The Bush administration’s seizure of troubled mortgage giants Fannie Mae and Freddie Mac is potentially a $200 billion bet that it will help reverse a prolonged housing and credit crisis.

The historic move announced Sunday won support from both presidential campaigns, but private analysts worried that it may not be enough to stabilize the slumping housing market given the glut of vacant homes for sale, rising foreclosures, rising unemployment and weak consumer confidence.

Officials announced that both giant institutions were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Treasury Secretary Henry Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing because the failures would “create great turmoil in our financial markets here at home and around the globe.”

Mark Zandi, chief economist at Moody’s Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That’s because investors will be more willing to buy the debt issued by Fannie and Freddie – and at lower rates – since the federal government is now explicitly standing behind that debt.

“Effectively, the federal government has now become the nation’s mortgage lender,” he said. “This takes a major financial threat off the table.”

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The Treasury Department is putting the finishing touches to a plan designed to shore up Fannie Mae and Freddie Mac, according to people familiar with the matter, a move that would essentially result in a government takeover of the mortgage giants.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

It is also expected to involve the government injecting capital into Fannie and Freddie. That could happen gradually on a quarter-by-quarter basis, rather than in a single move, one person familiar with the matter said.

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Update: The Washington post has more there.

The Promenade Shops at Dos Lagos opened two years ago in Corona, aimed at serving the legions of people moving into upscale new housing tracts in the surrounding hills.

Discount center it isn’t. This is where you go to find a $3,300 home espresso machine at Sur La Table, a $500 handbag at Coach or a $6 cup of Pinkberry frozen yogurt.

Harder to find are paying customers. On a recent weekday afternoon, most stores had fewer shoppers than salespeople.

Outside the Starbucks, Melissa McVicar was selling sunglasses from a cart, $12 a pair. Five hours into her shift, McVicar had sold only six pairs. And most of her customers weren’t paying cash.

“People are buying on credit, even if it’s only $12,” she said.

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Although [the community of] Merced [California] has one of the highest foreclosure rates in the country, this borrower isn’t in such dire straits. She’s not even behind on her mortgage. But her oldest daughter is turning 18, which means an end to $500 a month in child support. She just wants a better deal.

The mayor hangs up and shrugs: “It’s a surprise her daughter is turning 18? You’d think she could have planned ahead.”

But hardly anyone in Merced planned very far ahead.

Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth.

Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all.

Obviously not the speculators turned landlords, who thought that they could get San Francisco rents in a working-class agricultural city ranked by the American Lung Association as having some of the worst air in the nation.

And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed ”” because who was telling them differently? ”” that the good times would be endless.

“Owning a home is the American dream,” says Jamie Schrole, a Merced real estate agent. “Everybody was just trying to live out their dream.”

The belief that this dream could be achieved with no risk, no worry and no money down was at the center of the American romance with real estate in the early years of this decade, and not just in Merced.

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Lenders who must satisfy the requirements of Fannie Mae and Freddie Mac ”” the dominant buyers of U.S. mortgage debt ””now are demanding bank statements, big cash reserves and second appraisals before they approve a loan to refinance a home.

“The lenders are making it so difficult to qualify,” said Jaye, who now mainly works with homebuyers snapping up foreclosed properties and homes selling for deep discounts.

“I know everybody’s scared right now, but It’s just so over-the top.”

Mortgage rates are hovering around 6.6 percent, about the same level as a year ago. But if investors weren’t so nervous, rates would be about 1 percentage point lower, based on historical comparisons.

“Mortgage debt is viewed as much riskier now than it was a couple of years ago during the housing boom,” said Greg McBride, senior financial analyst at Bankrate.com.

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Credit market turmoil has driven the U.S. into a recession and may topple some of the nation’s biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

“The worst is yet to come in the U.S.,” Rogoff said in an interview in Singapore today. “The financial sector needs to shrink; I don’t think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.”

The U.S. housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Rogoff said the government should nationalize Fannie Mae and Freddie Mac, the nation’s biggest mortgage-finance companies, which have lost more than 80 percent of market value this year.

Freddie Mac and Fannie Mae “should have been closed down 10 years ago,” he said. “They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.”

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On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed ”” and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”

Over the past year, whenever optimists have declared the worst of the economic crisis behind us, Roubini has countered with steadfast pessimism.

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“KEEP your house” reads the handwritten sign on a chain-link fence some 60 miles east of downtown Los Angeles. It is an advertisement, although it could be the attitude of an overstretched buyer who owes the bank more money than his home is worth. Many people in Moreno Valley have simply walked away from their properties. As abandoned lawns turn brown in the desert climate, the fallout spreads. It is no longer a matter of saving individual houses, but a whole city.

Until recently Moreno Valley was one of the fastest-growing cities in America. It lies in the Inland Empire, a two-county region in southern California that is so called largely because it is difficult to know how else to characterise such a sprawling expanse of detached homes, strip malls and warehouses. Between 1990 and 2007 the Inland Empire’s population grew from 2.6m to 4.1m””the equivalent of adding a city the size of Philadelphia.

As in other regions now suffering from a rash of foreclosures and falling house prices, such as south Florida and Nevada, rapid growth is itself largely to blame. Moreno Valley had the misfortune to swell at a time of lax lending practices. Whole neighbourhoods were built on cheap credit and inflated expectations””palaces for the middle class. Around Camino del Rey, on the city’s southern edge, huge Spanish-style houses with three-car garages sit empty. The city’s population growth appears to have gone into reverse. Moreno Valley’s high schools expected to enrol 9,850 pupils last year. They fell short by 780.

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The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.

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From here:

LAKE CITY, Ga. ”“ More than 1,800 people showed up to help ABC’s “Extreme Makeover” team demolish a family’s decrepit home and replace it with a sparkling, four-bedroom mini-mansion in 2005. Three years later, the reality TV show’s most ambitious project at the time has become the latest victim of the foreclosure crisis. After the Harper family used the two-story home as collateral for a $450,000 loan, it’s set to go to auction on the steps of the Clayton County Courthouse on Aug. 5. The couple told WSB-TV they received the loan for a construction business that failed.

It feels like the summer of 1931. The world’s two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.

The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a “chance of a global recession”. Plainly, the IMF cannot or will not offer any useful insights.

Its “mean-reversion” model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True “mean-reversion” would imply debt deflation on such a scale that would, if abrupt, threaten democracy.

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As home prices continue to decline and loan defaults mount, U.S. regulators are bracing for dozens of American banks to fail over the next year.

But after a large mortgage lender in California collapsed late Friday, Wall Street analysts began posing two crucial questions: Just how many banks might falter? And, more urgently, which one could be next?

The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

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It’s dispiriting indeed to watch the United States financial system, supposedly the envy of the world, being taken to its knees. But that’s the show we’re watching, brought to you by somnambulant regulators, greedy bank executives and incompetent corporate directors.

This wasn’t the way the “ownership society” was supposed to work. Investors weren’t supposed to watch their financial stocks plummet more than 70 percent in less than a year. And taxpayers weren’t supposed to be left holding defaulted mortgages and abandoned homes while executives who presided over balance sheet implosions walked away with millions.

Over the course of this 18-month financial crisis, we have lurched from land mine to land mine. Last week’s was all about Fannie Mae and Freddie Mac, the giant government-sponsored enterprises set up to provide affordable housing across the nation. By issuing debt, these shareholder-owned companies guarantee or own more than $5 trillion in home mortgages. Got that? $5 trillion.

Because the federal government established the companies, investors view them as backed, at least implicitly, by taxpayers. And that implied guarantee is what drove Fannie and Freddie’s business models.

The advantages the companies gained from this unique arrangement were huge. They had to keep less cash on hand than traditional lenders, for example. They also made more money on their mortgages than lenders because they paid less to borrow money in the bond market. These profits enriched Fannie and Freddie shareholders over the years and bestowed significant wealth on the companies’ executives.

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Investors continued to flee Fannie Mae and Freddie Mac yesterday, almost as frantically as the political class tried to reassure everybody there was nothing to worry about. Allow us to sort the good (there isn’t much) from the ugly.

In the good category, Treasury Secretary Hank Paulson swatted back reports of a government “nationalization” of the companies ”“ which would mean making explicit what has long been an implicit taxpayer guarantee of their liabilities. This would instantly add $5 trillion in liabilities to the federal balance sheet, doubling the U.S. public debt burden and putting America’s AAA credit rating at risk. This is the nightmare scenario for taxpayers.

Less reassuringly, Mr. Paulson said, “our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.” This suggests that Treasury thinks the two companies have enough capital, or can raise enough in private markets, to ride out any mortgage losses. We’re not so sure, and neither are investors, who have kept bidding Fan and Fred shares to new lows on fears of insolvency.

The most immediate danger is that investors will shrink from rolling over the debt of the two companies, leading to a run a la Bear Stearns. Mr. Paulson is trying to reassure people that the companies are sound, but after Bear everyone has the heebie-jeebies. With so much on the line, we’ve been suggesting that Treasury and Congress step up now with a public capital injection to help the companies ride out their losses.

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Here’s a scary, and relevant, question to ponder as the housing market continues to slide: What would it take for the government to step in and help Fannie Mae and Freddie Mac, and how would a rescue affect you, the taxpayer?

A Lehman analyst’s note on Monday sent shares of both companies plunging. Though they’ve recovered some, the fall, and Fed Chairman Ben Bernanke’s downbeat outlook for housing issued Tuesday, is forcing investors to consider what would happen if a bailout is needed….

The doomsday scenario could cost taxpayers more than $1 trillion, says the S&P report. The report went so far as to say that a government bailout of Fannie or Freddie could force the agency to lower its rating on the creditworthiness of the United States.

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In many ways, Shelby Morrow is a typical 16-year-old. She likes hanging out with her friends, dreams of getting her own car and enjoys writing short stories in the bedroom of her wood-frame house in Palm Harbor, Fla.

But in the past few months, she’s been grappling with a financial reality that most teens don’t face. The home she shares with her mother, Melody, and younger sister, Lindsey, is falling into foreclosure. Some days, she watches as her mother cries over the stress.

“I completely understand what’s going on, so I went out and got a job as a server at a nursing home,” Shelby says. “I don’t want to move. Sometimes, I blame my mom for it, but I know it’s not her fault. I’m scared.”

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The troubled economy is leaving consumers with increasingly tough decisions about which debts to pay first, and in some cases, which to pay at all. In the latest indication of these pressures, late payments on home-equity lines of credit rose to an 11-year high in the first quarter of 2008, according to the American Bankers Association.

“It’s not a surprise at all that delinquencies are at an 11-year high,” says Joel Naroff, president of Naroff Economic Advisors. “The consumer is getting hit from all directions.”

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Maybe it is because we have so many pets and our youngest daughter has a special love of animals, but this one really got to me–watch it all.

One of the many reasons the housing market here is not recovering yet.

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist.

A report by the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

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Bank repossessions more than doubled in May and foreclosure filings rose 48 percent from a year earlier as previously foreclosed properties dragged down housing prices, RealtyTrac Inc. said in a report today.

One in every 483 U.S. homeowners lost their houses to foreclosure or received either a default warning or notice that their home would go up for sale at auction, RealtyTrac said. That was the highest rate since the Irvine, California-based company began reporting in January 2005 and the 29th consecutive month of year-over-year increases. Nevada, California and Arizona posted the highest rates in the U.S. and New Jersey entered the Top 10, according to RealtyTrac.

“It’s definitely a different kind of market than what we got used to a couple years ago,” said Devin Reiss, owner of Realty 500 Reiss Corp. in Las Vegas. “We used to sell homes in a day. Now 50 percent of our sales are foreclosures.”

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The difficulties today start””as they began last year””with housing and housing-related credit. Last Thursday, the Mortgage Bankers Association quarterly report showed that the percentage of mortgage borrowers behind on their payments””6.35 percent””was the highest since the MBA began tracking the number in 1979. It’s not just subprime. In the first quarter of 2008, 36 percent of all foreclosures initiated were on prime adjustable-rate mortgages in California. Mark Zandi, chief economist of Moody’s Economy.com, says the decline in home prices has slashed $2.5 trillion from household wealth, or about $25,000 per homeowner. The fall has also removed an important source of support for consumer spending, as Americans who grew accustomed to borrowing against rising home equity to finance car purchases or vacations now find themselves bereft. Banks are extricating themselves from the home-equity-line-of-credit business in the same way college students get themselves out of relationships gone bad: abruptly. Judi Froning, a second-grade teacher in San Diego, was surprised last week when she received a letter from Chase informing her that it was terminating her untapped HELOC. “In the light of declining home values, they said they are stopping, effective May 31, any draw on my line of credit,” she says.

Despite repeated claims that the damage has been contained, the banks that recklessly financed the housing boom””and then traded mortgage debt even more recklessly””are still cleaning up the mess. But it turns out (surprise!) the same sort of clouded judgment led banks to excesses in commercial lending, and in loans to private-equity firms. The battered financial system, which has raised tens of billions of dollars on onerous terms from new investors to shore up balance sheets, is still likely to suffer more pain from the popped credit bubble, said Bruce Wasserstein, the CEO of the investment bank Lazard, speaking at a New York breakfast. “The harm will radiate for another year.” The latest victim: Wachovia CEO G. Thompson Kennedy, cashiered after the North Carolina-based bank suffered a string of losses. Next up: write-offs for bad credit-card and commercial realestate debt. After a serene period between 2004 and ’07 in which the Federal Deposit Insurance Corp. went without a single bank failure, four have gone under so far this year. FDIC chairperson Sheila Bair warned of the “possibility that future failures could include institutions of greater size than we have seen in the recent past.” In preparation, the agency has brought staffers out of retirement.

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The likelihood that the U.S. is in a recession appeared to increase Friday, following weeks of hopes that the country might be skirting one.

Unemployment rose sharply and payrolls shrank for the fifth consecutive month. The economy news came on a day that oil surged to record prices, the dollar weakened and the Dow Jones Industrial Average plunged nearly 400 points. The deteriorating job numbers led markets to scale back the odds that the Federal Reserve will boost short-term interest rates this fall to ward off inflation.

The jobless rate posted its largest one-month gain in two decades, rising to 5.5% in May from 5.0% in April, the Labor Department reported Friday. Payrolls, measured by a separate survey, fell by 49,000 jobs last month, bringing the tally of job losses so far this year to 324,000.

The rise in unemployment has been accompanied by higher food and energy prices, pushing up the “misery index” — the sum of the unemployment and inflation rates — to around 9.4, the highest level since the recession of the early 1990s apart from a one-month blip in 2005.

Read it all from the front page of this morning’s Wall Street Journal.

Home foreclosures and late payments set records over the first three months of the year and are expected to keep rising, stark signs of the housing crisis’ mounting damage to homeowners and the economy.

The latest snapshot of the mortgage market showed that the proportion of mortgages that fell into foreclosure soared to 0.99 percent in the January-through-March period. That surpassed the previous high of 0.83 percent over the last three months in 2007.

The report by the Mortgage Bankers Association also found that more homeowners slipped behind on their monthly payments.

Read the whole article.

In a sign of how difficult it is to sell new homes in Southern California right now, a San Diego developer is offering a “buy one, get one free” deal, pairing million-dollar homes with less expensive homes.

“We thought, ‘Why does it just have to be on Pop Tarts and restaurants? Why not buy one home, get one free,'” Dawn Berry of Michael Crews Development told 10 News in San Diego.

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“It was like, ”˜Build it and they will come’…Except they didn’t come.”

—Lewis Tillman, who, with his wife Tara, owns Westchester Realty in the Greensboro, North Carolina area in today’s New York Times

Tracy Warren is not surprised by the foreclosure crisis. She saw the roots of it firsthand every day. She worked for a quality-control contractor that reviewed subprime loans for investment banks before they were sold off on Wall Street.

It was her job to dig into the loans and ferret out problems. By 2006, they were easy to find.

“I’d see people who were hotel workers saying that they made, in California, making $15,000 a month so that they could qualify for a $500,000 home,” Warren says. “If a hotel worker is making $15,000 a month changing sheets at the Days Inn, everybody would want to do it. It just really made no sense.”

Warren has worked in the mortgage business for 25 years, the past five in quality control. Most recently, she was a contract worker for a company called Watterson-Prime, which did loan audits for investment banks. She says their biggest client was Bear Stearns, which recently all but collapsed because of its exposure to bad loans.

A great look underneath the surface at just one dimension of the subprime mortgage fiasco. Listen to or read it all.

The city of Canton is being overwhelmed by a literally growing problem — property owners who won’t use a lawnmower.

The city now cuts grass and weeds on more than 2,000 thousand privately-owned lots at a cost of a quarter million dollars a year.

Foreclosures are a big part of the problem. But most of the lots are owned by Canton residents.

Health Department officials are worried about creating hiding places for rats and breeding grounds for ticks.

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On a brisk day last fall in Prineville, Ore., Raymond and Deanna Donaca faced the unthinkable: They were losing their home to foreclosure and had days to move out.

For more than two decades, the couple had lived in their three-level house, where the elms outside blazed with yellow shades of fall and their four golden retrievers slept in the yard. The town had always been home, with a lazy river and rolling hills dotted by gnarled juniper trees.

Yet just before lunch on Oct. 23, the Donacas closed all their home’s doors except the one to the garage and left their 1981 Cadillac Eldorado running. Toxic fumes filled the home. When sheriff’s deputies arrived at about 1 p.m., they found the body of Raymond, 71, on the second floor along with three dead dogs. The body of Deanna, 69, was in an upstairs bedroom, close to another dead retriever.

“It is believed that the Donacas committed suicide after attempts to save their home following a foreclosure notice left them believing they had few options,” the Crook County Sheriff’s Office said in a report.

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