US and Europe to Face More Ratings Cuts?

Here is an excerpt from CNBC on January 20, 2012. The article is entitled US, Europe Face More Ratings Cuts in Coming Years and was written by Jeff Cox. Click on the link to view entire article.

The string of sovereign debt downgrades in recent months could be just the beginning. The US, Europe—even Germany—could face further ratings cuts over the next three years, according to a lengthy analysis this week by Citigroup.  The European Union got a slight reprieve late Friday as Standard & Poor’s backed its triple-A/A-1+ rating on the EU.  It had been under review and at risk of a downgrade. The outlook remains “negative.”  In announcing its decision, S&P said the EU “benefits from multiple layers of debt-service protection sufficient to offset the current deterioration we see in member states’ creditworthiness.” The US is at the top of Citi’s list for possible downgrades because its debt and deficit troubles are unlikely to be resolved with the political infighting in Washington.  Some of the other usual suspects also are on Citi’s list – the European peripheral nations in particular such as Greece and Spain.  But even mighty Germany, seen as the continent’s most secure economy, could face a downgrade as the sovereign debt crisis escalates and a European recession spreads through the region. “We expect a string of further ratings downgrades for advanced-economy sovereign debt, and do not expect any ratings upgrades,” Citi analysts Michael Saunders and Mark Schofield wrote.  That includes American debt, which Standard & Poor’s downgraded in August in a move that set off a more than 600-point one-day selloff in the Dow industrials.

Citi said it is keeping its outlook unchanged on US debt in the near term but sees trouble looming for the American rating over the next two to three years.  Indeed, the list of potential downgrades is ominous and serves as a reminder that while the US equity markets seem conveniently to have forgotten about the world’s debt troubles, some stern and punitive reminders are on the way.  Further downgrades for the US, and the initial downgrade for Germany, could be a few years away.  But in the next six months, the ratings agencies are likely again to start rattling their sabers, starting with the declaration of a Greek default that is approaching a near-certainty in March.  In fact, in the next six months, Citi expects Moody’s to cut ratings for Italy, Spain, Portugal and Greece, with the nascent recovery in Ireland allowing it to be the only one of the “PIIGS” nations to escape the downgrade scalpel.  Additionally, France and Austria are deemed likely for a “negative outlook,” while Greece will be placed into either “selective default” or “outright default.”  Going out further, the next two to three years are likely to see downgrades not only to the US but also to Japan, France, Italy, Spain, Austria, Belgium, Finland, the Netherlands and Portugal.

Existing Home Sales Up

The National Association of Realtors recently published an article entitled December Existing-Home Sales Show Uptrend on January 20, 2012. The article was written by Walter Molony. Click on the link to view entire article.

The National Association of Realtors said Friday that sales increased 5% last month to a seasonally adjusted annual rate of 4.61 million, the best level since January 2011 and the third straight monthly increase for sales. For the year, sales totaled only 4.26 million. While that’s up from 4.19 million the previous year, it’s below the 6 million that economists equate with healthy housing markets.  Sales are increasing at a time when the market is flashing other positive signs. Mortgage rates are at record-low levels. Homebuilders have grown slightly less pessimistic because more people are saying they might be open to buying a home this year. Home construction picked up in the final quarter of 2011The median sales price rose 2.3% to $164,500 in December. 2011. Still the housing market has a long way to go before it is fully recovered from the housing bust four years ago. In the last four years, home sales have slumped under the weight of foreclosures, tighter credit and falling prices. Fewer first-time buyers, who are critical to a housing recovery, are in the market for a home. Purchases by that group fell last month to make up only 31% of sales. That’s down from 35% in November. In healthy markets, first-time buyers make up at least 40%.  At the same time, homes at risk of foreclosure made up a third of all sales last month. In healthy markets, they comprise 10% of sales.

Investors are increasingly buying homes priced under $100,000. Still, Sales rose across the country in December. They increased on a seasonal basis by more than 10% in the Northeast, 8.3% in the Midwest, 2.9% in the South and 2.6% in the West.  The glut of unsold homes declined to 2.38 million homes. At last month’s sales pace, it would take nearly 7 months to clear those homes. Analysts say a healthy supply can be cleared in about six Months.

Americans Lead in Debt Reduction

CNBC recently published an article entitled Americans Lead in Debt Reduction: Study. The article was written by Karina Frayter on January 24, 2012. Below is an excerpt from the article. Click on the link to view entire article.

Americans are cutting their debt faster than other countries and could already be halfway through the deleveraging process, setting the stage for the nation’s economic recovery, says a new report from McKinsey Global Institute.  However, even when U.S. consumers finish deleveraging, they probably won’t be as powerful an engine of global growth as they were before the crisis, warns the report.  According to McKinsey analysts, deleveraging happens in two stages: First, the private sector reduces debt, while economic growth is negative or minimal and government debt rises; then, growth rebounds and supports gradual government deleveraging.  “Somewhat surprisingly, given the amount of concern over the U.S. economy, we find that the United States is furthest along in private-sector debt reduction and closest to beginning the second phase of deleveraging,” says the report.  “The remaining obstacles for its return to growth are its unsettled housing market and its failure to lay out a credible medium-term plan for public debt reduction,” concludes the report.

Since the financial crisis, U.S. household debt has fallen by $584 billion, or 15 percentage points relative to disposable income, which is more than in any other country.  At this pace, Americans could reach sustainable debt levels by the middle of 2013.  The report also found that since the 2008-2009 financial crisis the world’s ten largest developed economies have seen their total debt increase, primarily due to growing government debt.  The U.S., South Korea and Australia are the only countries that have seen a decline in the ratio of total debt to GDP during that time period.  Moreover, the United Kingdom and Spain are deleveraging at a much slower pace, and it could take another decade until their private-sector debt returns to the pre-bubble levels.  In the United States, most of the private-sector deleveraging has happened in the financial sector, where debt relative to GDP had declined to $6.1 trillion from $8 trillion, levels not seen since 2000.

President’s Plan to Help Troubled Borrowers Referenced in State of The Union Address

Below is an excerpt from a recent CNBC article entitled President Obama Proposes Mortgage Refinances for ‘Responsible Borrowers’. Click on the link to view entire article.

“After several largely ineffective programs to help troubled borrowers and after fruitless attempts at budging the hard-line conservator of Fannie Mae and Freddie Mac, President Obama is proposing a brand new refinance program for borrowers who are current on their mortgages, regardless of who owns their loan; the catch is that this one has to go through Congress.  ’I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks,’ the President announced in his State of the Union address.  Unlike previous efforts in the refinance space, including a recently revamped and expanded government program for borrowers who owe more on their mortgages than their homes are currently worth, this plan would not be limited to those with loans backed by Fannie Mae and Freddie Mac, according to senior administration officials. The two mortgage giants own or guarantee about half of the nation’s mortgages. It would be open to all borrowers current on their loans.

The Obama administration is offering few details, promising more in the coming weeks, but several sources say the plan is to ask Congress to allow the government mortgage insurer, the Federal Housing Administration (FHA), to back refinances of underwater mortgages. No estimates were given as to how many borrowers such a plan could potentially help, only that this would be a voluntary, borrower-initiated plan, and not a blanket refinance of all borrowers.  The costs, according to administration officials, would be modest, and the President would request that a portion of his financial crisis responsibility fee offset any of those costs, so there would be no addition to the federal debt.  ’A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust,’ Mr. Obama added.  Loan servicers could be faced with a flood of applications and could have to add resources to handle it all, but officials say the opportunity to generate revenues from the refinances would be incentive enough. Still many servicers have balked at the idea ofmass refinancing, as the new loans could present more risk and less reward.

The idea is to remove the barriers and ‘frictions’ that have kept many borrowers out of refinancing to historically low rates. Some of those include high levels of negative equity, loan level price adjustments, loan origination dates, put-backs on loans that default, and borrower qualifications.  Then there is the very basic problem of politics. Whatever the details of the plan are, Republicans, despite the fact that they have been calling for more refinances, are unlikely to hand President Obama a popular victory on the eve of a presidential election. They may also oppose anything that makes Fannie Mae and Freddie Mac bigger, when the two are allegedly winding down.”

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