help stabilize markets, Treasury Secretary Henry Paulson asked Congress to temporarily empower Treasury to offer the companies a backstop if needed. Consequently the housing bill now includes provisions that let Treasury over the next 18 months offer Fannie and Freddie an unlimited line of credit and the authority to buy stock in the companies.

Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.

The Congressional Budget Office on Tuesday estimated the potential cost of a rescue could be $25 billion. CBO said there is probably a better than 50% chance that Treasury would not need to step in. It also said there is a 5% chance that Freddie’s and Fannie’s losses could cost the government $100 billion. 

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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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Drug developer Merck says its second-quarter profit rose 5% as cost-cutting efforts offset a drop in sales of its asthma treatment Singulair and cholesterol drugs Zetia and Vytorin.

Whitehouse Station, N.J.-based Merck & Co (MRK, Fortune 500). says profit rose to $1.77 billion, or 82 cents per share, from $1.68 billion, or 77 cents per share, during the prior-year period. Sales fell 1% to $6.05 billion from $6.11 billion.

Excluding restructuring charges, Merck says it earned 86 cents per share faxless payday loans.

Analysts polled by Thomson Financial expected profit of 83 cents per share on revenue of $6.05 billion.

Merck shares fell 23 cents to $35.10 in after-hours trading after falling $2.35, or 6.2%, to close at $35.33. 

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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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