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Three myths that sustain the economic crisis

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The summer of 2007 was a run-of-the-mill affair. Tony Blair had stepped down as prime minister in late June and his successor Gordon Brown was enjoying a honeymoon period. It was a year without a football World Cup or an Olympics, while Roger Federer won the men’s singles at Wimbledon, and the cricket involved series against the West Indies and India.

Then, on 9 August, came reports that central banks had been active in the markets. The Guardian said the action involved pumping billions of pounds into the financial system to calm nerves amid fears of a credit crunch. The trigger for the panic was the decision by BNP Paribas to block withdrawals from three hedge funds because of what it called a complete evaporation of liquidity. A spokesman for the bank described the move as a technical issue and said he hoped it would be temporary.

Technical? Temporary? Within six weeks, it was clear the meltdown of August 2007 was no short-term blip when investors queued outside branches of Northern Rock for three days in the first run on a leading UK bank since the mid-19th century. Five years on, the global economy has yet to recover from the deep trauma caused by the hubris of the bankers.

Back then, though, there were few who imagined that 9 August 2007 would prove to be such a milestone in financial history. The Guardian carried the story on page 29 because there seemed to be no reason to believe this was any different from previous bouts of jitters in the markets. It took a few days to work out what the bankers had been up to, because the “masters of the universe” had their own esoteric language the rest of us were not supposed to understand. Talk of mortgage-backed securities, credit default swaps and over-the-counter derivatives was the equivalent of 12th century monks writing bibles in medieval Latin for peasants who only spoke English.

Stripped of the jargon, it is now quite easy to see what happened. Banks were taking large gambles with precious little capital in reserve if the bets went wrong. Individuals were borrowing at levels only sustainable if the value of their share portfolios and homes continued to rise year after year. Governments assumed that booming tax receipts were permanent and increased public spending.

In August 2007, the air started to escape from this gigantic bubble. It happened in three stages. The financial sector was the first to feel the impact, because while it was evident that almost every bank had been up to its eyeballs in investments linked to the American housing market, nobody knew for sure just how much money each institution stood to lose. The financial system grinds to a halt if banks refuse to lend to each other, as they did in August 2007.

It took more than a year for the second stage of the crisis to unfold. During that period there were a number of developments: the crisis in finance deepened, house and share prices fell, and inflationary pressures increased as a result of sharp jump in the cost of fuel. When Lehman Brothers went bankrupt in September 2008, the global economy was ready to blow and the next six months saw the biggest slump in output since the Great Depression.

Governments arrested the slide into a 1930s-style slump by concerted and co-ordinated action, but wrecked their own finances in the process. Bailing out the banks was expensive, particularly since much lower levels of output reduced tax revenues. Banks felt they had too much debt. Consumers felt they had too much debt. By mid-2009, most governments also felt they had too much debt. It was not a comfortable place to be.

Central banks tried to help out by making credit cheap and plentiful. They cut interest rates and used unconventional methods – such as buying bonds in exchange for cash – to boost the money supply. The hope was this would stimulate a private sector recovery and so provide a breathing space in which governments could repair their finances.

The attempt to solve a crisis caused by credit with even more credit has, predictably enough, proved a failure. It has been a bit like the motorist desperately pumping air into a tyre with a slow puncture: it works for a while, but eventually the tyre goes flat again.

Some countries have fared better than others. Australia, for example, was one of the few developed nations to escape recession, because it had well regulated banks and is a big supplier of raw materials to China.

Britain, by contrast, was more exposed than most. Lax regulation cultivated an “anything goes” culture in the City; equity withdrawal from rising house prices underpinned consumer spending; inflationary pressures were stronger than elsewhere. The level of activity in the economy is close to 15% below where it would have been had growth continued at just over 2% a year since output peaked in early 2008.

For the global economy as a whole, things may get worse before they get better. The summer of 2012 has seen signs of a generalised slowdown, with knock-on effects from Europe’s sovereign debt problems felt in North America and Asia. The eurozone is heading for a nasty, double-dip recession, the US is growing far less slowly than has been the norm after previous downturns, while China’s economy is feeling the impact of previous policy tightening deemed necessary to curb the inflationary effects of the stimulus injected in 2008-09.

There is no real comparison between the events of the past five years and the half-decade that followed the Wall Street Crash in October 1929. In the 1930s, a quarter of the American workforce was out of work and industrial production fell by 50%. A better historical parallel may be the Great Depression of the 19th century, a broad-based slowdown in growth coupled with deflationary pressure that lasted from 1873 to 1896.

The reason the crisis has been so long lasting comes down to three myths. The Anglo-Saxon myth is that big finance is essentially a force for good, rather than dangerous, rent-seeking and – in too many cases – corrupt. The German myth is that you can solve a problem of demand deficiency through universal belt tightening and export growth. The right policy mix involves putting tough curbs on the banks, international co-operation so that creditor countries increase domestic demand to help out debtor countries, and a more measured pace of deficit reduction governed by the pace of growth rather than arbitrary targets.

The chances of this happening appear slim. Why? Because there is a third myth – namely that there was not much wrong with the global economy in 2007. But the old model was financially flawed in that it operated with excessively high levels of debt, socially flawed in that the spoils of growth were increasingly captured by a small elite, and environmentally flawed in its assumption that all that mattered was ever-higher levels of growth. It is possible to move on, but only when it is recognised that the genie will not go back into the bottle.

A lot from Lehman Brothers: sale of artwork and ephemera from the failed investment bank at Christie’s of London in September 2010, on the second anniversary of the bankruptcy. Photograph: Linda Nylind for the Guardian

Three myths that sustain the economic crisis
By: Larry Elliott

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Economy Personal Finance Real Estate

Mortgage-debt forgiveness preventing foreclosures

NEW YORK (CNNMoney) — Reducing the amount struggling homeowners owe on their mortgages is proving to be a more effective way to prevent foreclosures than other methods, such as reducing interest rates or postponing payments, a new report finds.
In a report presented this week, Amherst Securities Group said that when principal reductions brought mortgages near the home’s market value, borrowers were substantially less likely to fall behind on payments again and lose their homes.

Only 12% of borrowers who received principal reductions re-defaulted in 2011, Amherst found. That’s compared with 23% of borrowers who received mortgage modifications with interest rate reductions (but no principal reduction) and 30% who received forbearance, which postpones their debt repayment.
“[Modifications] with principal forgiveness are apt to be most effective, as the borrower no longer owes the money — so he is no longer hopelessly underwater,” said Laurie Goodman, Amherst’s housing market analyst and one of the authors of the report.

The success these principal reductions have had in turning delinquent borrowers back into paying clients has led many lenders to step up debt forgiveness on the loans in their own portfolios.

So far this year, principal reductions have accounted for 40% of the modifications done by the banks, up dramatically from 25% in 2011 and 11% in 2010, according to Amherst.

The mortgage servicers cannot forgive debt on loans that are owned or backed by one of the two government-controlled mortgage giants, Fannie Mae (FNMA, Fortune 500) and Freddie Mac (FRE), however, and they are limited in what they can forgive on loans owned by investors.

That means, of the vast majority of loans — 6 million since April 2009, according to the Treasury Department — only a fraction have received debt forgiveness. That may be changing, though.

The Federal Housing Finance Agency, which controls the majority of outstanding mortgages through its oversight of Fannie and Freddie, has thus far prohibited the mortgage giants from including debt forgiveness as part of their mortgage modifications.
See also: Most affordable cities to buy a home

Last month, however, Fannie and Freddie announced they would participate in two programs in California and Nevada that will use part of a $7.6 billion Hardest Hit Fund to pay down loans the companies own or back.

However, the move will not cost Fannie and Freddie anything and is a far cry from the principal reduction that private mortgage servicers are extending to borrowers.

“My guess is that eventually, [Fannie and Freddie will] go down that path, but there’s still a lot of reticence there,” said Mark Zandi, the chief economist for Moody’s Analytics. “People have problems with principal reduction. They think it’s unfair.”

Even if Fannie and Freddie remain on the sidelines, Amherst said it expects to see a continued increase in principal reductions.

Mortgage-debt forgiveness preventing foreclosures
source:http://money.cnn.com/

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Economy Personal Finance Real Estate

Americans brace for next foreclosure wave

(Reuters) – Half a decade into the deepest U.S. housing crisis since the 1930s, many Americans are hoping the crisis is finally nearing its end. House sales are picking up across most of the country, the plunge in prices is slowing and attempts by lenders to claim back properties from struggling borrowers dropped by more than a third in 2011, hitting a four-year low.

But a painful part two of the slump looks set to unfold: Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.

“We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010,” said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.

“Last year was an anomaly, and not in a good way,” he said.

In 2011, the “robo-signing” scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.

Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.

Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.

More conclusive national data is not yet available. But watchdog group, 4closurefraud.org which helped uncover the “robo-signing” scandal, says it has turned up evidence of a large rise in new foreclosures between March 1 and 24 by three big banks in Palm Beach County in Florida, one of the states hit hardest by the housing crash

Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.

Housing experts say localized warning signs of a new wave of foreclosure are likely to be replicated across much of the United States.

Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).

RealtyTrac CEO Brandon Moore said the “numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed.”

One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times.

“The subprime stuff is long gone,” said Michael Redman, founder of 4closurefraud.org. “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”

“HARD TO CATCH UP”

Until December 2010, Daniel Burns, 52, had spent his working life in the trucking industry as a long-haul driver and manager. When daily loads at the small family business where he worked tailed off, he lost his job.

Unable to cover his mortgage, Burns received a grant from a government fund using money repaid from the 2008 bank bailout. That grant is due to expire in early 2013 and Burns is holding out on hopeful comments from his former employer that he might get his job back if the economy recovers.

“If things don’t pick up, I will be out on the street,” he said, staring from his living room window at two abandoned houses over the road in the middle-class Cleveland suburb of Garfield Heights, the noise of traffic from a nearby Interstate highway filling the street.

Underscoring the uncertainty of his situation, Burns’ cell phone rings and a pre-recorded message announces that his unemployment benefits are due to be cut off in April.

A bit further up the shore of Lake Erie, Cristal Fell, who works night shifts entering data for a trucking company in Toledo, has fallen behind on her mortgage a second time because her ex-husband lost his job and her overtime was cut.

“Once you get behind it’s so hard to catch up,” she said.

Fell, a mother of four, hopes the economy will gather enough speed to help her avoid any risk of losing her home. Her ex-husband has found a new job and she is getting more overtime, so she hopes she can catch up on her mortgage by the fall.

Burns and Fell are the new face of the U.S. housing crisis: Middle class, suburban or rural with a conventional 30-year fixed mortgage at a reasonable interest rate, but unemployed or underemployed. Although the national unemployment rate has fallen to 8.3 percent from its peak of 10 percent in October 2009, nearly 13 million Americans remain jobless, meaning many are struggling to keep up with their mortgage payments.

Real estate company Zillow Inc says more than one in four American homeowners were “under water” or owed more than their homes were worth in the fourth quarter of 2011. The crisis has wiped out some $7 trillion in U.S. household wealth.

“We’re seeing more people coming through who have good loans with reasonable interest rates,” said Ed Jacob, executive director of non-profit lender Neighborhood Housing Services of Chicago Inc, which provides foreclosure counseling. “But in many households only one person works now instead of two, or they had their hours cut.”

“The answer to the housing crisis now is job creation.”

EARLY SIGNS OF UPTICK?

Zillow expects the resurgence in foreclosures this year, combined with excess inventory of unsold, bank-owned homes will contribute to a 3.7 percent national decline in prices before the market hits bottom in 2013 and stays there until 2016.

“The hangover from this crisis will far outlast the party of the boom years,” said Zillow chief economist Stan Humphries.

Getting through the remaining foreclosures and dealing with the resulting flood of homes on the market in the wake of the bank settlement is a necessary part of the healing process for the U.S. housing market, he added.

According to leading broker dealer Amherst Securities, some 9.5 million homes are still at risk of default and in February it said it expected to see the uptick in foreclosures start to hit in March and April.

There is other evidence that many of the foreclosures that did not happen in 2011 will happen this year.

A January report by the Neighborhood Economic Development Advocacy Project in New York found that in the first half of 2011 the number of 90-day pre-foreclosure notices in New York City outnumbered court foreclosure actions by a ratio of 14 to one, indicating that while proceedings were initiated against many homeowners, they were left incomplete.

“Now the banks have a settlement, foreclosure numbers for 2012 are going to be high,” said NEDAP co-director Josh Zinner.

A recent survey by the California Reinvestment Coalition, an umbrella group of nearly 300 non-profit groups in the state, of member agencies found 75 percent of respondents expected increased demand for their foreclosure prevention services in 2012 but more than a third had to scale back services because of funding cuts.

“Funding is a major concern given what our members expect for this year,” said associate director Kevin Stein.

All this has non-profits intensifying calls for the Federal Housing Finance Agency to drop its opposition to allowing the government-backed mortgage giants Fannie Mae and Freddie Mac it regulates to reduce principal for underwater homeowners.

Principal reduction involves reducing the amount borrowers owe in order to make a loan modification affordable for struggling homeowners. Republicans and the FHFA oppose principal reduction because of the risk of “moral hazard”- that homeowners who do not need help will seek to abuse largesse and have their mortgages reduced too.

ESOP in Ohio engages in “hits” on Chase branches — they say Chase is the least accommodating major bank when it comes to working with struggling homeowners — where they try to hand letters to bank mangers calling on chief executive Jamie Dimon to lobby FHFA head Edward DeMarco for principal reductions. A Chase spokeswoman said the bank has made “extensive efforts” to work with homeowners, helping 775,000 borrowers stay in their homes since early 2009, avoiding foreclosure “more than twice as often as we have had to foreclose.” Housing groups like ESOP maintain, as they have throughout the housing crisis, that unless the FHFA embraces widespread principal reduction, many more under water borrowers face losing their homes.

“Until banks engage in meaningful principal reduction as a matter of course,” ESOP’s Seifert said after a recent protest at a Chase branch in Cleveland, “this crisis will not end.”

(Reporting By Nick Carey; Editing by Martin Howell and William Schomberg; Desking by Andrew Hay)

By Nick Carey
GARFIELD HEIGHTS, Ohio

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Investment Real Estate

Genting Group downsizes plans for Miami resort site

With gambling approval denied in Tallahassee, Genting Group scales back its design to initially use just a fraction of the bayside resort site.

BY ELAINE WALKER
EWALKER@MIAMIHERALD.COM

Even without casino gambling, Genting Group said Tuesday it is moving ahead with a dramatically scaled down mixed-use plan for Resorts World Miami.

The five acres where The Miami Herald currently sits would become the site for a five-star luxury hotel, luxury condominiums, waterfront restaurants, some limited retail and an 800-foot long promenade along Biscayne Bay.

It’s still too early to tell exactly what it would look like because the project is being designed by Miami’s Arquitectonica. There are no renderings available, no specifics about the size of any of the elements or any idea what would happen to the rest of the 13.9 acres on the Herald site.

“With more and more people traveling to downtown Miami and a growing number of residents calling the area home, we are going to seize the opportunity to convert this prime piece of bayfront land into the centerpiece of a thriving neighborhood.” Bernardo Fort-Brescia, co-founder and principal of Miami-based Arquitectonica, said in a statement released by Resorts World Miami.

Early indications are that this version of Resorts World Miami will be a far cry from the original $3.8 billion project with 5,200 hotel rooms, the world’s largest casino, more than 50 restaurants and bars and a retail shopping mall. That plan drew the ire of many community leaders for the being out of scale with the neighborhood surrounding the Adrienne Arsht Center for the Performing Arts and having the potential to create a traffic nightmare.

“It sounds more modest and more reasonable; somebody is listening,” said Jack Lowell, a Miami commercial broker who was a Genting advocate in the business community. “I think it is also reflective of the current market and seems to make some sense.”

The first inkling of Genting’s latest plan comes about six weeks after the Florida Legislature shut down efforts to approve destination resorts in South Florida. A proposal can be revived next year.

Miami City Commissioner Marc Sarnoff, whose district includes the site, said he has been told renderings will be available in 30 to 60 days. During meetings with Genting, Sarnoff was told the project would include a pedestal with two or three towers on top. But the design would not include the futuristic look of the original project with irregular shapes designed to resemble a coral reef.

“I’m expecting to see a lot of rectangles with some architectural nuance to it,” Sarnoff said. “You could build the fish with casino gambling, because gambling allows you to do anything. It covers up all your mistakes. I like to see people build efficient buildings. These buildings will work across the board. They’re coming back with a footprint that is more germane for the way things get built in Miami.”

The new vision is also good news to Arsht Center leaders, who had been among the biggest critics of the original Genting plan because of the potential impact it would have on their facility.

“I think the Arsht Center and the neighborhood would benefit from that kind of development,” said Armando Codina, chairman of the Town Square Neighborhood Development Corp, the nonprofit created to protect the interests of the Arsht Center and the surrounding area. “It would be a very welcome addition. I just hope that the addition to the tax base will be used by the CRA to meaningfully improve the rest of the neighborhood.”

This time around Genting seems to be taking a go-slow approach. The company has been quietly discussing its new plans with select city leaders and distributing only a three-paragraph press release with limited specifics.

Last time around, Genting unveiled its ambitious proposal with a slick video and cocktail party for community leaders at the Four Seasons Hotel.

The new proposal would take up only a fraction of Genting’s 30 acres in the Omni neighborhood. Since purchasing the Herald land last May, Genting has invested about $500 million in real estate, including the Omni Center and other parcels. Genting is expected to continue operating the existing hotel at the Omni Center and leasing the remainder of the vacant office space on the site.

Genting Chairman K.T. Lim had always said that if gambling didn’t get approved, development of the Herald site could take up to 20 years.

“They said from Day One they would bring a project to market that meets market demand, and that’s what they’re doing,” said Tadd Schwartz, Genting’s South Florida spokesman. “They want to let the public know they are committed to Miami. This project will be within the scale of what currently exists in downtown Miami’s luxury hotel and condo market.”

The Herald, which has an agreement to remain on the property rent free for two years, is scheduled to move to a Doral site by May 2013.

Genting’s development plans, as they exist now, call for demolishing the Herald building and removing what has for decades been a barrier to public access of the waterfront. The idea is to create a gathering place where people can stroll or dine overlooking Biscayne Bay. Plans call for a waterfront promenade 50 feet wide that spans 800 feet. The design will also maintain 100-foot corridors on either side of the development with landscaped green space to allow a view of Biscayne Bay.

“The new design for Resorts World Miami will bring to life one of Miami’s most underutilized pieces of waterfront land after decades of inactivity,” Fort-Brescia said.

The Genting project also seeks to capitalize on what is quickly becoming a limited supply of luxury condominiums downtown. A recent study by the Downtown Development Authority found 93 percent of the nearly 23,000 condominiums built after 2002 are occupied. Of that, only about a third are occupied full-time by owners, with the majority serving as rental apartments.

“If we’re going to keep up with our growth, we have to get some projects in place,” said Alicia Cervera Lamadrid, managing partner of Cervera Real Estate. “There are not that many sites left. I don’t think there’s anything else being planned directly on the waterfront.”

Read more at Miami Herald