When Marci Needle and her husband began to contemplate divorce in June, they thought they had enough money to go their separate ways. They owned a million-dollar home near Atlanta and another in Jacksonville, Fla., as well as investment properties.

Now the market for both houses has crashed, and the couple are left arguing about whether the homes are worth what they owe on them, and whether there are any assets left to divide, Ms. Needle said.

“We’re really trying very hard to be amicable, but it puts a strain on us,” said Ms. Needle, the friction audible in her voice. “I want him to buy me out. It’s in everybody’s interest to settle quickly. That would be my only income. It’s been incredibly stressful.”

Chalk up another victim for the crashing real estate market: the easy divorce.

Read it all.

Live through enough bubbles, though, and you do eventually learn something of value. For example, I’ve learned that although getting out too early hurts, it hurts less than getting out too late. More important, I’ve learned that most of the common wisdom about financial bubbles is wrong.

Read it all.

As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest ”” all involving drugs.

Read it all.

In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States.

China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.

“This was a blinking red light,” said Kenneth S. Rogoff, a professor of economics at Harvard and a former chief economist at the International Monetary Fund. “We should have reacted to it.”

Read it all.

During this holiday season of hard times, not even houses of God have been spared. Some lenders believe more churches than ever have fallen behind on loans or defaulted this year. Some churches, and at least one company that specialized in church lending, have filed for bankruptcy. Church giving is down as much as 15% in some places, pastors and lenders report.

The financial problems are crimping a church building boom that began in the 1990s, when megachurches multiplied, turning many houses of worship into suburban social centers complete with bookstores, gyms and coffee bars. Lenders say mortgage applications are down, while some commercial lenders no longer see churches as a safe investment.

Read it all.

President Bush has grudgingly allowed General Motors and Chrysler to drive away with the last few billion bucks in Treasury’s TARP till, which boasted $350 billion a mere 77 days ago.

How did it all slip away so fast?

Read it all.

Ryan Wampler had never made much money selling his own homes.

Starting in 1999, however, he began to do very well. Three times in eight years, Wampler ”” himself a home builder and developer ”” sold his home in the Phoenix area, always for a nice profit. With prices in Phoenix soaring, he made almost $700,000 on the three sales.

And thanks to a tax break proposed by President Bill Clinton and approved by Congress in 1997, he did not have to pay tax on most of that profit. It was a break that had not been available to generations of Americans before him. The benefits also did not apply to other investments, be they stocks, bonds or stakes in a small business. Those gains were all taxed at rates of up to 20 percent.

The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so.

Read it all.

One of Hong Kong’s most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of “know thy customers” and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

“Previously, there was America,” he said. “American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick.”

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds ”” which Moody’s or Standard & Poors rate AAA ”” and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Painful but important reading.

The Federal Reserve entered a new era on Tuesday, setting its benchmark interest rate so low that it will have to reach for new and untested tools in fighting both the recession and downward pressure on consumer prices.

Going further than analysts anticipated, the central bank said it had cut its target for the overnight federal funds rate to a range of zero to 0.25 percent, a record low, bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation.

The move to a zero rate, which affects how much banks charge when they lend their reserves to each other, is to some degree symbolic. Though the Fed’s target had previously been 1 percent, demand for interbank lending has been so low that the actual Fed funds rate has hovering just above zero for the past month.

Far more important than the rate itself, the Fed bluntly declared that it was ready to move to a new phase of monetary policy in which it prints vast amounts of money for a wide array of lending programs aimed at financial institutions, businesses and consumers.

In essence, the Fed is embarking on a radically different route to stimulate the faltering economy, and it puts the Fed chairman, Ben S. Bernanke, in partnership with the incoming Obama administration as it moves on a parallel track.

This is a high risk tack in terms of the potential for inflation down the road (unless it is properly handled), but it is much needed. The Fed has been badly behind since this whole crisis began and the chairman was telling us that the subprime struggles would stay “isolated” to a small part of the economy. Better late than never–read it all.

MS. CARLY FIORINA: …I think all of those statistics are an important reminder. While we have been focused in Washington on big companies…

…the Detroit automakers, and big unions, the truth is we’re not as concerned, and we should be, about the hundreds and thousands of small businesses who actually create two-thirds of the jobs in this country. Which brings me all the way back to the original problem. We have a recession, a deepening recession right now because credit is unavailable. Credit is unavailable to small businesses so they can’t hire. When hundreds of small businesses can’t hire 10 and 15 people, over time that creates big unemployment numbers. They may not have big unions to represent their interests in Washington. They’re the little guy, but the little guy matters. When credit isn’t available, consumers don’t have the money they need to spend. So I think we have to go back to the root of this problem, ultimately, which is credit is still unavailable. And that is despite massive bailouts of big financial institutions who are still not lending (my emphasis).

Read it all from today’s edition of Meet the Press (and comments from two others besides these three also).

Steven Levitt’s best-selling book, Freakonomics, revitalized economics by explaining how economic principles affect our daily lives. With the economy so prominent in our lives today, how should we interpret what’s going on?

Host Scott Simon asks Levitt, now a professor of economics at the University of Chicago, for his thoughts about the state of the national economy.

Listen to it all.

More room to fall?

For every $100 spent on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then credit dried up, and the bust began.

Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.

The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.

“We’re so far underwater it’s not funny,” says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems.

Read it all.

But panel members lambasted the executives for taking undue risks to win bigger bonuses and for failing to take responsibility for a housing crisis that has ravaged the economy.

“Their irresponsible decisions are now costing taxpayers billions of dollars,” said committee Chairman Henry Waxman, D-Calif.

Fannie and Freddie own or guarantee half of outstanding home loans and became the largest buyers of subprime and Alt-A mortgages, both of which have had high rates of defaults. Alt-A, a category between subprime and prime, did not require documentation of income or assets. With the firms facing $12 billion in credit losses this year, the government took over both in September.

Read it all.

Comptroller of the Currency John C. Dugan said today that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six months.

“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” the Comptroller said in remarks at the Office of Thrift Supervision’s National Housing Forum today.

Read it all.

Almost one in 10 S.C. homeowners was behind on mortgage payments or in foreclosure at the end of September.

And the state’s high unemployment rate indicates more people will have trouble making payments next year.

In South Carolina, 9.4 percent of homeowners were at least 30 days past due or in the process of foreclosure in the third quarter,according to data released Friday by the Mortgage Bankers Association. That is up from 8.1 percent in the same period last year.

Of the 666,729 mortgages serviced in the state, 7.4 percent were delinquent and 2 percent were in foreclosure, the MBA reported.

Read it all.

Homeowners who want to refinance existing mortgages may be more likely to take advantage of the lower rates, but many people who bought during the real estate bubble won’t be able to qualify for a new loan because they have little equity or are “upside down” — owing more on their homes than they are worth.

“I anticipate it will increase refinance activity, but there will be nothing dramatic,” said Terrin Griffiths, an economist for the California Credit Union League, which represents credit unions in California and Nevada.
Jeff Lazerson, a Laguna Niguel mortgage broker, said all the customer calls he received Tuesday were from people seeking to refinance, not buy homes. Many are trying to get out of adjustable-rate mortgages scheduled to reset to higher rates next year, he said.

But most who called were rebuffed because they were upside down on their current mortgages or had credit scores too low to qualify.

“Out of all the people calling, about 30% at most can get help,” Lazerson said.

Read it all.

Everyone accused of a crime is entitled to a lawyer, whether they can afford one or not. But in civil cases, such as home foreclosures, there is no right to an attorney.

Legal aid attorneys say some people being kicked out of their homes might have been able to stay if they’d had legal help ”” help that isn’t there for everyone.

Sarah Bolling is an attorney with the Atlanta Legal Aid Society. Her 71-year-old client, Jenny McCaslin, bought a house more than 30 years ago. McCaslin raised her children there. Now it’s falling apart.

Read or listen to it all.

The Federal Reserve said Tuesday that it would buy up to $600 billion in mortgage-backed assets in another attempt to deal with the financial crisis.

The Fed said it would purchase up to $100 billion in direct obligations from the mortgage finance giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. It also will purchase another $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The $600 billion effort on mortgages came as the Fed also unveiled a program to help unfreeze the market that backs consumer debt such as credit cards, auto loans and student loans.

Read it all

By this year, the bleeding housing market had drained the equity from Judy Jones’ home in Murrieta, but her life still seemed secure. She had a government job, after all, and a 30-year fixed-rate mortgage at 5.875%, unlike the shaky, variable-rate loans of many of her Inland Empire neighbors.

Then her employer, the city of Corona, decided to deal with the economic slump by eliminating 112 positions, including Jones’ job as a code enforcer. Last month, at age 61, she joined a surge of once-solid borrowers who no longer could afford their mortgages.

“Every week at church, somebody else is out of work,” Jones said. “I’ve been a homeowner a long time — the last 10 years as a single mother — and I never missed a payment. Now look at me. And it could be you — any middle-class person who goes to work today could be walking out the door of a foreclosed house in a couple of months.”

Read it all.

From 2003 to 2005, Citigroup more than tripled its issuing of CDO’s, to more than $20 billion from $6.28 billion, and Maheras, Barker and others on the CDO team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the CDO’s generated fees of 0.4 percent to 2.5 percent of the amount sold — meaning Citigroup made up to $500 million in fees from the business in 2005 alone.

Even as Citigroup’s CDO stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars’ worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.

When Prince was put in charge in 2003, he presided over a mess of warring business units and operational holes, particularly in critical areas like risk-management and controls.

“He inherited a gobbledygook of companies that were never integrated, and it was never a priority of the company to invest,” said Meredith Whitney, a banking analyst who was one of the company’s early critics. “The businesses didn’t communicate with each other. There were dozens of technology systems and dozens of financial ledgers.”

Read it all.

Federal regulators were considering a new rescue for Citigroup on Sunday, a step that could mark a third leg of the government’s broader efforts to bolster the nation’s financial industry, according to people briefed on the plan.

Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to these people, who spoke on the condition that they not be identified because the plan was still under discussion.

If the government should have to take on the bigger losses, it would receive a stake in Citigroup. The banking giant has been brought to its knees by gaping losses on mortgage-related investments.

Read it all.

Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said.

Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“There is no question that Citi is in the category of ”˜too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

Read it all.

Clergy and congregants from more than 40 states gathered in front of the Department of Treasury on Tuesday to pray for Secretary Henry Paulson and members of Congress to put an end to the home foreclosure crisis.

PICO, a network of faith-based community organizations that helps provide affordable housing, is demanding that the Treasury require all banks receiving a chunk of the federal bailout package to adopt systematic loan modifications that could keep 2 million people from losing their homes, they said.

“We want them to look at the bigger picture. Don’t just look at Wall Street, look at Main Street. Look at the man next door who is working hard and really paying taxes,” said Marvin Webb, the assistant pastor of Peniel Full Gospel Baptist Church in El Sobrante, Calif. “We are asking the secretary and Congress to keep people in their homes.”

Read it all.

You put this much leverage together with this much global integration with this much complexity and start the crisis in America and you have a very explosive situation.

If you are going to fight a global financial panic like this, you have to go at it with overwhelming force ”” an overwhelming stimulus that gets people shopping again and an overwhelming recapitalization of the banking system that gets it lending again. I just hope the U.S. Treasury has enough money to do it. When you look at the way A.I.G. and Fannie Mae and Freddie Mac are eating money, you start to wonder.

And that brings me back to Obama. We need a leader who can look the country in the eye and say clearly: “We have not seen this before. There are only two choices now, folks: doing everything we can to shore up banks and homeowners or risk a systemic meltdown.”

Yes, that may mean rescuing some bankers who don’t deserve rescuing, while also helping prudent bankers who were doing the right things. And, yes, that may mean rescuing reckless home buyers who never should have taken out mortgages and now can’t pay them back, while not aiding people who saved prudently and are still meeting their mortgage payments.

Read the whole thing.

[Henry] Paulson says the department plans to expand its efforts to ease the credit crunch, but his strategy for the remaining $400 billion or so in TARP may not do the trick either. In particular, we’re skeptical of Paulson’s plans to invest in credit-supplying institutions that aren’t banks — for example, giant insurance company American International Group received a $40-billion investment from TARP — and to address problems in more types of debt markets, including credit card and student-loan debt. As the Center for American Progress points out, the biggest issuers of credit card debt are bank holding companies that have already dined at the TARP trough. And the U.S. Department of Education has already agreed to provide a secondary market for student loans.

The most welcome change that Paulson promised was to use a portion of TARP to avert foreclosures in some unspecified way. That effort may prove to be as weak as the administration’s other initiatives to help homeowners, but at least it’s aimed at the root of the credit crisis.

Read it all.

Finally, the outlines of a coherent debate on the federal bailout. This comes as welcome relief from a campaign season that gave us the House Republicans’ know-nothing rejectionism, John McCain’s mindless railing against “greed and corruption,” and Barack Obama’s detached enunciation of vacuous bailout “principles” that allowed him to be all things to all people.

Now clarity is emerging. The fault line is the auto industry bailout. The Democrats are pushing hard for it. The White House is resisting.

Underlying the policy differences is a philosophical divide. The Bush administration sees the $700 billion rescue as an emergency measure to save the financial sector on the grounds that finance is a utility. No government would let the electric companies go under and leave the country without power. By the same token, government must save the financial sector lest credit dry up and strangle the rest of the economy.

Treasury Secretary Henry Paulson is willing to stretch the meaning of “bank” by extending protection to such entities as American Express. But fundamentally, he sees government as saving institutions that deal in money, not other stuff.

Democrats have a larger canvas, with government intervening in other sectors of the economy to prevent the cascade effect of mass unemployment leading to more mortgage defaults and business failures (as consumer spending plummets), in turn dragging down more businesses and financial institutions, producing more unemployment, etc. — the death spiral of the 1930s.

Read it all.

From here:

….the new “Hope for Homeowners” program launched at the beginning of October was expected to help hundreds of thousands of households refinance their loans. But fewer than 100 borrowers ”“ in the entire nation ”“ applied for help from the program all last month.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. [Steve] Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says….

There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. “The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?” Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ”˜I can’t figure this thing out.’ And I said, ”˜I think we have our story.’”‰”

Eisman read Grant’s piece as independent confirmation of what he knew in his bones about the C.D.O.’s he had shorted. “When I read it, I thought, Oh my God. This is like owning a gold mine….

Quite a piece from the author of Liar’s Poker. Read it carefully and read it all.

“We make decent money, but it takes a tremendous amount to pay the mortgage,” [Jerry] Martinez, 33, said.

First American CoreLogic, a real estate data company, has calculated that 7.6 million properties in the country were underwater as of Sept. 30, while another 2.1 million were in striking distance. That is nearly a quarter of all homes with mortgages. The 20 hardest-hit ZIP codes are all in four states: California, Florida, Nevada and Arizona.

“Most people pay very little attention to what their equity stake is if they can make the mortgage,” said First American’s chief economist, Mark Fleming. “They think it’s a bummer if the value has gone down, but they are rooted in their house.”

And yet the magnitude of the current declines has little precedent. “When my house is valued at 50 percent less than it was, does this begin to challenge the way I’m going to behave?” he said.

Read it all.

Mr. Obama and his advisers acknowledge that their focus has to shift, but the change is still likely to be challenging, and a bit disappointing. “Unfortunately, the next president’s No. 1 priority is going to be preventing the biggest financial crisis in possibly the last century from turning into the next Great Depression,” says Austan Goolsbee, an Obama adviser. “That has to be No. 1. Nobody ever wanted that to be the priority. But that’s clearly where we are.”

Throughout the campaign, whenever Mr. Obama was asked about the financial crisis, he liked to turn the conversation back to his long-term plans, by saying that they were meant to solve the very problems that had caused the crisis in the first place. Back in January, he predicted to me that the financial troubles would probably get significantly worse in 2008. They had their roots in middle-class income stagnation, which helped cause an explosion in debt, and the mortgage meltdown was likely to be just the beginning, he said then.

His prognosis was right ”” and the pundits now demanding that he give up major parts of his economic agenda in response to the financial crisis are, for the most part, wrong. When you discover that a patient is in even worse shape than you thought, you don’t become less aggressive about treatment. But you do have to deal with the most acute problems first.

And Mr. Obama has a big incentive to do so. The hangover from a recession typically lasts more than a year, and this recession isn’t over yet. So he will be at risk of the same kind of midterm drubbing in 2010 that Ronald Reagan received in 1982 and Bill Clinton did in 1994. In the days leading up to this year’s election, as they confidently reviewed the polls, some Obama aides took to joking darkly that 2010 was already looking bad.

Read it all.