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Context of 'November 26, 2008-January 9, 2009: Fannie Mae, Freddie Mac Suspend Foreclosures for Six Weeks'

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US government-seized mortgage finance companies Fannie Mae and Freddie Mac suspend foreclosures from November 26, 2008 until January 9, 2009. The six-week suspension on both foreclosures and evictions will give loan servicers time to implement streamlined loan modifications for struggling borrowers. Since September 6, 2008, Fannie and Freddie have been federal government-controlled and sponsored entities that own or guarantee $5.2 billion of the $12 billion US home mortgage market. They offer borrowers who are 90 days or more delinquent with high loan-to-income ratios a chance to modify their mortgage terms to decrease their monthly mortgage payments by roughly 38 percent of the homeowner’s monthly pretax salary. The companies say they plan to reduce interest rates for up to 5 years while lengthening repayment terms as much as 40 years to trim monthly payments. [Bloomberg, 11/20/2008]

Entity Tags: Federal Home Loan Mortgage Corporation, Federal National Mortgage Association

Timeline Tags: Global Economic Crises

New York University economist Nouriel “Dr. Doom” Roubini and Western Europe Finance and Banking analyst Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on US originated securitizations:
bullet Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, US banks and brokers are expected to incur $1.1 trillion.
bullet Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached $1.92 trillion. According to flow-of-funds data, about 40% of these securities (and losses) are foreign-held. US banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.
bullet US-originated assets’ total loan losses and securities writedowns are expected to reach about $3.6 trillion. The US banking sector is exposed to half of this figure, or about $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns).
bullet As of the third quarter of 2008, Federal Deposit Insurance Corporation-insured banks’ capitalization is $1.3 trillion; as of the same period, investment banks had $110bn in equity capital. Roubini and Parisi-Capone say that past recapitalization through the first release of the TARP funds for $230bn, and private capital of $200bn leaves the US banking system very nearly insolvent, should loss estimates materialize.
bullet In order to restore safe lending, additional private and/or public capital of approximately $1 to 1.4 trillion is needed, thus calling for a comprehensive solution along the lines of a “bad bank” proposed by policymakers, or an outright restructuring through a new resolution trust corporation (RTC).
bullet In September 2008, Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines an RTC to deal with toxic assets, a homeowners loan corporation to reduce homeowners’ debt, and a reconstruction finance corporation to recapitalize viable banks.
They concluded that total financial system losses will likely hit $3.6 trillion, half of which, according to Roubini, “will be borne by US firms,” and that the losses will overwhelm the US financial system which, in the third quarter of 2008, had a capitalization of $1.3 trillion in commercial banks and $110 billion in investment banks. [Bloomberg, 1/20/2009; AFP Reporter, 1/22/2009] Since September 7, 2006, Dr. Roubini, an economics professor at New York University, has been known as “Dr. Doom” after telling an audience of economists at the International Monetary Fund that an economic crisis was brewing in the coming months and years. He warned that the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession, and laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he said, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac. [New York Times Magazine, 8/15/2008]

Entity Tags: Nouriel Roubini, Elisa Parisi-Capone, RGE Monitor

Timeline Tags: Global Economic Crises

President Barack Obama implements a home mortgage rescue plan that he says will prevent as many as 9 million Americans from losing their homes to foreclosure. Obama says that turning around the battered economy requires stemming the continuing tide of foreclosures. He says that the housing crisis that began last year set many other factors in motion and helped lead to the current, widening recession. “In the end, all of us are paying a price for this home mortgage crisis,” Obama says. “All of us will pay an even steeper price if we allow this crisis to deepen. The American dream is being tested by a home mortgage crisis that not only threatens the stability of our economy but also the stability of families and neighborhoods. While this crisis is vast, it begins just one house and one family at a time.” Of the nearly 52 million US homeowners with a mortgage, about 13.8 million, or nearly 27 percent, owe more on their mortgage than their home is currently worth. Obama’s plan contains three initiatives:
bullet Fannie Mae and Freddie Mac homeowners owing between 80 and 105 percent of what their homes are worth can refinance their mortgage. Prior to implementation of the rescue plan, only those borrowers with at least 20 percent home equity could refinance. Refinancing at a lower rate may save borrowers thousands of dollars yearly on their mortgage payments.
bullet Banks will be encouraged to work with homeowners to modify existing mortgages, which is different from refinancing. The Bush administration plan, “Hope for Homeowners,” passed late in 2008, tried to do what Obama has now accomplished, but, since banks were not eager to modify terms to help people stay in their houses, the Bush plan is considered a failure. Under Obama’s plan, banks who received TARP funding will have to participate and, if they do not, Obama may request that the Congress allow bankruptcy judges to modify mortgage terms. Before Obama’s new plan, judges already had the power to modify mortgage terms on a homeowner’s second and third homes, although not on their primary residences.
bullet Interest rates will be kept low by having the Treasury Department buy up mortgage-backed securities from Fannie Mae and Freddie Mac, in the hope of re-inflating the market for mortgage-related products, even if Treasury may be overpaying for toxic assets in a market with few, if any, other buyers. [Mother Jones, 2/18/2009; CNN, 4/16/2009]

Entity Tags: US Department of the Treasury, Barack Obama, Fannie Mae, Freddie Mac, George W. Bush, Troubled Asset Relief Program

Timeline Tags: Global Economic Crises

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