Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Combining two combustible issues is not usually the recommended strategy for shepherding legislation through Congress. But by adding regulatory reform for the Government Services Enterprises) to a bill providing assistance to homeowners facing foreclosure, Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, has managed to secure strong bipartisan support for both.

Republicans, opposed philosophically to a government-supported “bail-out” of borrowers and lenders, accepted a measure allowing the Federal Housing Administration (FHA) to refinance up to $300 billion in under-water mortgages in order to win stronger oversight of Fannie Mae and Freddie Mac, which they have sought for years. Democrats, concerned about overly restrictive controls on Fannie and Freddie, accepted tighter limits and a stronger regulatory hand they wanted to win Republican support of the housing assistance measure. The result: A 19-2 committee vote in favor of the combined bill.

“It’s a great deal – the kind of compromise that reflects how the Senate works,” an unidentified lobbyist told American Banker. “You’ve got a very strong chairman (Dodd) and a very engaged ranking member (Richard Shelby – R-AL). Each has an agenda, and they found common ground to get what each wanted, giving up stuff they probably otherwise wouldn’t have agreed to.”

“We’ve taken the word ‘partisan’ out of this,” Dodd told reporters. “I believe we will get overwhelming support, and I believe the President will sign it.”

The key to their compromise, and the most difficult obstacle it will face in the House-Senate conference, was the funding mechanism. Apart from their visceral objections to the “moral hazards” of a federal bail-out for struggling borrowers, and the lenders and investors who originated and purchased their loans, Republican have objected to the cost of the assistance package – estimated initially at $1.7 billion. Dodd’s bill reduces that estimate to about $500 million (by shortening its time frame and imposing other restrictions) and, crucially, shifts the financing burden from taxpayers to Fannie Mae and Freddie Mac by tapping a housing trust fund included in a House-passed GSE reform bill, designed to aid low-income households. The House bill requires Fannie and Freddie to allocate a portion of their profits to the trust fund; Dodd’s bill would establish a sliding scale, using 100 percent of the GSEs’ trust fund contribution to finance the foreclosure prevention program in the first year, 50 percent in the second year, and 25 percent in the third year.

House Democrats, on the other hand, are far from enthusiastic about diverting the GSEs’ contribution to the trust fund, the inclusion of which was essential to garnering their support for the GSE reform bill the House approved two years ago. Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee and the primary architect of the GSE-funded housing trust fund, made it clear that he will fight to keep it.

“A fight is brewing” over that issue, Frank warned recently. Speaking at a meeting of the New Democratic Network, he noted that trust fund contributions in the first year were to be channeled toward helping victims of Hurricane Katrina build affordable housing in New Orleans. “More broken promises to the people of New Orleans is not something high on my list,” Frank asserted.

“There is other money in the Senate bill that will pay for the housing plan without dipping into the money for affordable housing,” he suggested in a subsequent interview with reporters. Among the alternatives Frank has suggested: Increasing the FHA loan limit and lifting the cap on FHA-insured reverse mortgages, to boost the revenue generated by that program.


Home sales statistics aren’t the only indicator of housing market conditions. The titles of real estate how-to and self-help books provide a fairly accurate reflection of market trends. During the boom years, “fortune,” “easy,” and “millionaire” appeared frequently in those titles, as scores of authors promised to turn real estate novices into successful real estate investors overnight. Today, “foreclosure” is the operative word as bookstore shelves speak volumes about what has happened to the erstwhile housing boom. The current best-sellers: “Foreclosure Rights,” Foreclosure Self-Defense,” and “How to Buy Foreclosed Properties,” indicate that publishers are focusing both on troubled borrowers facing foreclosure and on prospective buyers – investors and potential homeowners – who stand to benefit from their problems.

Adams Media, one of many publishers occupying the real estate advice niche, reflects that dual focus, with two books on its current list: “The 250 Questions you Should Ask to Avoid Foreclosure” (just published) and “The 250 Questions Everyone Should Ask about Buying Foreclosures,” slated to hit the shelves in July.

“We sped that one along,” Publisher Karen Cooper told the New York Times in a recent article describing the publishing trend. Two years ago, the company found a strong market for two other titles – “The Everything House Buying Book,” and “The Everything Home Selling Book,” the Times noted, “but those books aren’t working for us right now,” Cooper said.


Some might call it a reasonable business “adjustment,” while others would characterize it in less flattering terms, as “crass opportunism,” or worse. But whatever the description, the trend seems clear: Many of the mortgage brokers who cashed in big time on the housing boom are finding ways to profit from the downturn, some by counseling borrowers facing foreclosure, others by purchasing foreclosed properties at steep discounts or by purchasing underwater loans, also at a discount, from lenders who want to get those mortgages (many of which were originated by brokers in the first place) off their books. A recent Business Week article noted, among other examples, the executive of a failed mortgage company who has established a company that handles foreclosure sales for bank, and the former Countrywide Financial executive, whose new company, PennyMac is purchasing troubled loans.

Consumer advocate Bruce Marks had harsh words for “bottom feeders,” describing them as former “predators” who are “resurrecting themselves.” But Marks’ nonprofit agency, Neighborhood Assistance Corp. of America, has also hired former mortgage brokers as counselors. They can be effective in that role, Marks told the Wall Street Journal, because their experience overcoming lending obstacles equips them well to help struggling borrowers refinance or modify their loans. Brokers turned counselors say helping borrowers makes them “feel good,” but critics see more than a little irony in the transition. “Some of them are the folks who got us into this mess,” one consumer advocate quoted in the WSJ article complained.


The Girl Scout motto, “be prepared,” also appears to be driving strategic planning at the Federal Deposit Insurance Corporation (FDIC). Agency officials announced recently that they will be expanding the staff of specialists assigned to deal with failed institutions by 60 percent, adding more than 200 workers to that area. Only two banks (both tiny) have failed so far this year and just five failed in 2007, but the FDIC and other bank regulators have noted, with concern, the mounting real estate-related losses reported, and likely to be reported, by banks and thrift institutions. Some analysts predict that up to 150 institutions could fail over the next three years, most of them likely to be concentrated in California, Florida and other states hammered by the real estate downturn. While no one is expecting failures to reach the crisis levels of the early 1990s, when more than 500 depository institutions failed in a three-year period, still, “We want to make sure we’re prepared” for the industry casualties to come, John Bovenzi, the FDIC’s chief operating officer told the Associated Press in a recent report. The contingency planning for bank failures may seem a bit ominous, but there is a brighter side to the FDI’s recent announcement: The new workers the agency is planning to hire will be temporary employees.


The rich may be different, but they are just as focused on Social Security benefits, albeit less dependent on them, than less affluent retirees. The National Center for Policy Analysis (NCPA) reports that, contrary to the assumption that wealthier individuals don’t really “need” Social Security, in fact, “most high-wage workers would have to significantly reduce their standard of living” if those benefits disappeared.

A recent NCPA report calculates that Social Security payments account for about one-third of the discretionary consumption of highest income households (defined as pre-retirement income of $500,000 for couples or $250,000 for singles). That makes Social Security obviously far less significant for the wealthy than for lower-income households (with pre-retirement incomes of less than $50,000 a year for couples and less than $25,000 for singles) for whom benefits represent nearly 100 percent of discretionary consumption. But the important point, the NCPA report emphasizes, is this: “If Social Security were abolished tomorrow, all retirees would experience an immediate reduction in their consumption.”

With sufficient advance notice of the change, younger workers could make the adjustments required to avoid “abrupt” changes in their post-retirement living standards, the NCPA says. “Yet only the highest income workers have the ability to adjust so as to completely smooth their consumptions across their lifetime. Low- and middle-income workers, on the other hand, are so “constrained by current obligations they cannot completely adjust.” And the adjustments required would be painful. To completely “level” consumption across their lifetime, the NCPA says, a couple 35 years old or younger earning $500,000 would have to reduce current consumption by 18 percent annually. A couple with an annual income of $200,000 who reduced current consumption by 24 percent annually, would still face a 15 percent decline in consumption after retirement; and a couple earning $50,000 who reduced current consumption by 21 percent annually (not possible for most households in this category), would face an additional 26 percentage point reduction after retirement.