Economists and consumers are feeling better about the economy a year after the most frightening moments of the financial crisis. Forecasters surveyed by The Wall Street Journal, giving the government generally good marks for its handling of the financial crisis, now see employers slowly adding jobs over the next 12 months.

And the latest reading of consumer spirits shows signs of optimism. But most economists still expect the unemployment rate will climb to 10.2%, from today’s 9.7%, before falling early next year.

“We are in a technical recovery, but risks remain abundant,” said Diane Swonk of Mesirow Financial. “It will still take some luck and skill to get Main Street to feel some of the relief Wall Street has felt.”

Read it all.

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout….

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.

Read it all.

Among the flotsam and jetsam that gather over the years in a home, there is now the random taillight behind the Winklers’ living room couch. And a 1967 Buick Riviera dashboard under the desk. When jobs are short and the savings account dwindles, selling spare parts on the Internet can help put braces in mouths, and pay a credit card bill or two.

“Check it out,” Phil Winkler said, hoisting a chrome piece of trunk onto his lap. “This one is next.”

Unemployed for a year, Mr. Winkler, 41, who until last August had never lost a job, has sold his favorite car, canceled the cable and is now scavenging junkyards for auto parts that he resells on eBay.

It is a role that Mr. Winkler, a teddy-bearish, clean-cut guy ”” the sort whose tattoo from the first gulf war is thoroughly unintimidating ”” has stopped wearing with discomfort. It is boring, it is unpleasant, but it is also something he has learned to live with, as he has made the transition from the primary breadwinner for his family of four to its bus driver, disciplinarian, schedule organizer and head chef.

Read it all from the front page of yesterday’s NY Times.

And yet if the Sunshine State is a larger-than-life reflection of where the country is heading, then the nation is still stuck, scared and uncertain of how far it wants to stray from the status quo. My travels through Florida make clear that ”” despite the urge to see recovery in improved housing sales ”” the costs of recent real estate mistakes continue to be severe. Change was often discussed during the 2008 election and after the financial meltdown, but Florida these days often resembles the character played by its native son Mickey Rourke in “The Wrestler”: a broken-down piece of meat, damaged and sincere, but a little too messed up to drop familiar habits.

Real estate and fast money, after all, have defined this peninsula since the ’20s, when empty lots of swamp could be flipped for a profit between martinis. Florida has generally relied far more on growth than its counterparts: in 2004 and 2005, housing construction’s share of the state economy was close to twice the national average, according to the Bureau of Economic and Business Research at the University of Florida.

Weaknesses in the approach emerged quietly, even before the bust, as overdevelopment and rising costs started pushing people away. Some were “halfbacks” ”” retirees originally from the North who ventured “halfway back” to Georgia or the Carolinas ”” but young families fled, too. In 2005, Broward County lost 1,756 students, in a district that thought nothing of adding 10,969 in 2001. Since 2004, enough parents have left to shrink the student body by 6 percent.

Read it all.

Fannie Mae plans to tap $11 billion in new government aid after posting another massive quarterly loss as the taxpayer bill from the housing market bust keeps growing.

The mounting price tag for the rescue of Fannie and its goverment-sponsored sibling, Freddie Mac, is surpassed only by insurer American International Group Inc., which has received $182.5 billion in financial support from the government so far.

Fannie Mae’s new request for $10.7 billion from the Treasury Department will bring the total for Fannie and Freddie to nearly $96 billion. Freddie is expected to report its quarterly results on Friday.

Ugh. One wonders when the red ink will ever end. Read it all.

Bank ‘walkaways’ from foreclosed homes are a growing, troubling trend

Renetta Atterberry thought she had lost her East 102nd Street house. So she was shocked to learn in January — five years after her mortgage company filed for foreclosure — that it was still in her name.

Worse, the long-vacant rental home had been vandalized and she faced a raft of housing code violations. Since then, she has been saddled with debts of about $12,000 to pay for demolition and back taxes.

“I thought I had nothing else to do with that home,” said Atterberry. “I was so embarrassed and humiliated by this.”

Read it all.

In concrete terms, the difference between the situation that the Obama advisers predicted and the one that has come to pass is about 2.5 million jobs. It’s as if every worker in the city of Los Angeles received an unexpected layoff notice.

Read it carefully and read it all.

The nation’s foreclosure crisis ”” once largely confined to only a few corners of the country ”” is spreading to new areas as the economy teeters. The foreclosure rates in 40 of the nation’s counties that have the most households have already doubled from last year, a USA TODAY analysis of data from the listing firm RealtyTrac shows.

Most were in areas far removed from the avalanche of bad mortgages and lost homes that have hammered the U.S. housing market. Among the new areas: Boise and Green Bay, Wis.

“The ripple effect is just broadening out to cover a lot more places,” says Susan Wachter, who studies real estate and finance at the University of Pennsylvania’s Wharton School.

Read it all.

While some other states with high unemployment, including Michigan, have seen their labor forces shrink, Oregon’s labor force has grown. Economists say some of the growth appears to be driven by people who moved here with money they made in California, whether from real estate or stock market investments, and expected to get by but now must look for work.

“It’s just so depressing to hear them because they thought they had life handled and they don’t,” said Bobbie Faust, an employment counselor who works for the state in Bend.

The Telfords are among those facing trouble. They had presumed they would be able to sell their house in Fresno for more than $300,000 to help pay the mortgage on the new house they bought near the Deschutes River in Bend for $475,000. But the Fresno house has yet to sell, and Mrs. Telford, an accountant, has lost a series of jobs at small firms here that she said had downsized. The couple’s only income now comes from her unemployment checks and her husband’s salary as a high school teacher.

“The cash flow is negative,” Mrs. Telford said. “This will be the first time we’ve had to go into savings.”

A very good article about some of what is happening underneath the surface of the economy. Read it all.

Some Church of England clergy and their families are living in crumbling and decrepit vicarages that are unsafe and environmentally unfriendly, according to trade union officials.

Unite, the country’s largest union that represents about 2,500 faith workers, is calling on the Archbishops of Canterbury and York, Dr Rowan Williams and Dr John Sentamu, to “practise what they preach” in terms of the carbon footprint left by hundreds of parsonages.

Unite want the Archbishops to revamp more than 6,000 vicarages and rectories that the union claims fail to meet modern environmental and safety standards.

Read it all.

Jeff Nielsen called the couple’s lender, Wells Fargo, and said he’d like to apply for a home loan modification.

“The bank didn’t quite know what to do with that,” he says. He remembers them telling him, “We don’t know anything more than you know. Just send in all kinds of documents and we’ll get to it as soon as we get the details from corporate.”

The Nielsens tried to guess what kinds of documents Wells Fargo might want and sent them in. Two months passed with no response, aside from a form letter saying the lender received the application. Jeff Nielsen began calling the bank twice a week. After another month, he heard that his file was on someone’s desk, but no one could tell him who that person was or whether anyone had looked at his file.

“Do you remember that scene in Kill Bill where Uma Thurman is trying to fight Lucy Liu,” he says, “but Lucy Liu has all these henchmen, so she has to fight all the henchmen and then Lucy Liu has like 50 more henchmen? But I feel that instead of being this samurai warrior, I’m like Jonathan Lipnicki with all these henchmen. So I have no chance to get to Lucy Liu.”

Read or listen to it all, a great examiniation of a government program from the inside.

The Treasury bond market is in cardiac arrest today over the May employment report: Yields are soaring, dealing another blow to investors who’ve been hiding out in government bonds — and threatening another big jump in mortgage rates.

If rising home loan rates price more buyers out of the market, sellers will have to respond by cutting asking prices. Anyone have a better idea?

the trend is not good.

There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

Read the whole thing.

Two weeks ago, the U.S. Treasury released additional details (link opens .pdf) about the homeowner bailout, or in Washington-speak the “Making Home Affordable” program. Part of those details included some new ways for homeowners to avoid foreclosure. I thought the far more fascinating part, however, was the so-called “Home Price Decline Protection Incentives” (HPDP). It’s the most interesting part of the homeowner bailout that you probably haven’t heard about. I have been fascinated with the HPDP since the bailout was announced in February, and now we finally have some detail to dig into.

For some strange reason, virtually no one is talking about the HPDP. I haven’t seen a single article on it. Here’s how the new fact sheet describes it:

This initiative provides lenders additional incentives for modifications where home price declines have been most severe and lenders fear these declines may persist. These incentives will encourage servicers to undertake more modifications by assuring that incremental investor losses will be partially offset.

All of the initiatives within the homeowner bailout have attempted to stabilize the housing market. But this is the only one that provides a sort of insurance to investors if home prices continue to decline. In February I remarked that it seemed like the housing bailout included everything but the kitchen sink. I was wrong: this is the kitchen sink.

Read it all.

John Rao, an attorney who studies state foreclosure procedures for the Washington, D.C.-based National Consumer Law Center, said this court order is the first of its kind. Some states like California have required foreclosing attorneys to include a statement saying whether the homeowner has been contacted about a loan modification, but the South Carolina order requires attorneys to say why the property isn’t eligible.

“Simply contacting a homeowner is easy to do,” Rao explained. “I think what’s more important is that before they process the foreclosure, a court can look at the file and see exactly why they aren’t eligible, so there’s some transparency.”

The order actually originated from a quirky state law that prompted Fannie Mae, a government-controlled mortgage company, to ask the state Supreme Court for a 90-day delay in foreclosure proceedings for homes it guarantees. Several South Carolina consumer groups filed a response to that request, alerting the court of this backlog in homeowner requests.

Lil Ann Gray of the South Carolina Department of Consumer Affairs, which wrote to the court on behalf of struggling homeowners, applauded the court order.

Read it all from the front page of the local paper.

A quick follow up to yesterday’s post With Each Interest Rate Tick Higher Another “Green Shoot” Dies….

We are drowning under the weight of near term supply for sure but I guess I think something else is afoot here.

Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US.That is why the curve is steepening so dramatically.

Yuck. Read it all and follow the links.

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans ”” those extended to home buyers with troubled credit ”” to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Read it all.

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans ”” those extended to home buyers with troubled credit ”” to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Read it all.

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others ”” borrowers, lenders and the Wall Street dealmakers behind them ”” I just thought I could beat the odds. We all had our reasons. The brokers and dealmakers were scoring huge commissions. Ordinary homebuyers were stretching to get into first houses, or bigger houses, or better neighborhoods. Some were greedy, some were desperate and some were deceived.

Read it all.

The average household size has declined from 3.4 in 1950 to 2.5 today, a 26% reduction. The average household size was 4.6 in 1900. Our average home size has increased from 1,000 sq ft in 1950 to 2,400 sq ft today, a 140% increase. The average square feet per person in the household has increased by 218%.

In 1950, only one percent of homes built had four bedrooms or more, but 39 percent of new homes had at least four bedrooms in 2003. We have one less person per household, but we have added one extra room. Our society has chosen to super size our houses, our vehicles, our TVs, our kitchens, our burgers, our sodas, and our egos. This desire to “keep up with the Joneses” combined with a rise in two-income families convinced millions to pour money into their home and its amenities. This seemed like a great idea when home prices were rising annually at a double digit clip. Most of the money was borrowed, so with home prices down 25% to 50% in many parts of the country the “Joneses” are in a heap of trouble.

Read it all.

Stranded by the nationwide slump in housing and jobs, fewer Americans are moving, the Census Bureau said Wednesday.

The bureau found that the number of people who changed residences declined to 35.2 million from March 2007 to March 2008, the lowest number since 1962, when the nation had 120 million fewer people.

Experts said the lack of mobility was of concern on two fronts. It suggests that Americans were unable or unwilling to follow any job opportunities that may have existed around the country, as they have in the past. And the lack of movement itself, they said, could have an impact on the economy, reducing the economic activity generated by moves.

Read it all.

Nor is excess supply the only reason prices still have a way to fall. Nationwide, homes may not be overvalued by much. But in some cities, including New York, San Francisco, Los Angeles, Boston, Chicago and Miami, they remain very expensive. So while Mr. Hatzius and his Goldman colleagues are somewhat more pessimistic than most forecasters, the difference isn’t enormous.

I’ll confess that this bearish picture isn’t exactly what I had hoped to find. A year ago, as part of a move from New York to Washington, my wife and I bought our first house. We did so fully expecting prices to continue falling (though perhaps not as much as they ultimately will, given the severity of the financial crisis). But we decided they had fallen enough for us to take the plunge. We preferred buying before the bottom of the market instead of renting and having to move again in a year or two.

Still, when I wrote about that decision last spring, I argued that anyone who didn’t have to move probably should not buy yet. Prices still had a way to fall.

They don’t have as far to fall today, but the great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.

Read it all.

The president and the Federal Reserve chairman voiced cautious optimism yesterday that the economy could be beginning to stabilize. But the economy wasn’t cooperating.

Retail sales dropped sharply in March, the government reported, and wholesale prices fell steeply. Both pieces of data underscore the hard slog the nation faces to emerge from its deep recession and the limitations of more optimistic talk from Washington. The stock market fell 2 percent, as measured by the Standard & Poor’s 500-stock index.

President Obama and Fed Chairman Ben S. Bernanke were hardly effusive. Obama acknowledged that “there will be more job loss, more foreclosures and more pain” before the recession ends. But both men, in separate speeches, spoke of an end to the sense of free-fall that enveloped the U.S. economy in the final months of 2008 and first months of 2009.

Their words reflect a new phase of the government response to the financial crisis and recession. Unlike a few months ago, the major policies meant to prop up the economy– increased government spending, special lending programs and extensive efforts by the Fed to pump money into the economy — are now largely in place. Thus, senior officials are trying to encourage Americans to be confident about the future, so that those who still have their jobs will feel more comfortable buying a house, a car or other large items.

Read it all.

From the very inception of the current downturn, sprawling places like southeast California’s Inland Empire have been widely portrayed as the heart of darkness. Located on the vast flatlands east of Los Angeles, the region of roughly 3 million people has suffered one of the highest rates of foreclosures and surges in unemployment in the nation.

Yet now George Guerrero, a top agent at Advantage Real Estate in Chino Hills, says he can see the light, with sales picking up and inventories finally beginning to drop. “There’s been a real surge in sales,” Guerrero says. “The market has come back to where it should be. I think we are ahead of the curve here of the overall recovery.”

Read it all.

The pricing of the toxic assets of the banks is in line with the pricing of other risky assets. There is no evidence that prices of credit instruments are now reflecting fire sales or distress selling. The evidence, if anything, suggests that the prices are actually on the high side. This means that the liquidity rationale of the Keynesians has no basis in fact.

The findings are sure to be contested in the literature, as most research is. In the end, they will prove robust. They will hold up.

The debate on bank bailouts is broader than economics. It goes to a question of justice. Should one group, taxpayers, be forced to pay for the mistakes of another group, bankers? It goes to a question of freedom versus socialism and fascism. Should banks operate in a profit and loss system and bear the losses that they incur, or should they not, in which case the financial system becomes more socialist and fascist? Even before addressing these questions, if the Keynesian policy does not do what it is claimed, then in economic terms the Keynesian case falls.
The government and FED claim that the financial system lacks liquidity. They say that there is a market pricing defect or failure. This, they say, is why the bad loans (toxic assets) held by the banks are worth more than the prices that they are fetching in the market. These prices, they claim, are fire sale prices. The remedy, they call for and implement, is for the Treasury and FED to supply the banks with liquidity, i.e., bail them out. Thus, the government and the FED are directing trillions of taxpayer dollars to shore up weak banks by buying their bad loans rather than overseeing a judicial-like process of re-organizing the banks and cleaning out these loans in established bankruptcy-like procedures.

The Austrian position is that the financial system does not lack liquidity. The bad loans were overpriced to begin with, largely because the FED and government engineered a speculative bubble. The bubble burst. The loans were repriced in the market. The loans are now worth what they are bringing in the market. Thus, the government has no liquidity justification for bailing out the banks. The government’s economic rationale has no merit. Many banks are insolvent. On the economic merits, they should be allowed to fail, not bailed out.

This may seem arcane but it really does matter. Read it all–KSH.

City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal ”” from legal fees to maintenance ”” exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.

In Ms. James’s case, the company that was most recently servicing her loan is now defunct. Its parent company filed for bankruptcy and dissolved. And the original bank that sold her the loan said it could not find a record of it.

“It is what some of us think is the next wave of the crisis,” said Kermit Lind, a clinical professor at the Cleveland-Marshall College of Law and an expert on foreclosure law.

Read it all

The median price for an existing, single-family detached home in California sank to $247,590 in February from $418,260 a year earlier, the Los Angeles-based group said in a statement. The U.S. median price fell 16 percent during the same period, the second-biggest drop on record, according to the National Association of Realtors.

Read it all

The good news from our historical study of eight centuries of international financial crises is that, so far, they have all ended. And we confidently predict this one will end, too. We are just not quite so sure it will be nearly as soon as the chirpy forecasts coming from policymakers around the globe. The U.S. administration, for example, is now predicting that growth will renew in the latter part of this year and continue at a brisk pace of 4 percent for several years thereafter. Is this a fact-based forecast or wishful thinking?

A careful look at the international evidence on severe banking crises suggests a far more cautious assessment. The recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11”“12 percent in 2011.

Read it all.

Aside from the president he’s the most powerful man working to save the economy, but you have never seen an interview with Ben Bernanke.

Bernanke is the chairman of the Board of Governors of the Federal Reserve System, better known as the Fed. The words of any Fed chairman cause fortunes to rise and fall and so, by tradition, chairmen of the Fed do not do interviews – that is until now.

The Federal Reserve controls the economy by setting interest rates. But after the crash of 2008, Bernanke invoked emergency powers, and with unprecedented aggressiveness has thrown a trillion dollars at the crisis.

Ben Bernanke may be the most important Fed chairman in history. The question is, can he help lead America out of this deep recession and when?

Read it all. If you have the time, I highly recommend watching the video version. I thought the chairman did well–KSH.

Update: Barry Ritholtz has comments on the interview here.

Zach is feeling the icy fingers of the recession gripping his throat. He’s a small-business man with a retail store in New York and an investment in a small apartment renovation that hasn’t gotten a buyer. Suddenly, his income is down by 25 percent or so. He has a mortgage on the house in Brooklyn where he lives that he used to be able to afford, but now he’s dipping into his savings to the tune of $2,000 or $3,000 a month to cover his costs, and he’s worried.

So he called his mortgage bank to see what might be done. The answer was: not much, certainly nothing from any government plans to help homeowners get through the crisis. And for Zach, who’s never gone to the government for anything before, there’s a larger point in that fact.

To wit: If you’ve behaved responsibly and prudently all these years, you’re on your own. But if you’ve made colossal mistakes of greed and misjudgment ”” either by selling billions in mortgages to people who couldn’t afford to pay you back or by being one of the people whose eyes were bigger than their wallets”” you might just get rescued, at the expense of taxpayers like Zach.

Read it all.