More bank failures and more thoughts on the mortgage bailout bill

Good Monday morning. Hope you're all ready for another exciting week. I'm working on plenty of things at my "day job," so I'll have to be brief. The big news, from where I sit, is that we saw more "Friday Night Lights Out" announcements from the FDIC over the weekend.

Specifically, the FDIC stepped in after both First National Bank of Nevada in Reno and First Heritage Bank of Newport Beach, Calif. failed. Mutual of Omaha Bank will take over their deposits and certain assets. Together, the failed institutions had assets of $3.6 billion. FDIC says the cost of the failures will be approximately $862 million.

Meanwhile, the housing bailout package originally passed by the House sailed through the Senate over the weekend. That clears the way for President Bush to sign it into law this week. The big question now is simple: "How much of an impact will it have?" I've shared some thoughts. Now, here are a few excerpts and quotes from other stories on this bill ...

From the Wall Street Journal:

"The housing rescue bill passed by the Senate Saturday hasn't been signed into law, but top Democrats already are putting pressure on regulators and bankers to make sure a major program to prevent foreclosures doesn't fall flat.

"For struggling U.S. homeowners, the success or failure of the program -- which would let roughly 400,000 owners refinance into affordable, government-backed loans -- depends largely on bankers' willingness to take a partial loss on the loans and to reduce the amount of money borrowers owe.

"Bankers say they will do it, but it isn't clear how many loans they might be willing to restructure.

"I absolutely do believe that there will be more principal reductions," Michael Gross, Bank of America Corp.'s managing director for loss mitigation, mortgage, home-equity and insurance services, told a congressional panel Friday."

and

"The Senate approved the bill 72-13 after the House of Representatives passed it Wednesday in a 272-152 vote. Minutes after the Senate vote, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) called for a prompt meeting with the Federal Reserve, the Department of Housing and Urban Development, and other regulators to determine the quickest way to get the program up and running.

"House Financial Services Committee Chairman Barney Frank (D., Mass.) on Friday asked lenders to hold off on foreclosures until Oct. 1 if it is possible the borrower would qualify for the government program. He threatened legislation if loan servicers and investors don't work together to help prevent foreclosures.

"Taking a loss on a loan by writing down the principal owed is one of the least desirable options for loan servicers. They typically prefer to either lower the interest rate or extend the life of the loan -- from 30 years, for example, to 40 years.

"The real problem is going to be, just like with every program out there, are the banks going to take this seriously?" said Rebecca Case-Grammatico, a staff attorney at the Empire Justice Center in Rochester, N.Y., who advises clients facing foreclosure. "And if they don't, we're in the same position we've been in all along."

From the Washington Post ...

"The centerpiece of the legislation is a plan to prevent as many as 400,000 foreclosures by authorizing the FHA to help people who, because of falling prices, owe the banks more than their homes are worth. If lenders agree to forgive a portion the debt and write new loans worth no more than 90 percent of the home's current, lower value, the FHA will insure the new loans and agree to pay off the lenders if borrowers default.

Homeowners also would get an immediate equity stake in their properties, which they would have to share with the government if they sell or refinance.

At a hearing Friday before the House Financial Services Committee, representatives of the mortgage industry promised Chairman Barney Frank (D-Mass.), one of the bill's chief authors, they would take advantage of the new program.

"Clearly in areas where home prices have dropped, it's going to be utilized more," Steve O'Connor, senior vice president of government affairs for the Mortgage Bankers Association, said afterward. "It also depends on the borrower's unique financial circumstances. Why are they struggling? Did they lose their job? If it's a temporary hardship, then you're not going to use this program at all. If it's something of greater significance, then this may be the best option."

But consumer advocates have their doubts. More than a year after the mortgage crisis began, banks are still foreclosing on far more loans than they modify. In May, as a coalition of lenders known as the Hope Now Alliance modified 70,000 loans, RealtyTrac reported 261,000 foreclosure filings. An April report by the State Foreclosure Prevention Working Group found that 70 percent of seriously delinquent borrowers were not receiving help.

"How effective can the FHA refinancing program be in light of how slow and ineffective mortgage servicers have been so far?" said Alys Cohen, a staff attorney at the National Consumer Law Center. "We're encouraged that steps are being taken. But we're worried."

Even if the program works, its goals are modest compared with the scope of the problem, said Mark Zandi, chief economist for Moody's Economy.com. He estimates that 5.5 million loans will default by the end of 2009, with about half of them going into foreclosure.

"If we're lucky enough to help 400,000 households," said economist Jared Bernstein, "I'm afraid it's a drop in the bucket."

Job cuts surge ... an investor dives into the distressed mortgage pool .. and more on the deficit

Not much positive to report on the employment front this morning. The latest update from ADP showed a massive 693,000-job drop in U.S. payrolls in the month of December. That was up from a revised 476,000 in November and far worse than the 495,000 job losses economists were forecasting. A lot of people are going to be looking to start digging as part of President-Elect Barack Obama's plan to fund "shovel ready" infrastructure projects.

Meanwhile, the FDIC and Private National Mortgage Acceptance Co. (Pennymac for short) have signed a deal whereby Pennymac is buying $558 million in residential mortgages from the banking agency. The loans come from First National Bank of Nevada, which the FDIC took over after it failed in July. Pennymac is buying the loans on the cheap, and hoping to increase their longer-term value by working out and modifying as many as possible.

Also, that trillion-dollar deficit issue I talked about yesterday is big news in the morning papers. The New York Times tackles it in this piece, which adds the following context on just how big a deficit we're talking about, historically speaking (my emphasis added):

"Mr. Obama was not specific about the size of the deficit he expects, beyond his reference to “a trillion-dollar deficit or close to a trillion-dollar deficit” for the fiscal year that ends Sept. 30. Aides said later that the estimate — in line with what economists have been anticipating given the economy’s rapid deterioration — did not include the costs of the proposed stimulus package, which could add hundreds of billions of dollars more to the red ink.

"At $1 trillion, the deficit would not only shatter the largest previous shortfall in dollar terms — $455 billion last year — but it could also exceed the post-World War II-era record by the measure more meaningful in economic terms, the deficit as a percentage of total economic activity.

"Diane Rogers, chief economist at the Concord Coalition, a nonpartisan organization that supports fiscal discipline, estimated that the deficit this year would hit 7 percent of the gross domestic product. The largest previous record in those terms was in 1983, when it hit 6 percent."

One thing I'll add: Keynesian stimulus, massive deficit spending, and so on is all the rage these days. And most economists seem to think it will work. I would just point out that after Japan suffered twin busts in stocks and real estate, it spent money out the wazoo trying to bring the good old days back.

Specifically, it launched a stimulus package of 10.7 trillion yen in August 1992 ... another for 13.2 trillion in April 1993 ... 6.2 trillion in September 1993 … 15.3 trillion in February 1994 ... 14.2 trillion in September 1995 ... 16.7 trillion in April 1998 ... 23.9 trillion in November 1998 ... and 18 trillion in November 1999. Grand total: 118.2 trillion yen (That's about $1.27 trillion U.S. at current exchange rates). The result: Japan STILL suffered a “Lost Decade” of deflation, lackluster growth and declining stock prices.

Or as the Wall Street Journal recently explained: “Keynesian ‘pump-priming’ in a recession has often been tried, and as an economic stimulus, it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.”

Nothing wrong with hoping for the best. But my confidence in a strong recovery is low. The only way to prevent painful busts is to avoid stupid bubbles from inflating in the first place -- a lesson officials at the Fed are hopefully starting to learn.