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August 20, 2007
Mortgage
Downturn
name='1'>Mortgage Crisis Prompts Congress to Look at Possible
Bankruptcy Law Changes
As mortgage delinquencies
increase, Congress is looking hard at changing the bankruptcy law so
courts can restructure home loans as they do other personal loans like
credit card debt, the
size='3'>New York Times reported yesterday.
About 1.7 million households will lose their homes to foreclosure this
year and next, according to estimates by Moody’s Economy.com. That
would be nearly double the number of the previous two
years. Protection
for the mortgage lender has been unchanged since the Bankruptcy Reform
Act of 1978. “The bankruptcy law was written for a different
world, and we want to give the bankruptcy courts, and creditors, more
flexible tools to work with borrowers to save their homes,” said
Sen. Richard J. Durbin (D-Ill.). In September, Sen. Durbin, the
Democratic whip, plans to propose amendments to the Bankruptcy Code, in
a bill called the Helping Families Avoid Foreclosure Act. It would,
among other things, permit writing down loans and stretching out payment
href='http://www.nytimes.com/2007/08/19/business/yourmoney/19bankrupt.html?_r=1&adxnnl=1&oref=slogin&ref=yourmoney&adxnnlx=1187611337-lSjcmdHaUSNdswm8ZvR3UA&pagewanted=print'>Read
more.
name='2'>Industry Warns Congress about Shutting Off Credit for
Borrowers
Mortgage brokers,
bankers, loan securitizers, ratings agencies, appraisers and loan
servicers are warning Congress that any strong steps it may take to
correct the current mortgage crisis could shut off mortgages to some
people who are trying to purchase homes,
size='3'>CongressDaily reported on Friday.
Brokers, who are regulated at the state level, appear to be the industry
that will come under the most scrutiny. Senate Banking Chairman
size='3'>Chris
called for a ban on yield spread premium and has said brokers should be
required to act either as a fiduciary agent of the borrower or as an
agent of the lender. The Mortgage Bankers Association is working against
language that would place liability on bankers for loans they make and
imposition of a 'suitability' standard requiring brokers and lenders to
find loans that fit a borrower's specific financial situation. House
Financial Services Chairman Barney Frank (D-Mass.) has said that he does
not want to include a strict suitability standard, preferring language
that would state that lenders should not make loans that the borrower
cannot repay.
name='3'>Study: Debt and Spending May Slow as Housing
Falters
A new research paper
co-written by the vice chairman of the Federal Reserve says that
consumer debt soared over the last six years mainly because of the rapid
increase in housing prices and that consumer spending may slow down over
the next few years, the
size='3'>New York Times reported today. The
paper, authored by Donald L. Kohn, the second-highest ranking Fed
official after Ben S. Bernanke, and Fed Economist Karen E. Dynan said
that higher housing prices made many homeowners feel wealthier and more
willing to take on debt, which they then used to finance more spending.
This spending helped to keep the economy growing at a healthy pace since
the last recession ended in 2001.
size='3'>But the increase in debt “is not likely to be
repeated” unless home prices rise as rapidly as they have in the
recent past and mortgages become even easier for borrowers to obtain,
according to the study. The authors note that the average household now
owes more money than it makes in annual income. In the early 1980s, the
debt-to-income ratio was below 60 percent.
href='http://www.nytimes.com/2007/08/20/business/20kohn.html?pagewanted=print'>Read
more.
name='4'>Judge Denies Bank's Bid to Seize AHM
Loans
Bankruptcy Judge
size='3'>Chris
size='3'>topher Sontchi refused a bid by
Credit Suisse First Boston (CSFB) to immediately wrest control of more
than $46 million in loans from American Home Mortgage Investment Corp.
(AHM), saying that CSFB had not established irreparable harm entitling
them to expedited relief,
size='3'>Bankruptcy Law360
size='3'>reported on Friday. The ruling comes as bad news for the
lender's other Wall Street investors caught up in the mortgage industry
fiasco, including Morgan Stanley, which filed an emergency motion with
the court Wednesday to seize more than $519 million in loans and is
awaiting a hearing. CSFB filed its motion on August 8 for a temporary
restraining order against the lender, claiming it held the rights to $46
million in mortgages serviced by AHM.
href='http://bankruptcy.law360.com/secure/ViewArticle.aspx?Id=32791'>Read
more. (Registration required.)
name='5'>Commentary: Tax Bills Come with
Foreclosure
For consumers who may
fall behind on their housing payments as they rise out of reach with
their adjustable-rate mortgages may receive another financial shock when
they receive their tax bill from the Internal Revenue Service,
theNew York
Times reported yesterday. The 1099 shortfall,
as it is called, stems from an IRS policy that treats forgiven debt of
all types as income even if the taxpayer has nothing tangible to show
for it, unless the debt is canceled through bankruptcy. Notices of
unpaid taxes, unanticipated and little understood, will probably
multiply as more people fall behind on their mortgages, said Ellen
Harnick, senior policy counsel at the Center for Responsible Lending, a
nonpartisan research and policy center in Durham, N.C. Foreclosure is
one way that beleaguered homeowners can fall into this tax trap. The
other is when homeowners are forced to sell their homes for less than
the value of the mortgage. If the lender forgives that difference, they
are liable for income taxes on that amount. Some people in this
predicament are fighting the IRS and winning. Sometimes, lower payments
can be negotiated with the IRS, tax experts say.
href='http://www.nytimes.com/2007/08/20/business/20taxes.html'>Read
more.
name='6'>Commentary: Mortgage Lender’s Bankruptcy Raises
Questions about Buyout Firm Treatment of Ailing
Companies
The bankruptcy of Aegis
Mortgage serves as a reminder that risky turnarounds can mean real pain
for more than just investors raising questions about how buyout firms
will treat ailing companies they have purchased, Fortune.com reported on
Friday. The private investment firm Cerberus bought a controlling stake
in Houston-based Aegis Mortgage in 1998, but despite an infusion of cash
and talent, Aegis ceased operations on Aug. 6.
size='3'>In late 2006, the company had grown its capital reserves to
$361 million, and like many other lenders it couldn't issue mortgages
fast enough for the Wall Street machine that used them to create
high-risk, very profitable bonds. At the height of the mortgage
origination boom, Aegis employed about 3,500 people, mostly in
the
size='3'>area. But Aegis lost it all in just nine months when the market
for mortgage loans tanked.
size='3'>The failure calls into question the management and health of
Cerberus's other loan plays. Cerberus owns a majority stake in GMAC and
its mortgage subsidiary ResCap. Thanks to the credit crunch, the ratings
agencies have downgraded ResCap, thus making it more expensive for the
company to operate. The rising cost of capital may hurt Chrysler
Financial, too, the healthy operation within Chrysler that should have
been able to help fund the ailing automaker's turnaround.
href='http://biz.yahoo.com/hftn/070817/081707_benner_aegis_fortune.html?.v=2'>Read
more.
name='7'>Hedge Funds Squeezed by Banks and
Investors
As problems that began in
subprime mortgage lending have expanded into the broader markets, hedge
funds like Sowood have come face to face with the ghost of past
financial crises: the one-two liquidity punch from banks and investors,
the New York
Times reported today. On the one side, Wall
Street banks and brokerage firms, as they did with Sowood, have stepped
up their demands for more cash and collateral as they restrict the money
they are willing to lend. On the other, jittery investors seem ready to
flee at any sign of trouble, as they did from the Bear Stearns
Asset-Backed Securities Fund. The fund had a solid track record, no
leverage and little exposure to subprime mortgages, but after it
reported losses in July, investors demanded their money and Bear Stearns
was forced to suspend redemptions. Pressure from banks to raise margin
levels as well as pressure from investors could not have come at a worse
time for hedge funds; the prices of the debt instruments they hold
continue to fall, if they trade at all. Stocks widely held by hedge
funds, from small-cap value stocks to potential targets for leveraged
buyouts, have been pummeled. And with volatility in the markets, banks
and hedge funds are scrambling to reduce risk and sell those securities
that can be easily sold.
href='http://www.nytimes.com/2007/08/20/business/20hedge.html?ref=business'>Read
more.
name='8'>Commentary: How Missed Signs Contributed to a Mortgage
Meltdown
A number of financial
players who missed signals of the mortgage downturn include investment
banks happy to sell risky but lucrative mortgage debt to hedge funds
hungry for high-interest payments, bond rating agencies willing to hope
for the best in the housing market and provide sterling credit
appraisals to debt issuers and subprime mortgage brokers addicted to
high sales volumes, according to a
size='3'>New York Times commentary yesterday.
Some of these players now find themselves in a dual role as both enabler
and victim, like the legions of individual borrowers who were convinced
that their homes could only keep rising in value and were confident that
they could afford to stretch for the biggest mortgage possible. Few
professionals on the losing end of these trades are willing to talk
publicly about how what started out as a crisis in an obscure corner of
the credit market — subprime debt— managed to infect stocks
and bonds. But the precipitous fall in the value of mortgage-backed
bonds was spurred by a mad rush by so many holders to dump them
simultaneously.
href='http://www.nytimes.com/2007/08/19/business/19credit.html?pagewanted=print'>Read
more.
name='9'>Sentinel Management Files for Chapter 11
Sentinel Management Group
Inc., a cash-management firm which froze client withdrawals three days
ago, filed for bankruptcy after a judge sought to block it from selling
assets to hedge fund company Citadel Investment Group LLC, Bloomberg
News reported on Friday Sentinel, a Northbrook, Ill.-based firm that
oversees $1.6 billion, stopped the withdrawals Aug. 14, causing brokers
Farr Financial Inc. and Velocity Futures LP to sue. Farr claimed the
freeze blocked access to client funds. Velocity, joining the suit today,
sought to keep its own clients' assets from being sold to Citadel
because the assets are being sold at a 15 percent discount. The assets
may have already been sold, lawyers for both sides told U.S. District
Judge Ronald Guzman today in
w:st='on'>
size='3'>Chicago
court. Sentinel froze withdrawals after saying turmoil in the credit
markets made it impossible to trade without incurring losses.
href='http://quote.bloomberg.com/apps/news?pid=20601087&sid=a7CjyeOgWtxs'>Read
more.
w:st='on'>
name='10'>U.S.
face='Times New Roman' size='3'> Trustee Objects to Werner's
Disclosure Statement and Liquidation Plan
U.S. Trustee
Kelly Beaudin
size='3'>objected to bankrupt Werner Holding Co.'s disclosure statement
and liquidation plan, saying it does not properly address the payment of
administrative claims,
size='3'>Bankruptcy Law360 reported on Friday.
The motion also said that an effort to convert the case to chapter 7
indicates that the estates may not have enough assets to pay the
priority claimants. In June, the company's unsecured creditors’
committee filed a reorganization plan and disclosure statement that
outlined a plan for liquidating the company. The plan called for the
consolidation of all Werner's assets, followed by the cancellation of
intercompany claims.
href='http://bankruptcy.law360.com/Secure/ViewArticle.aspx?id=32805'>Read
more. (Registration required.)
name='11'>Labor Pact Is Approved by a Union at
w:st='on'>
size='3'>Delphi
Members of a union
representing about 2,000 hourly workers of Delphi Corp., the auto parts
supplier, voted to ratify a new four-year contract with
size='3'>Delphi
reported yesterday. Seventy-five percent of International Union of
Electronic Workers-Communications Workers of America members at locals
with
size='3'>Delphi
favor of the deal, the union announced late Saturday. A bankruptcy court
approved the deal last week, so the contract goes into effect
immediately, the Communications Workers’ industrial branch said.
The bankruptcy court last month approved Delphi’s new agreement
with its biggest union, the United Automobile Workers, which represents
17,000
size='3'>Delphi
href='http://www.nytimes.com/2007/08/20/business/20delphi.html?pagewanted=print'>Read
more.
International
name='12'>Debt Puts German Banks in a Bind
Smaller banks in
size='3'>Germany
size='3'>seeking diversification and higher returns have also put large
sums into affiliates, raising concern that they might not have enough
funding to cover to cover shortfalls, the
size='3'>Wall Street Journal reported today.
Mainly because of conduits, issuance of asset-backed commercial paper
has exploded. As of March 31, there was $983 billion in such paper
outstanding globally, up about fivefold from a decade earlier, according
to Standard & Poor's Corp. Conduits issue commercial paper,
borrowing money for terms of less than a year, and use that cash to buy
longer-term bonds paying higher interest rates. The bank behind the
conduit typically collects asset-management fees and investment profits.
The conduit business model breaks down if investors get nervous about
the value of the securities the conduit has bought and stop lending the
conduit money. That is how midtier German bank IKB Deutsche
Industriebank AG ended up with big bills due to its commercial-paper
buyers that it couldn't pay -- and in need of a recent bailout organized
by
face='Times New Roman'
size='3'>Germany
size='3'>'s markets regulator and other German banks. Sachsen LB, a
small, German state-owned bank, became the second German bank to require
a financial rescue in less than a month, saying Friday that a consortium
of banks had stepped in to bail it out after an affiliate faced
difficulties selling commercial paper to finance its operations.
href='http://online.wsj.com/article/SB118755884288202235.html?mod=hpp_us_whats_news'>Read
more. (Registration required.)
href='http://online.wsj.com/article/SB118755884288202235.html?mod=hpp_us_whats_news'>