Wednesday, April 16, 2008

Foreclosures jump 57 percent in last 12 months

By Lynn Adler

NEW YORK (Reuters) - Home foreclosure filings surged 57 percent in the 12 month-period ended in March and bank repossessions soared 129 percent from a year ago, as homeowners struggled to make mortgage payments, real estate data firm RealtyTrac said on Tuesday.

For the month of March, foreclosure filings, default notices, auction sale notices and bank repossessions rose 5 percent, led by Nevada, California and Florida, RealtyTrac said.

The rise in March to filings on a total of 234,685 properties followed a 4 percent decline in February, RealtyTrac reported.

RealtyTrac said the peak has yet to be reached.

"What we're really looking at is ongoing fallout from people overextending themselves to buy homes they couldn't afford and using highly toxic loan products to get into the houses in the first place," Rick Sharga, vice president of marketing at RealtyTrac, based in Irvine, California, said in an interview.

"We're going to see quite possibly a record amount of foreclosure activity in the third or fourth quarter," reflecting sharp payment increases on adjustable-rate subprime mortgages in May and June, Sharga said.

One in every 538 U.S. households living in single-family dwellings received a foreclosure filing in March. The single-family dwellings can include condominiums.

There are three phases of the foreclosure process in most states -- an initial default notice, notice of a scheduled auction, and an "REO" filing if the property is not sold at auction but instead repossessed by the bank, Sharga said.

REO refers to real estate-owned property.

All of the households in the report received at least one of these filings last month.


While default notices and repossessions soared in March, auction notices rose a relatively small 32 percent, James J. Saccacio, chief executive officer of RealtyTrac, said in a statement.

That suggests "more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender," he said. "This deed-in-lieu-of-foreclosure process allows the lender to take possession of a property without putting it up for public foreclosure auction."

The states with the highest foreclosure filing rates -- Nevada, California and Florida -- also are among those that had the biggest price appreciation in the five-year boom before the housing meltdown that began in 2006.

These states tend to also be plagued by defaults on unoccupied homes bought by speculative investors. In many cases, home prices have now fallen below the size of the mortgages and some owners are walking away.

In Nevada, one in every 139 households received a foreclosure filing in March, keeping the state at the top of the ranks for the 15th straight month.

The 7,659 Nevada properties receiving foreclosure filings last month represented a 24 percent jump from February and a nearly 62 percent spike from March 2007.

California had the second highest rate of foreclosure filings, one for every 204 households, followed by Florida with one of every 282 households.

Arizona's filings fell about 5 percent, but it retained its standing as with the fourth highest pace of foreclosure activity for the third month straight.

Foreclosure activity in Colorado dropped 8 percent in March from February and 1 percent from a year ago, but it ranked No. 5, with one filing for each 339 households.

Georgia, Ohio, Michigan, Massachusetts and Maryland were the other states with the highest foreclosure rates in March.

The states with highest total number of foreclosure filings were California, Florida and Ohio.

Foreclosure filings were reported on 64,711 California properties in March, the most of any state for the 15th consecutive month, up nearly 21 percent from February and up almost 106 percent from March 2007.

Florida posted the second highest total, with foreclosure filings reported on 30,254 properties in March. While down about 7 percent from February, filings were about 112 percent higher than last March.

Georgia, Texas, Michigan, Arizona, Illinois, Nevada and Colorado were the other states with the highest foreclosure totals in March.

(Editing by Leslie Adler)

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Fears of long recession rising

Growing number of economists worry that second-half recovery is out of reach and that recession will be longer and more painful than current forecasts.

NEW YORK ( -- There is little debate about whether the U.S. economy is in a recession. The question is how painful and long the downturn will be.

There is a growing fear among some economists that the recession will be particularly bad.

"We just can't believe it's going to be short. The question is how bad can it get? The situation is moving more towards severe than towards mild," said Allen Sinai, chief global economist for Decision Economics.

According to the National Bureau of Economic Research, the firm that officially determines when recessions begin and end, the last two recessions (2001 and 1990-1991) each lasted 8 months.

But Sinai and other economists cited numerous economic headwinds, including tight credit, falling home prices and mounting losses for banks, as reasons why this downturn could last longer and be more painful than seen in those last two recessions, with more job losses and a sharper drop in economic activity.

In addition to the drag on the economy from rising job losses, they also pointed to record high commodity prices and plunging confidence as factors that could cut into consumer spending.

Since consumer spending makes up nearly three-quarters of the nation's economic activity, any decline in spending can create a downward spiral for the whole economy.

"We have a deadly combination of commodity price inflation and credit contraction," said University of Maryland economics professor Peter Morici. "It's tough to imagine a worse combination. In a worst case scenario, the recession could last several years."

The Federal Reserve is still projecting modest growth for the U.S. economy in the second half of this year though, as are many economists. This is based on the belief that the economic stimulus package passed by Congress in February and a series of interest rate cuts by the Fed should lead to higher spending by consumers and businesses in the coming months.

But even Fed policymakers voiced worries of a worse downturn according to the minutes of their March 18 meeting released last week.

Credit, housing and inflation all big concerns

Many of the problems facing the economy will come into focus this week as many top bank and Wall Street firms report results and the government will give its latest update on inflation and housing starts.

Citibank (C, Fortune 500), Washington Mutual (WM, Fortune 500) and Merrill Lynch (MER, Fortune 500) are expected to announce additional losses.

Meanwhile, the Consumer Price Index and Producer Price Index, two of the government's key inflation readings, are likely to show big jumps in March compared to February.

But it's the crisis in housing that is of particular concern.

Economists forecast that the Census Bureau will report building permits hit a 17-year low in March and that housing starts were anemic.

And during a conference call with investors Monday, Don Truslow, chief risk officer of banking giant Wachovia (WB, Fortune 500), said home prices should fall through 2008 before finally hitting bottom in the middle of 2009. (Wachovia, the No. 4 U.S. bank by assets, reported an unexpected loss Monday.)

Sinai argues that until housing prices turn around, there isn't much hope for a pick-up in the economy because housing woes will continue be a drag on consumer spending and the credit markets.

"So much borrowing and lending was leveraged to [housing], that as long as values keep going down, the exposure of consumers, of financial institutions and of investors remains extremely high," he said.

The home-equity spigot has been shut off

Bill Hampel, chief economist for the Credit Union National Association, said the run-up in home prices in the middle of this decade led consumers to take on much higher levels of debt than in the past.

As long as home prices continued to rise, homeowners were able to tap into home equity lines of credit. But with home prices falling and credit suddenly tight, many households have lost this extra source of income. That could create a significant and long-lasting decline in consumer spending.

"What happened in the short space of the last five years was pretty scary -- household debt rose to about 125% of income. It hadn't ever been 100% before that. It took consumers a long time to get into these conditions; it's going to take a long time to get that fixed," Hampel said.

At the same time, consumers are also facing rising prices at the grocery store and gas station. The Fed's rate cuts have cut into the value of the dollar, further increasing the costs of commodities, which impacts the price of food and oil. This may only get worse if the dollar keeps falling.

"It seems to me the big wild card for the economy would be a sharp decline in the dollar, which in turn would cause U.S. inflation to spike up," said Paul Kasriel, chief economist with Northern Trust.

That would be a problem since it would force the Fed to start raising interest rates again in order to make sure inflation does not get out of hand, Kasriel said.

And rate hikes at a time when the economy is trying to rebound from this slowdown could kill any chances of a quick recovery. To top of page

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The Madness of Ben Bernanke

By Gabor Steingart in Washington

The dollar is in a tailspin, the trade deficit is growing and a recession is on the horizon. The American way of life is in serious danger. But the head of the Federal Reserve keeps on pumping easy credit into the system -- a crazy policy that will worsen the crisis.

Ben Bernanke at the G7 meeting of central bank governors over the weekend.

Ben Bernanke at the G7 meeting of central bank governors over the weekend.

Alan Greenspan and Ben Bernanke have more in common with the big cat entertainers Siegfried & Roy than any of us can be comfortable with.

The Las Vegas magicians call themselves "Masters of the Impossible" and have been fascinating audiences for decades by getting snow-white tigers to leap through burning rings.

The legendary Federal Reserve Chairman and his successor were equally adept at fascinating their audiences -- with a policy of miraculous monetary growth that gave America one of the longest periods of economic expansion in modern times. Many saw them as "Masters of the Universe." It seemed as if the central bankers had tamed predatory capitalism with their constant interest rate cuts.

Siegfried & Roy at times seemed at one with their cats, until the day everything went out of control. A tiger bit Roy in the neck during a show and looked as though it were about to devour him alive.

Greenspan and Bernanke too have lost their magic touch, and their image has been shredded by the real estate crisis and the dollar slide. The ravages of the financial markets aren't doing them any personal harm. But devalued stocks, bad mortgage loans and the diving dollar are damaging millions of small investors and savers.

It's as if the tiger has leapt of the stage and is mauling the audience. We can't blame wild cats or financial markets for being ruthless. It's in their nature to be brutal. Their unmistakeable message is: you can take things this far and no further.


In the case of the real estate crisis which reached the banks and is now unsettling the stock markets, the markets are now showing what G7 finance ministers and central bank governors meeting last weekend in Washington for their annual spring get-together declined yet again to admit publicly: Americans must change their lives -- or it will be changed for them by force.

American Way of Life Under Threat

The credit-financed consumer boom of recent years is coming to a painful end. Today's American Way of Life has no chance of surviving the coming years undamaged. The virus will continue to ravage its way through the financial system.

The property crisis is likely to spread to credit card providers soon and will then probably infect car manufacturers, furniture makers and all the other firms that owe their sales increases to the growth in credit finance. "The virus will keep on infecting the system," one management board member from a large bank said, requesting anonymity in return for the candour of his analysis.

His argument is that banks that grant mortgages to home buyers virtually unable to pay their bills are unlikely to be especially scrutinizing when it comes to lending cash to the buyers of fridges, cars and furniture. Indeed, a furniture store in Miami recently tried to lure consumers with the following offer: buy now, pay your first credit installment in three years, and no need for a down-payment.

The credit-financed way of life is typical of the US these days. Many people resort to credit to plug the gap between the lifestyle they have become accustomed to and their declining wages.

Dulling the Pain With Credit

The borrowed cash is like an anaesthetic against the painful impact of globalisation. Private household debt has been growing by $4 billion each business day for years.

All this wouldn't be so bad if the US economy were at least doing well in foreign markets. But it isn't, and hasn't been for a long time. Despite the depreciation of the dollar, which makes imports into the US far more expensive while making US exports cheaper in foreign markets, US manufacturers are finding it hard to sell their products.

Contrary to forecasts by both the Federal Reserve and the Treasury, the trade deficit has continued to grow, by 6 percent in February alone. America imported $62 billion worth of goods more than they exported in February, including a disturbingly large number of cars, computers and pharmaceutical products. Try as they might, most private households in America can't keep up this consumer miracle. The savings behavior of many Americans means that many of them now live from hand to mouth.

But Bernanke is doing nothing to dampen this hunger for credit. The former advisor to President George W. Bush is even trying to whip up credit-financed consumption by lowering interest rates. This is helping to fuel inflation because the monetary growth isn't being matched by growth in real economic output. Inflation in the US currently stands at 4 percent.

It's a paradox. The private commercial banks which have just had to make billions of dollars in write downs have become more cautious. They're scared of further risks. The management resignations at Citigroup and Bear Stearns have had a sobering impact.

Patriotic Madness

Meanwhile the Federal Reserve is urging the banks to go on taking risks. It has been injecting cash into the banking system for the past half-year while urging bank CEOs in confidential chats to offer more credit. The aim is to keep on financing consumer spending and even to stimulate it further -- for reasons of patriotism.

There's a word for this policy -- madness.

But because there is method in this madness, the meeting of mighty central bank governors and finance ministers in Washington over the weekend remained silent about it, at least officially. Outside the meeting rooms, though, there were murmurings about the poisoned legacy of Alan Greenspan and Bernanke's irresponsible behavior.

One participant told me: "There's an unwritten code of honor that says central bank governors should refrain from criticizing each other." Not least out of respect for the independence of central banks.

But the US is unlikely to realize the error of its ways on its own. "The Americans will always do the right thing," British Prime Minister Winston Churchill once said, "after they've exhausted all the alternatives."

Central bankers and tiger tamers have something else in common -- obstinacy. Roy has recovered from his wounds and wants to return to the stage in Las Vegas. "The magic is back," came the defiant announcement.

Alan Greenspan cut a similarly indestructible figure at the weekend. Even though criticism of his cheap money policy was only murmured privately, the 82-year-old legend of central banking said: "I was praised for things I didn't do. I am now being blamed for things I didn't do."

Not that he ever complained about getting false praise.

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A Taxing History

No better time than tax day for to announce it's including access to federal income tax records—dated 1862-1918—for subscribers


Abraham Lincoln (fifth name from the top) is listed as having income of $25,000 for the year 1864, the equivalent of $566,000 today. His tax bill: $1,296.


A federal document listing the 1865 income and taxable possessions of steel baron and philanthropist Andrew Carnegie (second name from the bottom), including a gold watch and carriage.

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The year is 1865. Andrew Carnegie steps out of his carriage sporting a gold watch. At home in Carnegie's Pennsylvania estate, his grandchildren bang on a custom-made piano. Things are quite comfortable for the Carnegie family. And why not? The steel baron and later philanthropist would earn $84,000 that year—the equivalent of about $2 million today.

Those choice details of Carnegie's luxurious lifestyle will soon be included in a monthly subscription, which runs $12.95. The genealogy Web site, which already offers access to databases covering everything from immigration to military service, is branching out to include income tax records. As part of an agreement in which the company paid $46,000 to the National Archives in Washington, has digitized and indexed federal income tax records from 1862 through 1918.

The site's IRS Tax Records collection is an alphabetical listing of annual income as well as taxable possessions, such as Carnegie's gold watch and carriage. Another document shows President Abraham Lincoln's $25,000 income (about $566,000 today) for 1864, the year before his assassination. His tax bill: $1,296.

A Collection of Collections

According to Megan Smolenyak,'s chief family historian, the government first imposed a federal income tax in 1862 on affluent families who made at least $600 annually. The money, collected by a commissioner of Internal Revenue, was to help fund the Civil War. Taxes were still modest compared with today, topping out at 10%. But by 1873, William Astor, then the richest man in the U.S., and a few of his old cronies had had enough. They sued the federal government, resulting in the federal tax being declared unconstitutional.

Throughout the Civil War era, the federal tax continued to be imposed and redacted. Also available in the archives are the fortunes of individual companies.

Up to now, those records have been a treasure trove for anyone who's had the time to travel to Washington and view them on microfilm at the Archives. Now, they'll be available online as well. And just in time to offer small comfort to those who have had to fork over 30% of their present-day income to the IRS.

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Hormones 'may fuel market crises'

City dealer
Does a macho culture cause problems?

Hormone surges among City traders could be partly responsible for driving "boom and bust" economics, say researchers.

A Cambridge University team found testosterone levels were directly linked to the profit they made.

The Proceedings of the National Academy of Sciences study also found levels of the stress hormone cortisol could affect the risks they took.

A psychologist who works with investment bankers said it may help explain seemingly irrational behaviour.

The Cambridge study measured testosterone levels in a small group of male City of London traders at both 11am and 4pm, and matched these to the levels of profit or loss recorded for that day.

They found that daily testosterone levels were significantly higher on days when traders made more than their average profit.

They ascribe this to the "winner effect", seen in sportsmen, in which success increases testosterone levels, which in turn increase feelings of confidence and ability to take risks, which then increase the chances of further profits.

However, if repeated too much, they say, the rising testosterone levels could eventually compromise their ability to make rational decisions, as the traders take bigger and bigger risks during so-called "bubbles", where the market rises sharply.

Prof Joe Herbert, one of the study's authors, said: "Our work suggests that these decisions may be biased by emotional and hormonal factors that have not so far been considered in any detail.

"Hormones may be important for determining how well an individual trader performs in the stressful and competitive world of the market."

'Learned helplessness

The researchers also looked at cortisol, which is produced in response to stress, and in the case of traders, extreme volatility in the markets.

In very stressful situations, some traders will just freeze
Jeremy Holt
Occupational Psychologist

Dr John Coates, another of the study's authors, said that while ever-increasing testosterone levels might turn risk-taking into an "addiction", the reverse was true with the stress hormone cortisol, which, in excess, causes people to actively avoid risk, potentially worsening the effects of any downturn.

"In the present credit crisis, traders may feel the noxious effects of chronic cortisol exposure, and end up in a psychological state known as 'learned helplessness'.

"If this happens central banks may lower interest rates only to find that traders still refuse to buy risky assets.

"At times like these, economics has to consider the physiology of investors, not just their rationality."

'In the Zone'

Jeremy Holt, an occupational psychologist who works with investment banks to coach their traders on the psychology of risk-taking, agreed that both scenarios fitted well with his experiences.

"Traders will often talk to me about being 'in the zone' - similar to a sportsman, meaning a feeling of 'unconscious competence', decisiveness and confidence.

"But it's amazing the number of times that traders put in a really good run but then hand a lot of their profits back because they have become over-confident, and didn't just stop when they needed to.

"They often come up with some strange, irrational reasons for doing this."

He added: "On the other hand, in very stressful situations, some traders will just freeze, and not do anything."

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