We get over one crisis by creating a bigger one. Let me talk about the present crisis and in my next article I’ll talk about the scariest one, which is still to come.
Instead of beating round the bush let me get to the point. Three edged sword, what’s that? Below are the three categories of problem:
i) Investors: losses on investments, asset prices are decreasing, rising default rates, etc.
ii) Credit crisis: borrowing is expensive, credit is not available, illiquidity in the markets, banks are not lending to each other, to the business and to the individuals.
iii) Foreclosures: people are unable to make payments and hence foreclosures are increasing, drop in house value, inventory of houses is increasing.
These are the main categories of problems. If these are tackled, at least to some extent, other related problems which arise from these may be subdued, if not eliminated. Ideally what should the government focus on? “Investors” or “Credit crisis” or “Foreclosures”? Previously the government focused on “Investors” and used almost half of the TARP money, USD 350bn, in bailing out the banks and other institutions. Now, with the other half the government is trying to focus on “Foreclosures”. I don’t think either will solve the problem. The problem lies in the heart of the financial system. The “Credit crisis” is what that needs be resolved. Below are the possible solutions to the all the category of problems.
Solution for the “investor” problem
The investors are bearing the consequences of the high risk taken. Now you might argue that we cannot resolve the “credit crisis” without bailing out the banks which essentially fall in the “investors” category. Banks lend money to the consumers, businesses and keep the economy going.
Bailing out the banks and resolving the credit crisis are two different issues. Government is bailing out the banks mainly coz of two reasons: 1) to control the ripple effect that other organization/businesses might face due to failure of these banks and 2) to inject liquidity in the economy which has frozen to a significant extent, as banks want to conserve as much money as they can due to credit crises, losses and write downs. Government bailing out the banks for first reason, to some extent, makes sense. It should keep a close eye on the biggies and if need be, bail them out. The government has been rightly doing the same for the financial institutions. This will avoid the ripple effect which can be quite devastating. The government should keep some money aside for this, so that it can utilize the same, if need arises. The money should be kept aside taking into consideration the capital that might be needed by big companies in various sectors and not just financial services. As mentioned above, bailing out banks and other institutions by taking stakes in them makes sense but buying their troubled or toxic assets doesn’t and I have explained the rationale behind the same, further in my article.
In case of small companies, if they file for bankruptcy they would restructure their debt and emerge as a much leaner organization which would ideally reduce their cost and help function them more efficiently.
You can argue that if small companies are not bailed out and not offered any aid then why should the big companies be given this privilege? After all they are the ones who levered themselves much more than the small firms. This point is valid but if the big companies fail the short term catastrophic effect that would be created in the economy (in terms of job losses, defaults rates, small suppliers and vendors supplying to the big firms going out of business, etc) will be so huge that it might take a very long time for the economy to overcome that and the country might fall into further recession.
Solution for the “credit crisis” problem
With the remaining money from TARP the government should resolve the “credit crisis”. The government is bailing out the banks by buying all their troubled or toxic assets which may be worth zero (coz the bank has the liberty to sell whatever assets they feel like, it is pretty obvious that they would sell their worst assets, which may have least or no value). As a matter of fact, in the present time, if you lend money to the banks by buying their troubled or toxic assets there is a high possibility that the banks might not pass/loan that money (or might just pass a small percentage of money received) to their customers as they are themselves in serious need of money. The banks would need that money for various reasons: to conserve liquidity as the short term money markets are illiquid, to maintain their capital reserve ratios (regulatory requirement), to avoid breach of their covenants on credit agreements, to pay of their debt on their upcoming maturities as refinancing are not happening and the primary markets are quite illiquid. Below is the data which proves the same: (source: www.fdic.gov)
|
|
|
cash and due from depository institutions of all national commercial banks insured by FDIC (in USD bn)
|
|
9/30/2008
|
3Q08
|
691.7
|
|
6/30/2008
|
2Q08
|
519.2
|
|
3/31/2008
|
1Q08
|
507.9
|
|
12/31/2007
|
4Q07
|
482.2
|
|
9/30/2007
|
3Q07
|
442.6
|
|
6/30/2007
|
2Q07
|
458.2
|
|
3/31/2007
|
1Q07
|
400.6
|
|
12/31/2006
|
4Q06
|
433.0
|
|
9/30/2006
|
3Q06
|
393.9
|
|
6/30/2006
|
2Q06
|
397.6
|
|
3/31/2006
|
1Q06
|
370.5
|
|
12/31/2005
|
4Q05
|
400.3
|
|
9/30/2005
|
3Q05
|
384.9
|
|
6/30/2005
|
2Q05
|
381.2
|
|
3/31/2005
|
1Q05
|
391.0
|
|
12/31/2004
|
4Q04
|
387.6
|
|
9/30/2004
|
3Q04
|
416.9
|
|
6/30/2004
|
2Q04
|
436.3
|
|
3/31/2004
|
1Q04
|
402.2
|
|
12/31/2003
|
4Q03
|
387.4
|
|
9/30/2003
|
3Q03
|
381.1
|
|
6/30/2003
|
2Q03
|
419.1
|
|
3/31/2003
|
1Q03
|
378.9
|
|
12/31/2002
|
4Q02
|
383.8
|
|
9/30/2002
|
3Q02
|
377.8
|
|
6/30/2002
|
2Q02
|
361.7
|
Average from 2Q02 until 1Q07 i.e. 20 quarters or 5 years average = USD 391bn
Average from 2Q07 until 3Q08 = USD USD 517bn
The first column in the above table is the cash balances (cash that the banks hold) of all national commercial banks insured by the FDIC (almost all banks in the U.S. are FDIC insured). If analyzed the data from 2Q02 to 1Q07, i.e. 5 years of cash balances, the range has been USD 362bn to USD 436bn, with an average of USD 391bn. From 2Q07 until 3Q08, there has been an upward trend in the cash that the banks are holding, with an average of USD 517bn. This is a huge difference in the average. Also, in 3Q08 the cash balances increased to USD 692bn from USD 519bn in 2Q08, an increase of 33% in just 1 quarter. This proves my above point that the banks are pretty much holding all the money they have received from the government. So what sense would it make for the government to buy the toxic assets and provide all that tax payers money to these banks, when the money is not being circulated in the economy.
On 13 Jan, Bernanke said, “The next step is to get toxic assets off bank balance sheets”. He outlined several ways to do this, including setting up of “bad banks” which would hold the troubled assets. I don’t think this makes sense.
The underlying principle of my solution for the “credit crisis” is that the government should set up its own bank/banks (from now on I will call them government bank/banks) which will start lending money to the corporate. The précis of the plan: The government banks should provide secured loans to the businesses with decent financials at low interest rates. The government can do this until the credit crisis is resolved and the banks start lending money back in the system. At that point, the government can sell these loans at discount, to yield good returns to the investors. Since the loans are secured and of good quality, selling them shouldn’t be a problem.
Now of the many things to be clarified in the above plan, two are of utmost importance: the functioning on the banks and the infrastructure of banks. Let me discuss the former first. These banks would function just as any other commercial bank. Initially the bank would have the money received from the TARP program as its asset, with no liabilities and hence the net worth or the shareholders equity will be equal to that of the total assets. The bank can then lever itself and start loaning out the money.
For example, a bank can be created with an initial capital of USD 400bn. Either one or multiple banks can be created. Pros of creating one bank would be economies of scale, but the huge negative would be too much of power in one hand. So creation of multiple banks is a better option. Say, 4 banks are created having an initial capital of USD 100bn each. On average the commercial banks are levered anywhere between 12 to 18 times. On a conservative basis, these government banks can lever themselves 4 times. This would give them a base of 400bn for each bank and USD 1.6tr in total. This money can be loaned out to businesses.
Will USD 1.6tr be enough to revive the economy? The average amount of loans given each year by all FDIC insured commercial banks in the U.S. (almost all banks in the U.S. are FDIC insured) is USD 506bn (see Exhibit 1). So on average, the government banks will have an extra USD 1tr to loan out. This amount is pretty much in line with the total corporate bonds issued in 2006 (USD 1tr), and 2007 (USD 1.12tr) (see exhibit 2). Since the primary markets for raising money are frozen, more and more firms will turn to bank debt for refinancing or for raising capital. This is where the government can use the remaining USD 1tr.
As a normal bank functions, these banks can issue long term debt (in the form of notes/bonds) at say 50 or 100 basis points above the Treasury notes of similar maturities. The investors should be more than willing to invest in these banks as the banks would have a lot of cash as their assets, their liability side would be clean, and they intent to lend only to businesses with sound credit quality and decent financials. Also, since these are government banks the investors’ money would be safe. Since 2nd January 1962 (since the start of the data published) until today the market yield on a 10 year U.S. Treasury note was the lowest on 18th December 2008, yielding 2.08%. (source: www.federalreserve.gov). This shows investors risk averseness. Government bank bonds yielding 50 or 100 bps above the Treasury notes of similar maturities would attract investors as they would get higher yields on securities which are backed by the government. The government banks can then loan out this money at low interest rates in the economy.
This will bridge the gap which is broken by the financial system and the primary market. Lower interest rates and easy availability of credit should help boost the economy to some extent. Eventually the other banks will feel the need to lower the interest rates to compete with the government banks. The government banks, in this process, can earn the spread between lending and borrowing just as a normal bank does. This spread can be conservative as the government is not in a business of making profits. Also, this net interest income will help meet the banks their daily operational expenses. Once the banks start lending money back in the system the government can sell these loans at some discount to yield decent returns to the investors. Since the loans are of good quality, selling them shouldn’t be a problem. The money received by selling these loans can be used to pay of the debt of the government banks.
The second and the main question is: how will the infrastructure of establishing new government banks work? Isn’t setting up infrastructure for a new bank extremely expensive and time taking? I definitely think it is.
For this, the government can take some branches of already existing banks with their already set up infrastructure for a year or two, on lease and run operations thru those branches. Or, the government can acquire two or three small banks which are most likely to fail (the list is huge) and run its operations thru those banks. Also, I always mentioned that the government banks should lend to the businesses and not individuals. This is because lending to individuals would need a much greater infrastructure. In case of loaning to corporates (for example with revenues more than USD 500m), the infrastructure required would be much smaller. Also, the corporates are the ones that are in need of money as the short term and long term primary markets are quite illiquid.
Setting up the infrastructure for these banks could be potentially difficult and time taking. If setting up infrastructure for these banks is something that can’t be done, this is what I would suggest:
The other way of solving the “credit crisis” would be making it mandatory for the banks to lend a portion of the government’s money to businesses in a specified period of time, at a the specified interest rate. This oversimplified statement can be described by an example. For example, the government allotted bank ABC USD 600m based on its assets and revenues it generates in a year. Now, the government compulsorily lends (does not buy any of their toxic assets) bank ABC USD 600m, collateralized by its assets, at an interest rate of 3.75%. Bank ABC has USD 150mn of maturities due within a year. It is mandatory for the bank ABC to lend at least 80% (80% figure is just an example) of the government’s loan, remaining after subtracting the upcoming maturities due in a year, in 12 months time (12 month is just an example, could be a year and a half) at an interest rate range of 4% to 8% (again 4% to 8% is just an example). So in this case, it becomes mandatory for the bank ABC to lend at least USD 360m (600m of government loan –150m of maturities = 450m, 450m*80% = 360m) in 12 months time to businesses, at an interest rate range of 4% to 8%. Since the primary bond and equity markets are quite illiquid, the corporations are now turning to banks for new money or for refinancing their upcoming maturities. This will be beneficial for the banks as they are earning a spread on the government loans. Also, the banks won’t just give risky loans from the money received by the government coz of two reasons: first there is no significant incentive for giving riskier loans as the interest rate range is specified and secondly these are secured loans i.e. banks assets are collateralized by the government loan. Adding to this, the government can also specify banks the industries in which they are suppose to lend.
For loaning all this money to the banks, the government can issue Super Treasury notes that would yield 50 or 100 bps above the Treasury notes of the similar maturities. This would attract the investors who are presently extremely risk averse, as they would get higher yields on securities which are backed by the government and so as safe as treasury notes. The government can do this until sufficient money has been injected into the economy.
This can stop the lethal scene in the market where corporations are cutting down on their businesses due to decreased demand in the economy and trying to preserve as much cash as possible due to unavailability of short and long term credit. Companies are defaulting on their covenants due to decrease in asset values and EBITDA’s, resulting in forced pay back of their loan or unavailability to access their revolvers or amendments increasing their cost of capital or any combination of these. Even good firms with stable positive cash flows are facing tough times refinancing their upcoming maturities. The consequences for the inability to refinance their debt is either selling assets at fire sale prices to pay down the debt resulting in further decrease in asset prices or filing for chapter 11 or chapter 7. All this has resulted in increased unemployment and hence decrease in disposable income, decreased investor confidence and hence decreased spending.
In both my solution, the government is not buying the bad assets of the banks, which in some cases can be worthless. It is just creating a system to lend the money in the economy (which is presently hoarded by the banks) and is backing that money with good loans. Also, the money lent, is borrowed within the system and not by printing more money or by borrowing from other countries.
Presently, the government is printing more money and is increasingly borrowing from other countries. As of October 2008, the amount of Treasury Securities held outside of the U.S. (most of the dollar reserves held by various countries is in the form of U.S. Treasury Securities) were almost USD 3tr (source: http://www.treas.gov/tic/mfh.txt), an increase of 32% in just 1 year, while the GDP increased by just 3.31% during the same period to USD 14.4tr (www.bea.gov) (all the figures are nominal and not adjusted for inflation). The weakening economy is driving down tax collection resulting in further need of debt. This is only the treasuries, there is about USD 829bn in circulation and the majority is held outside the United States (source: http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html). It is said that almost 60% or more of the USD in circulation, is held outside of the U.S. This means almost USD 500bn (60%*829bn). So the *external debt of the U.S. is almost USD 3.5tr* and that as a percentage of GDP is almost 24%. If this continues to grow, then the U.S. debt held by other countries as a percentage of U.S. GDP would increase significantly. On 18 December 2008, FED announced that it would print as much money as necessary to stimulate the frozen credit markets and fight recession. The repercussions of printing more money and taking on more external debt can be drastic and I will be explaining the same in detail in my next article “So what’s my big concern?….”.
*here external debt is defined as U.S. treasuries held outside of the U.S. and the currency USD held outside of the U.S. The actual definition of external debt as defined by CIA is the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services (source: https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html#2079). USD 3.5tr is the addition of USD 3tr of treasury securities held by other countries and US dollars floating outside of the U.S. This does not include dollars held by small and large corporations outside of the U.S.
Solution for the “Foreclosures” problem
So what’s the “foreclosure” problem? People are defaulting on their monthly house payments and hence there are a lot of houses that are being foreclosed i.e. taken back by the lender who provided the loan. Lets analyze the main reasons for any foreclosure:
i) The interest rates of the loans suddenly jumped up (ARM, option ARM) and the borrower is unable to afford those payments. Also, since there is no equity on the house since the house prices are falling, he/she cannot take a second loan (HELOC) on the house.
ii) The houses prices are falling. So if the house value is less than the loan value, there is no incentive to pay the monthly installments and so people are vacating their houses. (an example resembling a live situation: You bought a house 2 years back for USD 130,000. You made a down payment of 10% i.e. 13,000 and took a 117,000 loan for 30 years with 6% annual interest. So, if you calculate, your monthly installment is USD 701.47. After 2 year, as per calculation, you have repaid USD 2962 of principal and USD 13873 of interest. The remaining loan amount is USD 114,038 (117,000 – 2962). Now, i.e. after 2 years, the house value is say USD 100,000. So basically you can get the same house for USD 100,000 with less interest rate, say 5%, as interest rates have declined. Your remaining loan on the present house is 114,038 with 6% interest. So basically you have no incentive to live in that house as you would get the same new house cheaper with lesser interest rate.)
iii) Usually, majority of the income of any household is paid towards monthly house installments. With the increase in unemployment rates people are unable to pay their monthly installments, resulting in foreclosures.
So what’s the big deal if there are a lot of foreclosures, in fact there is an opportunity to buy foreclosed houses for cheap. Valid question. The answer to this is that mortgage lenders have severely tightened their terms and now require larger down payments and better credit records. As a result, many people interested in buying foreclosed homes can’t get loans and hence don’t get the deals. So the problem is that the foreclosed houses are increasing at a much faster pace than people who are buying them.
So what’s the trouble if the foreclosed houses are increasing at a faster pace? The answer to this is that foreclosed homes depreciate faster than those that are occupied, because they are not maintained and hence the aesthetic appeal is gone. Also, if there are a few un-maintained foreclosed houses in the vicinity it might bring the value of that area down. The longer the foreclosed houses sit unsold, the more un-maintained and dirty they look, the more they depreciate and the longer the lender (foreclosed property owner) must keep paying its related monthly expenses: insurance taxes, property taxes and other charges. So in many cases the lender (foreclosed property owner) wants to get rid of these foreclosed properties desperately and hence slashes down the prices significantly. These slashed down prices bring down the value of overall house prices down. These declining house prices hit the triggers when the house value decrease from the loan value at which there is no incentive for an individual to keep paying the monthly installments (as described in point ii) which eventually results in further foreclosures. Also, increase in unemployment has a direct impact on the foreclosure rate. Since the unemployment rate is expected to increase, the foreclosure rate might further go up. Also all the job cuts that have been announced by the companies are just the announcements and not the actual job losses. The actual job losses will occur down the line, increasing the foreclosures.
Now you may argue that market always corrects itself. So eventually this has to stop and things have to get back to normal and home prices should start appreciating again. I absolutely believe in this but if we wait for the market to correct, it might take quite some time, probably years.
So what’s the solution to stop this? There are a few possible solutions and a mix of everything should result in some impact. To think of the solution think of the economics of the problem. It is the supply of the foreclosed houses and the desperateness of lender to sell those houses. If anyway we can stop the supply and the lenders (holders of the foreclosed properties) are not desperate to sell the foreclosed houses and maintain the price tag, the problem of steep declining home price could be resolved to some extent. One of my solutions to this is described below:
Start giving the foreclosed houses on minimum rents. The rents should be so cheap that people are attracted on taking them. The deposit should be significant enough so that its in the interest of the people living there to keep the house clean and not damage anything. The lease should have a clause that the lender can ask the tenant/lessee to vacate the house on a month or two months notice. The lender should keep the house on sale and keep showing the place to potential buyers. Once the foreclosed house is sold, the lender can give a month or two months notice, as in lease, to the tenant/lessee. This will have three benefits:
1) If people live in the houses they will keep paying the electricity bills and other charges related to maintaining the house which otherwise would be a cost to the lender.
2) The tenant pays a minimum rent which contributes some positive cash flow to the lender
3) The house is maintained which otherwise wouldn’t be the case. This to some extent preserves the house value as the aesthetic appeal is maintained.
Due to these the lender will not have incentive to sell the foreclosed home at extremely low prices, since the home is maintained and the bills are paid, the lender can wait until they get the decently right price. This, to some extent, may stop the chain reaction of steeply falling house prices.
You may say that a lot of property will be accumulated in the lenders books and since the lenders are not selling it they are not getting cash flows as recoveries on the foreclosed properties. Now here we need to analyze are these cash flows (recoveries on the foreclosed properties) the only mode of income or a significant income to the lender.
Also, are the lenders depended on the cash flow form the recoveries on the foreclosed properties to pay for their daily operations? If the cash flows from recoveries on the foreclosed properties are the main source of income for the lender to survive then the lender should liquidate. But is that really the case? For this we need to analyze who owns most of the foreclosed properties? Among the big owners of foreclosed properties are Fannie Mae and Freddie Mac, Department of Housing and Urban Development, or HUD and big lenders like Countrywide Financial Corp., Wells Fargo and others. Fannie, Freddie and HUD are government agencies and so are definitely not dependent on the cash flows from the recoveries on the foreclosed properties to survive or to run their day to day operations. The Countrywide’s and Wells Fargo’s of this world were acquired by the biggies. So I believe even they are not dependent on the cash flows from the recoveries on the foreclosed properties to run their daily operations.
Now I have been trying to find the average time it takes to sell a foreclosed property once its declared as foreclosed. I haven’t been able to find any public database/website providing me with this data. So I started searching the articles to get some rough idea. Probably there might be a lot of data on this which is paid and not publicly available so I can’t get access to it. What I could find in one of the articles is that “ The average time it takes to sell has grown to 196 days from 175 a year earlier, says Laurie Maggiano, a HUD official.” (Source: http://www.realestatejournal.com/buysell/markettrends/20080326-hudson.html). This article was published on 26 March 2008. If you look at the housing prices and unemployment rate, it has only deteriorated from there. So logically this average time should have increased. If the average time to sell a foreclosed property keeps increasing it would make even more sense to give foreclosed houses on minimum rents.
Secondly, as the unemployment rate is going up more and more people are defaulting which eventually, if continued, results in foreclosure. So the idea here is the unemployed person who just lost his/her job should be given a 3 month or a 6 month deferral on their monthly house installments. For example, an individual lost his job today. He should let the lender know about the same. Once the lender verifies the same, the individual should be given a 3 month or a 6 month deferral on his monthly house payments. For example if he already made his 27th payment last month, say January, and then lost his job in February, then his next (28th) monthly payment would be either May end, if a 3 month deferral, or August end, if a 6 month deferral.
This will reduce the foreclosures to some extent, if not significantly. Also, here we are assuming that the individual should be able to get another job in next 3 or 6 months and then starts paying his/her mortgage installments.
This combined with various *government efforts (a few recent government efforts are described below) can help to reduce the rate of foreclosures.
There are quite a few other plans out there like buying huge numbers of troubled mortgages by the government at discount from the lenders and re-financing them at lower rates. Re-financing at lower rates will make it more affordable to the home owners. But this has to be done on mass basis and so the government might end up helping everyone in that pool of mortgages which includes people who are not in need. Also this will cost government a fortune.
Exhibit 1
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source: www.fdic.gov
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|
|
1) Number of institutions reporting
|
2) Total loans and leases reported by FDIC website of all Commercial Banks – National (in USD bn)
|
3) Loans and leases given in a quarter (in USD bn) (Present Quarter total loans – previous quarter total loans)
|
|
3Q08
|
7146
|
6,805
|
242
|
|
2Q08
|
7203
|
6,563
|
-1
|
|
1Q08
|
7240
|
6,563
|
26
|
|
4Q07
|
7283
|
6,537
|
233
|
|
3Q07
|
7303
|
6,304
|
214
|
|
2Q07
|
7350
|
6,091
|
188
|
|
1Q07
|
7379
|
5,903
|
-10
|
|
4Q06
|
7401
|
5,912
|
247
|
|
3Q06
|
7449
|
5,665
|
75
|
|
2Q06
|
7478
|
5,590
|
161
|
|
1Q06
|
7491
|
5,430
|
117
|
|
4Q05
|
7526
|
5,312
|
117
|
|
3Q05
|
7541
|
5,195
|
137
|
|
2Q05
|
7549
|
5,058
|
150
|
|
1Q05
|
7599
|
4,909
|
76
|
|
4Q04
|
7631
|
4,833
|
93
|
|
3Q04
|
7660
|
4,740
|
143
|
|
2Q04
|
7694
|
4,597
|
184
|
|
1Q04
|
7714
|
4,414
|
62
|
|
4Q03
|
7770
|
4,352
|
77
|
|
3Q03
|
7812
|
4,275
|
58
|
Average loans and leases given by FDIC insured commercial banks in a quarter (average of all figures in column 3) = USD 127bn
Average loans and leases given by FDIC insured commercial banks in a year = USD 127bn x 4 = USD 506bn
I took the quarterly net loans and leases of all FDIC insured commercial banks in the U.S. and then took an average of 20 latest quarters (last 5 years), multiplied that by 4 to find the rough estimate of net loans and leases given by all commercial banks in a year. So with this calculation we can conclude that roughly USD 506bn of loans are given each year by all FDIC insured commercial banks in the U.S. (almost all banks in the U.S. are FDIC insured).
Exhibit 2 (source: http://archives1.sifma.org/story.asp?id=1720 )
|
Corporate Bond Issuance – Yearly (1) (in USD billions)
|
|
Year
|
High Yield
|
Investment Grade
|
Total
|
|
1990
|
0.7
|
77.1
|
77.8
|
|
1991
|
8.8
|
155.1
|
163.9
|
|
1992
|
33.7
|
211.1
|
244.8
|
|
1993
|
56
|
302
|
358
|
|
1994
|
33.3
|
208.6
|
241.9
|
|
1995
|
38.2
|
263.5
|
301.7
|
|
1996
|
58.5
|
313.4
|
371.9
|
|
1997
|
108
|
400.5
|
508.5
|
|
1998
|
129.6
|
529.5
|
659.1
|
|
1999
|
84.3
|
592.8
|
677.1
|
|
2000
|
34.3
|
638.9
|
673.2
|
|
2001
|
77.8
|
750.6
|
828.4
|
|
2002
|
57.4
|
598.4
|
655.8
|
|
2003
|
130.9
|
665.4
|
796.3
|
|
2004
|
137.9
|
659.2
|
797.1
|
|
2005
|
96.4
|
663.4
|
759.8
|
|
2006*
|
149.1
|
910.8
|
1059.9
|
|
2007**
|
135.6
|
986.8
|
1122.4
|
|
2008**
|
37.2
|
645
|
682.2
|
1) Includes all non-convertible corporate debt, MTNs and Yankee bonds, but excludes all issues with maturities of one year or less, CDs and federal and agency debt.
*As of December 31, 2006
**source: http://www.tradingmarkets.com/.site/news/Stock%20News/2104244/
*Government efforts:
1) HOPE NOW, the private sector alliance of mortgage servicers, non-profits, counselors, and investors, announced on 11 November 2008 that it would be working with the U.S. Treasury, the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and a number of major mortgage loan servicers to reduce foreclosures by modifying the mortgages of the most at-risk homeowners. Below is the link to the document. One of the statements mentions “The streamlined process will apply to at-risk borrowers who are 90 days or more late on their existing mortgages and whose loans are owned by Freddie Mac, FNMA or participating balance sheet lenders/servicers.
After compiling the homeowner’s information, lenders will use a simple process that reduces the homeowner’s monthly payment to no more than 38 percent of the borrower’s monthly income. This may include in any combination (1) extending the number of years of the loan, (2) reducing the interest rate, and/or (3) forbearing part of the principal. If these steps are cannot reduce a homeowner’s monthly payment to that affordable level, the borrower will receive an additional loan-by-loan review that will include all other options to prevent foreclosure”
http://www.hopenow.com/upload/press_release/files/SMP%20Release%20Final.pdf .
2) Neighborhood Assistance Corporation of America, or NACA. A non-profit that works towards providing affordable home ownership to individuals with not so good credit scores and refinancing a predatory loans at below-market interest rate.
3)Mortgage rates are at historical lows since the agencies have started tracking data. Congress is trying to pass a bill to let bankruptcy judges modify mortgage terms, including the principal value.
There are quite a few other efforts which I am not aware of. I have just included some latest ones.
Disclaimer: The views expressed in my blog are my personal opinion. They are subject to various factors and risks which are not explicitly described. All information on my blog is provided in good faith. Under no circumstances I will be held liable for anybody’s or any organizations or any firm’s or any company’s or any LLCs’ or any governments’ decision based on my opinions.
-Suneet Chandvani
