Falling home prices hurt borrowers, neighbors

Economist estimates inflation-adjusted value of $23 trillion housing market could fall by $3 trillion by next year.

NEW YORK -- If home prices fall as forecast, the $23 trillion housing market could lose $3 trillion in value by August 2008, a leading housing economist and former mortgage bank president told lawmakers on Wednesday.

Between 1998 and early 2006, when housing prices peaked, home values rose 86 percent on an inflation-adjusted basis, Robert Shiller, a professor of economics at Yale University, said at a hearing about the subprime crisis held by Congress's Joint Economic Committee.

Since that peak, Shiller noted, real home values have fallen 6.5 percent and they're forecasted to fall at least another 7 percent on average in the next year.

That combined decline could translate into a $3 trillion loss of wealth for households, said Alex Pollock, a resident fellow at the American Enterprise Institute and the former CEO of the Federal Home Loan Bank of Chicago, in his written testimony.

Those hardest hit likely would be homeowners with subprime adjustable-rate mortgages (ARMs) whose payments are scheduled to reset to higher levels in the next year - in some cases by as much as 50 percent. Refinancing out of those loans, already made difficult by the recent credit crunch, will be out of reach should a borrower's home price fall below the value of his loan in the next year, said Martin Eakes, CEO of the Center for Responsible Lending, during his testimony.

That's why he and Shiller were urging lawmakers to act quickly to pass measures to aid struggling homeowners saddled with high-cost predatory loans.

Helping them with foreclosure avoidance wouldn't just assist the mortgage borrower but his neighbors, too, Eakes asserted. He cited a study that estimates that for every foreclosure on a block, values on homes within an eighth of a mile are likely to fall 1.14 percent in value.

Lawmakers have been considering what steps, if any, to take both to contain the current subprime contagion and also to prevent another mortgage meltdown in the future.

A number of proposals have been put forth, including one by Sen. Charles Schumer (D-NY), chairman of the Joint Economic Committee and a member of both the Senate banking and finance committees. Schumer's bill is aimed at making it easier for homeowners with subprime ARMs to refinance and to help home buyers in high-cost markets get a mortgage since even those with good credit have been shut out recently.

Among the measures he calls for: temporarily lifting the portfolio caps allowed for Fannie Mae and Freddie Mac by 10 percent, or $145 billion. Those caps apply to the amount of mortgage assets the government-sponsored agencies buy and own directly (as opposed to their other function - which is to buy, pool and sell mortgages as mortgage-backed securities).

Half of the cap increase would be earmarked for the purchase of subprime refis with scheduled interest-rate resets between June 2005 and December 2009. That would potentially encourage lenders to offer them, since they know Fannie and Freddie would guarantee a secondary market in which the lender could sell the refis.

Those who oppose such a move, such as the White House and the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates both agencies, contend that such a big increase would not be prudent given the accounting problems both Freddie and Fannie have had in recent years.

To date, the Federal Housing Administration has already loosened its criteria for refinancing. And eligibility requirements for FHA loans would be further liberalized if FHA reform legislation passes into law, which many are expecting.

Group bids $150 million for Aeromexico

Subsidiary of Citigroup bids for majority stake of Mexican airline; Aeromexico says it will reply within 10 business days.

MEXICO CITY (AP) -- Mexican airline company Consorcio Aeromexico SAB said Friday that a trust run by a unit of Citigroup has launched a $150 million tender offer for the company's shares.

Aeromexico said its board of directors will issue its opinion on the latest offer no later than 10 business days. The board had already endorsed an earlier offer from other local investors as "reasonable from a financial point of view."

The trust run by Citigroup's (Charts, Fortune 500) local banking unit Banamex is offering 1.68 pesos (15 cents) a share for between 50.1 percent and 100 percent of Aeromexico's 992.4 million shares, the airline said in a filing with the local stock exchange.

The offer is open until Oct. 15 and could be extended until Nov. 30. Banamex's brokerage unit is acting as the intermediary in the transaction.

Flying Southwest? Reconsider that miniskirt

The trust's bid was first announced Sept. 12, and represents a 53 percent premium over the 1.10 pesos (10 cents) a share offer made last month by local businessmen Moises Saba Masri and Alberto Saba Raffoul.

Both offers would be contingent on the Mexican state selling some or all of its 62 percent stake in Aeromexico. The government has said that it would sell the shares through a public offer unless a buyer emerged

Barclays says trading unit profitable in August

British bank, with a deal in the balance, fears major losses from overexposure to risky mortgages.

LONDON (AP) -- Barclays, the British bank in a bidding war for ABN Amro Holding, said Monday that its securities unit "traded profitably" last month, easing fears that the bank was overexposed to the credit crisis that has swept global markets.

Barclays (Charts), Britain's third-largest bank, borrowed twice in two weeks from the Bank of England's emergency loan facility this month, but sources said at the time that the loans were due to technical glitches rather than a shortage of funds.

"Barclays Capital traded profitably in August 2007, after full allocation of costs and the mark to market of all positions," said Bob Diamond, head of investment banking at Barclays, in a statement coinciding with an investor presentation in New York. "Year-to-date profits are well ahead of 2006."

Shrinking global credit levels started with defaults on U.S. subprime mortgages, or home loans made to people with weak credit histories. The crisis has spread because banks have repackaged risky loans with the more reliable, and sold them to a wide range of investors across the globe.

All the latest market news

Attention was drawn to Barclays when it turned to the Bank of England as a lender of last resort - once after a loan from HSBC Holdings was delayed and again after a breakdown in the banking clearance system.

"I find it amazing there was any question about a bank the size and quality of Barclays to fund itself," Diamond said in notes prepared for the U.S. investor presentation and posted on the Barclays Web site. "In fact, as in previous times of market turbulence, we've been net recipients of liquidity as a haven in rough seas."

Diamond said that Barclay's mortgage and asset-backed business has been a good growth area, but accounted for less than 5 percent of its revenue based on its first-half results.

"Subprime is an even smaller piece of this," he said.

Diamond also addressed concerns about Barclay's structured investment vehicles, known as SIV-lites.

Barclays denies exposure to failed debt vehicles

Edward Cahill, who was head of the European collateralized debt obligation division, resigned earlier this month, and the bank injected $1.6 billion into a SIV-lite run by Cairn Capital to rescue it from collapse after a failed attempt to raise money in the credit markets.

Two similar funds set up by Barclays Capital, Mainsail II and Golden Key, were forced to begin selling assets earlier this month because they were unable to raise new financing.

Diamond said Barclays had structured four SIV-lites for managers looking to increase their exposure to credit, but neither selected nor managed the assets.

"As liquidity in the short-term debt markets has tightened and asset prices have declined we've been working with our clients to restructure these vehicles," he said, adding those moves were not "bailouts."

"It's also worth noting that SIV-lites constitute in total about $10 billion of a market in asset-backed commercial paper worth $1.2 trillion," he said.

Thornburg raises $1.44B to relaunch loans

Residential mortgage lender announces deal backed by ARMs; amount is enough to let firm repay what it owes and start issuing mortgages again.

SANTA FE, N.M. (AP) -- Thornburg Mortgage, a residential mortgage lender, said Tuesday it raised $1.44 billion in a deal backed by adjustable-rate mortgages, giving it enough money to start making loans again.

Thornburg (Charts), which specializes in adjustable-rate mortgages of more than $417,000, said the financing allows it to repay $1.37 billion in borrowings, clearing the way for new loan originations.

Mortgage lenders originate loans and then typically package them together for sale to bigger banks, who then slice them into securities. Demand on this so-called secondary market has waned, making it difficult for lenders to raise money to initiate mortgages.

Thornburg said the money it raised is backed by $1.44 billion in prime-rated ARM loans in the publicly registered Thornburg Mortgage Securities Trust.