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Market News (04/30/2008)

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MADISON, Wis. (5/1/08)
* The nation’s gross domestic product (GDP) grew at an anemic 0.6% annual rate during the first quarter, as an inventory buildup kept the economy barely expanding amid weak consumer spending and lower business investment. The Commerce Department noted that the report was preliminary, and based on statistics that are incomplete and subject to revision. The economy also expanded by 0.6% in the fourth quarter. Consumer spending rose at only a 1% rate during the first quarter--slowing sharply from a 2.3% pace in the fourth quarter and the weakest since the second quarter of 2001. Inflationary pressures eased. The core PCE price index, which excludes food and energy, rose at a 2.2% rate--down from a 2.5% pace in the previous quarter. Federal Reserve policymakers closely track the index to keep tabs on inflation (bea.gov and Reuters via Yahoo! News April 30) … * Business fixed investment declined at a 2.5% pace in the first quarter--after a 6% increase during the previous quarter and the largest decline since the first quarter of 2004, according to the Commerce Department report. Spending on residential construction tumbled at a 26.7% rate--the ninth consecutive decline and the largest since the fourth quarter of 1981. Inventories increased at a $1.8 billion annual rate after declining at an $18.3 billion rate. Economists said the inventory buildup probably reflected weak demand, and the report suggests that the economy is in or near recession. Tax-rebate checks may help lift the economy during the second half of the year, as consumer spending strengthens (Reuters via Yahoo! News and Bloomberg.com April 30) … * In a bid to snare consumers’ tax-rebate checks, Wal-Mart Stores said it will cash the checks for free at its customer-service desks or in its MoneyCenters. While no purchase is necessary to cash the checks, the world’s largest retailer also announced price cuts for many key grocery products to coincide with the rebates. Checks totaling more than $100 billion are expected to be in most consumers’ hands by the end of June. Grocery chains Kroger and Supervalu are offering to exchange customers’ tax-rebate checks for gift cards loaded with extra funds. Sears is offering a 10% bonus to customers who trade their rebate checks for a Sears or Kmart gift card (Reuters via The New York Times April 29) … * Millionaires plan to buy stocks and real estate even though they currently view the U.S. economy as “very weak,” according to the latest Fidelity Investments Millionaire Outlook survey. About 27% of millionaires polled said they plan to boost their exposure to individual stocks within the next 12 months, and 14% said they plan to increase their real-estate investments. “Millionaires’ attitudes and behaviors could be seen as a harbinger for economic stabilization or turnaround beginning in early 2009,” said John Callahan, president, Fidelity Institutional Wealth Services. The stock markets also may be anticipating a turnaround for the U.S. economy. The Dow Jones Industrial Average is up almost 8% since mid-March, while the Standard & Poor’s 500 Index is up more than 9.5% (Reuters via The New York Times April 29) … * Mortgage activity fell last week, even as mortgage rates declined, according to a report by the Mortgage Bankers Association (mbaa.org April 30). The trade group’s Market Composite Index dropped 11.1% during the week ending April 25 to 567. The Refinance Index plunged 16.7% to 1905.2, while the Purchase Index fell 4.8% to 340.1. The average 30-year, fixed-rate mortgage (FRM) edged down 3 basis points to 6.01%, and the one-year, adjustable-rate mortgage (ARM) dropped 7 basis points to 6.86%. The refinancing wave that began in January is probably over, said Moody’s Economy.com (April 30). The research firm also noted that ARM applications are down to low levels. ARMs made up just 5.9% of mortgage activity last week--down from 6.6% the previous week and 18% a year earlier … * The cost of employing a U.S. worker increased at the slowest pace in two years during the first quarter as benefit-cost gains slowed, the Labor Department reported Wednesday. Employment costs rose by 0.7%--following a 0.8% increase in the fourth quarter and the slowest pace since the first quarter of 2006. Benefit costs rose by 0.6%, slowing from a 0.8% gain. Wage and salary costs rose 0.8% for a fourth consecutive quarter. Over the past year, employment costs have increased 3.3% (MarketWatch and Thomson Financial April 30) …

News of the Competition (04/30/2008)

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MADISON, Wis. (5/1/08)
* Lenders are seeing a surge in delinquencies on option adjustable-rate mortgages (ARMs). The products may become even more toxic than subprime loans, partly because the loan balance and monthly payments on some are increasing, even as home prices are declining. Borrowers opted for option ARMs during the housing boom because they offered low minimum payments. They were especially popular in markets with high home prices. But many borrowers say they didn’t understand the loans. And a growing number of borrowers with option ARMs now owe more on their loans than their homes are worth. Countrywide Financial said Tuesday that 9.4% of its option ARMs were 90 days or more overdue in the first quarter--up from 5.7% in the fourth quarter and just 1% in the first quarter of last year. Analysts predict that the delinquency rate for option ARMs will continue to increase at many lenders. Attorneys general in California, Colorado and Illinois are investigating the practices of lenders who offer option ARMs. Several private lawsuits allege lenders didn’t adequately disclose the loans’ terms (The Wall Street Journal Online April 30) … * Preparing for a continued jump in bad loans, Citigroup said Tuesday that it plans to raise at least $3 billion in new capital by selling common stock. Citigroup already has collected $39 billion in new capital from investors. “The market is probably not going to like more dilutive shares being issued,” said Sandler O’Neill & Partners Analyst Jeffery Harte. Last week, Citigroup reported a $5.1 billion loss for the first quarter. The company has seen $35 billion in writedowns from the credit crunch (The Wall Street Journal Online April 30) … * Greater Atlantic Financial Corp. announced Tuesday that its wholly-owned banking subsidiary, Greater Atlantic Bank, has consented to a cease and desist order issued by the Office of Thrift Supervision. Among other things, the order requires the bank to maintain a Tier One capital ratio of at least 6% and a total risk-based capital ratio of at least 12%. It also requires the firm to develop a comprehensive long-term operating strategy to implement if its proposed merger with Summit Financial Group isn’t completed. Greater Atlantic also must stop accepting brokered deposits and making certain types of loans without the Regional Director’s approval, and is prohibited from paying dividends and other capital distributions (/PRNewswire-First Call/ April 29) … * Payment Innovations LLC announced the official launch of its BillCharger.com service, which lets consumers use their Visa or MasterCard credit cards online, even if a merchant doesn’t accept credit cards. “Many consumers are finding themselves in situations where a bill that usually requires them to write a check is coming due and they don’t have the cash available in their checking or savings accounts,” said co-founder Andrew Fisher. “BillCharger allows consumers to charge the bill to their credit card and pay the bill on-time, thus avoiding late fees.” According to the Mortgage Bankers Association, almost 10% of Americans say that paying bills is “very difficult,” and 8% of all mortgages aren’t current--the highest percentage since 1985 (Market Wire via Yahoo! Finance April 24) … * The Japanese financial sector has been hit by the U.S. credit crisis. Brokerage Daiwa Securities reported a net loss of $123.8 million for its fiscal fourth quarter (ended March 31)--its first quarterly loss in five years--even though it isn’t directly linked to the U.S. subprime rout. However, the U.S. credit crisis has dampened the Japanese stock market, prompting weaker stock issuance and trading. Lender Sumitomo Mitsui lowered its profit forecast for the full year, as it wrote down the value of share holdings and reported higher credit costs (The Wall Street Journal Online April 29) …

Hampel Rate drop may be lastand151unless economy worsens

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MADISON, Wis. (5/1/08)--Credit unions may expect that Wednesday's 25-basis point drop in the target for the fed funds rate will be the last rate cut, pending no other economic downturns, says Bill Hampel, chief economist with the Credit Union National Association (CUNA). In a widely anticipated move, the Federal Reserve's Open Market Committee lowered the target for the federal funds rate, at which banks borrow from each other, by 25 basis points to 2%. That’s the lowest rate since late 2004. The Fed also lowered the discount rate, at which banks borrow from the Fed, by 25 basis points to 2.25%. What does this mean for credit unions? "We continue to expect strong savings inflows and modest loan growth the rest of the year," Hampel said. "The fact that short-term interest rates have fallen below longer-term rates will provide a little bottom-line relief, but probably not enough to counter increases in loan losses at most credit unions," he added. The rate cut coincided with Wednesday's report on the Gross Domestic Product (GDP). "The GDP report, which shows an economy sputtering into a so-far mild recession, and the Open Market Committee's assertion that it has now substantially eased monetary policy, suggests that this will be the last rate reduction by the Fed unless the economy takes a further turn for the worse," Hampel told News Now. In a statement following the meeting, the Fed said the economy “remains weak,” with subdued consumer and business spending and soft job markets. The central bank said it expects the housing slump and credit crunch to continue dampening economic growth during the remainder of the year. However, Fed policymakers also said they were concerned about higher inflation. “The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation remains high. It will be necessary to continue to monitor inflation developments carefully. "The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability,” the Fed said. Credit unions can find out more in CUNA's "CU Response to the Current Economy" webinar series scheduled for 1-2:30 p.m. CDT Thursdays. Today's session will feature National Credit Union Administration (NCUA) Board Member Gigi Hyland and Dave Marquis, director of NCUA's office of examination and insurance, discussing the economic downturn and its impact on credit unions from a regulatory compliance standpoint. Use the resource link for more information.

News of the Competition (04/29/2008)

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MADISON, Wis. (4/30/08)
* Wachovia Corp. of Charlotte, N.C., is being investigated by federal prosecutors as part of a broad probe of alleged money laundering of drug profits by Mexican and Columbian money-transfer firms, say people familiar with the situation. They say Wachovia is in negotiations with the Justice Department about compliance-system reforms and could face a deferred-prosecution agreement that would mandate extensive federal supervision. In December and January, Wachovia and several other U.S. banks cut their ties with Mexican foreign-exchange companies after authorities started their investigation. Some banks have avoided prosecution by agreeing to improve their money-laundering efforts. Documents filed in federal court detail former ties between Wachovia and casas de cambio, the money-exchange houses along the southern border. Federal regulators have long expressed concern that the houses are often used to launder drug money. “Wachovia is committed to maintaining a strong anti-money-laundering program,” said bank spokeswoman Christy Phillips-Brown (The Wall Street Journal Online April 28) … * The Federal Trade Commission (FTC) is investigating “more than a dozen” mortgage firms for possible deceptive advertising, said Lydia Parnes, director of the agency’s bureau of consumer protection. She told Congress yesterday that the FTC also plans to follow up on more than 200 warning letters the agency sent last year to mortgage brokers and lenders about their advertisements. “The FTC identified the ads, including some in Spanish, in June 2007, during its nationwide review of ads featuring claims for very low interest rates or monthly payment amounts without adequate disclosure of other important loan terms,” she told Congress. Parnes said the FTC will pursue law enforcement efforts when appropriate (Reuters via Yahoo! News April 29) … * MasterCard said its profit more than doubled during the first quarter, as more consumers outside the U.S used their credit and debit cards. The firm said it earned $446.9 million in the first three months of the year--up from $214.9 million a year earlier. Cardholder spending within the U.S. rose at a more moderate pace than outside the nation. U.S. consumers will continue to shift away from luxury purchases and toward necessities such as food and gasoline, which are becoming more expensive, noted MasterCard President and Chief Executive Robert Selander. “We recognize that our customers are experiencing extraordinary challenging conditions,” said Selander. In other news, Visa Inc. said its profit increased 28% in the first quarter, as customers charged more on their cards. Visa also reported that its cardholder spending outside the U.S. rose more quickly, as more people in developing nations used plastic instead of cash (Associated Press via The New York Times April 29) … * Countrywide Financial Corp., the nation’s largest mortgage lender, said Tuesday that it lost $893.1 million in the first quarter as it took more than $3 billion worth of charges for writedowns and bad loans. Countrywide set aside $1.5 billion for bad loans--10 times higher than a year earlier. The company wrote down another $1.5 billion for other securities and claims. It was the third consecutive quarterly loss for the Calabasas, Calif.-based firm, which has agreed to be acquired by Bank of America. The deal would give Bank of America a 25% share of the U.S. mortgage market. BofA announced Monday that it plans to help 265,000 troubled mortgage borrowers keep their homes over the next two years by refinancing or modifying at least $40 billion in mortgages. The firm plans to drop the Countrywide name after the acquisition, which is expected to close in July (Reuters via Yahoo! News April 29) … * Finance company GMAC reported a loss Tuesday of $589 million for the first quarter, compared with a $305 million loss a year earlier. The loss largely reflected continued weakness in its Residential Capital mortgage unit, which has reported losses for more than a year because of its exposure to subprime mortgages. ResCap’s net loss narrowed to $850 million from $910 million. GMAC Chief Financial Officer Robert Hull said earnings will “continue to be challenged” if the economy weakens further (The Wall Street Journal Online April 29) …

Market News (04/29/2008)

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MADISON, Wis. (4/30/08)
* Foreclosure filings soared during the first three months of the year, as declining home values and tighter lending left many homeowners powerless. Almost 650,000 foreclosure filings--including notices of default, auction sales, and bank repossessions--were issued during the first quarter--up 23% from the fourth quarter and 112% from the same period last year, according to a report by RealtyTrac Inc. The first-quarter pace means one in every 194 households were in some stage of foreclosure. So far this year, 156,463 households have lost their homes to repossessions. Foreclosure filings will continue to increase, said RealtyTrac Spokesman Rick Sharga. He noted that a record number of hybrid adjustable-rate mortgages--worth $362 billion--will reset this year. “We expect to see another foreclosure peak in the late third or fourth quarter of the year because of the record number of resets coming.” (CNNMoney.com and Associated Press via Yahoo! News April 29) … * Foreclosure filings increased in all but four states during the first quarter, according to the report by RealtyTrac Inc. Nevada was the hardest hit--with 1 of every 54 homes receiving some type of foreclosure filing. Stockton, Calif., had the highest foreclosure rate of any metropolitan area--with one out of every 30 homes receiving some type of foreclosure filing. The Riverside/San Bernardino area had the second-highest rate, at one of every 38 homes. Just two metro areas outside the Sunbelt were among the 20 hardest hit: Detroit, at one in every 68 households, and Cleveland, at one in every 105 homes. Among states, Pennsylvania was a standout in the foreclosure data. The number of homes receiving a foreclosure-related filing in that state tumbled 24.4% from a year earlier. RealtyTrac Spokesman Rick Sharga attributed the decline to some cities in the state enacting foreclosure moratoriums and other measures designed to help slow the pace of foreclosures (CNNMoney.com and Associated Press via Yahoo! News April 29) … * Home prices declined at a record pace in February, as the housing slump continued. The Standard & Poor’s/Case-Shiller home price index of 20 cities plunged by 12.7% in February from a year earlier--the largest decline since the index was launched in 2000. Of the 20 metropolitan areas, 17 reported record annual declines. Declines were led by a 23% plunge in Las Vegas and a 22% drop in Miami. All 20 metro areas have seen price declines for the past six months, noted David Blitzer, chairman of the index committee at S&P “There is no sign of a bottom in the numbers,” added Blitzer. The 10-city S&P/Case-Shiller index fell 13.6% year-over-year in February--the largest decline since that index was created in 1987 (Bloomberg.com and CNNMoney.com April 29) … * The weak job market and surging energy prices made consumers more downbeat this month. The Conference Board’s Consumer Confidence Index declined to 62.3 in April--from a revised 65.9 in March and the weakest level since a 61.4 reading in March 2003. The index has fallen for the past four consecutive months, from its most recent peak of 90.6 in December. “This continued weakening suggests that not only has the feeble level of growth in the first quarter spilled over into the second quarter, but the economic conditions may have slowed even further,” said Lynn Franco, director of the Board’s Consumer Research Center. “And not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns,” added Franco. She also noted that the percentage of consumers who said they planned to take a vacation over the next six months declined to a 30-year low in April--another indication that consumers have become more thrifty (Associated Press via Yahoo! News and The Wall Street Journal Online April 29) … * Gasoline prices top the list of economic worries for consumers, according to a survey conducted for the Kaiser Family Foundation. About 44% of respondents said paying for gasoline was a “serious problem” for them. The cost of gasoline was the most frequently reported economic worry across all income groups. For respondents with household income under $30,000, about 63% said that paying for gasoline was a serious problem. And about one-fourth of households earning more than $75,000 said they felt that way. Getting a good-paying job and paying for health care came in second and third, respectively, followed by paying the rent or mortgage. Almost 30% of respondents said they had postponed obtaining health care they needed during the past year (Associated Press via Yahoo! News April 29) …

News of the Competition (04/28/2008)

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MADISON, Wis. (4/29/08)
* During a Federal Reserve hearing about its plan to acquire Countrywide Financial, Bank of America pledged to help 265,000 troubled mortgage borrowers keep their homes over the next two years by refinancing or modifying at least $40 billion in mortgages. Bank of America also will double its community-development lending, to $1.5 trillion over the next 10 years, said Liam E. McGee, BofA’s top consumer and small-business executive. The bank also pledged to donate $2 billion to charity over the next 10 years--up 33% from its current level of charitable contributions. McGee pledged to make mortgage lending “available to the underserved” while ensuring “that people who get loans from us can repay them and stay in their homes.” BofA’s bid to acquire mortgage-lender Countrywide would give it a 25% share of the U.S. mortgage market. The deal is expected to close in July (latimes.com April 28) … * The Federal Home Loan Bank (FHLB) system announced Monday that the amount of loans made to its member financial institutions jumped to a record high during the first quarter, as the credit rout eroded other sources of funding for financial institutions. Advances rose 4.3% to $913 billion during the first three months of the year--making up 69% of total assets. “That is our highest reported advances outstanding figure,” said FHLB Spokesman Mike Ciota. The system also reported that its combined net income for the first quarter totaled $697 million--up 12.2% from the previous year. Combined net income was lowered by the FHLBank of Chicago’s net loss of $78 million, which included an impairment loss of $33 million on certain private-issue mortgage-backed securities primarily collateralized by first lien mortgages to subprime borrowers, said the FHLB (Reuters via Yahoo! News April 28) … * The global credit crunch is only just beginning, according to a report by analysts at Morgan Stanley released on Monday. The analysts cut their estimates for 2008 large bank earnings by $17 billion--or 27%--amid rising loan losses and higher expenses. They also lowered their forecasts for 2009 earnings by $13 billion, or 15%. “More capital hikes and dividend cuts [are] coming, as our credit deteriorates and forward earnings decline,” wrote the analysts. They said investors should “underweight” banks with bigger mortgage exposures and those operating in regions hit harder by the credit crunch. Those banks include Wells Fargo, Wachovia, Fifth Third Bancorp, and KeyCorp (Reuters via The New York Times April 28) … * Moody’s Investors Service took a step toward further cutting its rating on General Motors, saying it is worried that GMAC’s struggling mortgage unit won’t be able to support its former parent’s auto operations. GM holds a 49% in the GMAC unit. GMAC’s Residential Capital subprime-lending unit reported $4.3 billion in losses. “GMAC has always filled a critical role in supporting GM’s retail sales, and anything that lessens its ability to provide that support is a negative for GM,” said Bruce Clark, senior vice president at Moody’s. The ratings agency’s current corporate credit rating for GM is B3--only one step above highly speculative (The Wall Street Journal Online April 28) …

Market News (04/28/2008)

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MADISON, Wis. (4/29/08)
* The role of the financial sector, which acquired an increasing share of the U.S stock market, profits, and the economy during the past several decades, could be declining. The role of finance was boosted by deregulation, globalization and technology. Domestic financial-sector profits accounted for 27% of pretax profits in 2007--up from 13% in 1980, according to the Federal Reserve. Financial workers captured a bigger percentage of total U.S. compensation, as the role of the financial sector expanded--a trend that helped widen the gap between the middle class and the rich. Financial workers made about 50% more than comparable employees in other fields in 2005--up sharply from 10% in 1980, according to New York University Economist Thomas Philippon. He said an employment bubble was created--one that now is bursting. There are 60,000 fewer people working in finance than a year ago, according to the Labor Department. Philippon estimates that the sector will lose another 70,000 jobs (The Wall Street Journal Online April 28) … * The number of vacant homes in the U.S. hit a record high during the first quarter, as foreclosures soared, the Census Bureau reported Monday. Declining home prices and stricter lending standards have made it tougher for delinquent mortgage holders to refinance or sell their homes. A record 18.6 million homes stood empty during the first three months of the year--up from 17.6 million a year earlier. The vacancy rate, the percentage of homes empty and for sale, increased to a record-high 2.9%, from 2.8% in the first quarter of 2007. About 2.3 million empty homes were for sale, compared with 2.2 million a year earlier. By region, vacancy rates for the first quarter of this year were the highest in the West--jumping to 3.2% from 2.6% a year earlier. They were lowest in the Northeast, rising to 2% from 1.9% (Bloomberg.com, Associated Press via CNNMoney.com, and Reuters via Yahoo! News April 28) … * Even homeowners with strong credit scores are ending up in foreclosure. More than 20% of subprime mortgage borrowers with credit scores of 840 to 900 were 60 days or more delinquent in September 2007--the most recent month for available data--according to First American LoanPerformance. The default rate was about the same as for borrowers with credit scores in the 540 to 599 range. Default rates rose for people with good credit scores, as borrowers took out bigger loans than they could afford and lenders pushed profitable option- and hybrid-adjustable-rate mortgages that reset to much higher payments. Lenders also failed to assess such risk factors as total household debt. Both borrowers and lenders were counting on home prices to continue rising. Instead, home prices have declined. “You had many mortgage brokers who took the path of least resistance--or the most profitable one,” said Steve Habetz, a mortgage broker in Connecticut. “The elderly and minorities were often put in loans that didn’t make any sense.” (CNNMoney.com April 28) … * Losses from the global credit crunch probably will total $1 trillion, said former World Bank President James Wolfensohn. “I’m more pessimistic than optimistic,” said Wolfensohn after addressing a pension and savings summit in London yesterday. He noted that the International Monetary Fund’s forecast of about $1 trillion in losses is now a “consensus estimate.” Banks already have announced more than $309 billion worth of writedowns and credit losses. “I don’t think in my working lifetime I’ve seen challenges to the major institutions, in terms of writedowns and impact on market capitalization,” said Wolfensohn (Bloomberg.com April 28) … * The U.S. economy is solidly in recession and the economies of Europe and Canada aren’t far behind, according to the latest Moody’s Economy.com Survey of Business Confidence. Economic growth in Asia is near the low end of its potential, although businesses there are the most upbeat. Financial institutions and business-service companies are the most downbeat about their prospects. Business confidence in the U.S. is now consistent with monthly job losses of about 100,000--up from the 75,000 during the first quarter of the year. The survey noted a couple of bright spots. Real-estate firms have become more optimistic in recent weeks. And pricing pressures haven’t increased in tandem with the recent surge in oil and commodity prices … * Gasoline prices jumped to $3.60 a gallon, and oil futures rose to a new record of almost $120 a barrel on Monday amid supply concerns. The national average price Americans pay at the pump rose 0.4 cent overnight to a record-high $3.603 a gallon, according to AAA and the Oil Price Information Service. The average price is 66 cents higher than a year ago. Light, sweet crude for June delivery increased to a record $119.93 a barrel in electronic trading on the New York Mercantile Exchange overnight. Oil analysts will closely watch the Federal Reserve’s decision Wednesday on whether to cut interest rates again. Lower interest rates typically weaken the value of the dollar. But if the Fed signals an end to any future rate cuts, the dollar could strengthen and oil prices could decline (Associated Press via The New York Times April 28) …

Market News (04/25/2008)

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MADISON, Wis. (4/28/08)
* The housing slump has made some previously unaffordable markets attainable to more buyers, one bright spot in the downturn. During the long housing boom, home prices rose much faster than incomes. As measured by the S&P/Case-Shiller national index, home prices jumped 74% over the six years through 2007, while median household income increased 15% (not adjusted for inflation). Now prices are adjusting downward as the housing slump continues. Home prices were sharply overvalued in relation to household income and other factors in 21 metropolitan areas during the fourth quarter of 2007, according to a study by Global Insight and National City Corp. That’s down from a peak of 58 in the second quarter of 2006. Goldman Sachs Chief U.S. Economist Jan Hatzius says the percentage of a typical family’s income needed to pay mortgage payments on a median-priced home now averages 20%--down from 26% in 2006. He predicts that home prices will decline another 10% before stabilizing late in 2009. However, Hatzius says prices could decline even more if foreclosure problems worsen (The Wall Street Journal Online April 24) … * Mortgage refinancings are soaring this year, as record numbers of homeowners convert their adjustable-rate mortgages (ARMs) into fixed-rate mortgages (FRMs). Fannie Mae estimates that the total amount of refinanced mortgage loans will hit $321 billion by the end of June. Fannie says 90% of borrowers will choose a FRM when refinancing. Homeowners with ARMs want to avoid higher payments when their loans reset. Two-thirds of foreclosures in the fourth quarter were ARMs, according to the Mortgage Bankers Association. Citigroup analysts estimate that $460 billion worth of ARMs will reset this year. ARMs probably will account for only 8% of new mortgages in 2008--a record low, according to Freddie Mac. The popularity of ARMs soared in 2004, when ARMs made up 34% of overall mortgage activity--up from 19% the previous year and the largest percentage since 1994 (Bloomberg.com April 25) … * Consumer confidence tumbled to a 26-year low this month amid concerns about soaring fuel and food prices, weakening income gains, and falling home values. The Reuters/ University of Michigan Surveys of Consumers said its final index of confidence for April dropped to 62.6--from 69.5 in March and the lowest reading since 62 in March 1982 during a “stagflationary” period of weak growth and rising inflation. “More consumers reported that their personal financial situation had worsened than any time since 1982 due to high fuel and food prices, as well as shrinking income gains and widespread reports of declines in home values,” said the survey. Almost 90% of respondents said they believe the economy is in recession. The poll also found that consumers “by a wide margin” prefer using their tax-rebate checks to pay down debt or boost their savings (Reuters via The New York Times April 25) … * States will have an estimated $26 billion shortfall during the next budget year due to falling tax receipts in the weak economy, according to a survey by the National Conference of State Legislatures. The group forecasts deficits in 23 states for the 2009 budget year. Moody’s Investors Services has said it may lower states’ credit ratings this year as the housing downturn erodes property-tax revenue and the economic downturn weakens other sources of tax. States that benefited the most from the housing boom may see the biggest deficits next year. The largest projected deficits are in Arizona, Nevada, California, Alabama, and Florida. According to the survey, 16 states plan to respond to their deficits by cutting spending, while at least eight are considering tax or fee increases. However, some states where the economy is based on energy--such as North Dakota and Wyoming--are enjoying good times. North Dakota said its revenue is higher than legislative predictions by 13%. Alaska is enjoying so much money from oil that it expects a surplus of $8 billion next year (Bloomberg.com and Associated Press via Yahoo! News April 25) … * The job market improved in the latest week, but is expected to remain weak this year. First-time claims for unemployment insurance declined by 33,000 during the week ending April 19 to 342,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, fell by 7,250 to 369,500. In another hopeful sign, continuing claims--the number of people still on the benefit rolls after an initial week of aid--declined by 65,000 during the week ended April 12 to 2.934 million. Still, initial unemployment claims have averaged 352,600 so far this year--compared with an average of 321,000 in 2007, noted Bloomberg.com (April 24). Employers probably cut 78,000 jobs in April after cutting 80,000 jobs in March and 76,000 jobs during each of the two previous months, according to a Bloomberg.com survey of economists. The Labor Department will report April data on May 2 … * The housing slump helped erode profit at AutoNation, especially in top markets such as California and Florida. AutoNation reported a $50.7 million profit for the first quarter--down from $77.5 million a year earlier. The auto industry overall reported an 11% drop in new vehicle sales during the period, according to CNW Research. “We expect to continue to see a challenging automotive retail market as long as the current economic difficulties persist,” said AutoNation Chairman and Chief Executive Mike Jackson. “However, AutoNation continues to have confidence in the long-term health of California, Florida, Nevada, and Arizona,” added Jackson. Those four states account for about 60% of the firm’s new-vehicle sales and about 25% of the overall industry’s U.S. sales (MarketWatch April 24) …

News of the Competition (04/25/2008)

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MADISON, Wis. (4/28/08)
* Commercial banks boosted their use of the Federal Reserve’s discount window last week, while investment banks backed away from their use of a temporary direct-lending program. Commercial banks’ lending via the discount window’s primary credit facility totaled $13.462 billion as of April 23--up sharply from $8.83 billion the previous week and topping the previous record of $10.341 billion set only three weeks earlier. Average daily borrowings were $10.73 billion--the highest since after the Sept. 11, 2001 terrorist attacks. However, lending via the separate primary-dealer credit facility for big investment banks totaled $18.56 billion as of April 23--down from $25.66 billion the previous week. Another $25 million passed through the window, as seasonal credit to support banks in rural areas. With the lowered borrowing by investment banks, total lending through the discount window fell 7.1% last week to $32.043 billion (The Wall Street Journal Online and American Banker April 25) … * In the first U.S. regulatory case to target stock manipulation during the credit crunch, former Schottenfeld Group Trader Paul Berliner has agreed to pay $156,000 to settle claims that he spread false rumors about Blackstone’s Group’s bid to acquire Alliance Data Systems. The Securities and Exchange Commission (SEC) said Berliner sought to profit by messaging traders at hedge funds and brokerages on Nov. 29 that Alliance’s board was meeting to discuss a reduced offer by Blackstone. Berliner allegedly said Blackstone wanted to cut its bid to $70 a share from $81.50 a share. Alliance’s shares plunged 17% in a half hour that day, prompting the New York Stock Exchange to temporarily halt trading in the shares. “The story disseminated by Mr. Berliner was a figment of his imagination,” said SEC Attorney Scott Friestad. The SEC claims Berliner made more than $25,000 by shorting the stock to profit from the decline in price (Bloomberg.com April 25) … * Wachovia Corp. of Charlotte, N.C., has agreed to pay an estimated $144 million to settle allegations that consumers were harmed by its relationship with telemarketers and payment processors, the Office of the Comptroller of the Currency announced Friday. The marketers called Wachovia customers, offered them services, obtained bank account information, and then created checks and withdrew funds from the customers’ accounts. Many customers complained that they never authorized the payments or didn’t receive the products or services proffered by the marketers. While admitting no wrongdoing, Wachovia agreed to pay $125 million in claims, $8.9 million for consumer education programs, and a $10 million fine. “We will work diligently to provide restitution to consumers affected by the situation and to educate consumers,” said Wachovia Spokeswoman Christy Phillips-Brown. She said her firm wasn’t directly involved in the telemarketing or in asking for account data (Associated Press and Reuters via The New York Times April 25) … * A ruling by the second U.S. Circuit Court of Appeals has reinstated a class-action suit against a group of banks--including Bank of America, Capital One, JPMorgan Chase, and Citigroup--that force their credit-card customers to use arbitration, not the courts, to settle disputes. The cardholders claimed the banks violated antitrust laws. The cardholders “alleged that the banks--with other co-conspirators, including Wells Fargo and American Express--illegally colluded to force the cardholders to accept mandatory arbitration clauses in their cardholder agreements,” according to the ruling. “The cardholders have adequately alleged antitrust injuries,” said the ruling. A lower court had sided with the banks (Reuters via The New York Times April 25) … * Online auctioneer eBay has used its online expertise and huge user base to turn its MicroPlace Inc. unit, which it acquired in late 2006, into a successful microlending network. MicroPlace connects lenders with entrepreneurs in 22 developing nations. MicroPlace founder Tracey Turner became the unit’s general manager when eBay acquired the firm. The unit has originated 20,000 loans since the site went live in October, said Turner. “The kinds of people that are interested in MicroPlace are those who want to connect their social values … with their investment wallet,” noted Turner. Returns on the microloans range from 1% to 3%. Lenders can send funds via automated clearing house transactions or through PayPal, which doesn’t charge transaction fees for the loans (American Banker April 24) …

Economic webinar to feature NCUAs Hyland Thursday

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MADISON, Wis. (4/28/08)--National Credit Union Administration (NCUA) Board Member Gigi Hyland was recently confirmed as a speaker for this Thursday’s webinar on the economy, offered by the Credit Union National Association. “CU Response to the Current Economy: NCUA/Compliance” will take place May 1 at 1-2:30 p.m. (CDT) for credit union CEOs and senior-level staff. Hyland, along with Dave Marquis, director of the office of examination and insurance for NCUA, will discuss the current economic downturn and its impact on credit unions from a regulatory compliance standpoint. The webinar is the third in a series of six geared toward helping credit unions understand the impact to their operations from the current turn in the nation’s economy. The three remaining sessions will explore investing/asset-liability management, marketing, and mortgage lending. For more information or to register, use the resource link.

Market News (04/24/2008)

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MADISON, Wis. (4/25/08)
* The housing market remained weak in March, as sales slumped, inventories rose, and prices declined, the Commerce Department reported Thursday. Sales of new homes declined by 8.5% to a seasonally-adjusted annual pace of 526,000 units. Sales were down a huge 36.6% from a year earlier. Inventories increased substantially last month. The seasonally-adjusted estimate of new homes for sale at the end of March was 468,000--representing an 11-month supply at the current sales pace--up from 10.2 in February and 8.3 a year earlier. The median new-home price was $227,600--down 6.8% from the previous month and 13.3% from a year earlier. The year-over-year decline is the largest since a 14.6% drop in July 1970 (Associated Press via The New York Times April 24). Home prices are falling the most in formerly boom regions of the nation. Analysts say the housing market will remain weak for the remainder of the year … * Home sales and construction will remain weak at least through the end of this year, according to economists speaking at the National Association of Home Builders (NAHB) conference in Washington, D.C. this week. “Housing production will continue to drag on the economy until the first quarter of 2009,” said NAHB Chief Economist David Seiders. “The explosion of single-family building permits in 2003 to 2005 produced an unsustainable, unprecedented run-up in the building economy,” added Seiders. He said permits “fell off a cliff” when the housing market plunged, with permits returning to levels not seen since the recession of 1991. That produced a huge oversupply of new homes without many buyers. Global Insight Economist Nariman Behravesh was slightly more optimistic about the housing market, predicting that home sales will enter “small positive territory” during the second half of this year. But he said home prices could decline again during the first quarter of next year after the effects of the federal government’s stimulus package fade (CNNMoney.com April 24) … * Mortgage rates increased this week following economic releases that prompted inflationary worries and pointed towards a slowly improving economy. The 30-year, fixed-rate mortgage (FRM) rose 15 basis points to 6.03%, while the 15-year FRM jumped 22 basis points to 5.62%, and the one-year, adjustable-rate mortgage (ARM) increased 19 basis points to 5.29%. “The Producer Price Index jumped 1.1% in March--about double analysts’ expectations,” noted Freddie Mac Vice President and Chief Economist Frank Nothaft. “March’s index of leading indicators showed a tepid increase of 0.1%, after five consecutive months of decline. As a result, trading of federal futures contracts implied a reduced likelihood of a substantial rate cut at the next Federal Open Market Committee meeting.” Despite this week’s increases, mortgage rates remain below year-ago levels. The 30-year FRM stood at 6.16% a year ago, while the 15-year FRM was at 5.87%, and the one-year ARM averaged 5.43% (MarketWatch April 24). For CUNA's Daily Financial Rates, use the link. … * Futures traders and many economists now anticipate only a 25 basis-point cut when Federal Reserve policymakers meet next week. Barclays Capital economists expect a 25 basis-point cut, reflecting an improved economic outlook. “There seems to be a sense in the market that perhaps the worst is behind us,” said Barclays Capital Senior U.S. Economist Julia Coronado. Bear Stearns economists also predict a quarter-point cut when the Fed meets on April 29-30. Traders in the futures market are pricing in an 80% chance of a 25-basis-point cut. Only two weeks ago, they priced in a 100% chance of a quarter-point cut and a 44% chance for a half-point reduction. However, the stock market and other market indicators have improved since then (MarketWatch April 24) … * The housing slump and economic slowdown continued to weaken the manufacturing sector in March, according to a Commerce Department report. Orders for big-ticket durable goods, such as vehicles and appliances, declined by 0.3%, following declines of 0.9% in February and 4.4% in January. That’s the longest stretch of declines since the recession of 2001. Last month’s weakness was led by a 4.6% plunge in orders for autos. The auto sector has been hit hard by rising gasoline prices and the economic slump. Orders for commercial aircraft rose by 5.5%. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, were unchanged in March following a 2% decline in February (Associated Press via Yahoo! News April 24) …

News of the Competition (04/24/2008)

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MADISON, Wis. (4/25/08)
* The subprime-mortgage crisis has prompted a “tsunami” of lawsuits--the largest since the aftermath of the savings-and-loan crisis in the early 1990s, according to a study by Navigant Consulting. During the first three months of this year, 170 new civil cases related to subprime mortgages were filed in federal courts--nearly as much as the 181 cases filed during the last six months of 2007. Class-action suits accounted for 76% of the new cases. “Like the credit crunch itself, the litigation is unrelenting,” said Navigant managing director Jeff Nielsen. He noted that filings now total 448 cases over the 15 months ending in March--not far behind the 550 savings-and-loan cases of the early 1990s. He also noted that cases have spread beyond subprime mortgages to involve claims related to auction-rate securities (FT.com April 24) … * The Federal Reserve announced Wednesday that it will auction an additional $75 billion in Treasury securities to large investment firms, as part of its plan to help ease the credit crunch. The auction--the fifth in a series--was scheduled for Thursday. Bidding companies can put up their risky investments, including mortgage-backed securities, as collateral for the 28-day loan of Treasuries. The central bank so far has provided about $159 billion worth of Treasury securities to investment firms. In its biggest extension of lending authority since the 1930s, the Fed agreed in March to temporarily allow investment firms to receive emergency loans from the Fed (Associated Press via Yahoo! News April 24) … * The Federal Home Loan Bank of Chicago announced Wednesday that it will no longer purchase loans under the Mortgage Partnership Finance program. Member banks must purchase stock in the Home Loan bank to obtain access to the loans, and the Chicago Home Loan bank has stopped paying dividends amid pressure from federal banking regulators. The bank said it will continue funding mortgages for members with existing agreements until the end of July. The bank launched the program in 1997, and it became a model for other regional Home Loan banks. However, the Chicago Home Loan bank didn’t adequately hedge its risks, and regulators required the bank to boost its capital to support the mortgages (American Banker and chicagobusiness.com April 24) … * U.S. insurer Allstate Corp announced Wednesday that large writedowns on mortgage-backed securities and big tornado-related payouts prompted a 77% decline in its first-quarter earnings. The firm’s net income fell to $348 million, from $1.5 billion a year earlier. Allstate saw a $347 million reduction in the value of fixed-income securities related to residential mortgages. The firm also reported a $300 million loss on some derivative-based financial investments (chicagotribune.com April 24) … * Fallout from the U.S. subprime-mortgage crisis continues to spread worldwide. Zurick-based Credit Suisse on Thursday reported a $2.11 billion loss for the first quarter--its first quarterly loss in five years, amid huge writedowns tied to the U.S. subprime-mortgage rout (Associated Press via Yahoo! News and MarketWatch April 24). Writedowns for the period totaled $5.2 billion. However, Switzerland’s second-largest bank said there has been a “continued significant reduction” in its risk exposure. In other news, Australia & New Zealand Banking Group, Australia’s fourth-largest bank, said its net profit declined during the first half of the year, for the first time in 10 years, after it boosted loss provisions because of fallout from the U.S. subprime crisis (The Wall Street Journal Online April 24). The bank’s profit declined 6.6% from a year earlier to $1.85 billion …

CUNA analysis on IU.S. News and World ReportI IAPI

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WASHINGTON (4/25/08)--Two high-profile media outlets--U.S. News & World Report and Associated Press--turned to Credit Union National Association (CUNA) chief economist Bill Hampel Thursday for analysis on key events this week in the housing market. U.S. News & World Report reported on the backlog of unsold new homes, noting yesterday's report--that new-home sales fell 8.5% from last month and nearly 37% from last year--was sour news that undercut the gloomy expectations for the housing market. It turned to Hampel for a "glass-is-half-full perspective." "I believe a good case can be made that most of the really bad news in the housing market is behind us," Hampel told the publication. "This is NOT to suggest we can expect a dramatic resurgence soon, but we're probably only in for a few more months of declines in sales and construction," he said. "After that, sales and construction will level, at admittedly low levels, before beginning a very gradual rebound," he said, noting that unlike previous downturns in the housing market, "this time around we've seen unprecedented declines in home prices. These declines…will drive the adjustment mechanism of rising affordability to put a floor under sales and construction," he concluded. The Associated Press item--about rates on 30-year mortgages topping 6% for the first time in six weeks while inflation pressures rose--pointed out that analysts say the Federal Reserve is likely to scale back its rate cuts to a quarter-point at next week's meeting. Hampel told AP that while interest rates rose this week, they still remain at historically favorable levels. The bigger problem for the housing industry at the moment is that many lenders have tightened credit standards in reaction to rising mortgage defaults, Hampel said. That makes it harder for prospective buyers to qualify for loans, he added.

Economy renews interest in floating-rate certificates

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PLANO, Texas (4/24/08)--Low interest rates and excess liquidity are sparking renewed interest in an investment product that hasn’t received much attention in recent years--floating-rate certificates, said Southwest Corporate FCU. Credit unions flush with liquidity might be hesitant to lock in investments with current long-term fixed interest rates, in expectation that rates eventually will begin to rise again. A viable investment alternative in this low-interest rate environment is a floating-rate certificate of deposit, the corporate said (LoneStar Leaguer April 23). A floating certificate is an investment with interest payments that “float,” adjusting periodically, based upon a pre-established benchmark. Generally, a floating certificate pays a coupon equal to the reference rate, plus a fixed spread. “Floating certificates offer credit unions less interest-rate risk,” said Cynthia Shi, vice president of portfolio management with the Plano, Texas-based corporate. “Floating certificates also fit credit unions’ balance sheet needs. When the cost of funds increases, the floating certificate interest rate increases, thereby minimizing impact to credit unions’ margins in a rising rate environment.” Southwest Corporate offers floating-rate certificates with terms ranging from six-months to three years, tied to one of two reference rates: the Fed funds rate, or the one-month London Interbank Offer Rate (LIBOR). “We have always offered floating certificates,” Shi said. “We are just publicizing them more now because credit unions have become more diverse in their investment requirements and more sophisticated in their balance-sheet management. Credit unions actually can set their own structure for certificates, starting at $5 million and have us create the instrument to match. Most agencies require $25 million.”

News of the Competition (04/23/2008)

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MADISON, Wis. (4/24/08)
* Citing confidentiality, the Securities and Exchange Commission (SEC) has refused a congressional request to disclose why it dropped an investigation into whether Bear Stearns harmed investors by improperly valuing debt securities. It abandoned the probe just months before Bear imploded, leading to its decision to sell itself to JPMorgan Chase. Analysts say congressional investigators could continue to pursue the information by claiming they have previously sought and received more-sensitive data. In addition, Bear Stearns will soon become part of JPMorgan Chase, so the information should be less sensitive (The Wall Street Journal Online April 23) … * Home- and auto-insurer Liberty Mutual announced Wednesday that it has agreed to acquire Seattle-based Safeco Corp. in a $6.2 billion deal that would create the fifth-largest property and casualty insurance firm in the U.S. (The New York Times April 23). The acquisition would help Boston-based Liberty Mutual expand into the West Coast. Safeco has faced increased competition and has seen big payouts for losses in California wildfires. Safeco’s stock value has fallen 19% this year (Bloomberg.com April 23). Commercial insurance rates declined 14% in the first quarter compared with a year earlier, according to the Council of Insurance Agents and Brokers, as firms competed for market share … * Regional banks SunTrust and Fifth Third Bancorp saw their profits eroded by writedowns and soaring loan-loss provisions during the first quarter. Atlanta-based SunTrust’s net income tumbled 44%, as its provision for credit losses jumped almost tenfold and it recorded losses on asset-backed securities. Net chargeoffs rose to 0.97% from 0.21%. Despite the weak results, the bank “is financially strong, with ample liquidity, ample capital, and a solid balance sheet, and we are effectively managing through this difficult economic environment,” said CEO James M. Wells III. Cincinnati-based Fifth Third posted a 19% decline in net income for the first quarter amid weakening credit quality, especially from its operations in Florida and Michigan. The bank increased its provision for loan and lease losses more than sixfold to $544 million. Net chargeoffs surged to 1.37% from 0.39%. CEO Kevin Kabat said the firm’s decision to avoid the subprime market will help it weather the economic slump (The Wall Street Journal Online April 23) … * Ambac Financial Group, the nation’s second-largest bond insurer, reported a $1.66 billion loss for the first quarter--compared with net income of $213.3 million a year earlier. The credit crunch prompted another $1.73 billion in collateralized-debt-obligation losses and $1.04 billion in loss provisions. The company has taken several actions to get it past the credit crisis, raising $1.5 billion and tripling its outstanding shares. Ambac also said it would stop insuring mortgage-backed debt in an effort to retain the AAA rating for its Ambac Assurance subsidiary (The Wall Street Journal Online April 23) … * Sovereign Bancorp, the nation’s second-largest savings and loan, announced Wednesday that its first-quarter net income increased to $100.1 million, about twice its year-ago income of $48.1 million. However, Sovereign set aside $135 million for credit losses--triple the year-ago level--and its net chargeoffs tripled to $74.3 million. The company’s non-performing assets jumped 74% to $484.4 million (Reuters via Yahoo! News April 23) …

Market News (04/23/2008)

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MADISON, Wis. (4/24/08)
* Mortgage activity declined last week as fixed-mortgage rates surged, according to a report by the Mortgage Bankers Association (MBA) (mbaa.org April 23). The trade group’s Market Composite Index tumbled 14.2% during the week ending April 18 to 637.6. The Refinance Index plunged 20.2% to 2286.3, while the Purchase Index fell 6.4% to 357.3. Refinancings made up just 49.2% of overall activity--down from 53.5% the previous week. Mortgage rates were mixed last week. The average 30-year, fixed-rate mortgage (FRM) jumped 30 basis points to 6.04%, while the one-year, adjustable-rate mortgage (FRM) fell 9 basis points to 6.93%. The 30-year FRM is now just nine basis points lower than a year ago, while the one-year ARM is 114 basis points higher, said Moody’s Economy.com (April 23). The research firm also noted that the yield rate for one-month Treasury bills remains under 1%, suggesting a flight to safety that continues to shift funds away from mortgage lending … * Efforts by government officials and mortgage-service firms to deal with the national mortgage crisis have done little to stem foreclosures, according to a report by the State Foreclosure Prevention Working Group. The group of banking regulators and attorneys general in 11 states reported that 70% of borrowers who were seriously behind on their mortgage payments weren’t slated to receive any kind of help. The report said the number of delinquent borrowers working with lenders has increased, but a surge in the number of delinquent borrowers has outpaced any gains. The report noted one bright spot: 66% of borrowers who started working with their lenders in January were in the process of getting their loans modified--up from 45% in October (The Wall Street Journal Online April 23) … * Citigroup and a group of cities in California have asked Moody’s Investors Service to change the way it rates municipal bonds. They say the current rating system is unfair because it uses one method to rate muni bonds and another to rate companies, sovereign issuers, and structured finance. They note that muni bonds default less than corporate bonds, according to recent studies. Rating munis in the same way as corporations and nations probably would result in an upgrade for many muni bonds. The League of California Cities said the current rating system creates “indefensible market discrimination” against states and cities and costs taxpayers “enormous amounts of money” that is needed for investments in infrastructure and public programs (MarketWatch April 23) … * The number of layoff actions involving 50 or more workers from a single firm totaled 1,571 in March--down slightly from 1,672 in February, according to Labor Department data. Layoffs in March involved 157,156 workers, down from 177,374 the previous month. However, the number of layoffs is expected to increase in coming months, as the economy continues to weaken. With high oil prices, the transportation-manufacturing sector will continue to experience significant layoffs, mostly in the Midwest. Florida is the weakest state in the South because of layoffs by homebuilders and mortgage originators (Economy.com April 23) … * Another two U.S. airlines reported steep losses for the first quarter because of soaring fuel costs (Associated Press via Yahoo! News April 23). Delta Air Lines said its losses widened to $6.39 billion in the first quarter because of surging fuel prices and a plunge in the firm’s market value. Northwest Airlines, which has agreed to be acquired by Delta, reported a $4.1 billion loss for the quarter. Other airlines reporting losses for the quarter include UAL Corp., JetBlue Airways, and AirTran Holdings (Reuters via The New York Times April 22). They also cited soaring fuel costs. Crude oil continued to push further into record territory Wednesday, with crude nearing $120 a barrel … * Toyota Motor has overtaken the world sales lead from General Motors. The Japanese automaker sold 2.41 million vehicles during the first quarter, while GM sold 2.25 million. GM barely won the global sales race last year. In the first quarter, GM said a record-high 64% of its sales occurred outside the U.S. Toyota has steadily gained market share, as its production of more fuel-efficient models gained ground (Associated Press via The New York Times April 23) …

News of the Competition (04/22/2008)

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MADISON, Wis. (4/23/08)
* The Federal Reserve has provided a total $360 billion in short-term loans to banks since December in its effort to address the credit crunch. In the Fed’s latest auction on Monday--the 10th since the program was started--commercial banks paid a 2.870% interest rate for the loans. There were 83 bidders for the $50 billion worth of 28-day loans. The central bank received bids for $88.3 billion worth of loans (Associated Press via Yahoo! News April 22) … * Banks continue to slash jobs, as the credit crunch persists. Swiss bank Credit Suisse announced Tuesday that it plans to cut 500 more jobs. The bank already has eliminated about 1,000 investment-banking positions this year. Other major banks to cut jobs include Citigroup, which announced last week that it plans to cut another 9,000 jobs on top of the 4,200 layoffs it announced in January. Bank of America said in January that it would eliminate 650 corporate- and investment-banking jobs, and Lehman Brothers Holdings said in March that it plans to lay off about 1,430 employees. Banks and brokerages worldwide have cut about 49,000 jobs during the past 10 months (Reuters and Bloomberg.com April 22) … * Bank of America announced Tuesday that it plans to change its mortgage-product menu when it completes its acquisition of mortgage-lender Countrywide Financial. Bofa said it will offer traditional mortgages that conform to the guidelines of the government-sponsored enterprises. The company said it also will offer interest-only, fixed-rate and adjustable-rate mortgages that have long reset periods. However, Bofa said it won’t originate subprime mortgages or mortgages that let customers make payments for less than the monthly interest due. The bank’s acquisition of Countrywide is expected to close during the third quarter (Associated Press via Yahoo! News April 22) … * Defaults on prime jumbo mortgages that underlie securities from the last two years surged in February, according to a report by Standard & Poor’s. Loans 90 days or more overdue among 2006 bonds jumped 23% to 1.63%, while the delinquency rate for 2007 securities surged 19% to 0.82%, said S&P. Prime jumbo mortgages have gone bad at an increasing pace, as home prices have plunged (Bloomberg News via American Banker April 22) … * Electronic-payments association Nacha is developing a database of abusive automated clearing house originators to share with member banks. Nacha wants to continue tightening the monitoring of potential fraudulent transactions under its Network Enforcement Rule, said Nacha President and Chief Executive Elliott C. McEntee. He noted that stricter fraud control has become more important, as the system has opened up to more one-time transactions. McEntee said the list probably will be made available to financial institutions by the end of this summer (American Banker April 22) …

Market News (04/22/2008)

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MADISON, Wis. (4/23/08)
* Sales of previously-owned homes fell 2% to an annual pace of 4.93 million units in March, the National Association of Realtors (NAR) reported Tuesday. Sales were down 19.3% from a year earlier. “Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets,” said NAR Chief Economist Lawrence Yun. “At the same time, many buyers continue to bide their time with a large number of homes to choose from, while other potential buyers remain on the sidelines.” Total housing inventory increased 1% at the end of March to 4.06 million homes available for sale. That represents a 9.9-month supply at the current sales pace, up from a 9.6-month supply in February. The national median existing-home price was $200,700 in March--down 7.7% from a year earlier. NAR said there is a downward push on the national median because the slowdown in sales from a year ago is concentrated in high-cost areas (realtor.org April 22) … * Home prices edged up 0.6% in February compared with January, the Office of Federal Housing Enterprise Oversight (Ofheo) announced Tuesday (MarketWatch April 22). Prices were down 2.4% from a year earlier and 3.1% from the peak reached in April 2007. The Ofheo index is based on repeat sales of homes mortgaged via Freddie Mac and Fannie Mae. The Ofheo data may be overly optimistic because the price index under-represents the amount of subprime mortgages and it excludes lower-priced homes bought with non-conventional loans, noted Moody’s Economy.com (April 22). The exclusion of mortgages that exceed Freddie Mac and Fannie Mae limits also eliminates the upper tier of the housing market from the sample, said the research firm, thus ignoring a big component of the housing slump … * Consumer advocates say financial speculators have prompted the recent surge in agricultural prices. However, at a public forum Tuesday the Commodity Futures Trading Commission (CFTC) said there’s no correlation between rising prices and an increase in investments by speculative buyers. The agency also has said that rising oil prices haven’t been driven by speculation. Since the beginning of 2007, wheat futures have shot up 69%, while soybeans have jumped 92%, corn has increased 49%, and rise has soared 131% on the Chicago Board of Trade. CFTC Commissioner Bart Chilton said factors affecting the global supply and demand for farm products--not speculation--explain the surge in agricultural prices. “Thirty-year supply lows, worldwide droughts, fungus, the low dollar--these are all factors that are contributing to high prices in commodities,” said Chilton. Some grain buyers disagree with that assessment. “When you get a huge influx of speculative money, as happened in December and January, the price inflates beyond what the fundamentals would dictate and creates a sort of balloon,” said Daren Coppock, CEO, National Association of Wheat Growers (MarketWatch and The Wall Street Journal Online April 22) … * Gasoline and oil prices moved further into record-high territory Tuesday--with gas hitting a new high of $3.51, and crude oil reaching a new high of more than $118, as the value of the U.S. dollar declined to a new low against the euro (Associated Press via The New York Times April 22). Gas prices are up almost 66 cents from a year ago, and some analysts are predicting that the price could soon hit $4 a gallon. Soaring fuel prices prompted three U.S. airlines to report big losses for the first quarter on Tuesday (Reuters via The New York Times April 22). United Airlines parent UAL Corp. said it lost $537 million during the quarter--more than triple the $152 million loss reported a year earlier. JetBlue Airways reported a net loss of $8 million, smaller than its year-ago loss of $22 million. And AirTran Holdings said it lost $34.8 million in the first quarter--reversing its year-ago profit of $2.2 million. The airlines are announcing cost cuts, fare increases, and new fees to help shore up their balance sheets … * The odds of a recession occurring in the U.S. this year have increased sharply, according to a survey by the National Association for Business Economics (NABE). In the latest poll, 30% of economists said they think the economy will contract during the first half of this year--up from 10% in a survey conducted in January. Seventy percent of respondents said they’re more pessimistic about the economic outlook than they were only three months ago. And 45% said they anticipate a substantial downturn in housing over the next six months (Associated Press via Yahoo! News April 22) …

News of the Competition (04/21/2008)

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MADISON, Wis. (4/22/08)
* Due to credit loss provisions quintupling to $6 billion and investment banking writedowns tallying at least another $1.91 billion, Bank of America Corp. posted a 77% decline in first-quarter net income Monday. Weaknesses in home equity loans and borrowing by small businesses and home builders drove the big increase in credit costs, analysts said. Credit costs will remain an issue throughout 2008, Bank of America said. The losses at the largest retail bank in the U.S. underscore the downward pressure on U.S. consumers, as the housing slump worsens and economic growth slows, increasing the damage to bank profits, analysts said (The Wall Street Journal April 21) … * With losses escalating in 2008, Citigroup may have to cut or eliminate its dividend, according to Meredith Whitney, analyst at Oppenheimer & Co. Citigroup, the largest U.S. bank by asset size, saw Whitney triple her 2008 loss estimate to 45 cents per share. She also reduced her 2009 profit estimate to 90 cents per share from $2.50. In October, Whitney correctly forecasted two months in advance that Citigroup would cut its dividend to preserve capital. On Friday, Citigroup posted a $5.11 billion first-quarter loss and cut 9,000 jobs. The New York-based bank paid a quarterly dividend of 32 cents, compared with a 54-cent quarterly payout last year. “The company has seriously constrained earnings power,” she reported, adding that this may cause Citigroup to “seek additional capital from outside investors.” (Bloomberg.com April 21) … * National City Corp. plans to raise $7 billion after posting its third consecutive quarterly loss. Ohio’s biggest bank and subprime lender said in a statement it intends to raise $6.37 billion selling convertible securities. The Cleveland-based company also said it would offer shares of common stock for $5 per share--40% less than National City’s Friday closing price. Also, the company’s dividend was cut down to one cent per share from 21 cents. National City, like several other banks and securities firms, is being compelled to seek cash to replenish capital, due to subprime-related losses, analysts said (Bloomberg.com April 21) … * Carlyle Group is raising a $500 million collateralized loan obligation (CLO). The world’s second biggest private-equity firm is doing so to buy high-risk, high-yield debt being sold at discounted prices, according to sources who have knowledge of the plan. Deutsche Bank AG is arranging the CLO, which follow the same guidelines as a $450 million CLO that Carlyle and JP Morgan Chase closed earlier this month, the sources said. CLOs, which are a type of collateralized debt obligation, package loans and then channel the income to investors in portions--otherwise known as tranches--of varying risks and ratings (Bloomberg.com April 21) … * Two Lehman Brothers mortgage units were sued for allegedly engaging in improper lending practices that drove up financing fees for minority homebuyers. The units--the $16 billion-asset Lehman Brothers Bank and BNC Mortgage Inc.--wrongly created a discretionary pricing policy that authorized an unchecked, subjective surcharge to additional points and fees to an otherwise objective risk-based financing rate, said the lawsuit, which was filed last week in the U.S. District Court for the Southern District of New York. The suit is seeking class action status on behalf of minorities who have residential mortgage contracts financed, originated or purchased with Lehman units (American Banker April 21) …

Market News (04/21/2008)

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MADISON, Wis. (4/22/08)
* U.S. stocks dropped for the first time in five days after weaker than expected profit reports from Bank of America Corp., the nation's second-largest bank, and from National City Corp., Ohio's largest bank. BofA said bad loans caused its disappointing first-quarter profit, while National City's profits dropped to a 17-year low. The Standard & Poor's 500 Index dropped 8.53 points or 0.6%, to 1,381.8 late Monday morning. The Dow Jones Industrial Average decreased 0.6% or 74.01 points, to 12,775.35 while the Nasdaq Composite Index dropped 8.27 points--or 0.3%--to 2,394.7. For every stock that rose on the New York Stock Exchange, three others declined (Bloomberg.com and The New York Times April 21) … * The Chicago Fed National Activity Index rose to -0.78 during March from February's -1.28 reading. The slight increase was not enough to mitigate the overall weakening of activity the past few months, said Moody's Economy.com (April 21). The three-month moving average, which is a more reliable measurement, inched up to -0.86 from -0.92, which is consistent with an economy already in recession. The three-month average hovered near or below -0.7 for the past four months, also indicating a recession. Since 1967, the index has dropped below that benchmark seven times, and six of those occurred within a recession. The index's four major categories were negative in March, although slightly less so than in February … * Global business confidence hit another record low during the week ending April 18, according to Moody's Economy.com Survey of Business Confidence. Confidence fell sharply after last summer's subprime financial market crisis, and although it maintained the same low range since late last year, it is now at the lowest level since 2002. Businesses' assessments of current business conditions are bleak. Investment in equipment is on firmer ground, but it too has weakened in the past few weeks. Hiring predictions for April are down, and the only good news is inventories are looking less tentative (Economy.com April 21) … * Credit cards are delivering profits far out of proportion to their share of bank assets, according to a report by R.K. Hammer Investment Bankers, a portfolio sale brokerage firm based in Thousand Oaks, Calif. Cards accounted for a higher percentage of bank income, with 6.9% of bank assets and 16% of their earnings last year. That's the most in the past four years, the firm said. As each of the past five years has progressed, the contribution credit card businesses made to bank earnings were at least twice as large as the percentage of assets they represent. However, CEO Robert Hammer expects the recession will mean card businesses will be lucky if they keep the same returns this year (American Banker April 21) … * The Federal Reserve offered $50 billion in 28-day credit Monday through its Term Auction Facility. Minimum bids were for $5 million in $100,000 bid increments. The maximum was $5 billion--10% of the amount offered. Summary auction results will be published on the Fed's website at 10 a.m. EDT today …

News of the Competition (04/18/2008)

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MADISON, Wis. (4/21/08)
* Regulators have widened their investigations into the collapse of the auction-rate securities market. New York Attorney General Andrew Cuomo has subpoenaed 18 banks and securities firms in a probe that could result in criminal charges, said a person familiar with the matter. Cuomo is asking for information about how securities firms decided when to stop bidding on the securities to support the market, as they had for 20 years to prevent failures. More than 60% of the public auctions held each day since Feb. 13 have failed, according to Bloomberg.com statistics. Regulators from nine other states have created a task force to investigate whether brokers misrepresented auction-rate securities as a good alternative to money-market investments. The Securities and Exchange Commission is working with the Financial Industry Regulatory Authority to investigate companies’ disclosures to clients who bought the securities (Bloomberg.com April 18) … * The Bank of England (BOE) is finalizing a plan to bail out struggling British banks and ease the credit crunch. BOE is considering accepting as much as $59.1 billion in mortgages from banks as collateral for loans of government securities, which the banks could use to raise funds, said a person familiar with the matter. British policymakers have been urging banks to disclose the amount of their losses on mortgage securities and to beef up their capital cushions by selling shares to existing shareholders. Analysts have criticized BOE for not responding to the global credit crisis as aggressively as other central banks. The credit crunch ended the British housing boom and threatens to severely weaken the overall economy (The Wall Street Journal Online April 18) … * Investment banks lowered their borrowings at the Federal Reserve’s discount window last week, even as banks boosted their emergency borrowings. Lending through the primary dealer credit facility totaled $25.655 billion as of April 16--down from $26.479 billion the previous week. Average daily borrowing was $24.804 billion, down from $32.562 billion. The statistics show “more signs of dealers needing less funding from the Fed,” said Morgan Stanley Chief Treasury Strategist George Goncalves. Lending to healthy commercial banks through the Fed’s discount window rose by almost $1.5 billion during the week to $8.831 billion. There were no loans to weak commercial banks (Dow Jones Newswires and American Banker April 18) … * In a surprise move, Bank of America announced Friday that it will stop making private student loans and will plan to do more lending under the Federal Family Education Loan (FFEL) program. More than 50 lenders during the past few months have announced that they will stop making FFEL loans because of subsidy cuts and the credit crunch. Bank of America’s strategy shift will provide a much-needed boost to the program, which accounts for about 80% of college loans. Congress also is considering various legislative proposals to help shore up the program (The Wall Street Journal Online April 18) … * Former Fannie Mae Chief Executive Franklin Raines has agreed to pay $24.7 million, as part of a settlement with regulators related to his role in the firm’s overstatement of earnings from 2001 through mid-2004, the Office of Federal Housing Enterprise Oversight (Ofheo) announced Friday. Ofheo sued Raines, Chief Financial Officer Timothy Howard, and Comptroller Leanne Spencer for $215 million in December 2006, alleging that the executives manipulated accounting to meet bonus targets. “My agreement to end this dispute through making a charitable donation of my claim to some Fannie Mae stock, the forfeiture of some stock options, and a payment by the company’s insurance carrier, is consistent with my acceptance of accountability as the leader of Fannie Mae and with my strong denial of the allegations made against me,” said Raines in a statement. Howard agreed to surrender $6.4 million in compensation. Spencer agreed to pay a $275,000 fine (Bloomberg.com April 18) … * Capital One Financial, the nation’s fourth-largest issuer of Visa and MasterCards, announced last week that its earnings declined to $548.5 million in the first quarter, from $675 million a year earlier. Capital One charged off bad loans in its credit-card business at a 5.85% annual rate in the first quarter--up sharply from a 3.72% rate in the first three months of 2007. The McLean, Virginia-based firm set aside $1.08 billion for bad loans, compared with $350 million a year earlier. Capital One said it expects further deterioration in its portfolio, as the economy continues to weaken (Reuters via The New York Times April 18) …

Market News (04/18/2008)

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MADISON, Wis. (4/21/08)
* The housing slump and credit crunch pose the most significant threats to economic growth this year, according to a survey of top executives from firms belonging to the Financial Services Forum. Respondents say there’s an 88% chance that the U.S. will experience a recession within the next 12 months. They expect economic growth of only 0.9% this year--down from 2.2% growth in 2007 and the weakest gain since 2001. Respondents named the next largest threats to the economy as being the possibility that the government will boost taxes and erect trade barriers. “As the U.S. economy slows, trade and economic openness are more important than ever,” said Forum President Rob Nichols (Associated Press via Yahoo! News April 18) … * Companies are cutting employees’ hours as the economy slows, making it even more difficult for workers to make ends meet. Many workers also have been forced to take part-time jobs when they wanted full-time work. Employees’ average work hours fell in March, compared with six months earlier, the first such decline since February 2001, when the economy was close to recession. At the end of March, more than 4.9 million people were working part-time, either because their employers had cut hours or because they couldn’t find full-time jobs, according to Labor Department data. At the same time, soaring prices for food, energy, and medical care have eroded workers’ buying power. Real (inflation-adjusted) weekly earnings declined by 1% over the 12 months ended in March (The New York Times April 18) … * Consumers already facing high food and gasoline prices are now seeing natural-gas prices soar. Since August, natural-gas prices have jumped 93% amid strong demand from overseas nations. Before 2003, natural gas was mostly a regional commodity. But new methods of supercooling and transporting the fuel have boosted global trade and shifted supplies towards the highest bidders. Natural gas heats about half of all homes in the U.S. and generates 20% of the nation’s electricity (The Wall Street Journal Online April 18) … * The economic slump in the U.S. has prompted a large decline in remittances sent home to Mexico from immigrants living in the U.S., increasing poverty south of the border. Remittances were down nearly 7% in January, compared with a year earlier--the largest decline in 13 years, according to Mexican government data. The money sent home to relatives and friends helped Mexican villages grow when the U.S. economy was strong. Now many villages are decaying as the money dries up. Analysts say that, ironically, the trend will push even more Mexicans to migrate north in search of work, as the Mexican economy sags (washingtonpost.com April 18) … * A local United Auto Workers (UAW) unit went on strike last week at a General Motors plant in Michigan. “We are disappointed that UAW Local 602 has taken strike action at the Lansing Delta Township plant,” said Company Spokesman Dan Flores. GM already has idled about 30 plants in North America because of parts shortages, stemming from a seven-week strike at American Axle. GM also is facing a couple of possible strikes at other plants, even as it struggles with sluggish sales in the weak economy (Reuters via The New York Times April 18) ... * The housing slump and economic slowdown continue to prompt layoffs. Citigroup on Friday announced a $1.5 billion loss for the first quarter and said it plans to cut another 9,000 jobs (CNNMoney.com April 18). The firm recorded more than $15 billion in writedowns, mostly from subprime-related exposures. AT&T announced Friday that it is laying off about 4,650 workers, or 1.5% of its workforce (Bloomberg.com April 18). The layoffs are in addition to the 10,000 job cuts announced with the 2006 acquisition of BellSouth Corp., said AT&T Spokesman Walt Sharp. Economists attributed the latest round of layoffs to both the weak economy and a consumer shift to cable and wireless phone service …

News of the Competition (04/17/2008)

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MADISON, Wis. (4/18/08)
* UBS AG has received subpoenas from New York Attorney General Andrew Cuomo over how it handled auction-rate debt, said a source who has seen the document. The investigation is centered on how auctions were handled and how the debt was sold. The $330 billion auction-rate market seized up in late January, as investors flooded dealers with too much debt. Investment banks, which usually stepped in to buy unwanted securities, retreated from the market. In a report, Citigroup predicted that the auction-rate market will disappear. This will have a big impact on state and local governments, which relied on auction-rate securities--long-term bonds that pay short-term rates. Citigroup said investors may now prefer money market funds. “Plain and simple, the money fund turned out to be a superior product, and as the auction rate crisis is resolved, we expect inflows into money market funds.” (Reuters April 17) … * Hedge fund assets surged 27% to $2.6 trillion last year, but slowed during the second half, as the credit crunch began, according to a report by HedgeFund Intelligence (MarketWatch April 17). Several medium-sized and large hedge funds collapsed last year, including two run by Bear Stearns. Hedge funds fell an average 1.5% in the first quarter of this year--the weakest quarterly performance in nearly four years, according to a report by Morningstar (Reuters April 17). “The liquidity crisis that started in the summer of 2007 spilled over into 2008, punishing the markets and hedge fund portfolios,” said Morningstar Hedge Fund Analyst Nadia Van Dalen. Equity-focused hedge funds performed the worst during the quarter … * Merrill Lynch, the world’s biggest brokerage, announced a $2.14 billion loss for the first quarter after posting more than $6.5 billion of new writedowns. It was Merrill’s third consecutive quarterly loss. The firm, which has now written off about $29 billion worth of risky asset-backed securities and leveraged loans, said it plans to slash 3,000 jobs. “This was about as difficult a quarter as I’ve seen in my 30 years on Wall Street,” said CEO John Thain. Moody’s Investors Service said it may cut Merrill’s ratings for the second time in six months after the firm’s latest loss. Banks and brokerages have posted about $200 billion worth of writedowns so far (Associated Press via Yahoo! News April 17) … * Sallie Mae, the largest student lender in the U.S., announced Wednesday that it has cut about 1,000 jobs during the last six months, or about 9% of its workforce. The firm said it lost $103.8 million during the first quarter, compared with a $116.2 million profit a year earlier. Last quarter’s loss reflected $363 million of unrealized losses on derivatives. Salle Mae set aside $137.3 million during the first quarter to cover actual and expected loan losses (washingtonpost.com April 17) … * Countrywide Financial Corp. has created new appraisal guidelines that require more up-to-date data on comparable home sales, say lenders who sell loans to the firm. The new guidelines require appraisals to include two comparable sales that have closed within the past 90 days, along with at least one current listing or pending sale (American Banker April 17) … * General Electric’s GE Capital unit has agreed to acquire much of Citigroup’s North American commercial lending and leasing business, as both firms continue to realign their portfolios. Citigroup is trying to strengthen its balance sheet after seeing almost $22 billion in writedowns in 2007. Citi said the deal is part of its strategy “to direct capital to core businesses.” Citigroup posted a record $9.83 billion loss for the first quarter. GE acquired CitiCapital’s transportation financial services group in 2005 (The Wall Street Journal Online and Reuters April 17) …

Market News (04/17/2008)

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MADISON, Wis. (4/18/08)
* Freddie Mac plans to announce an agreement with Wells Fargo, JPMorgan Chase, and Citigroup to make more funds available for big mortgage loans. Large loans have become very expensive during the credit crunch. To address that problem, Congress passed legislation in February that temporarily boosted the ceiling on loans that can be purchased by Freddie Mac and Fannie Mae to as much as $729,750 in high-cost areas, from the regular $417,000 limit. Freddie has agreed to make 90-day price commitments to the three mortgage lenders. Interest rates on conforming jumbo loans probably will be about 0.50 to 0.75 of a percentage point higher than on loans of $417,000 or less, said Bob Ryan, vice president of mortgage-credit pricing at Freddie Mac (The Wall Street Journal Online April 17) … * Fixed-rate mortgages (FRMs) held steady this week while adjustable-rate mortgages (ARMs) declined, Freddie Mac reported Thursday. The average 30-year FRM was unchanged at 5.88%, while the 15-year FRM fell a slight 2 basis points to 5.40%. The one-year ARM dropped 8 basis points to 5.10%. ARMs continued to decline “amid market speculation that the Federal Reserve may cut rates again at its upcoming committee meeting,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “Currently, the federal funds future contracts suggest nearly a 100% probability that the Fed will cut rates at the end of this month.” Nothaft also noted that housing starts in March fell to the lowest level since March 1991, and consumer sentiment in April dropped to a 26-year low. Mortgage rates are lower than a year ago. The 30-year FRM averaged 6.17% at this time last year, while the 15-year FRM was at 5.89%, and the one-year ARM stood at 5.45% (MarketWatch April 17). For CUNA's Daily Financial Rates, use the link. … * Lending to top-rated companies has slowed during the credit crunch, as banks seek to shore up their capital. Investment-grade loan issuance declined 26% year-over-year during the first quarter--to $69.6 billion, according to Reuters Loan Pricing Corp. Dealogic data show that companies borrowed more than $1 trillion each in 2006 and 2007. They tapped the investment-grade corporate bond market for just $791 billion in 2007 and $662.6 billion in 2006. Banks “are prioritizing deals because they are preserving liquidity for their most-important lending relationships,” said Steven Victorin, head of global loans for North America and Europe at Citigroup (The Wall Street Journal Online April 17) … * The job market weakened further last week, according to the Labor Department. First-time claims for unemployment insurance increased by 17,000 during the week ending April 12 to 372,000. The four-week moving average, which smoothes out weekly volatility, edged down by 750 to 376,000. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, increased by 26,000 during the week ended April 5 to 2.984 million, suggesting that people are having a tough time finding new jobs after they’ve been laid off. At 376,000, the four-week moving average is still below the average of about 400,000 hit during the 2001 recession, noted Moody’s Economy.com (April 17). That’s because hiring was modest throughout the economic expansion, and there is less excess payroll to shed during the current downturn … * The Conference Board’s index of leading economic indicators increased for the first time in six months during March, but was down significantly from a year earlier. The index rose just 0.1% following five months of decline. It was down at a 3.3% rate from March 2007. The index suggests “economic weakness is likely to continue in the near term,” said Conference Board Labor Economist Ken Goldstein. Higher unemployment claims, lower stock prices, and fewer residential building permits were the biggest negatives in March, while an increase in the money supply was the largest positive (Associated Press via Yahoo! News and Economy.com April 17) … * Consumers and businesses are coping with high energy prices, even as the economy slows. Retail gasoline prices rose 1.9 cents to a record-high $3.418 a gallon this week, according to AAA and the Oil Price Information Service (Associated Press via Yahoo! News April 17). Diesel fuel jumped 1.7 cents to a new record-high of $4.146 a gallon. Analysts say gasoline prices could rise to about $4 a gallon later this spring. High fuel costs eroded earnings at two airlines during the first quarter (Reuters via The New York Times April 17). Southwest Airlines posted net profit of $34 million--down from $93 million a year earlier. Continental Airlines reported a net loss of $80 million, compared with a $22 million profit a year earlier. Both firms said high fuel costs eroded their earnings … * Some mortgage markets have stabilized since March, the Federal Reserve said in its latest Beige Book survey of the economy. Lending activity rose in the Philadelphia, Richmond, Va., and St. Louis districts. And the Federal Reserve banks of New York, Cleveland, Chicago, and San Francisco said home mortgage lending has stabilized since March. Still, many districts also reported tighter lending standards and rising delinquencies (American Banker April 17) …

Market News (04/16/2008)

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MADISON, Wis. (4/17/08)
* Inflation remained largely within expectations last month, allowing the Federal Reserve room to ease interest rates further. The Consumer Price Index (CPI) rose 0.3% in March following virtually no change in February, the Labor Department reported Wednesday. The energy index jumped 1.9% last month after falling 0.5%. The food index rose 0.4% following a 0.2% gain. Excluding the volatile food and energy categories, the core CPI rose 0.2% last month after no change in February. Over the 12 months ending in March, the core CPI rose 2.4%, compared with a 4% jump in the overall CPI. The core CPI is slightly above the upper end of the Federal Reserve’s preferred range of 1% to 2%. Many categories posted large gains over the past year. The energy index jumped 17%, while the food index rose 4.5%. The transportation index soared 8.2%, while the medical-care component surged 4.6% … * Price pressures from food, energy, and raw materials have increased across much of the nation, even as economic conditions weakened, according to the Federal Reserve’s latest Beige Book survey of the economy. “Price increases were consistently reported for food products, fuel and energy products, and many raw materials,” said the Fed. The report said there also were some reports of rising wage pressure, and some manufacturers said they planned to raise their selling prices to recoup the rising cost of raw materials. The Fed said economic growth has slowed in nine of its 12 districts since February--eroded by “anemic” real-estate markets and sluggish consumer spending. “Housing markets and home construction remained sluggish throughout most of the nation.” (Reuters and Bloomberg.com April 16) … * Initial construction of new homes tumbled 11.9% in March to a seasonally-adjusted 947,000 annual pace—the lowest level in 17 years, the Commerce Department reported Wednesday. The rate was 36% lower than in March 2007. The decline is necessary to reestablish balance in the housing market, noted Weiss Research Real Estate Analyst Mike Larson. “As painful as these numbers are in the short term, they are exactly what we need for long-term growth.” The market probably will experience more weakness in coming months. Building permits, a gauge of future construction activity, declined by 5.8% to an annual pace of 927,000 in March. And builder confidence in the market remained unchanged for a third consecutive month in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The index remained at 20, close to the record low of 18 reached in December. Only about one-in-five homebuilders has a positive outlook on the housing sector (CNNMoney.com and MarketWatch April 16) … * States are trying a wide range of solutions to address the foreclosure crisis, according to a survey by the Pew Charitable Trusts. The study found that 20 states have launched intervention programs, while 13 have created counseling hot lines. In addition, 14 states have created task forces and 9 have created funds for emergency loans or refinancings, totaling $450 million. “States have had to step into the void because the federal government has not moved,” said Pew Senior Program Officer Tobi Walker. Some states also have passed legislation to address the problem. Maryland passed a ban on prepayment penalties, which often make it difficult for borrowers to refinance. Some states--including Colorado, Maine, Massachusetts, Minnesota, North Carolina, and Ohio--have passed bills requiring tighter underwriting standards. But critics say the federal government needs to do much more to address the problem. “Much more serious progress is only going to be achieved if the feds take appropriate action,” said Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio (The New York Times April 16) … * Mortgage activity rebounded last week, as mortgage rates declined and refinancings increased, according to a report by the Mortgage Bankers Association (mbaa.org April 16). The trade group’s Market Composite Index rose 2.5% during the week ending April 11 to 743.4. The Refinance Index jumped 5.2% to 2866, while the Purchase Index fell 0.8% to 381.6. Refinancings made up 53.5% of overall applications, up from 52.2% the previous week. The average 30-year, fixed-rate mortgage (FRM) fell 4 basis points to 5.74% last week, while the one-year, adjustable-rate mortgage dropped 4 basis points to 7.02%. The 30-year FRM is now 48 basis points lower than a year ago, while the one-year ARM is 114 basis points higher, said Moody’s Economy.com (April 16). ARMs made up just 6% of mortgage activity last week--down from 6.5% the previous week and 18% a year earlier. The research firm noted that only much lower interest rates or much stronger lender confidence will prompt an increase in purchase mortgage applications in the months ahead … * Industrial production increased 0.3% in March following a 0.7% drop in February, the Federal Reserve reported Wednesday. The small gain in March mostly reflected a 1.9% jump in utility output. Manufacturing output rose just 0.1%, dampened by a large decline in the production of motor vehicles, as a strike at a parts manufacturer idled some auto-assembly plants. The output of mines increased 0.9%. The capacity utilization rate for all industry edged up 0.2 percentage point to 80.5% in March. For the first quarter, industrial production declined at a 0.1% annual rate after edging up at a 0.4% rate in the fourth quarter … * Seventy-one percent of small- and medium-sized firms say the economy is in worse shape than it was five years ago, according to a survey by the National Small Business Association. That’s up from 43% in a poll conducted last year. Fifty-five percent said they have faced problems in securing credit during the past year, and 45% said they expect the economy to fall into a recession within the next year. Just 28% of respondents said they had sought bank loans--down from 29% last year and the lowest percentage since the association began conducting the annual poll in 1993 (Reuters via The New York Times April 16) …

News of the Competition (04/16/2008)

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MADISON, Wis. (4/17/08)
* The Student Loan Corp. (SLC) announced Wednesday that it plans to suspend lending at some schools and withdraw from the Federal Consolidation Loan market because of the turbulent market and federal legislation (Reuters April 16). “These changes reflect the decisive action that is needed to manage our business through this difficult time in the overall economy,” said Michael Reardon, CEO of SLC, which is majority-owned by Citigroup’s Citibank N.A. Last year, Congress cut the federal subsidies paid to lenders participating in the federal student loan program. At least 50 lenders have stopped making student loans, as the cost of raising money has soared, and the loans became less profitable (Bloomberg.com April 15). Several Democratic lawmakers have introduced proposals to help college students borrow money … * The subprime-mortgage crisis will cost U.S. commercial banks about $60 billion in losses--assuming a 40% recovery rate, the Organization of Economic Cooperation and Development (OECD) said Wednesday. The OECD said a $60 billion loss would lower total assets by $548 billion or 5.4%, “assuming no new capital is injected, and that there is no socialization of the losses. The magnitude of the decline in nominal banks assets now projected … would imply an exceedingly heavy impact on [gross domestic product] and hence cannot be allowed to happen.” The OECD said raising capital from private institutions or sovereign-wealth funds would help. The organization estimates the overall price tag of the financial crisis at $350 billion to $420 billion (The Wall Street Journal Online April 16) … * Stronger-than-expected bank earnings announcements and reports on inflation and housing that were mostly within expectations prompted a rebound in stocks yesterday (Associated Press via Yahoo! News April 16). The Dow Jones Industrial Average rose 201.19 to 12563.66 in early afternoon trading. The Dow has gained more than 700 points from the lows of around 11,740 hit on March 10. JPMorgan Chase reported net income Wednesday of $2.4 billion for the first quarter--down 50% from a year earlier (CNNMoney.com April 16). However, the earnings decline was smaller than analysts expected. The company reported a $2.6 billion writedown on its loan portfolio and said it added $2.5 billion to its loan-loss allowance. Wells Fargo also reported a profit decline for the first quarter that topped analysts’ forecasts (Reuters April 16). The nation’s second-largest mortgage lender said its profit fell 11%, the second consecutive quarterly decline. The firm set aside $2.03 billion for credit losses--almost three times higher than a year earlier. Its net chargeoffs more than doubled to $1.53 billion, while non-performing assets jumped 60% to $4.5 billion. … * Bowing to shareholder pressure, Washington Mutual said it will revise an incentive-compensation program that protected executives’ cash bonuses from some costs linked to mortgage losses and foreclosures. Mary E. Pugh, who oversaw the board’s finance committee, has resigned from the board, said Chairman and Chief Executive Kerry Killinger. Some shareholders are also asking for Killinger’s resignation. Another proposal calls for WaMu to appoint a director who is independent of the company as chairman to “ensure proper oversight of executives and to increase accountability by executive management to the entire board.” (The Wall Street Journal Online April 16) … * Citigroup has won the dismissal of a large part of a New Jersey lawsuit about its alleged role in the collapse of Italian food company Parmalat SpA in 2003. Parmalat claims that Citigroup helped its previous management disguise losses, contributing to its eventual bankruptcy. Judge Jonathan Harris of Bergen County Superior Court dismissed most of Pamalat’s claims, including racketeering and fraud. But he said Parmalat CEO Enrico Bondi may pursue a claim that Citigroup aided and abetted a breach of fiduciary duties by former Parmalat insiders who stole from the firm. The ruling could prompt a settlement of the suit for much less than the $7.3 billion in damages Pamalat had been seeking (The Wall Street Journal Online April 16) …

Market News (04/15/2008)

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MADISON, Wis. (4/16/08)
* Foreclosure filings surged 57% in March compared with a year earlier, according to a report by Irvine, Calif.-based RealtyTrac Inc. Filings were up 5% from February. The report said 234,685 homes were in some stage of foreclosure last month--or one in every 538 households. Of those filings, 51,393 homes were lost to foreclosure--up 10% from February. Year-over-year, the number of homes repossessed by banks was up 129% in March, while the number of foreclosed homes going up for auction rose just 32%. That difference means more borrowers are just walking away from their homes after defaulting, said RealtyTrac Chief Executive James Saccacio. Nevada, California, and Florida had the highest foreclosure rates. In Nevada, one out of every 139 households received a foreclosure notice last month. In California, the rate was one out of 204. The foreclosure rate in Florida was one out of 282. Foreclosure filings are expected to continue rising this year. About $460 billion of adjustable-rate loans are scheduled to reset to higher rates in 2008, according to Citigroup analysts (CNNMoney.com and Bloomberg.com April 15) … * In another foreclosure report by Calif.-based ForeclosureS.com, lenders repossessed 210,280 homes during the first quarter--affecting about three of every 1,000 U.S. households. That’s up 70.6% from 1.7 of every 1,000 households a year earlier and 2.7 per 1,000 in the fourth quarter. Another 0.7% of homes were in some stage of default in the first quarter that could lead to repossession. For all of 2007, almost 1.32 million homeowners or 18.2 of every 1,000 households nationwide faced pre-foreclosure--up 60% from 636,957 filings or 11.4 per 1,000 households in 2006. Let’s get some perspective on those numbers though, said ForeclosureS.com President Alexis McGee. “Total outstanding U.S. mortgage debt is more than $10 trillion. Foreclosures are a drop in that bucket,” said McGee (BUSINESS WIRE and Dow Jones Newswires April 15) … * The U.S. is seeing a wave of bankruptcies at shopping centers nationwide, as consumers curb spending and banks balk at extending credit. Chain stores typically borrow large sums from banks to cover such routine expenses as wages and electricity bills, then pay the loans off when sales are strong, as during the holiday season. However, banks are refusing to extend credit. About eight midsized chains have filed for bankruptcy since last autumn. These chains are leaving behind a mountain of unpaid bills, having a ripple effect on shipping firms, manufacturers, mall owners and advertising agencies. Analysts say many of the bankrupt firms won’t be able to reorganize because of tighter deadlines imposed by the new bankruptcy code and because of the recession. Even chains that aren’t filing for bankruptcy are closing stores or delaying planned openings. The International Council of Shopping Centers predicts there will be 5,770 store closings this year, up 25% from last year (The New York Times April 15) … * Delta Air Lines and Northwest Airlines Corp. have agreed to merge in a deal that would create the world’s biggest airlines--with $35 billion in revenue, a fleet of about 800 aircraft, and 75,000 employees. Industry analysts say the deal will prompt a wave of consolidation in the airline industry, which has been hit hard by soaring fuel costs and the economic downturn in the U.S. The firms hope the merger will be approved by the Justice Department because the airlines have little route overlap. Consumer advocates worry, however, that airfares will increase and small communities will lose air service. Delta CEO Richard Anderson said he doesn’t anticipate any layoffs in rank-and-file employees from the merger, because frontline staffs at both firms already are lean after restructurings. The combined company would retain the Delta name, would be headquartered in Atlanta, and be run by Anderson (The Wall Street Journal Online April 15) … * Soaring food and energy costs prompted a surge in wholesale inflation last month. The Producer Price Index (PPI) jumped by 1.1% in March--accelerating from a 0.3% gain in February and the largest increase since a 2.6% surge in November, the Labor Department reported Tuesday. Wholesale energy prices soared 2.9% in March, while food costs jumped 1.2%. Excluding those volatile categories, the core PPI rose a much tamer 0.2% in March following a 0.5% increase in February. Over the past 12 months, the core PPI was up 2.7%, compared with a 6.9% surge in the overall PPI. Inflation probably will moderate in coming months if demand doesn’t pick up, said Moody’s Economy.com (April 15). Moderating inflation will make it easier for the Federal Reserve to keep interest rates low … * Oil prices surged to a new record high Tuesday amid concern about the global oil supply. Light, sweet crude for May delivery rose as high as $113.66 a barrel on the New York Mercantile Exchange in afternoon trading in Europe--$1.45 higher than its previous record. An International Energy Agency report said Russian oil production has declined this year, for the first time in 10 years. Russia is the world’s biggest oil exporter after Saudi Arabia. A decline in the value of the U.S. dollar also helped buoy oil prices. Higher oil prices helped push gasoline prices to a new record high this week. Retail gasoline averaged $3.39 a gallon--up more than 50 cents from a year ago, according to AAA. Diesel now averages $4.12 a gallon, up $1.18 from a year ago (Associated Press via Yahoo! News and The New York Times April 15) …

News of the Competition (04/15/2008)

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MADISON, Wis. (4/16/08)
* The performance of government-sponsored enterprises (GSEs), such as Freddie Mac and Fannie Mae, could harm the nation’s credit rating and have a direct impact on the economy, said Standard & Poor’s in a report Monday. The ratings agency said the U.S. could lose its AAA rating if the government were forced to bail out the GSEs. S&P noted that the credit crunch hasn’t yet threatened the nation’s credit ratings, but that a prolonged recession could prompt strains at Freddie and Fannie. The two GSEs also are guaranteeing bigger loans as part of the government’s effort to support the housing market--adding to their risk. The two firms must provide as much as $200 billion in new funding for mortgage loans in exchange for having their capital requirements eased. “These potential risks are not a prediction, but a risk worth monitoring,” said S&P. A lower credit rating would mean higher borrowing costs for the federal government and could prompt a flight from Treasury securities (The Wall Street Journal Online and Dow Jones Newswires April 15) … * The shortage of student loans will become more apparent as demand increases next month, said John Remondi, chief financial officer of SLM Corp. (Sallie Mae). “For the current academic year lending season, we are facing a scenario where demand for student loans will significantly outstrip supply,” Remondi told the Senate Banking Committee yesterday. “The gap between available loans and the demand for them could manifest itself as early as May,” added Remondi. About 50 lenders have stopped making student loans, as the cost of raising money has soared. Several Democratic lawmakers have introduced proposals to help college students borrow money (Bloomberg.com April 15) … * Private-equity firms are still raising money from investors despite the credit crunch, according to a report by London-based Private Equity Intelligence Ltd. During the first quarter, $163.5 billion was raised worldwide--the largest quarterly total since $195 billion during the second quarter of 2007. In the latest period, 46 buyout funds raised $82 billion, with 48% of that coming from U.S.-focused funds, 40% from Europe-focused funds, and 12% from funds focused on Asia and other regions. The remainder of the capital was raised by other vehicles including real-estate funds, mezzanine funds, and funds of funds (Reuters via Yahoo! News April 15) … * Several regional banks posted weak earnings for the first quarter, as plunging home prices and consumers’ financial strains prompted large writeoffs and higher loan-loss provisions. In one bright spot, Visa Inc.’s initial public offering (IPO) helped boost regionals’ financial results. Birmingham, Ala.-based Regions Financial Corp. said its first-quarter profit rose just 1% to $336.7 billion, as increased delinquencies and loan-loss provisions were barely offset by Visa gains and the sale of investment securities. At Minneapolis-based U.S. Bancorp, first-quarter income dipped to $1.09 billion, from $1.13 billion a year earlier. The quarter included a $492 million gain related to Visa’s IPO. Milwaukee-based Marshall & IIsley said its first-quarter income plunged 33% to $146.2 million. Its first-quarter chargeoffs totaled $131 million, and the firm boosted its loan-loss provisions to $146.3 million from $17.1 million. Buffalo, N.Y.-based M&T Bank Corp. said its first-quarter income rose 15% to $202.2 million. The firm said Visa’s IPO buoyed its results by $29 million. Still, the firm’s net chargeoffs rose to $46 million from $17 million, while its loan-loss provisions increased to $60 million from $27 million (MarketWatch April 15) …

Market News (04/14/2008)

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MADISON, Wis. (4/15/08)
* Consumers hit by rising food and energy costs stayed away from the malls last month (Associated Press via Yahoo! News April 14). Retail sales rose just 0.2% following a 0.4% drop in February, the Commerce Department reported Monday. The March gain mostly reflected a 1.1% jump in sales at gasoline service stations due to higher gasoline prices. Excluding those sales, retail sales were flat last month. Sales at department stores and general merchandise outlets declined by 0.6%. Much of the gain in retail sales last month was concentrated in retailers that are benefiting from food and energy price inflation, noted Moody’s Economy.com (April 14). Excluding those segments, sales have been on a distinct downward trend since the middle of last year … * Food shortages and soaring prices for food are a much bigger threat to economic and political stability worldwide than the credit crunch, said officials at the World Bank on Sunday. “Throughout the weekend we have heard again and again from ministers in developing countries and emerging economies that this is a priority issue,” said World Bank President Robert B. Zoellick. He said a doubling in food prices over the past three years has pushed people in poor nations even deeper into poverty. Zoellick also noted that nearly half of the $500 million that the World Food Program recently requested already has been committed. Dominique Strauss-Kahn, managing director of the International Monetary Fund, said many financial officials have complained that the West’s focus on shifting the production of corn and other commodities to produce fuel has helped create a shortage of food and soaring prices. He said many financial officials have called that shift in focus “a crime against humanity.” (The New York Times and Associated Press via CNNMoney.com April 14) … * High food prices threaten to become permanent, as farm costs continue to soar. Higher fuel prices have increased the cost of fertilizer and made it more costly to operate farm equipment. Equipment prices also are soaring because of strong demand for farm machinery in China and other developing nations. And farm wages are rising because of robust demand for food. Rising prices for commodities have prompted “ a complete structural shift” in farm prices to a new, higher level, said Michael Lewis, global head of commodities research at Deutsche Bank (The Wall Street Journal Online April 14) … * The financial crisis will affect market structure and pricing for at least another 10 years and prompt increased regulatory powers for central banks, said JPMorgan analysts. “Market participants and regulators will focus intensely on controlling the risks that were at the core of the crisis,” said analysts Jan Loeys and Margaret Cannella. They predict that banks will become “bigger, safer and somewhat less profitable” as they retain more assets on their balance sheets. “Banks did not have the tools to try to protect the capital market from its own excesses,” said the analysts. Central banks therefore will have to take on more power (Reuters via Yahoo! News April 14) … * The economic downturn is hitting the federal government’s finances. The federal budget deficit jumped to a record-high $311.4 billion during the first half of the budget year--20.5% higher than in the same period last year and topping the previous six-month high of $302 billion set in 2006, the Treasury Department reported last week (Associated Press via CNNMoney.com April 10). Economists say the $168 billion economic stimulus package, slower tax receipts due to the economic downturn, and continued expenditures for the wars in Iraq and Afghanistan will push the 2008 deficit into record territory. Moody’s Economy.com (April 10) predicts that the fiscal 2008 budget deficit will total about $400 billion--up sharply from the $163 billion deficit recorded for fiscal 2007 and the largest deficit in four years. The research firm noted that the tax cuts enacted by President Bush in his first tem have permanently lowered personal-income tax receipts as a share of GDP … * Internal Revenue Service (IRS) audits of large corporations have declined to a 20-year low, according to a study by Transactional Records Access Clearinghouse (TRAC), a research group associated with Syracuse University. The nation’s largest corporations--with assets of $250 million or more--have only about a one-in-four probability of being audited--down from a three-in-four chance in 1990. The study indicates that the IRS has shifted its focus from large corporations to smaller firms and private partnerships. After reviewing the study, the IRS said the shift in focus is appropriate because companies and wealthy individuals are using partnerships and other obscure entities to minimize their tax liabilities. The agency noted that it is bringing in more tax revenues from corporations of all sizes today (The New York Times April 15) …

News of the Competition (04/14/2008)

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MADISON, Wis. (4/15/08)
* Student lender Sallie Mae announced Friday that it plans to stop offering federal consolidation loans. The credit crunch and recent cuts in federal subsidies for student loans have prompted many lenders to stop making federal student loans. Consolidation loans have been the hardest hit because they’re the least profitable for lenders. Eight of the top 10 student lenders that provided federal consolidation loans have exited the business during the past few months, estimates Mark Kantrowitz, publisher of FinAid.org (The Wall Street Journal Online April 14) … * Some cities are trying to mitigate the effects of foreclosures on neighborhoods by increasing lenders’ costs of holding onto foreclosed properties. They are imposing big fines or other sanctions for code violations on foreclosed homes that have been sitting vacant for a long time. St. Paul, Minn., Mayor Chris Coleman has given 19 firms--most of them lenders and servicers--30 days to propose a plan to rehabilitate foreclosed homes or face legal sanctions. An ordinance in Palmdale, Calif., makes lenders pay a $100 registration fee for vacant homes, and as much as $2,500 for code violations. In response, some lenders are crying foul. “Cities are using the citations as a tax,” said Jonathan Engman, an attorney with the Detroit firm of Fabrizio & Brook PC, which represents lenders (American Banker April 14) … * Wachovia Corp. of Charlotte, N.C., posted a $350 million loss for the first quarter. The firm said the quarter included a $2.8 billion provision for possible credit losses--up from just $177 million a year earlier. Wachovia said it expects charge-offs and additional reserves of $3.2 billion to $3.8 billion for this year. The firm also announced that it plans to raise $7 billion by selling common and preferred shares. Wachovia cut its quarterly dividend to 37.5 cents from 64 cents. “The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses,” said CEO Ken Thompson. “As a result, we have substantially increased our reserves,” added Thompson (CNNMoney.com April 14) … * Wachovia Corp. announced that it is tightening mortgage-underwriting standards by imposing minimum credit scores and requiring borrowers to verify their employment and assets. The firm’s new requirements will apply to mortgages held on its balance sheets, said Wachovia Spokesman Don Vecchiarello. He said the firm also is adjusting its loan-to-value guidelines in some markets. Keefe, Bruyette & Woods Analyst Jefferson Harralson has estimated that about 20% of Wachovia’s option adjustable-rate mortgages have credit scores under 620--compared with “about 2%” for other firms (American Banker April 14) … * Some activist shareholders are tying to oust several Washington Mutual board members. They say the board members should have known that housing prices were poised to decline and they shouldn’t have given out hefty bonuses to executives, even as the firm’s shares lost value. WaMu announced last week that it anticipates a big loss for the first quarter and is setting aside $3.5 billion for mortgage delinquencies and defaults. The company also said it planned to take a $1 billion cash injection from private equity group TPG and other investors, a move that would dilute shareholder value (Associated Press via The New York Times April 14) …

Recession is consumer-led Hampel tells IAPI

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NEW YORK (4/15/08)--The current U.S. economic recession is consumer-led, Bill Hampel, chief economist for the Credit Union National Association, told the Associated Press (AP). CNN picked up the story Monday. Media outlets running the AP story include CNN.com, CNNMoney.com, FoxNews.com, Marketplace, Miami Herald and Washington Post online, Forbes.com, MSNMoney.com and MSNBC.com. Households are cutting back on their spending because of unmanageable debt, and the drop in spending is pulling the economy down, Hampel said. “How long they do this is how long the recession ends up being,” he told the AP. Economists surveyed Friday by Thomson Financial /IFR forecast a flat reading for March retail sales when the Commerce Department issued its report Monday. This follows a drop in February, the AP said. “If it’s flat, that means that real spending has declined,” Hampel told the AP, noting growth needs to be about 0.3% for retail sales to actually increase. “The last four months, we’ve essentially had no growth in retail sales when adjusted for inflation.” The Federal Reserve’s main concern now is economic growth, Hampel said. “Although the Fed cannot say this, I think for the most part, as a group, it doesn’t matter to them what happens to inflation this week,” he said.

Weakening labor market hits grads says CUNA economist

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MADISON, Wis. (4/14/08)--The weakening U.S. labor market may hurt the prospects of college students, especially those approaching graduation, a Credit Union National Association (CUNA) economist told a student newspaper, The Badger Herald Thursday. About 80,000 jobs were lost in March nationwide, which comes on the heels of significant job losses in previous months, Steve Rick, CUNA senior economist, told the University of Wisconsin-Madison newspaper. The job market may not rebound as quickly as the economy, which should recover by late 2008 or early 2009, he added. “Firms are historically slow to hire after a recession, preferring to increase the productivity of current workers,” Rick told the paper. “So I expect the unemployment rate to keep rising through 2009.” However, prospects for student financial aid look better. Students should not have problems obtaining federally subsidized student loans, Mike Long, vice president of lending, University of Wisconsin CU, Madison, Wis., told the paper. Although there might be slight reductions in financial aid, there should be sufficient money to lend because the federal government doesn’t want to be an obstacle to students getting an education, Long said. It actually might be a good time to be a student, because students don’t have to worry about plummeting home values or pension funds, Long said. The current low interest rates are just what college students are looking for from financial institutions at this stage of their lives, he added. It is important for college students to establish good credit with the current higher standards for obtaining loans, which students will need to purchase electronic gadgets, cars or homes after they graduate, Long concluded.

News of the Competition (04/11/2008)

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MADISON, Wis. (4/14/08)
* The San Francisco city attorney filed a lawsuit last month against the National Arbitration Forum (NAF)--an organization that provides arbitrators to help resolve disputes between credit card companies and their customers. The lawsuit accuses NAF of disregarding the rights of consumers and of favoring lenders. In efforts to save time and money, companies, such as credit card issuers, generally prefer to resolve their disputes with their customers through private arbitration--handled by one or several lawyers, known as arbitrators--rather than in court. The suit specifically alleges, among other things, that in certain cases, NAF approved inflated awards, wrongly imposed attorneys’ fees and ignored consumers’ requests to appear at arbitrations. Bank of America’s credit card unit indicated it would launch a pre-emption defense against the lawsuit (The Wall Street Journal April 7 and American Banker April 11) … * Many regional banks nationwide are growing their mortgage operations by adding production staff and picking up loan officers from defunct lenders. This is done as a strategy to garner market share in the housing sector during the current downturn. Because there is significantly less competition in the mortgage field than a year ago, small to midsize banks are pursuing their most forceful mortgage expansion in the past decade in their quest to become major lenders in the next five years, analysts said. Some banks are even joining forces to sell their loans through cooperatives to Freddie Mac and Fannie Mae. The combined home loan volume of the banks allows them to obtain secondary market pricing that equals that enjoyed by large banking companies, such as Wells Fargo & Co. and Bank of America Corp., analysts said (American Banker April 11) … * The collapse of the bond-auction market has made it more difficult for college students to obtain loans. Student-loan providers rely on auction-rate securities because they let lenders borrow at short-term interest rates for as long as 40 years. In February, the Wall Street firms that ran the bidding for the market stopped using their own funds to purchase auction-rate bonds that went unsold because of the credit panic. At the beginning of this year, auction securities backed by student loans represented about $86 billion of the $330 billion market, according to Moody’s Investors Service. However, no municipal bonds backed by student loans were sold during the first quarter--for the first time in 40 years, according to Thomson Financial data. Without the ability to finance, 45 state agencies, private lenders, and nonprofit groups have pulled out of the Federal Family Foundation Education Loan Program this year. An overhaul of federal student-loan regulations last year prompted many lenders to exit the student-lending business, even before the collapse of the bond-auction market (Bloomberg.com April 10) … * The Department of Labor has filed a lawsuit against Chicago investment firm AA Capital Partners and its executives for improperly causing more than $25 million in losses for five Michigan pension funds by misusing plan assets and assessing the plans excessive investment-management fees. The suit alleges that the firm, Co-owner and President John Orecchio, Chief Financial Officer Mary Elizabeth Stevens, and affiliate AA Capital Liquidity Management violated the Employee Retirement Income Security Act. It claims the defendants used $25.9 million in plan assets to pay for the company’s operating expenses, renovations for a strip club and horse farm managed by Orecchio, as well as other improper expenditures. The suit is seeking to restore all losses (PRNewswire-USNewswire April 11) …

Market News (04/11/2008)

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MADISON, Wis. (4/14/08)
* U.S. regulators must strengthen their supervision of the financial markets, said Federal Reserve Chairman Ben Bernanke. “Regulators should adopt policies that lead financial institutions to hold capital and liquidity cushions commensurate with their firm-wide exposures to adverse market events,” said the Fed chairman in a speech in Virginia on Thursday to the World Affairs Council of Greater Richmond. “We do not have the luxury of waiting for markets to stabilize before we think about the future.” A presidential advisory group last month advocated stricter regulation of mortgage lenders and ratings agencies. Bernanke said those recommendations, if implemented, could help avert another credit crisis. “Many of the necessary changes that have been identified, including increasing transparency, improving risk management and attaining better coordination among regulators could provide important support to the process of normalizing our financial markets,” said Bernanke (Bloomberg.com and Associated Press via Yahoo! News April 10) … * Wall Street investment firms retreated slightly in their borrowing from the Federal Reserve’s emergency lending program last week, the Fed reported Thursday. Daily borrowing averaged $32.6 billion--compared with $38.1 billion the previous week. In an effort to ease the credit crunch, the central bank has agreed to let investment firms temporarily receive emergency loans directly from the Fed. The program is similar to the one available for commercial banks. Banks averaged $10.2 billion in borrowing for the week ended April 9--compared with $7 billion the previous week. Also last week, the Fed auctioned another $33.95 billion in Treasury securities to large investment firms--less than the $50 billion the central bank had made available. Analysts said the slowdown could mean the credit crunch is easing (Associated Press via CNNMoney.com April 11) … * Two surveys suggest the economy will stall this year. The economy won’t grow at all during the first half of this year, as consumer spending weakens, according to the latest Bloomberg News survey (April 9). The median estimate of economists calls for no growth in the economy during the first half of the year and 1.3% growth overall for the full year--the weakest gain since 2001. Consumer spending is projected to rise just 0.5% during the first half of the year before picking up slightly in the second half, as consumers spend their tax-rebate checks. The odds of a recession surged to 70%, from 50% in a March poll. By a 3-to-1 margin, economists polled by The Wall Street Journal (April 10) say the economy is in a recession, and nearly three-fourths say the economy hasn’t yet hit bottom. Respondents expect the economy to lose an average 1,625 jobs per month over the next year, and the unemployment rate to rise from 5.1% to 5.6% by December. Only 21% expect home prices to bottom out this year, while 67% say a bottom won’t be reached until next year … * Consumer confidence plunged to a 26-year low this month amid concerns about the weak economy and job market and rising energy prices (Bloomberg.com April 11). The Reuters/ University of Michigan preliminary index of consumer sentiment fell to 63.2 in April--from 69.5 in March and the lowest reading since 1982. The poll’s index of consumer expectations plunged to 53.4--from 60.1 and the weakest reading since November 1990. The low level of confidence is consistent with a severe recession, said Moody’s Economy.com (April 11). Confidence hasn’t been this low since the aftermath of the 1981-1982 recession--reflecting soaring food and energy prices, and declines in home and stock prices … * In another sign of recession, Frontier Airlines Holdings Inc. announced Friday that it has filed for bankruptcy protection--the fourth air carrier to file for bankruptcy in the past four weeks. Frontier said it was forced into bankruptcy after its main credit-card processor said it would start withholding a bigger share of proceeds from ticket sales. A filing will prevent the planned holdback increase. Facing the economic downturn and soaring energy prices, ATA Airlines, Skybus, and Aloha Airgroup also have filed for bankruptcy during the past several weeks. Unlike those carriers, Frontier said it plans to continue operating normal service during its bankruptcy proceedings (Associated Press via The New York Times and MarketWatch April 11) …

Market News (04/10/2008)

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MADISON, Wis. (4/10/08)
* Mortgage activity rebounded last week as both purchase and refinancing applications rose, the Mortgage Bankers Association (MBA) reported Wednesday (mbaa.org April 9). The trade group’s Market Composite Index rose 5.4% during the week ending April 4 to 725.6. The Purchase Index jumped 8.1% to 384.7, while the Refinance Index rose 3.4% to 2724.7. Mortgage rates edged up last week. The 30-year, fixed-rate mortgage (FRM) rose 3 basis points to 5.78%, while the one-year, adjustable-rate mortgage (ARM) increased 6 basis points to 7.06%. The 30-year FRM is now 38 basis points lower than a year ago, while the one-year ARM is 118 basis points higher, said Moody’s Economy.com (April 9). The research firm noted that one-year ARMs remain at a historic low share of new mortgage applications, as the loans remain more risky and amid expectations that resets will be on an upward trend. MBA reported that ARMs made up just 6.5% of overall applications during the latest week. That compares with 19% a year earlier … * Long-term mortgage rates steadied this week, according to a Freddie Mac survey. The average 30-year, fixed-rate mortgage (FRM) was unchanged at 5.88%, while the 15-year FRM remained at 5.42%. “Once again, mortgage rates held relatively steady this week amid release of subdued economic data,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “For example, pending existing home sales hit the lowest value since its introduction in January 2001, presaging additional weakness in single-family home sales over the upcoming months.” Mortgage rates were down from a year ago. The 30-year FRM averaged 6.22% at this time last year, while the 15-year FRM was at 5.90% (MarketWatch April 10). For CUNA's Daily Financial Rates, use the link. … * Initial jobless claims eased back from recent gains last week but remained elevated. First-time claims for unemployment insurance declined by 53,000 during the week ending April 5 to 357,000, the Labor Department reported Thursday. However, the four-week moving average, which smoothes out weekly volatility, increased by 2,500 to 378,250--the highest level since October 2005. And continuing claims--the number of people still on the benefit rolls after an initial week of aid--rose by 3,000 during the week ended March 29 to 2.94 million--the highest level since July 2004. The increase in continuing claims indicates people are having a tough time finding new jobs after they’ve been laid off (MarketWatch April 10) * Wall Street firms may have to cut as many as 35% of their employees, as the pace of mergers and acquisitions (M&A) slows and leverage lending weakens, said Kenneth Moelis, former president of UBS AG’s investment bank, in an interview Wednesday. “The street got staffed up to support what was a slight bubble in M&A,” said Moelis. “You’re going to see a significant retrenchment,” added Moelis, who now heads investment-banking boutique Moelis & Co. He said the leveraged credit market probably won’t return to last year’s level for another five to six years. Banks still hold about $213 billion worth of leveraged loans they can’t sell, according to Standard & Poor’s. Wall Street firms have eliminated more than 34,000 jobs during the last nine months (Bloomberg.com April 10) … * Retailers reported the weakest March sales in 13 years, as consumers worried about jobs and rising prices curbed purchases (Associated Press via Yahoo! News April 10). Same-store sales--at stores open at least one year-- fell 0.5% last month, according to UBS-International Council of Shopping Centers. That’s the weakest sales pace since a 0.8% drop in March 1995. Discount stores fared the best as cash-strapped consumers shopped for bargains. Wal-Mart reported a 0.7% gain in same-store sales, while Costco reported a 7% increase. Retail sales will remain very weak until consumers begin receiving their tax-rebate checks in May, predicts Moody’s Economy.com (April 10). Falling employment, record-high energy prices, near-record debt burdens, declining home prices, and tight lending standards will continue to weigh on consumers … * The nation’s trade deficit widened by 5.7% to $62.3 billion in February, as imports set a new record, the Commerce Department reported Thursday. Imports of goods and services increased 3.1% to $213.7 billion, offsetting a 2% gain in exports, to a record $151.4 billion. Exports were buoyed by sales of fuel oil, autos, food oils, and corn. U.S. oil imports fell to $37.7 billion following 11 consecutive monthly increases as high oil prices curbed import levels. Oil imports fell to 9.9 million barrels per day--compared with the 2007 average of 10.1 million. The U.S. also purchased fewer goods from China. The politically-sensitive trade deficit with that nation fell to $18.4 billion--the lowest level since March 2007--as imports declined by 7.8% (Reuters via Yahoo! News and Bloomberg.com April 10) …

News of the Competition (04/10/2008)

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MADISON, Wis. (4/11/08)
* The Bank of England cut its key interest rate Thursday by a quarter of a percentage point to 5%. The move was made in response to falling home prices, tight credit conditions and declining consumer confidence, analysts said. The rate cut--the third quarter-point rate reduction since December--was implemented by the Monetary Policy Committee, which sets the central bank’s rates. The move was made despite consumer inflation running at a 2.5% annual rate--which analysts said is above the central bank’s 2% medium-term target. The decision is congruent with its efforts to balance upside and downside risks to inflation, the committee said (Market Watch April 10) … * Recent disruptions in the secondary market for student loans will make such loans more expensive for financial institutions and may compel them to consider whether to stay in the student loan business, analysts said. Education Resources Institute Inc.--a nonprofit that guaranteed loans for First Marblehead Corp.’s securitizations--filed for bankruptcy protection Monday, leading to reduced hopes for recovery in the industry. First Marblehead handles back-office functions for financial institutions that make private student loans. Now First Marblehead’s bank clients will have to fund loans with deposits, which could create a cash-flow issue, according to Sameer Gokhale, analyst at KBW Inc. This will reduce the appeal of the student loan business for many financial institutions, he added (American Banker April 10) … * The deadline for requests to testify at public meetings regarding Bank of America’s acquisition of Countrywide Financial Corp. has been extended by the Federal Reserve Board. The Fed issued a notice Wednesday setting April 15 as the deadline for written requests to testify at the meetings, which will be held later this month in Chicago (April 22) and Los Angeles (April 28-29). “The purpose of these meetings is to collect information relating to factors the board is required to consider under the Bank Holding Company Act,” the Fed said in the notice (American Banker April 10) … * A decision on how to incorporate remittance information into wire transfers will soon be made by the Federal Reserve Board. While the Fed has been considering a format based on the well-established electronic data interchange (EDI) since 2006, a format known as ISO 20022 has risen in prominence in the world’s payment systems in the meantime. The Fed will not support the latter system in the short-term, according to Sue Valentine, wholesale product officer at the New York Fed. However, in the long term, compatibility with the ISO 20022 is the goal--specifically one of convergence and interoperability, she added (American Banker April 10) ...

Missed CU Response to Economy webinar Replay it

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MADISON, Wis. (4/11/08)--If you missed the first of a series of webinars on "CU Responses to the Current Economy" presented Thursday by Credit Union National Association's (CUNA's) economists, you still aren't too late. The webinar will be archived and credit unions who missed it can replay it. And they can sign up for the rest of the e-School series, which starts at 1 p.m CDT on Thursdays for six weeks. The first session provided a 45-minute session overview by CUNA chief economist Bill Hampel and senior economists Mike Schenk and Steve Rick, followed by a discussion by participants. Rick outlined 10 economic issues the nation faces:
* Two fears hang over the U.S. economy--wrenching recession and spiraling inflation. * The deleveraging and reckoning process has begun. * The Federal Reserve is easing monetary policy to liquefy the banking system and monetize the recession. * The subprime credit crisis is spreading to many credit markets; * The housing market is in a severe meltdown. * Falling home prices will restrain consumer spending. * A weaker dollar and strong overseas growth will keep export growth strong. The global trade imbalance correction has begun. * Rising energy prices has creating a negative real income effect for consumers. * The government has passed a questionable stimulus plan. * Households have a near zero savings rate.
Schenk told how the economy will impact credit union balance sheets and income statements. Credit unions can expect:
* Much slower loan growth compared with the last few years; * Fast savings growth; * Some members in economic distress, which translates to relatively fast growth in unsecured loans and a demand to refinance toxic mortgages; * Greater volume of delinquency and net chargeoffs; and * More obvious bottom-line pressures.
Hampel discussed possible credit union responses to the economy, noting that:
* Credit unions are collateral damage to the subprime crisis and recession; * Negative effects of rising loan losses and falling return on assets were neither caused by the credit union and likely will not be long lasting; * Responses by credit unions should be modest; * Let the capital cushion do its work; * Avoid penalizing members with higher fees and loan rates, and lower dividend rates just to protect net income; and * Rising delinquency and loan losses do not necessarily require modified lending policies
Credit unions have opportunities in the economy, said Hampel. "They are in very strong condition and many other financial institutions are hurting. This creates an opportunity for credit unions to gain market share." He advised credit unions to adjust budgets and monitor them closely, and tell members about the credit union's share insurance. Archive versions of the session are available beginning within 48 hours after the webinar. Five more followup webinars will address how the current economic crisis will affect these credit union operations:
* April 24: Consumer lending; * May 1: Compliance; * May 8: Investment/Asset-Liability Management; * May 15: Marketing; and * May 22: Mortgage lending.

Market News (04/09/2008)

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MADISON, Wis. (4/10/08)
* Incomes have declined for the poorest Americans and stagnated for the middle class since the late 1990s--making it harder for them to weather the recession. Average income fell 2.5% among the bottom fifth of families since the late 1990s, according to a study of Census Bureau data by the Center on Budget and Policy Priorities and the Economic Policy Institute. Income for the middle fifth of households rose only 1.3%, while Americans in the top fifth saw their incomes jump 9%. Average income for the lowest rung was $18,116, compared with $50,434 for the middle fifth, and $132,131 for the top fifth. The income gap between the rich and other Americans has widened. The top fifth made more than seven times the income of the poorest fifth in 22 states during the latest period. Just one state in the early 1980s--Louisiana--saw such a large income gap. The study noted that poorer Americans have become more indebted, as their wages failed to keep up with inflation. Now they’re facing declining home values and a recession (CNNMoney.com April 9) … * More Americans say they aren’t better off then they were five years ago, as debt burdens have grown and economic pressures have mounted, according to a survey by the Pew Research Center. Among the middle class, 54% said they have made no progress or fallen backward. The study also found that 56% of people overall said they haven’t economically progressed during the past five years--the highest percentage since the question was first added to the poll in 1964. People have become more pessimistic, as median household income has stagnated, said lead study author Paul Taylor, director of Pew’s Social & Demographic Trends project. He said people also are feeling pinched because they have borrowed heavily against their homes to support spending (Associated Press via Yahoo! News April 9) … * Americans are becoming increasingly more worried about saving for retirement as the economy slumps. Just 18% of workers said they are very confident about saving enough money for a comfortable retirement, according to the Employee Benefit Research Institute’s (EBRI) 2008 Retirement Confidence Survey. That’s down sharply from 27% in a poll last year and the biggest annual decline in the 18-year history of the survey. While many factors play a role in saving for retirement, “the economy and health costs are major concerns,” said EBRI President Dallas Salisbury. Just 34% of workers said they expect to receive employer-paid health insurance after they stop working--down from 42% last year. Almost 50% of workers said they have less than $25,000 put aside for their retirement. And 22% of workers and 28% of retirees said they have no savings at all (CNNMoney.com April 9) … * Americans are facing soaring energy costs, even as their income has stagnated, and the economy has been thrown into recession. Crude oil jumped to more than $111 a barrel in New York Wednesday and gasoline surged to a new record after the Energy Department said crude-oil inventories tumbled 3.15 million barrels to 316 million last week (Bloomberg.com April 9). Light, sweet crude for May delivery jumped $2.51 to $111.91 on the New York Mercantile Exchange. Strong global demand is keeping prices high, even as domestic demand weakens, noted Antoine Halff, head of energy research at Newedge USA ... * “The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression,” said the International Monetary Fund (IMF) in its World Economic Outlook. In the forecast released Wednesday, the IMF predicted that the U.S. economy will grow by only 0.5% this year--the worst showing in 17 years. The U.S. economy is forecast to expand only 0.6% in 2009. “The global expansion is losing speed in the face of a major financial crisis,” said the IMF. It now expects the global economy to expand by just 3.7% this year and 3.8% next year--down from 4.9% growth in 2007. However, the agency sees a 25% probability that world economic growth will decline to 3% or less this year and next--“equivalent to a global recession.” (Associated Press via Yahoo! News April 9) … * International Monetary Fund (IMF) policymakers broke with their tradition of advocating fiscal restraint yesterday, saying countries should ease economic policy further to address “the largest financial shock since the Great Depression.” IMF economists said the U.S. Federal Reserve and the European Central Bank should cut interest rates further. And they said countries may need to use tax and spending measures to cushion the economic slowdown. The IMF said central banks should consider abandoning the “prevailing orthodoxy” of resisting targets for home prices. “Recent experience seems to support the case for giving significant weight to house price movements in the context of a ‘risk-management’ approach to monetary policymaking.” The agency noted, however, that policymakers still face a “delicate balancing act between alleviating the downside risks to growth and guarding against a buildup in inflation.” IMF economists predict that oil prices will stay around $95 a barrel this year and next (Bloomberg.com April 9) …

News of the Competition (04/09/2008)

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MADISON, Wis. (4/10/08)
* Bear Stearns Cos. Inc. announced Tuesday it had completed a share exchange with JPMorgan Chase & Co. as part of an agreement in which JPMorgan acquires the distressed investment bank for $10 per share JPMorgan now owns a 45% stake in the troubled Bear. JPMorgan purchased 95 million newly issued shares of Bear’s common stock, or 39.5% of Bears’ outstanding common stock. JPMorgan disclosed in a regulator filing that it had earlier bought 11.5 million Bear shares for $140.7 million in the open market. The acquirer said it will continue purchasing Bear shares in the open market or in private transactions in an attempt to increase its stake to as much as 49.5%. The deal has the support of the Federal Reserve Bank of New York (RTTNews April 8) … * Three of the largest private equity firms--Apollo Management, Blackstone Group and TPG Capital--are nearing a deal to purchase about $12.5 billion of loans used to finance corporate buyouts from Citigroup, according to sources familiar with the talks. The three firms are making the move, saying the tight credit markets are loosening up, analysts said. The so-called leveraged loans helped with financing the wave of corporate takeovers last year, but ended suddenly last summer when the credit markets froze. The three firms agreed to pay about mid-80 cents on the dollar for the Citigroup loans. It is expected that Apollo will buy roughly half the loans, while Blackstone and TPG will procure the remainder, a source privy to the negotiations said (The New York Times April 9) … * Ending a protracted political standoff that kept the country’s central bank without a leader during a time of worldwide financial unrest, Japan’s Parliament chose a new chief of the Bank of Japan Wednesday. The Diet--the moniker for the parliament--approved Masaaki Shirakawa as governor of the bank, ending a three-week period in which the position sat vacant during political in-fighting between the country’s prime minister and its largest opposition party. Analysts said the vacancy was acutely embarrassing to Japan, which had no central bank head for the first time since World War II. Yasuo Fukuda, prime minister of Japan, ultimately found a candidate acceptable to the opposition Democratic Party of Japan, which controls the upper house of the Parliament. The party had rejected two previous nominees because they had sought careers in the commanding Ministry of Finance, which critics believe compromises the bank’s independence. Shirakawa is a bank insider with a 34-year career. He became one of the bank’s two deputy governors and recently served as the bank’s acting chief (The New York Times April 10) …

Market News (04/08/2008)

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MADISON, Wis. (4/9/08)
* Existing-home sales will stabilize over the new several months before picking up during the second half of the year, according to the latest forecast by the National Association of Realtors (NAR). The trade group’s Pending Home Sales Index fell 1.9% to 84.6 in February, from 86.2 in January. The February index was 21.4% below the 107.6 reading in February 2007. “The slip in pending home sales implies we’re not out of the woods yet, though an era of successive deep sales declines appears to be over,” said NAR Chief Economist Lawrence Yun. NAR predicts that existing-home sales will increase from an annual 4.9 million pace in the first quarter to a 5.9 million rate in the fourth quarter. “Exceptionally weak home sales related to jumbo loan problems will depress home prices in the first half of the year, but steady liquidity improvements in the conforming jumbo-loan market will help prices recover in the second half of the year,” said Yun. NAR forecasts that existing-home prices will decline by 1.4% to a median $215,800 this year, before rising 3.7% to $223,800 in 2009 (realtor.org April 8) … * Financial losses from the U.S. mortgage crisis could near $1 trillion, the International Monetary Fund (IMF) predicted Tuesday. Declining home prices in the U.S. and rising delinquencies could prompt $565 billion in mortgage-related losses, said the agency. Total losses, including securities linked to loans, may reach $945 billion. So far, bank and securities firms have posted $232 billion in credit losses and writedowns--suggesting that the worst of the credit rout is ahead. “The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,” said the IMF in its report. “There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions … and the associated risks of a disorderly unwinding.” (Bloomberg.com April 8) … * The Federal Reserve auctioned another $50 billion to banks Monday, as it worked to address the impact of the credit crunch. The Fed has pumped $310 billion in short-term loans into the banking system in a series of nine auctions since December. In the latest auction, the central bank auctioned funds at an interest rate of 2.82%. The auction attracted 79 bids seeking a total $91.6 billion. In a related move, the European Central Bank announced Tuesday that it had auctioned $15 billion in short-term loans to European banks. It was the sixth auction conducted in tandem with the Fed (Associated Press via Yahoo! News April 8) … * Gasoline prices retreated from a record high this week, according to a report by AAA (CNNMoney.com April 8). The average price of regular unleaded gasoline declined 0.8 cent to $3.331 a gallon. Still, gasoline prices are up almost 20% from a year ago. Gasoline prices could hit as high as $4 a gallon this summer, the Energy Department’s Energy Information Administration (EIA) announced Tuesday (Associated Press via Yahoo! News April 8). “The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices,” said the EIA. “The flow of investment money into commodities has contributed to crude oil price volatility.” … * Soaring fuel prices and the weak economy have prompted several airlines to shut down, a development that could mean fewer choices and higher prices for airline consumers. ATA Airlines, Aloha Airlines, and Skybus Airlines all shut down within a week. “The days of discount flying are over,” said Julius Maldutis, president of Aviation Dynamics. Fuel now accounts for 30% to 35% of airlines’ costs--almost three times higher than the historical average. In response, airlines are cutting back service, boosting ticket prices, and tacking on service fees (MarketWatch April 8) … * Chain store sales rose just 0.7% over the week ending April 5, according to the International Council of Shopping Centers-UBS Retail Chain Store Sales Index (Dow Jones Newswires April 8). The small gain followed a 0.2% decline the previous week. “Although sales bounced back on a week-over-week basis, the year-over-year pace ground to a near halt, up a meager 0.3% from the prior year,” said ISCS Chief Economist and Director of Research Michael P. Niemira. He noted that the year-over-year pace was the slowest in five years. High gasoline prices, declining employment and home prices, and high debt burdens will continue to weigh on sales going forward, said Moody’s Economy.com (April 8). Low interest rates and a not-severely-weak labor market are the only bright spots …

News of the Competition (04/08/2008)

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MADISON, Wis. (4/9/08)
* Federal Home Loan Bank (FHLB) of Chicago announced the termination of its merger discussions Monday with the FHLB of Dallas, after they were unable to reach an agreement. The Chicago bank also announced the resignation of Mike Thomas, president/CEO, to be effective Friday. The failure to reach agreement came after extensive analysis and due diligence regarding the feasibility of combining the banks’ business operations. The FHLB of Chicago will now focus on operating as an independent entity and continuing to transition to a more traditional home loan bank business model and financial structure, said P. David Kuhl, chairman of its board of directors. The board has formed a search committee to recruit a new president/CEO within the next month and a half (PRNewswire April 7) … * Discover Financial Services signed an agreement Monday to purchase Citigroup’s Diners Club International for $165 million with a goal of increasing transaction volume and worldwide acceptance of its own cards, analysts said. As part of the deal, Discover will acquire the Diner’s Club International Network, including its brand, trademark, and employees, and over 40 license agreements with Diners Club card issuers. However, the deal will not include Diner’s club licensees in North America and worldwide. When the transaction closes in an expected 90 days, Citigroup will remain a long-term issuer on the network. Discover will not issue cards or offer consumer credit in international markets, the company said. (Forbes.com April 7) … * Cease-and-desist orders have been issued for Peoples Community Bancorp by the Office of Thrift Supervision (OTS). The orders place the West Chester, Ohio-based bank under strict oversight and keep a tight reign on its ability to make loans and issue lines of credit. Difficulties with real estate loans and a failed merger in February with Integra Bank Corp. of Evansville, Ind., created problems for Peoples. The bank said in a news release that the orders require it to: file updated business plans and compare projected and actual operating results quarterly; receive OTS permission before declaring dividends or payments on outstanding securities, adding or replacing a director, hiring a CEO or making any “golden parachute” payments; not make new loans or lines of credit for land acquisition or development, speculative residential construction, commercial or multi-family construction, or acquisition of commercial property; and hire an independent consultant to review its loan portfolio and establish a plan for reducing bad loans (Business Courier of Cincinnati April 4) … * In efforts to serve smaller middle-market businesses, Bank of America Corp. will expand its asset-based lending capabilities. The move is a result of BofA’s acquisition of LaSalle Business Credit--a former LaSalle Bank business unit. Bank of America Business Capital will focus on asset-based financing from $5 million to $25 million by forming a national division to serve that market segment. BofA Capital provides companies with cash management, interest rate and foreign exchange rate risk management, senior secured loans, and capital markets products (Baltimore Business Journal April 8) … * Washington Mutual revealed Tuesday that it had it had raised $7 billion in capital. The money was raised through an investment consortium led by TPG, a private equity firm. WaMu, the largest U.S. savings and loan, also said it would cut its quarterly dividend. The company said it intends to stop buying mortgages from brokers and plans to close all of it freestanding loan offices. WaMu also revealed Tuesday that it would lose $1.1 billion in the first quarter and take a $3.5 billion provision for loan losses. The company needs to raise capital because its stock has dropped with home prices, and it is struggling with increased mortgage delinquencies and defaults among homeowners, analysts said (The New York Times April 8) …

CUNA to ICNNI Credit slowdown is typical for recession

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NEW YORK and WASHINGTON (4/8/08)--The nation's consumers pulled back on borrowing in February but remained dependent on credit cards to weather a tough economy. That behavior is typical in a recession, Bill Hampel, chief economist at the Credit Union National Association, told CNNMoney (April 7). Consumer credit increased by $5.2 billion--or a 2.4% annual rate--to $2.539 trillion during February, said the Federal Reserve Monday. Borrowing was roughly half of January's revised $10.3 billion increase (Economy.com April 7). But revolving credit, which includes credit cards, rose $4.7 billion--at nearly a 6% annualized rate--to $951.7 billion after a gain in January of 7.1%. "This is standard consumer behavior in the face of a recession," Hampel told CNNMoney. "When consumers are worried about losing their jobs, they borrow less." The situation will continue. "The pattern of February will be continued," he said. "What growth there will be, will be in credit card debt." Also affecting consumer credit is the price of gasoline. "With really high gas prices, people are charging their gas more than they usually do," Hampel said. Non-revolving credit decelerated further in February with a 0.4% growth at an annual rate, compared with 3.6% in January, said the Fed report. February's growth is the slowest since December and was driven by weak vehicle sales, said Economy.com. February's year-over-year growth in total credit usage was 5.76%--down from 5.82% in January but still within a narrow range that has prevailed since 2003.

News of the Competition (04/07/2008)

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MADISON, Wis. (4/8/08)
* Washington Mutual is close to a deal that would result in it obtaining a $5 billion infusion of new capital. Private equity firm TPG and other investors would supply the capital that would allow the largest U.S. savings and loan to alleviate its impending capital requirements resulting from the national mortgage crisis, according to people familiar with the negotiations. However, such a deal would significantly dilute WaMu shareholders, who sustained losses totaling 74% of their investment the past year, analysts said. On Friday, WaMu’s market capitalization was just below $9 billion, after its shares dropped 11% that day (The Wall Street Journal April 7) … * The government of Japan nominated Masaaki Shirakawa, who is acting central bank governor, to permanently lead the Bank of Japan. The government has been working to resolve a dispute that left the country’s central bank without a leader for the first time in 80 years. Japan hopes to have a permanent governor at the helm when a G-7 meeting takes place Friday in Washington, during which the topic of unrest in global markets and the looming recession will be addressed. This is the government’s third choice for a permanent governor. The previous choices were vetoed by Japan’s opposition party because of their ties to the finance ministry, which lawmakers said would threaten the central bank’s independence in monetary policy (Reuters April 7) … * Following criminal fraud convictions of four former executives of its reinsurance subsidiary, Berkshire Hathaway Inc. is feeling heat from federal prosecutors to replace the chief executive of its General Re Corp subsidiary, according to sources familiar with the situation. The prosecutors claim that discussions about the removal of Joseph P. Brandon as General Re CEO are being conducted to try to end the government investigation of the company. A final decision on the matter would be up to Warren Buffet, Berkshire chairman. Buffet and a spokesman for the Justice Department declined comment on the matter (The Wall Street Journal April 7) … * Several U.S lenders have imposed new restrictions on their brokers in response to increased regulatory scrutiny of the roles played by mortgage brokers in the subprime mortgage meltdown. In March, Provident Funding Associates LP and Wells Fargo and Co. began to require their brokers to supply applicants with forms that delineate the broker’s total compensation--namely fees the borrower must pay and the yield-spread premium the lender would pay. Last week, Countrywide Financial Corp. said it would reduce by a percentage point--to 4% of the loan amount--the cap on the total compensation its brokers may receive (American Banker April 7) … * The Federal Reserve Board is giving JPMorgan Chase & Co. a freer hand in its dealings with Bear Stearns Cos. by lifting restrictions on capital and easing regulations on the types of business JPMorgan can conduct with Bear. Section 23a of the Federal Reserve Act was created to keep holding companies from putting banks at risk by limiting certain transactions--including lending--to 10% of capital to any one affiliate. Now that JPMorgan is purchasing Bear, the Fed is raising that limit to 50% of capital. The exemption is designed to help JP Morgan ensure the funding liquidity of Bear and help the smooth integration of Bear after the acquisition is complete, according to the Fed (American Banker April 7) …

Market News (04/07/2008)

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MADISON, Wis. (4/8/08)
* Global business confidence hit a number of record lows in the latest Moody's Economy.com Survey of Business Confidence, for the week ended April 4. Overall business confidence was 8.4, with a 7.5 four-week moving average. That compares with the previous week's readings of 7.3 and 7.9, respectively. Survey readings below 10% are consistent with a recession. The U.S. economy is in recession, with European and Canadian economies close to a recession, said Moody's (April 7). Conditions are better in South America, which is growing below its potential, and in Asia, where economic growth is near the low end of its potential. Record lows were set in U.S business confidence, sales strength, assessment of current conditions and sentiment in the financial services industry. However, the index saw some positives--in more stable inventory investment, confidence that the real estate industry has firmed and sturdy equipment investment … * Thanks to the mortgage crisis, more CEOs of U.S. companies are declining their annual bonus for fiscal 2007 (The Wall Street Journal April 7). The cutbacks occur most often among financial companies impacted by the mortgage crisis. The CEOs of at least eight major companies--Warner Music Group, Bear Stearns, First American Corp., Washington Mutual Inc., Morgan Stanley, Zions Bancorp, Thor Industries and IndyMac Bancorp--spurned their bonuses, which ranged from $250,000 to $1.8 million. More CEOs will likely follow suit as more proxy statements appear, according to Alexander Cwirko-Godycki, research manager at Equilar Inc., which conducted the study for The Wall Street Journal (April 7). Such a move by otherwise well-paid executives don't necessarily make staff and investors of the companies happy, said Edward Lawler, director, the Center for Effective Organizations at the University of Southern California … * The Federal Reserve Monday offered $50 billion in 28-day credit through its Term Auction Facility. Winning bids will be notified today, with settlement due on Thursday. Summary action results will be published on the Fed website. Reserve Banks will notify individual institutions in their districts who have submitted winning bids … * California's manufacturing activity is flatlining, according to the California Manufacturing Survey, which continued its first-quarter decline by dropping to 50.5 from 53.8 during fourth-quarter 2007. It was the weakest reading since fourth-quarter 2006, reflecting an industry on the brink of contraction, said Moody's Economy.com (April 7). Production, new orders and employment indices were the largest contributors to the drag in the composite index. The commodity price index, which soared to its highest level since 2001, the year the index began, helped mitigate the burden. Although the index remains above the 50 expansionary benchmark, the first quarter marked the composite's third straight decline. Only high-tech manufacturing kept the index above the 50 mark, said Moody's. …

News of the Competition (04/04/2008)

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MADISON, Wis. (4/7/08)
* Bank borrowing from the Federal Reserve’s discount window surged last week. The Fed reported Thursday that borrowing from the discount window averaged $7 billion during the week to April 2--or $6.5 billion higher than the previous week. Total primary credit rose to $10.32 billion as of April 2--well above the $579 million as of March 26. The discount-window borrowing was the highest since data tracking started in 1961--with the exception of the week following the Sept. 11, 2001 terrorist attacks, noted JPMorgan Chase Economist Michael Feroli. The level of borrowing related to the Fed’s opening of the discount window to primary dealers or investment banks fell slightly to $34.4 billion from $37 billion the previous week (FT.com and Thomson Financial via Yahoo! News April 4) … * Global writedowns at financial institutions could hit $400 billion by the end of this year, said Lehman Brothers analysts on Friday. The investment bank said writedowns are unlikely to hit the “Himalaya-like guestimates” of $600 billion to $1.2 trillion that other analysts have made. Lehman Brothers said new equity infusions of $182 billion are partly offsetting the capital decay at financial firms (MarketWatch April 4) … * Freddie Mac announced last week that it has been notified by Triad Guaranty Insurance Corp. that the Freddie-approved mortgage insurer has been downgraded by Fitch Ratings to BBB- from AA-. Triad has up to 90 days to submit a plan to restore its AA- ratings to Freddie Mac for review. Freddie said it will not automatically change Triad’s eligibility status to a Type II insurer from a Type I insurer. Type II insurers have higher capital requirements and operational restrictions (Thomson Financial via Yahoo! News April 4) … * Citigroup has agreed to pay $33 million to 2,500 current and former female brokers at its Smith Barney brokerage unit to settle a three-year-old discrimination lawsuit. The suit filed by four female brokers in 2005 claims the firm’s managers assigned clients disproportionately to male brokers. It also said the company deprived women of equal training and sales support. As part of the settlement, Citigroup also agreed to change the way it awards bonuses and partnerships and how it assigns accounts. A federal judge in San Francisco still must approve the proposed settlement (Reuters via The New York Times and Associated Press via Dow Jones Newswires April 4) … * San Francisco-based Wells Fargo has boosted its fee for Wells customers who use ATMs at other banks by 50 cents, to $2.50. The fee increase is “part of the cost of doing business,” said Wells Spokeswoman Peggy Gunn. She noted that the firm hadn’t raised the fee in eight years. The company has 6,800 ATMs nationwide (bizjournals.com via Yahoo! News April 4) … * JetBlue Airways Corp. announced last week that customers booking its flights online now can use the PayPal online payment system. “JetBlue customers can now pay for travel though debit cards, bank accounts, stored balance, or credit cards without sharing their financial information,” said the firms. PayPal said it has more than 57 million active accounts (bizjournals.com via Yahoo! News April 4) …

Market News (04/04/2008)

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MADISON, Wis. (4/7/08)
* The job market weakened further in March, according to Labor Department data. Nonfarm payrolls tumbled by 80,000 last month, following declines of 76,000 in each of the previous two months. That means the economy lost 232,000 jobs during the first quarter of the year. The nation’s unemployment rate jumped to 5.1% in March, from 4.8% in February and the highest level since September 2005. In March, employment continued to decline in construction, manufacturing, and employment services. The health-care, food-service, and mining sectors added jobs. The number of unemployed people in the U.S. rose by 434,000 to 7.8 million in March. That number has increased by 1.1 million since March 2007 … * At 4.9 million, the number of people who work part time for economic reasons increased by 629,000 over the past year, the Labor Department reported Friday. Such people are working part-time because their hours have been cut or because they were unable to find full-time jobs. There also were 1.4 million people who were marginally attached to the workforce in March. They wanted and were available for work, but weren’t counted among the unemployed because they hadn’t sought work during the four weeks prior to the government survey. Critics say the nation’s unemployment rate would be much higher if marginally attached workers and people working part-time for economic reasons were counted among the jobless … * Most Americans think the U.S. economy is on the wrong track, according to a survey by The New York Times/ CBS News. In the poll, 81% of respondents said they think “things have pretty seriously gotten off on the wrong track.” That’s up from 69% a year earlier and the highest number since the survey began asking that question during the early 1990s. A majority of almost every demographic and political group said the economy is on the wrong track. And 76% said the U.S. is worse off than five years ago. Two-thirds of respondents said the economy already is in recession. Most respondents are opposed to the government helping lenders in the current housing downturn, and think the government instead should help individual borrowers (The New York Times April 4) … * Long-term mortgage rates edged up last week while short-term rate fell, according to a report by Freddie Mac. The average 30-year, fixed-rate mortgage (FRM) rose 3 basis points to 5.88%, while the 15-year FRM increased 8 basis points to 5.42%. The one-year, adjustable-rate mortgage (ARM) declined 5 basis points to 5.19%. “While prime, conforming rates still remain at historically low levels, long-term mortgage rates did drift upwards this week on signs that the economy may have a little more strength than what financial markets forecasted,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He said consumer spending was revised upward for the fourth quarter, and February growth in personal income was the strongest since July 2007. However, he noted that “fears of economic recession, too, are putting pressure on the markets.” Mortgage rates were higher a year ago. The 30-year FRM averaged 6.17%, while the 15-year FRM stood at 5.87%, and the one-year ARM was at 5.44% (MarketWatch April 3). For CUNA's Daily Financial Rates, use the link. … * Banks that make mortgage loans insured by the Federal Housing Administration (FHA) are adding fees and restrictions that make the loans more expensive and harder to obtain, even as politicians are pressing the FHA to help boost the housing market. Congress recently approved a temporary increase in the loan ceiling the FHA can insure to as much as $729,750 in the nation’s highest-costs regions. However, JPMorgan Chase is adding “price adjustments” to the larger FHA loans that will make them about half a percentage point more expensive. Mortgage brokers say other lenders are making similar price adjustments. Some lenders also are requiring higher credit scores to obtain the loans. Lenders say they must make these adjustments because there is weak investor demand for securities backed by jumbo FHA loans (The Wall Street Journal Online April 4) … * Demand for new homes won’t return to typical levels for a couple of years, according to the latest forecast by the National Association of Home Builders (NABE). “It could be 2010 before we see sustainable, long-term stability in the home building sector, said NABE Chief Executive Jerry Howard. At the end of last year, the trade group had predicted a pickup in new-home demand during the second half of this year (CNNMoney.com April 4) …

Corporate Dont compromise credit standards for recession

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DALLAS (4/4/08)--There is a 50% chance the U.S. will experience at least one quarter of negative growth, and a 40% chance the country will have two consecutive quarters of contraction, according to Brian Turner, Southwest Corporate CU manager of advisory services. Turner commented on Federal Reserve Chairman Ben Bernanke’s message Wednesday that the U.S. economy could fall into a recession. A recession is no longer two consecutive quarters of contraction, according to some financial analysts, Turner noted. Instead they correlate a recession to any time there is a slowdown in growth, while to others, “a slowdown is when a neighbor loses a job, a recession is when you lose yours,” he added (LoneStar Leaguer April 3). “The nation’s economy is very diverse geographically,” Tuner said. “That separation traditionally runs between the Coastal and Upper Midwestern areas and the rest of the country. Over the past two decades, the former has seen home valuations appreciate at a rate equal to at least 10 times the rate of inflation. They have a higher percentage of service-based employment, and as a result, much higher wages and labor costs. “The rest of the country, still not immune from the cyclical downturn, is being impacted far less due to its diverse industry, more modest incomes and reasonable home values,” Turner added. Credit unions must be as proactive as possible in their balance sheet management by keeping a proper mix within their earnings-asset portfolio between loans and investment assets, Turner said. “Credit unions must not compromise their credit standards to pursue volumes of higher rates--that would be a short-term Band-Aid,” he said. “Credit unions have to be very conscientious in their pricing to minimize long-term costs of funds. Having to offer premium certificate rates to attract liquidity not only compromises long-term earning streams, it also adversely impacts the marketplace that they share.”

Market News (04/03/2008)

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MADISON, Wis. (4/4/08)
* Consumer delinquencies in the fourth quarter rose to the highest level in 15 years, and they will continue to increase during the first half of this year as consumers face “stubbornly high” food and gasoline prices, according to a report by the American Bankers Association (ABA). The delinquency rate on eight types of loans jumped 21 basis points to 2.65% of all accounts during the quarter--the highest level since the first quarter of 1992. “The rise in consumer-credit delinquencies is consistent with a rapidly slowing economy,” said ABA Chief Economist James Chessen. He said the overall increase in the delinquency rate largely reflects late payments on auto loans. The delinquency rate for direct auto loans jumped to 1.9% from 1.81%. The delinquency rate for home-equity loans rose to 2.39% from 2.28%, while the delinquency rate for home-equity-lines-of-credit rose 0.12 percentage points to 0.96% (Dow Jones Newswires and Bloomberg.com April 3) … * Home prices declined in 21 cities during January, as banks sold off foreclosed homes at bargain prices, according to a report by Radar Logic Inc. Price declines were led by Sacramento, where the price per square foot tumbled 28% from a year earlier to $166, and by Las Vegas, where the price per square foot plunged 25% to $137. San Diego saw a 21% decline, while Los Angeles experienced a 17% drop. “Like homebuilders who feel pressure to get rid of inventory quickly, many banks and lenders experience the same pressure when dealing with homes from foreclosure” and sell them at below-market prices, said the report. There were two bright spots nationwide. Prices in Charlotte, N.C., rose 3.9%, while New York saw a 2% price gain (Bloomberg.com April 3) … * Falling home prices are affecting the job market as people find it harder to accept new jobs in other regions when they can’t sell their homes. No government agency tracts the data specifically for job moves. However, the number of people moving across state lines for all reasons plunged by 27% in 2007--after rising by nearly that percentage during each of the previous three years, according to Census Bureau data. Interstate migration tumbled to 1.6 million people last year--from 2.2 million in 2006. A decline in worker mobility made a large contribution to that drop, said Moody’s Economy.com Chief Economist Mark Zandi. He noted that while it’s “still a historically high number,” the recent slowdown in the economy since midyear 2007 could send domestic migration down to “a record low in 2008.” (The New York Times April 3) … * The number of people filing first-time claims for unemployment benefits jumped last week to the highest level since just after Hurricane Katrina slammed into the Gulf Coast in September 2005. Initial jobless claims surged by 38,000 during the week ending March 29 to 407,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, jumped by 15,750 to 374,500. Continuing claims--the number of people still on the benefit rolls after an initial week of aid-- surged by 97,000 during the week ended March 22 to 2.937 million--the highest level since July 2004 (Bloomberg.com April 3) … * The service sector continued to contract in March. The Institute for Supply Management’s non-manufacturing index, which includes banks, retailers, and other service providers, edged up to 49.6--from 49.3 in February but still below the 50 level that indicates growth. The index has remained below that level for the past three months. Despite the slowdown, purchasing managers remain worried about higher prices. Members’ comments “reflect concern about rising fuel and energy costs and the impact they are having on commodity prices,” said Anthony Nieves, chairman of the institute’s non-manufacturing business survey committee. The price index jumped to 70.8 in March from 67.9 the previous month. Both new orders and export orders increased last month, while employment continued to contract (Associated Press via Yahoo! News April 3) …

News of the Competition (04/03/2008)

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MADISON, Wis. (4/4/08)
* Freddie Mac, Fannie Mae and the Federal Home Loan banks have become the main mortgage providers, as private financing sources have retreated. They provided 90% of the financing for new mortgages at year-end 2007, according to the Office of Federal Housing Enterprise Oversight. Fannie and Freddie provide financing by purchasing mortgages and packaging them into securities. The two government-sponsored enterprises accounted for a record-high 75% of new mortgage financing at the end of last year--twice the percentage they held at the end of 2006. The Home Loan banks lend funds to member institutions against mortgage collateral. They made $875 billion worth of such loans last year--up 36% from 2006 (FT.com April 3) … * Two more student-loan providers have exited the market. NorthStar Education Finance, one of the largest originators of government-backed student loans in the U.S., said it will halt such lending (The Wall Street Journal Online April 3). The credit crunch has made it extremely difficult to market securities backed by student loans. Including NorthStar, 31 lenders responsible for 10% of new loan volume have stopped participating in the Federal Family Education Loan program. In other news, CIT Group announced Thursday that it will stop making new student loans (Reuters via Yahoo! News April 3). CIT entered the student-loan business in 2005 when it acquired Student Loan Xpress. However, the business became more difficult, as the asset-backed market stalled and new federal legislation made student lending less profitable … * An in-depth investigation of Countrywide Financial Corp.’s mortgage-processing systems by bankruptcy investigators has been authorized by a federal judge. The Justice Department’s office of the U.S. Trustee is seeking evidence that the mortgage lender systematically abused borrowers involved in bankruptcy proceedings. Countrywide argued that the office had no authority to investigate the company. The office claimed it needed to investigate claims that the firm inflated mortgage payments with improper fees and ignored court orders. Judge Thomas Agresti of the U.S. Bankruptcy Court in Pittsburgh ruled that the Trustee’s office had found “a common thread of potential wrongdoing” in some bankruptcy cases involving Countrywide (The Wall Street Journal Online April 3) … * Washington must increase its regulation of Wall Street to keep other banks from needing rescues similar to the Bear Stearns rescue by the central bank, said Federal Reserve Bank of New York President Timothy F. Geithner. “We judged that a sudden, disorderly failure of Bear would have brought with it unpredictable but severe consequences for the functioning of the broader financial system and the broader economy,” said Geithner in Congressional testimony. “Absent a forceful policy response, the consequences would be lower incomes for working families, higher borrowing costs for housing, education, and the expenses of everyday life, lower value of retirement savings, and rising unemployment,” added Geithner (The New York Times April 3) … * Wachovia Corp. is considering halting its Pick-A-Payment mortgage loans in 17 counties in California that have been socked by rising foreclosures and declining home prices. Critics say the loans, which offer clients four different payment options every month, carry high fees and can prompt increases in loan balances. Wachovia acquired the loan product when it bought Golden West Financial Corp. in 2006 (Associated Press via The Wall Street Journal Online April 3) … * Merrill Lynch, which has been hit with big losses on mortgages and other assets, plans to slash 10% to 15% of its non-broker workforce in May, CNBC reported yesterday. The layoffs could range from 4,000 to 7,000 employees. Merrill Chief Executive John Thain is expected to review the structure of the workforce by the end of this month (Reuters via Yahoo! News April 3) …

News of the Competition (04/02/2008)

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MADISON, Wis. (4/3/08)
* The securities backing the Federal Reserve’s $29 billion loan to Bear Stearns consist mostly of “mortgage-backed securities and related hedge investments,” the Treasury Department disclosed to the Senate Finance Committee Wednesday. The central bank will lend the money to an independent entity that will hold the securities. Under terms of the deal, the Fed will be repaid first from the proceeds of the sale or maturity of the securities. JPMorgan Chase, which has agreed to acquire Bear Stearns, will be paid last. Fed Chairman Ben Bernanke told Congress Wednesday that backing the deal was necessary in order to avoid a financial panic that could derail the economy. However, critics say the Fed and ultimately taxpayers could end up footing the bill (The Wall Street Journal Online and Associated Press via Yahoo! News April 2) … * Lenders are tightening terms for auto loans, making it difficult for even buyers with good credit to obtain financing. AmeriCredit Corp. and Sovereign Bancorp recently boosted the minimum credit scores needed to avoid an automatic rejection. Some lenders in California and other states hit hard by the housing slump are applying especially strict standards for auto loans. So far this year (through March 20), lenders approved about 90% of auto-loan applications from prime borrowers--down from 92.5% in the same period last year, according to CNW Research. Only 57% of applications from subprime borrowers have been approved--down from 68%. CNW also noted that loan applications for both types of borrowers this year are sent to more financial institutions before being approved (The Wall Street Journal Online April 2) … * U.S. banks lost $9.97 billion trading cash and derivatives in the fourth quarter, as writedowns from collateralized debt obligations and other losses linked to the housing downturn prompted a 22% jump in banks’ credit exposure, the Office of the Comptroller of the Currency (OCC) reported Wednesday. In comparison, banks earned a net $2.3 billion trading cash and derivates during the third quarter. For all of last year, trading revenue totaled $5.5 billion--down 71% from the previous year. The net current credit exposure of banks jumped 22% in the fourth quarter, to $309 billion, and was 67% higher than during the same period in 2006. “We expected to see an adverse effect on trading results, given current turbulent conditions in the credit and capital markets, particularly in light of the deterioration in market liquidity,” said Kathryn Dick, deputy comptroller for credit and market risk at the OCC (Dow Jones Newswires April 2) … * Credit-card debt and delinquencies rose the most in several states that have been hit the hardest by resets of adjustable-rate mortgages (ARMs), according to a study by TransUnion LLC. The biggest increases in average credit-card debt in the fourth quarter were in Florida (6.84%); Nevada (5.98%); and California (5.95%). Consumers are often pushed into delinquency and default as their total debt service rises. The District of Columbia saw the biggest growth in delinquencies--at 48.9%. Alaska’s delinquency rate rose the least--at 8.1%. Nationwide, the 90-day bankcard delinquency rate is expected to increase from 1.36% in the fourth quarter of 2007 to 1.9% by year-end 2008 (PRNewswire/ via Yahoo! News April 1) … * National City Corp. is considering a sale to competitor KeyCorp., say people familiar with the situation. The deal could include a capital flow from private-equity firm Kohlberg Kravis Roberts. National City has struggled during the subprime rout, seeing its stock plunge more than 70% during the past year, as its mortgage delinquencies surged. The firm posted a $333 million loss for the fourth quarter. Representatives of KeyCorp and National City declined to comment on the possibility of a merger between the two Cleveland-based banks (The Wall Street Journal Online April 2) …

Market News (04/02/2008)

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MADISON, Wis. (4/3/08)
* Federal Reserve Chairman Ben Bernanke acknowledged for the first time that a recession is possible. “It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,” said the Fed chairman in Congressional testimony Wednesday. However, he predicted a recovery during the second half of this year. He also defended the Fed’s role in helping JPMorgan Chase acquire Bear Stearns. “Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets,” said Bernanke. “With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence.” (Bloomberg.com and CNNMoney.com April 2) … * Fannie Mae informed lenders this week that it plans to require a minimum credit score for the loans it purchases individually. Fannie will require a minimum credit score of 580 for most loans, though it still will purchase loans with lower scores in certain instances. The company also will require borrowers to re-establish their credit history within five years following foreclosure, instead of four years as is now required. “Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission,” said Fannie Mae Spokesman Brian Faith. “We have taken these steps to ensure that borrowers receive loans that give them the best chance to sustain homeownership.” (Reuters via Yahoo! News April 2) … * Mortgage activity retreated last week, according to a report by the Mortgage Bankers Association (mbaa.org April 2). The trade group’s Market Composite Index plunged by 28.7% during the week ending March 28 to 688.3. The Purchase Index fell 11.8% to 356, while the Refinance Index tumbled 38.1% to 2636. Refinancings made up 53.4% of overall applications last week--down sharply from 62% the previous week. Mortgage rates were little changed. The average 30-year, fixed-rate mortgage (FRM) edged up one basis point to 5.75%, while the one-year, adjustable-rate mortgage (ARM) slipped two basis points to 7%. The 30-year FRM remains high despite the developing recession, noted Moody’s Economy.com (April 2). The risk premium for the one-year ARM also remains high--at 1.25% … * Vehicle sales slumped in March, as the credit crunch and high energy prices curbed consumer spending (Economy.com April 2). Vehicles sold at an annual pace of 15.1 million units in March--following a 15.3 million rate in February and the slowest pace in 10 years. Sales were down 12% from a year ago. New-vehicle incentives steadied in March as automakers moved to cut production instead of trying to boost sales with rebates and low-rate financing (Reuters via The New York Times April 1). Automakers spent an average $2,519 per vehicle on incentives--up just 0.2% from February and 4% from a year earlier, according to industry tracker Edmunds.com. Chrysler led the industry in incentive spending--at $4,142 per vehicle, while Toyota spent the less--at just $898 … * Factory orders declined by 1.3% in February following a 2.3% drop in January, the Commerce Department reported Wednesday. Orders for durable goods--big-ticket items that are made to last three years or more--fell by 1.1% in February, while orders for non-durable gods such as chemicals and oil declined by 1.5%. Vehicle orders plunged by 2%. The report contained a bright spot: Orders for commercial airplanes increased by 5.1% during the month. Another report released Tuesday also indicated a weak factory sector. The Institute for Supply Management’s manufacturing index edged up to 48.6 in March--from 48.3 in February but still below the 50 level that indicates expansion (Associated Press via The New York Times April 2) … * U.S. companies announced 53,579 job cuts in March--up 9.4% from a year earlier, according to a report by Challenger, Gray & Christmas. So far this year, employers have announced 200,656 layoffs, compared with 195,986 in the same period last year. “We will probably see more months in which payrolls remain relatively static or worsen,” said John Challenger, chief executive of the Chicago-based outplacement firm. Government and non-profits announced the most layoffs in March--at 16,167--followed by transportation firms (5,089) and financial-services companies (4,663) (Bloomberg.com April 2) …

Market News (04/01/2008)

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MADISON, Wis. (4/2/08)
* The U.S. stock market ended the first quarter with the biggest quarterly loss in almost six years. The Dow Jones Industrial Average stood at 12,262.89 as of close on March 31. That’s down 7.55% from the end of December. The Standard & Poor’s 500 Index was down 9.92% to 1322.70--the worst performance since third-quarter 2002. “We’ve priced in a recession now with a correction in stocks,” said FTN Financial Chief Economist Christopher Low. “But we haven’t priced in a bad recession, and it’s now likely that this will be one of the worst in the last 30 years.” (washingtonpost.com April 1) … * The stock-market downturn and housing slump have prompted many aging Americans to postpone their retirements. The percentage of people aged 55 to 64 in the workforce rose to 64.8% in February--up 1.5 percentage points from April 2007, according to the Labor Department. That means more than one million more people are in the labor market. The percentage of people aged 65 and over in the workforce rose to 16.2% from 16%--translating into another 212,000 more people in the job market. The last time stocks and home prices declined concurrently was in 1987, but that year saw a much milder decline in both assets. The shift from defined-benefit pension plans to defined-contribution plans and the loss of retiree health benefits also are keeping people in the workforce longer. Just 33% of big companies offered retiree health benefits in 2007--down by half from 1988, according to the Kaiser Family Foundation (The Wall Street Journal Online April 1) … * U.S. investment-grade corporate bond issuance tumbled 31% to $185 billion in the first quarter, as the credit crunch and recession worries eroded demand, according to a report by Thomson Financial. The decline followed a banner year for high-grade corporate issuance--at $978 billion. Junk-bond issuance plunged 85% to $5.9 billion in the first quarter. While some firms failed to attract buyers, other borrowers were forced to offer huge spread concessions of 15- to 100-basis points more than existing bonds to lure buyers. “It’s an extremely challenging environment and liquidity is very poor in the secondary market,” said Spencer Lee, an investment-grade corporate bond trader at SCM Advisors (Reuters via Yahoo! News April 1) … * The manufacturing sector improved in March but remained at a level consistent with decline. The Institute for Supply Management’s (ISM) factory index edged up to 48.6--from 48.3 in February but below the 50 level that indicates expansion. March capped “the weakest quarterly performance for the U.S. economy since the second quarter of 2003,” said Norbert Ore, chairman of ISM’s manufacturing business survey committee. He said the factory sector has seen weak orders for the past few months. The new-orders index fell to 46.5 in March--from 49.1 in February and the fourth consecutive month that new orders failed to grow. “Additionally, manufacturers continue to experience heavy cost pressures, as the prices they pay are still rising, even with slower overall demand.” The price index jumped to 83.5 in March, from 75.5 the previous month. Ore noted one bright spot in the report: The export index rose to 56.5 from 56. Ore said the average overall ISM reading of 49.2 in the first quarter “corresponds to a 2.5% increase in real gross domestic product” (Associated Press via The New York Times and CNNMoney.com April 1) … * Construction spending declined again during February, according to a Commerce Department report. Spending fell 0.3% to an annual pace of $1.12 trillion in February. The decline followed a 1% drop in January. The February level was 3.5% below the February 2007 level of $1.16 trillion. Spending on private construction fell 0.5% in February, while spending on public construction rose 0.4%. Private residential construction put in place will plunge by 45% this year, predicts Moody’s Economy.com (April 1). The research firm forecasts that non-residential private construction will increase by a modest 3% …

News of the Competition (04/01/2008)

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MADISON, Wis. (4/2/08)
* Defaults on privately insured mortgages in the U.S. jumped 38.1% in February, according to a report by the Mortgage Insurance Companies of America. The trade group said 60,911 insured borrowers were 60 days or are overdue on their mortgage payments--down 11.7% from January’s record of 68,950 but up from 44,111 in February 2007. Defaults have been above 60,000 for the past four months--for the first time since the tally began in 2001 (Reuters via Yahoo! News April 1) … * Most Americans are opposed to the government bailing out Wall Street firms that have incurred big losses from mortgage investments. In a survey by Zogby Interactive, 68% said they are opposed to federal bailouts. Only 25% said they agreed with such corporate rescues. A majority of respondents--54%-- also said they don’t support government assistance for people who are facing foreclosure. Forty-three percent said they were in favor of helping these homeowners. The survey was conducted after the Federal Reserve agreed to back JPMorgan Chase’s acquisition of Bear Stearns with government guarantees (AFP via Dow Jones Newswires April 1) … * Zurich-based UBS AG said Tuesday it expects to post a $12.1 billion loss for the first quarter. It also plans to seek $15.1 billion in new capital. UBS said it expects writedowns of about $19 billion. The Swiss bank already has reported writedowns of $40 billion during the last nine months. The bank’s disclosures are “a clear indication that we are not out of the woods yet in terms of the credit crisis,” said Octavio Marenzi, head of financial consultancy at Celent. Marenzi predicts that the U.S. banking sector will post its first contraction in overall revenue in more than 40 years. “This will inevitably lead to staff reductions, and we expect to see the U.S. banking industry shed about 200,000 jobs in the coming 12 to 18 months.” Deutsche Bank AG also announced Tuesday that it expects writedowns in the first quarter. The German bank said it expects $4 billion in writedowns due to “significantly more challenging market conditions” prompted by the U.S. subprime rout (Associated Press via The New York Times April 1) … * The credit crunch helped boost earnings at the 12 Federal Home Loan banks last year, according to a report by the banks’ Office of Finance. Net income at the banks surged 8.2% to $2.8 billion, reflecting a 36.6% jump in advances, to $875 billion at year-end 2007. Assets at the banks surged 25.4% to $1.274 trillion, while the banks’ combined capital holdings jumped 19.1% to $54 billion (American Banker April 1) … * Thornburg Mortgage announced Monday that it has succeeded in its effort to raise new capital and avoid bankruptcy. The lender said it raised $1.35 billion through selling bonds, warrants to acquire common shares, and interest in certain mortgage assets. Thornburg plans to use the new money to meet its lenders’ capital requirements. Buyers of the firm’s bonds will receive an 18% initial interest rate. The Santa Fe, N.M.-based lender has seen low default rates. But it still ran into trouble because it depends on borrowed money to generate returns, and that became a problem as the credit crunch intensified (The Wall Street Journal Online April 1) …