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After a string of costly bailout and stimulus measures, President Obama will set a goal this week to cut the annual deficit at least in half by the end of his term, administration officials said. The reduction would come in large part through Iraq troop withdrawals and higher taxes on the wealthy.
Mr. Obama’s budget outline, which he will release on Thursday, will also confirm his intention to deliver this year on ambitious campaign promises on health care and energy policy.
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Credit cards, home equity lines, student loans, car financing: none come cheaply or easily in these credit-tight times. The banks, the refrain goes, just will not lend money.

But it is not simply the banks that are the problem. It is also what lies behind them.
Largely hidden from view is a vast financial system that serves as the banker to the banks. And, like many lenders, this system is in deep trouble. The question is how to fix it.

Most banks no longer hold the loans they make, content to collect interest until the debt comes due. Instead, the loans are bundled into securities that are sold to investors, a process known as securitization.

But the securitization markets broke down last summer after investors suffered steep losses on these investments. So banks and other finance companies can no longer shift loans off their books easily, throttling their ability to lend.

The result has been a drastic contraction of the amount of credit available throughout the economy. By one estimate, as much as $1.9 trillion of lending capacity — the rough equivalent of half of all the money borrowed by businesses and consumers in 2007, before the recession struck — has been sucked out of the system.

Banking chiefs, who have come under sharp criticism for not making more loans even as they have accepted billions of taxpayer dollars to prop themselves up, say it is the markets, not the banks, that are squeezing American borrowers.

The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.

But analysts question whether this approach will be enough to unlock the credit that the economy needs to pull out of a deepening recession. Some worry it may benefit only select investors at taxpayer expense.

The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.

In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy F. Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion.

Investors and economists said that the effort could help restore some lending, but added that it might not be big enough to fully replace all or most of what has been lost, especially if the nation’s biggest banks are not restored to health.

“The gap to be made up is huge,” said Hyun Song Shin, an economist at Princeton who has written extensively about the shadow banking system. “Ideally, you would like the commercial banking sector to step up and take charge of the train but they are in no position to do that because they are undercapitalized.”

The market for new securities backed by mortgages and other types of loans has collapsed. Last year, investors bought $313.9 billion of these securities, down from $1.6 trillion in 2007 and $2.1 trillion in 2006, according to Dealogic.

Last month, banks issued just $1.6 billion worth of such deals.

Banks and finance companies are holding more loans on their books, but their ability to do so has been eroding as losses rise on their existing assets. Since October, banks’ holdings of loans and leases have shrunk by 2 percent, to $7.1 trillion.

In the mortgage market, banks own just one-third of all loans, down from half as recently as 1990.

Investors and bankers say the Treasury program, called the Term Asset-Backed Securities Loan Facility, or TALF, could help unclog vital channels of capital, but they add that it is hard to know how big an impact it will have.

For one thing, the Fed will make loans against only triple-A rated securities, not lower-rated bonds, which are first to suffer losses when borrowers default on loans. That will not help banks sell junior bonds, which many investors have shunned because of fears that losses would rise as the economy worsened, said Thomas H. Atteberry, a partner at First Pacific Advisors, an investment firm based in Los Angeles.

“It’s probably a step forward but it may only be a baby step forward,” said Mr. Atteberry, who does not plan to use the TALF.

Jerry Marlatt, a partner at the law firm of Clifford Chance who specializes in securitization, said that lenders using the TALF would be willing to retain more of the risk associated with loans on their own books to get deals done. That should help ensure that lenders make better-quality loans in the future, because they will be liable for most of the losses.

Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more.

“The TALF,” he said, “raises a lot of questions.”

By VIKAS BAJAJ
Published: February 19, 2009
Source-New York times

President Obama announced a plan on Wednesday to help as many as nine million American homeowners refinance their mortgages or avert foreclosure, saying that it would shore up housing prices, stabilize neighborhoods and slow a downward spiral that was “unraveling homeownership, the middle class and the American Dream itself.”
The plan, which was more ambitious and expensive than many housing analysts had expected, drew praise from consumer advocates as well as the financial industry.

It could ultimately cost taxpayers as much as $275 billion — $75 billion in direct spending to keep people in their homes and the rest in additional financial backing for the government-controlled mortgage giants, Fannie Mae and Freddie Mac.

But analysts and administration officials alike cautioned that it would not come close to halting the tidal wave of foreclosures. Nor would it provide much help to millions of homeowners who are “under water,” or holding mortgages that are bigger that the market value of their houses.

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

Almost one in 10 home mortgages is either delinquent or in foreclosure, and analysts estimate that at as many as six million families could lose their homes over the next three years in the absence of government action.

The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.

A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.

Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.

The banking industry has vehemently fought that proposal for more than a year, saying it would make investors unwilling to finance future mortgage lending. But Democrats in Congress strongly support the idea and banking executives are putting up less resistance than before.

Republican lawmakers reacted cautiously to Mr. Obama’s plan. Representative John Boehner of Ohio, the House Republican leader, called it “an important step,” but raised questions.

“Does your plan compensate banks for the bad mortgages they should never have made in the first place?” Mr. Boehner asked. “Will individuals who misrepresented their income or assets on their original mortgage application be eligible to get taxpayer-funded assistance?”

Mr. Obama’s announcement came a day after he signed his $787 billion economic stimulus package, and administration officials said that the initiatives would work in tandem to stabilize the economy.

The plan will take effect March 4, when the administration publishes detailed rules explaining it.

Except for the provision that empowers bankruptcy judges, almost all the other elements can be enacted by Mr. Obama without further action by Congress.

To help the estimated four million homeowners in danger of foreclosure, Mr. Obama will create a $75 billion program to subsidize loan modifications that would reduce a family’s monthly payment to as little as 31 percent of its gross monthly income.

As envisioned, a mortgage lender would have to first make enough concessions to reduce a borrower’s payments to 38 percent of monthly income. To encourage lenders, the government would offer incentives, like a $1,000 upfront payment for every loan modified and more payments if the borrower stays current.

If the lender gets the monthly payments down to 38 percent of the borrower’s monthly income, the government would then match, dollar for dollar, additional reductions to bring the payment as low as 31 percent of monthly income.

The changes could be accomplished in several ways, from stretching out the repayment period of a loan to reducing the interest rate or reducing the outstanding principal.

But analysts noted that lenders, or the mortgage-servicing companies that administered the loan, would still have the last word on whether to make concessions. If a lender decides that the cost of the concessions is higher than the cost of foreclosing, even with the government subsidies, then a borrower would probably still lose the property.

A potentially big limitation on the rescue portion of Mr. Obama’s plan involves second mortgages. To avoid the need for a down payment, or to minimize the down payment, millions of people bought homes with piggy-back mortgages that went alongside the primary mortgages.

Administration officials said on Wednesday that their plan to help homeowners facing foreclosure did not deal with second mortgages. Because those second mortgages were often made by a different lender than the first mortgages, that could greatly complicate negotiations over a loan modification.

To help homeowners who can still keep up with their payments, but who may resent the idea of rescuing others, Mr. Obama’s plan would make it easier to refinance at today’s very low interest rates.

The plan would apply to people with fairly traditional loans that are owned or guaranteed by Fannie Mae and Freddie Mac — about 30 million homeowners. The new loans would not be subsidized, but borrowers would not need to have a 20 percent equity stake in the house.

Normally, Fannie Mae and Freddie Mac require that such borrowers pay private mortgage insurance, which can add hundreds of dollars to a monthly payment. Administration officials estimated that this portion of the plan could help 4 million to 5 million borrowers.

The big limitation of the refinancing portion of the plan is that it would not help most borrowers who are current, but under water. It would only be available for mortgages that are not more than 5 percent above the current market value of the house. Mark Zandi, chief economist at Moody’s Economy.com, estimated that the plan would help less than a million of the 14 million homeowners who are under water.

A third, more vague component of the plan is aimed at propping up the mortgage market as a whole by having Fannie Mae and Freddie Mac step up their purchases of mortgages and mortgage-backed securities.

Sheryl Gay Stolberg reported from Mesa, Ariz., and Edmund L. Andrews from Washington. Source-New York times

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Tax credit of 10% of the purchase price up to $8,000
Credit only valid for first-time homebuyers purchasing principal residence
Credit can be applied to purchases made from 1/01/09-12/01/09
Home purchased must be principal residence for 3 years or credit will be recaptured
Only applies when taxable income for the year is less than $75,000 (file single return) or 150,000 (file join return)