Analysis: Mortgage probe may open new path for housing relief (Reuters)

(Reuters) – A controversial weapon could be deployed soon in the U.S. fight against the housing crisis as states and top banks near a deal in their dispute over mortgage abuses -- cutting the mortgage debt owed by homeowners.

Five major banks could be required to commit roughly $15 billion to reduce principal balances for struggling homeowners and modify loans in other ways under a proposed deal to settle allegations linked to the "robo-signing" scandal.

That amount would be part of broader sanctions that could total $25 billion, small change for the giants of Wall Street but potentially sowing the seed for a new approach to tackling the housing crisis.

Settlement talks continue with the banks, state attorneys general and some federal agencies over foreclosure shortcuts and other abuses. A deal could be struck within a month, according to people familiar with the matter.

Much of the exact language has yet to be hashed out but it could provide for the first broad use of principal writedowns, something economists and housing advocates say is a drastic but needed step to help set right the housing market.

Investors and the government-controlled mortgage finance giants Fannie Mae and Freddie Mac -- which own around half of all U.S. mortgages -- have long resisted the idea.

There are concerns it could encourage some borrowers to stop paying in order to qualify for a reduction in their overall mortgage.

Fannie and Freddie's regulator has been wary of allowing principal reductions, doing so would lower the value of the assets held by the taxpayer-supported firms.

More broadly, public anger over the possibility of bailouts for homeowners who got out of their depth in debt is seen as one of the origins of the conservative Tea Party movement.

Given the political sensitivity, the Obama administration has so far trodden carefully to help homeowners. It wants to let more borrowers refinance to lower interest rates and stretch out the terms of loans to reduce monthly payments.

Some officials at the Federal Reserve say the central bank should buy more mortgage debt to bring down borrowing rates.

But those efforts do little to address the underlying problem, that many borrowers owe more than their homes are worth.

Under a potential settlement, the five banks -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial -- would have to meet dollar targets to reduce principal for underwater borrowers.

"I think it will be a step in the right direction," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "The AGs hope this could work as a pilot program, and show how principal reduction could work."

To be sure, the reductions will have limited impact. The deal is unlikely to touch mortgages held by Fannie and Freddie. And according to a back-of-the-envelope calculation, $15 billion in reduction at $50,000 per borrower could reach around 300,000 borrowers, a fraction of the 11 million underwater homeowners.

But a deal may prompt banks to expand the limited principal reduction programs that they have so far directed toward only the riskiest loans in their portfolios.

The settlement could lay the groundwork for a broader program, if Fannie and Freddie are swayed to test it out themselves as an alternative to the costly process of foreclosing on struggling borrowers.

"Fifteen billion (dollars) is a drop in the bucket, but here might well be the very opportunity to conduct an experiment," said Ken H. Johnson, a professor at Florida International University's business school.

PRIOR EFFORTS

One model could be the 2008 settlement between Countrywide, the mortgage lender bought by Bank of America in that year, and state attorneys general. It provided a framework for loan modifications that became the basis for the administration's Home Affordable Modification Program which has so far had only a modest impact.

That deal set up the now widely used "waterfall" approach to trying to lower a borrower's monthly payment through a series of steps that include reducing the interest rate, extending the term of the loan and deferring some principal.

The states are hopeful a settlement on foreclosure abuses could have a similar ripple effect.

Not all states are satisfied with Bank of America's compliance with the 2008 settlement, presaging some concerns that could arise in any new settlement. Nevada and Arizona sued the bank saying it did not honor its obligations and engaged in "deceptive" practices in dealing with distressed borrowers.

Shum Preston, a spokesman for the California attorney general, also said that his office continues to receive complaints from Countrywide borrowers.

But Massachusetts, which last year extracted an additional commitment from Bank of America to reduce around $3 billion in principal on some of its riskiest loans across the country, said the bank had been complying with the settlement.

A spokesman for the attorney general's office in the state, Brad Puffer, said around 2,600 residents have received loan modifications under the settlement, saving some $125 million in mortgage payments, including both principal reductions and other types of modifications.

Bank of America said it had extended 49,000 offers to reduce principal for underwater borrowers nationwide, forgiving almost $3 billion in principal payments, since the agreement.

That settlement, and a similar one by Wells Fargo, were directed at the riskiest loans, leaving largely untouched more traditional mortgages that still deep underwater due to cratering home prices.

Wells says it has provided $4 billion in principal reduction as part of 96,000 modifications completed since the Wachovia acquisition. In addition, since 2010, Wells has participated in a HAMP principal reduction program.

"We're never been here before so we can't look to past experience," said Johnson, the business school professor, "with the added complexity of what foreclosures do to market pricing, some form of principal reduction may be the answer."

(Reporting by Aruna Viswanatha in Washington D.C. and Rick Rothacker in Charlotte, North Carolina; Editing by Tim Dobbyn)

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Housing starts drop underscores economic woes (Reuters)

WASHINGTON (Reuters) – New construction of homes fell more than expected in August, dragging on economic growth and keeping pressure on President Barack Obama to do more to help the sputtering economy.

Housing starts dropped 5 percent, the most since April, to a seasonally adjusted annual rate of 571,000 units, the Commerce Department said on Tuesday.

Economists polled by Reuters had forecast groundbreaking activity would fall to only a 590,000-unit rate in August. Housing starts are at less than a third of their peak during the housing boom.

"The housing market is not only bad, but still missing low expectations," said Sal Catrini, a managing director for equities at Cantor Fitzgerald & Co in New York.

An overhang of previously owned homes on the market has left builders with little appetite to break ground on new projects and is frustrating the economy's recovery from the 2007-09 recession.

The housing market "won't improve until the labor market improves substantially and that doesn't look like that would happen this year," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

Housing has been a persistent headwind to the U.S. recovery, although now it only accounts for about 2.4 percent of gross domestic product, down from about 6.1 percent reached during the housing boom.

U.S. stock prices rose as investors shook off the data and turned their focus to a two-day meeting the Federal Reserve that kicked off on Tuesday. The Fed is expected to end its meeting with a decision to take further steps to aid the economy. U.S. Treasury debt prices were little changed.

The ongoing weakness in housing keeps pressure on the White House to provide more support.

Obama, who is struggling with a 9.1 percent unemployment rate that imperils his re-election bid next year, has proposed a $447 billion stimulus package combining tax cuts with infrastructure spending and extended jobless benefits.

The administration is also working with the Federal Housing Finance Agency, a regulator, to try to expand a program that helps distressed borrowers with government-backed loans.

Some other government props for the sector, however, are set to fall away. At the end of this month, the size of the loans federal housing agencies can purchase will fall, and next year government-controlled mortgage companies Fannie Mae and Freddie Mac will begin to raise fees on the loans they purchase.

RECESSION WATCH

The fall in new residential construction in August may have been fueled in part by tropical storms, including Hurricane Irene, which pummeled the East Coast at the end of the month. Starts in the Northeast fell 29.1 percent.

Most of the weakness in new construction nationwide was concentrated in the multi-family housing sector, where starts dropped 13.5 percent.

Single-family home construction -- which accounts for a larger share of the market -- slipped 1.4 percent.

With overall economic growth looking less steady, the International Monetary Fund warned on Tuesday the United States could slip back into recession.

However, the consensus view among economists is that the country will dodge that bullet.

Heavy manufacturer Caterpillar Inc on Tuesday reported a slight acceleration in machinery sales to North American dealers in the three months through August, a sign demand remains steady.

In another upbeat sign, General Motors reached a tentative deal to create more than 6,000 U.S. factory jobs, union officials said.

The housing sector also saw a glimmer of hope in Tuesday's data, with permits for future construction up 3.2 percent in August. A day earlier, home-builder Lennar Corp had forecast a strong fourth quarter.

Still, the sector does not look ready to provide much support to economic growth anytime soon.

"Housing isn't going anywhere fast," said Sean Incremona, an economist at 4Cast in New York. "The permits side is a little bit more positive looking, but it doesn't look like things are really finding their way off the ground."

(Additional reporting by Caroline Valetkevitch and Richard Leong in New York, Editing by Andrea Ricci and Neil Stempleman)

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Factory and housing data point to weak growth (Reuters)

WASHINGTON (Reuters) – Factory output in the U.S. central Atlantic region dropped to a two-year low in August and new home sales hit a five-month low in July, the latest signs to suggest the economy is at risk of stalling.

The Richmond Federal Reserve Bank said on Tuesday its index of factory activity in its district fell to minus 10 from minus 1 in July as new orders and shipments weakened sharply.

It was the lowest reading since June 2009.

While the survey covers only a small portion of U.S. manufacturing, it follows a report last week that showed a steep decline in factory activity in the mid-Atlantic region, signaling a potential shrinking in the sector that has shouldered the economy's recovery.

"The manufacturing sector was one of the most consistent pockets of strength in this recovery and all of a sudden it seems to be taking a very severe beating that goes beyond the supply chain disruptions related to the Japan earthquake," said Anthony Karydakis, chief economist at Commerzbank in New York.

The Institute for Supply Management's index of national manufacturing activity stood at 50.9 in July and economists said it would likely fall below the 50 mark in August, which would indicate a contraction.

The index has been steadily declining since March, but that weakness had been blamed mainly on supply chain disruptions from Japan. The August survey will be published on September 1.

The Philadelphia Fed said on Thursday that an index covering factory activity in its region dropped to a near 2-1/2 year low in August.

That survey covered businesses in eastern Pennsylvania, southern New Jersey and Delaware, while the report from the Richmond Fed covered the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia.

Analysts cautioned against interpreting the regional weakness as a sign the economy was already in recession.

RECESSION RISKS UP

The Philly Fed survey has a very small correlation with the national ISM index and much of the decline this month reflected the extreme turmoil in financial markets, which has eroded both business and consumer sentiment.

"Our forecast is for ISM manufacturing index to fall below the 50 mark for the first time since mid-2009, though it will remain above the 46 mark which is consistent with overall economic contraction," said Millan Mulraine a senior U.S. macro strategist at TD Securities in New York.

Economists estimate the odds of a contraction in overall economic activity as high as 50 percent.

Those risks were reinforced by a Commerce Department report showing new single-family home sales slipped 0.7 percent in July to a 298,000-unit annual rate, the lowest since February.

Economists polled by Reuters had forecast sales at a 310,000-unit rate. In the 12 months through July, new home sales rose 6.8 percent.

July's weak sales pace left the supply of new homes on the market unchanged at 6.6 months' worth.

"The recovery cannot count on the housing sector adding much to growth," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Despite the soft data, U.S. stock prices rallied on speculation that a string of weak data could prompt Federal Reserve Chairman Ben Bernanke to announce stimulative measures to support the economy at a gathering of gathering global central bankers in Jackson Hole, Wyoming, later this week.

Bernanke will deliver a keynote address on Friday morning. Traders expecting the Fed chief to outline plans for a new round of bond purchases are likely to be disappointed.

Instead, he is most likely to outline gradualist measures, such as how the Fed could tweak its balance sheet as a way to put further downward pressure on medium- and long-term interest rates.

(Additional reporting by Jason Lange and Glenn Somerville, editing by Neil Stempleman)

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Jobless claims, housing data offer economic hope (Reuters)

WASHINGTON (Reuters) – The number of Americans claiming new jobless benefits hit a three-month low last week and contracts to buy existing homes rose in June, hopeful signs for an economy that has struggled to regain momentum.

Initial claims for state unemployment benefits dropped 24,000 to 398,000, the Labor Department said on Thursday, below economists' expectations for a fall to 415,000.

A separate report from the National Association of Realtors showed pending home sales rose 2.4 percent in June, the second straight monthly increase. Contracts usually lead sales by a month or two.

The reports offered some relief after a recent string of weak data, which had shown the economy closing out the first half of the year on a soft note. A deadlock in Washington over raising the nation's debt limit has hurt sentiment.

"Claims provide some hints that the economy is going to do better in the third quarter," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut.

"Assuming we don't get massive government furloughs because we don't get the debt limit raised in the next couple of days or couple of weeks, we would probably see GDP growth in the 3 percent range in the second half of year as opposed to sub 2 percent in the first half."

U.S. stocks rose on the data, a day after posting their biggest fall in eight weeks. Prices for Treasuries also increased despite fears of the government defaulting on its debt, while the dollar fell against a basket of currencies.

WEAK HOUSING, JOBS FRUSTRATING RECOVERY

The government is expected to report on Friday the economy grew at an anemic 1.8 percent annual rate in the second quarter, according to a Reuters survey, a touch slower from the already weak 1.9 percent first-quarter pace.

The weak economy hurt domestic sales of consumer companies such as Colgate-Palmolive Co and Avon Products Inc in the second quarter.

However, Colgate Chief Executive Ian Cook said on Thursday that business in the United States got off to a healthy start in July.

While the rise in pending home sales was encouraging, there has been an increase in contract cancellations because of problems with property valuations and tight lending standards, and high cancellations had pushed down home resales in June.

"The pickup in pending home sales might not necessarily end up in a measurable pick up in mortgage closings and translate into a healthy increase in existing home sales," cautioned Yelena Shulyatyeva, an economist at BNP Paribas in New York.

The weak housing and labor markets are high on the list of factors frustrating the economy's recovery from the 2007-09 recession.

The labor market took a beating in May and June, with nonfarm payrolls increasing only 43,000 over the two months. But the dip in claims below the 400,000 mark offered reason for cautious optimism.

"The recent softness in the labor market may be beginning to subside," said Troy Davig, a senior economist at Barclays Capital in New York.

"The full unwinding of the high gasoline prices and supply chain disruptions stemming from the Japanese earthquake, which led to much of the softness in the second quarter, will take time, but appears to be proceeding."

A four-week moving average of claims, considered a better measure of labor market trends, fell 8,500 to 413,750, while the number of people still receiving benefits under regular programs after an initial week of aid declined 17,000 to 3.70 million in the week ended July 16.

Data for the so-called continuing claims covered the survey week for the household survey from which the unemployment rate is derived. The jobless rate rose to 9.2 percent in June from 9.1 percent in May.

(Editing by Andrea Ricci and Neil Stempleman)

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