Rudd lends life to sick market

Jennifer Hewett, National affairs correspondent


THE Rudd Government knows how tough life is going to be for voters this year as unemployment rises.But it also knows that job losses at companies such as BHP and David Jones and collapses of companies such as Australian Discount Retail are merely the symptoms of the malaise. The deeper cause is rooted in the banking system and particularly the availability of credit for business. Without a steady and reliable funding flow, the whole economy seizes up. No economic stimulus packages can work effectively if there is not enough credit to go around. This is an international problem, but its impact will reverberate throughout Australia, particularly if Australian corporates can't get the refinancing they need.

Australian banks have been warning the Government they will not be able to meet the financing shortfall likely to occur once many of the foreign banks withdraw from the local market. In response, the Government is planning to establish a special facility - supposedly temporary - that would effectively mean the Government is lender of last resort. This would be half funded by the Government and half by the big four banks.

It is an extraordinary proposal for extraordinary times. Many in the market are deeply uneasy at the prospect of the Government being in the business of direct lending to the corporate sector. Some see it more as a clever way for profitable Australian banks to get rid of dubious loans, particularly in the property market, from their balance sheets. They warn that the Government will end up carrying the cost of bad investments or temporarily propping up sectors where values must inevitably fall. But having seen the failures of the market, the Government is not prepared to take the risk of not doing enough. It has been convinced that standing back would lead to a vicious circle of falling asset values leading to more collapses and more reluctance to lend. This is why Kevin Rudd has been emphasising that the withdrawal of foreign bank lending and the tightening in domestic bank lending are hurting the real economy. "If banks do not allow clients to refinance as they would in normal conditions, then companies can be forced to sell assets, often at low value," the Prime Minister said this week. The Government will now present this proposal as another example of the action the Government is prepared to take to protect Australian interests. And given the even more radical measures being taken in Britain and the US - and a new phase of turmoil in the global banking sector - Australian
voters will probably give it a tick. At least for now.


Source

To evaluate the economic today many companies are close because of the economic global crisis and also many people are unemployed because of that the market today are sick.

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Highest Rates in Generation Confront Everyone Without Fed Funds

By James Sterngold


Jan. 26 (Bloomberg) -- Shannon Luhrsen, a stay-at-home mom in Wilmington, North Carolina, can't understand why she should pay 5.8 percent for her mortgage when her local bank gets money from the Federal Reserve at little more than 0 percent and the U.S. government is borrowing for 10 years at 2.6 percent.

“I want to get in the 4s,” Luhrsen said. “That would be fantastic. I don't want the bank to have my money. I want to have my money.”

The last time the disparity between 30-year mortgage rates and 10-year Treasury yields was so great during a period of Fed monetary policy loosening was 1982, when Timothy F. Geithner entered his senior year at Dartmouth College and Ben S. Bernanke was an assistant professor at Stanford University.

Until Geithner, President Barack Obama's nominee for Treasury Secretary, and Fed Chairman Bernanke figure out a way to narrow the spread, which would help shore up house prices, the economy will be in “quicksand,” said Clyde V. Prestowitz Jr., president of the Economic Strategy Institute in Washington and a counselor to the Secretary of Commerce during the Reagan Administration.

“We can't stabilize the overall economy until we fix housing prices, and mortgage rates are a huge, if not the biggest part of that,” Prestowitz said.

Maxine Waters, a California Representative and the No. 3- ranked Democrat on the House Banking Committee, also wants banks to lower mortgage expenses.
"If the government is making sure that cost is dropping for the banks, it should be dropping just as much for consumers, but they're not,” Waters said in an interview last week. “Banks could make loans at 4.5 percent, or even lower, and it would still be profitable.”

Rising Profit Margins

JPMorgan Chase & Co., the largest U.S. bank by market value, helps families purchase homes with long-term mortgages that they can afford and also assists them in refinancing existing mortgages to lower monthly payments, said David Lowman, head of home lending at the New York-based company. He wasn't more specific in a statement sent in response to questions about home- lending costs. While the average 30-year fixed mortgage rate fell below 5 percent this month for the first time since McLean, Virginia- based Freddie Mac started keeping records in 1971, the banks' profit margins are increasing. That's because the yield spread between 30-year mortgages and 10-year Treasury notes is 2.5 percentage points, compared with an average 1.7 points during the past two decades, data compiled by Freddie Mac and Bloomberg show. The difference was 3.3 percent on Dec. 3, the widest since 1986 when the Tax Reform Act eliminated real estate-related tax shelters, causing investors to sell properties and reducing market values.

FOMC Action

The Fed cut the benchmark interest rate six times in the past year. It was reduced last month to as low as zero to combat the longest recession since 1982 and revive the credit market. The Federal Open Market Committee said in a Dec. 16 statement that “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Fed policy makers twice pared the overnight lending rate to 1 percent since adopting it as the main tool of monetary policy in the late 1980s. The 1 percent held from June 2003 to June 2004, and again from the end of October until last month's reduction. As rates dropped during the past 12 months, the gap between mortgage and Treasury yields approached 1982 levels. The gross domestic product contracted 1.9 percent that year, the worst performance since 1946.

Volcker to Bernanke

Former Fed Chairman Paul A. Volcker raised the government's target interest rate to 20 percent in 1980 and then again in 1981 to break the back of inflation as the economy sank into a recession. Inflation peaked at 14.8 percent in March 1980 and declined to 3.8 percent by the end of 1983.

Efforts by Bernanke, 55, to reverse the two-year drop in home prices and the economic slump depends in large part on banks lowering rates enough to stimulate loan demand. His attempts are so far having little effect. Analysts estimate the economy will contract 1.5 percent in 2009, a half percentage point more than projected a month ago, according to a survey compiled by Bloomberg last week.

JPMorgan and Charlotte, North Carolina-based Bank of America Corp., the country's biggest home lender, said the industry is changing the terms of existing mortgages to keep Americans in their homes as job losses spread across the nation. Jamie Dimon, JPMorgan's chief executive officer, said in a Jan. 15 statement that the company has prevented more than 300,000 foreclosures, and “we plan to help more than 300,000 more families keep their homes through mortgage modifications over the next two years.”

Adjustable Rates

Bank of America will adjust more than $100 billion of existing home loans to keep as many as 630,000 borrowers from defaulting over the next three years, CEO Kenneth D. Lewis said during a Jan. 16 conference call after the company reported a fourth-quarter loss of $1.79 billion. In the current business climate, “rates should be 4 percent, not 5 percent,” said Lawrence Yun, chief economist of the National Association of Realtors, a lobbying group in Washington. Spreads are even wider for adjustable-rate mortgages. The average 1-year ARM is almost 5.8 percentage points above three- month Treasury bill yields, the biggest gap ever, and far above the historical average of about 2 percentage points, according to Bloomberg data. The difference peaked at 6.9 percentage points on Sept. 16, after the bankruptcy of New York-based investment bank Lehman Brothers Holdings Inc.

Luhrsen's Lament

“Mortgage rates are probably 25 to 50 basis points too high, once you factor everything in,” said Laurie Goodman, an economist and senior managing director at Amherst Securities Group LP in Austin, Texas.
She estimates the wider spreads mean banks making loans of $300,000 and then selling the mortgage on the so-called secondary market are earning about $6,240 more than they did as recently as three years ago when the housing market was booming. Luhrsen, the 40-year-old mother of two in Wilmington, North Carolina, said she wants to refinance her 30-year fixed loan and checks the Internet every other day for a lower rate. The best she can do is a little more than 5 percent. “I want to get as low a rate as possible,” Luhrsen said. No matter how far rates fall, borrowers always want them lower, said Chris Hutchens of Alpha Mortgage Corp., Luhrsen's mortgage banker in Wilmington. “If it goes to 5, people will want it to go down to 4, and if it goes to 4, they want 3,” Hutchens said. “I want to say, 'Hey, it's not going to zero.' But that's what everybody wants.”

Geithner Hearing

The increase in costs runs contrary to programs supported by Obama, who said in speeches during the past month that “we've got to start helping homeowners in a serious way.” Geithner, 47, said Jan. 21 at a Senate Finance Committee hearing that the new administration will propose a “comprehensive plan” within the next few weeks to respond to the economic and financial crises. It will address the credit crunch, the collapse of the housing market and the global economy, he said. Stan Sieron, a realtor in the St. Louis suburb of Belleville, Illinois, said that, with banks able to borrow overnight at almost nothing and the Treasury pouring record amounts of capital into the financial system, mortgage rates of 5 percent are doing little to stabilize prices or attract new buyers to soak up the excess supply of homes. “I do think banks could go much lower, to 4 percent or so now,” Sieron said. “It's not just rates, though. They're really tightening up lending. People I know are having an extremely difficult time getting loans. Everything is an issue, and there are too many 'no's.'”

Prices in Freefall

Home prices in 20 major U.S. cities have declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales. The S&P/Case-Shiller Index dropped by a more than estimated 18 percent in the 12 months through October. The gauge has fallen every month since January 2007. Foreclosure filings rose 81 percent last year as companies slashed payrolls by almost 2.6 million, the most since 1945, the Labor Department and Irvine, California-based research group RealtyTrac Inc. reported.
“A lot of people working at mortgage companies are dealing with defaults, not originating new loans,” said Goodman of Amherst Securities. Financial institutions have reduced risk-taking after more than $1 trillion of writedowns and credit market losses since 2007, triggered by record subprime home-loan defaults in the U.S., data compiled by Bloomberg show.

Stricter Standards

With lenders tightening standards, as few as 50 percent of applications are resulting in mortgages this month, down from an average of about 70 percent during the past 18 months, according to analysts at Zurich-based
Credit Suisse Group AG. Banks are so traumatized by their losses that they're reluctant to narrow lending spreads or extend loans, said Douglas Duncan, chief economist at Fannie Mae, the Washington-based mortgage buyer seized with Freddie Mac in September after federal regulators determined the companies were at risk of failing. “Underwriting criteria have been tightened considerably, and that is a real issue,” Duncan said. “Mortgages could well be close to 4 percent if they reflected traditional spreads. It's not greed or things like that. It's the real risks the banks see.” Waters, the U.S. congresswoman, said the House will push the Obama Administration to bring cheaper rates to homebuyers. Before releasing the second $350 billion of the $700 billion Troubled Asset Relief Program, she said guidelines will be sought that push banks to increase mortgage lending, drop rates and negotiate modifications for loans in default.

Waiting for Washington

Without significant pressure from Washington, the banks will maintain the wide interest rate spreads to resuscitate depleted balance sheets, rather than pass along the savings to consumers, said Alan Fischer, executive director of the San Francisco-based California Reinvestment Coalition, an advocate group for low- income housing. “The banks are just doing what is safest, but it doesn't reflect taxpayer needs or the public good,” he said. “They've gone from making too many unsafe loans to making it almost impossible for the folks who really need the loans to get them. The financial institutions just aren't going to fix this on their own. You have to look to the new Congress and Washington, not the markets.” In addition to reducing lending rates and using TARP to inject capital into banks, the government has allocated more than $100 billion since
September for Fannie Mae and Freddie Mac to buy new mortgages, Freddie Mac Chief Economist Frank Nothaft wrote in a report earlier this month. The Fed has said it may add another $570 billion. 'Looking to Save' The Mortgage Bankers Association in Washington forecasts that mortgage originations for home purchases, rather than refinancings, will decline to $847 billion this year from $1.14 trillion in 2007. Bank rates are set largely by what Fannie Mae and Freddie Mac are willing to pay for mortgages in the secondary market, not the companies' cost of funds, according to Jay Brinkmann, the MBA's chief economist. Luhrsen and her husband Mike, a 42-year-old airline pilot, said they worked hard to buy their three-bedroom ranch house with a boat pier. Now they see their ability to retire and pay for college slipping away. “I'm very frightened about the economy,” she said. “We worked very hard for what we have, and we're afraid it's being taken away from us. So we're looking to save as much as we can. I see saving as investing in our
future. Every little bit counts right now.”


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It should be the bank will lower mortgage so that the borrowers would lovely to borrow again.

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Hotel Loans Coming Due During Distressed Times

By By Hans Detlefsen and Emil Iskandar


This article outlines a series of possible options owners may consider if their hotel loans are scheduled to mature during these distressed times. In a November 8th, 2008 article by Bloomberg, analysts from RBS Greenwich Capital estimated that approximately $88 billion in commercial real estate loans will come due in 2009. A significant portion of these loans are for hotel assets. As the national economy continues through a recession that began more than a year ago, and as credit remains constricted, the options for hotel owners with loans coming due will be limited. Refinancing risks may also be compounded by the fact that hotel values have declined due to lower leverage and reduced cash flows, as lenders become more conservative and markets experience deteriorating demand.

This article outlines a series of possible options owners may consider if their hotel loans are scheduled to mature during these distressed times.

Extending Hotel Loans

Extending or rolling over an existing loan on a hotel may be the best option if it is available. The availability of this option depends on the performance of the existing loan and the lender's current capital needs. Assuming the lender has sufficient capital, the lender will try to determine whether the hotel's operations can be expected to produce ongoing cash flows sufficient to make loan payments in the future. If the cash flows appear strong enough under new lending parameters, then a lender may be willing to extend the existing loan.
However, it is important to keep in mind that lenders are investors and they have the goal of making loans for a profit. Like any prudent investors, lenders will evaluate the loans they make in the context of any "opportunity cost" that may be associated with committing their capital to a certain asset or project. That is, a prudent lender will evaluate the expected yield of extending your loan versus originating a new loan. Given the high degree of competition for loans in today's credit environment, owners should anticipate some changes to the existing terms of their loans. These changes are likely to include adjustments to interest rates, some equity payment to reduce the outstanding loan balance, and payment of extension fees.

Refinancing Hotel Loans

If an existing lender needs capital and is not willing to extend a hotel loan even though cash flows are expected to be adequate to service the loan, the borrower will likely need to refinance the existing loan with a
different lender. Because the number of lenders actively seeking to make loans on hotel properties has declined in recent months, only the best-performing assets have this option available to them. Even then,
owners are unlikely to find a new lender willing to refinance a loan with the same leverage and interest rate that applied to many hotel loans issued during the 2004-2007 peak of the industry cycle. When refinancing a hotel, a new lender will require the property to meet certain performance benchmarks. Any expected decline in cash flows will make meeting these benchmarks more challenging. On average, loan-to-value ratios are likely to be in the range of 50% to 65% rather than the higher 70% to 85% leverage levels available in recent years.

Deleveraging

With the exception of hotel assets with very strong cash flows or very low debt levels, most borrowers will need to deleverage, given today's tighter lending parameters. Moreover, today's lower loan-to-value ratios will be applied to the hotel's current market value, which may be 10% to 30% lower than its market value was when the existing loan was underwritten, assuming the asset is performing well enough to produce a positive cash flow. Taken together, these two factors can create a substantial cash "shortfall". The table shows historical operating performance for a 200-room, full-service hotel and a forecast for operating performance in 2009.

Performance figures reflect the ongoing national economic recession as well as severe tightening of the credit markets. In 2006, the hotel achieved an annual occupancy of 75% and an average rate of US$210, which
produced a net income of US$3.4 million. By applying a capitalization rate of 8.5% to the net income, the resulting value would be US$40.6 million. A loan-to-value ratio of 75% would have allowed the owner to take out a loan for $30.5 million in that year.

In the second half of 2007 credit began to tighten and the national economy entered a recession in December, 2007. As a result, net income declined in 2008 and is expected to decline further in 2009. At the same time, capitalization rates increased as buyers perceived more risk in commercial real estate investments. Moreover, loan-to-value ratios declined substantially. When the hotel's loan comes due in 2009, the owner would potentially face a shortfall of US$10.8 million needed to refinance the hotel, or roughly one-third of the original loan amount.Due to the decreased leverage now available for financing hotel investments, exacerbated by lower market values, owners of highly leveraged assets should be prepared to increase the amount of equity in their hotels. One obvious way to accomplish this is for such owners to invest more of their own money to pay down a portion of the debt currently held in these projects. By increasing the equity in a hotel and reducing the debt, an owner will decrease the lender's risk and capital commitment. This will allow the owner to attract a broader range of lenders willing to consider financing the debt when it comes due; however, it will decrease the owner's return on investment because leverage is reduced.For owners with enough liquidity in their balance sheet, paying down and injecting new equity into their hotel investments may not be a huge undertaking. In fact, this may be an opportunity to reduce borrowing costs. There have been transactions in the recent past involving early retirements of hotel notes. In exchange for owners paying down loan balances, some lenders are offering discounts to entice certain owners to do so. Unfortunately, this is not the case for most hotel owners.

Finding an Equity Partner

Injecting a large sum of money into a hotel may not be a viable option for some owners, especially during distressed times. One alternative that owners may consider is to seek equity partners who have cash and a
willingness to invest it in hotel assets. The primary advantage of this strategy is that it does not require owners to use their own funds to pay down debt on maturing loans. The primary disadvantage of this strategy is that equity partners are often costly and they may be very selective, especially in desperate times.

Currently, equity partners are seeking yields in the range of 20% or more.

One thing to bear in mind is this level of yield is a function of the equity partner's cost of capital, as well as the yields offered by other alternative investments in the market. This level could go up or down, depending on how soon the economy and debt markets improve. Currently, most market indicators and experts' opinions would lead one to believe that this yield level is not likely to decline substantially in the near-term.

Finding a Second Lender

If an owner is not able find, or willing to seek, an equity partner, another option is to seek a second lender. So-called "mezzanine" lenders seek to provide an additional loan, which would be subordinate to the owner's original loan. Because this second loan is subordinated to the original loan, it is riskier and requires a higher interest rate than the first loan. The interest rate is likely to be lower than an equity partner's yield requirement. A second loan may allow some owners to finance shortfalls, like the one identified in the previous example, without using additional equity. However, the availability of such financing in 2009 may remain limited.

Selling the Hotel

If none of the previous options are available or acceptable to a hotel owner with a loan coming due, then the best remaining option may be to sell the hotel. Selling a hotel allows the owner to obtain cash, assuming the hotel's value exceeds its current debt burden. While selling a hotel is the ultimate exit strategy for most owners, selling during an industry downturn is likely to yield a lower price than owners anticipated.

Furthermore, when owners near the date of their loan's maturity they may come under extreme compulsion to sell the asset. There may be limited time to market such assets before the loans mature if owners wait too long, in hopes of extending or refinancing existing loans. These conditions describe two of the key parameters in the definition of "liquidation value". A hotel's liquidation value is likely to be significantly lower than its "market value", which requires typically motivated buyers and sellers. If an owner of a highly leveraged hotel waits too long to de-leverage or sell the hotel, then the seller's motivation may become distorted by a compulsion to sell the asset in a short period of time before the existing loan matures.

Concluding Remarks

As maturing hotel loans come due in 2009, owners will have to determine which, if any, of these strategies are likely to be available to them.

Planning sooner rather than later can help maximize an owner's options.

One of the first steps in evaluating potential strategies is to evaluate the likely future operating performance of hotels with maturing loans and to obtain an unbiased determination of market value. With a realistic understanding of market performance and market value, both owners and lenders can create and achieve realistic goals for their hotel investments. If a loan extension or refinancing is an option, owners should approach and start talking to lenders early. Negotiations are less successful when the parties are under duress and subject to unrealistic time pressures.


Source

Refinancing risks and also compounded by the hotel values have declined due to lower leverage. The changes can come up with a good results for the hotel loans because of the adjustments of interest rate.

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Dark months ahead?

John Durie

DAVID Jones boss Mark McInnes has set the low bar for the tales of gloom.

He forecasts the worst sales conditions for 20 years with no hope for recovery until the second half of next year.

Comings on the same day BHP Billiton, as expected, shut its Ravensthorpe nickel production in Western Australia and will cut some 6000 jobs world-wide, while Rio Tinto snaked in news of cutbacks in its aluminium production and 1100 jobs gone.

The good news from Rio is at least its Australian alumina operations have been spared the knife.

None of this came as any great surprise and in fact the bourse stood up remarkable well, shedding 62 points in morning trade to be still 62 points above the November lows.

These lows will be breached and it should be noted financial stocks have already taken out their November lows to be trading at their lowest levels for eight years.

Prime Minister Kevin Rudd did what prime ministers are meant to do and reassured the punters he was ready to help support the financial system, as said previously, he should move with caution to avoid simply subsidising the banking cartel even further than he already has.

But there is no harm in soothing words, even if they were planted directly by the folk from NAB.

The Wesfarmers board meets in Perth today prior to its scheduled golf game to consider the financing options.

As you would expect, the company has canvassed lenders to see what it would cost to refinance early should the banks be willing to do so and this cost will be compared to the equity raising options.

Wesfarmers boss Richard Goyder is keen to settle matters early to let him get on with his job free of balance sheet concerns.

There is work to do as shown by David Jones’ McInnes, who said same sore sales are down a massive 9.5 per cent and the retailer is budgeting for sales falls in the first half of 2010 with no improvement until the second half.

Market bulls were pinning hopes on a flood of bad news this half and recovery in the second.

The first part is right, the second isn’t looking so good.


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I can't understand the article.

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Prepaying Mortgage May Not Trump Investing

By JILLIAN MINCER

Prepaying a mortgage in these uncertain times sounds perfect. It could shorten the term of the loan and offer a stable return when other investments are losing ground.

But it's not a slam dunk decision. Interest rates are low, unemployment high and property values slipping. That cash may come in handy if you lose your job or can't get credit. Long term, you may be better off investing the extra money in an easily accessible mutual fund or a tax-deferred retirement account, especially if your employer offers a match.

"Financial flexibility is at a premium right now so prepaying your mortgage, particularly if you have a low (interest) rate, really doesn't yield much in immediate benefits," says Greg McBride, senior financial analyst at Bankrate.com. "You have to look at the big financial picture. Americans in general are underinvested for retirement and over-invested in their homes."

First Things First

Don't even consider prepaying your mortgage if you haven't put aside an emergency nest egg or owe credit-card debt. Everyone needs at least three to six months worth of cash. Many advisors recommend saving even more if your job's at risk and may take time to replace.

Getting rid of the credit-card balance could improve your credit score and save you at least 10% -- far more than the potential savings on a mortgage.

Assuming you've got a nest egg and job security, you can consider boosting the amount you pay on your mortgage. It's appealing with the current market volatility especially because you can reduce the amount of interest you pay over the life of your loan without paying refinancing fees.

"Prepaying your mortgage is always a good thing to do," says David G. Kittle, chairman of the Mortgage Bankers Association, which represents the real estate financing industry.

He says borrowers could shorten a 30-year fixed rate mortgage by nine and a half years if they annually make an extra mortgage payment, spread over 12 payments. A similar strategy could cut four years off a 15-year mortgage.

Prepaying an adjustable-rate mortgage could have a much more immediate benefit, says Kittle. That's because the lower balance would be used in the calculations when the mortgage resets.

But he says never to prepay without checking your loan documents or with your mortgage servicer to make sure that you don't have a prepayment penalty. Almost no loans do.

McBride says there are a few scenarios in which he recommends paying ahead. One is if you have Private Mortgage Insurance and are close to paying off 20% of the loan. Lenders typically require the extra insurance if the loan is for more than 80% of the home's value.

Another time to consider prepayment is if you're close to bringing down your jumbo mortgage to the size of a conventional loan, which is $417,000 for most of the country but $625,500 in places like New York and Los Angeles. McBride says once you reach that threshold you could refinance the conventional mortgage for potentially a much lower rate.

Another time to prepay is if you're close to retirement and only have a small balance to pay on your mortgage.

One of the biggest drawbacks of prepaying is that it's extremely hard right now to get credit.

"Money you send to your mortgage company is very difficult to get your hands on again," says Stuart Ritter, a financial advisor at T. Rowe Price Group Inc. in Baltimore, Md.

Short term, you have two choices if you need cash from your home, get a second mortgage -- which has become harder to do -- or sell the house.

Cash, on the other hand, is easily accessible. If you've been socking away an extra $100 a month into a money market or savings account, it's there three years later if you lose your job.

In most instances, you need to have paid off the mortgage in full to get the real benefit from prepayment. "There's no discount because you prepaid (a portion of it) in the past," says Ritter.

He says it's not just about how much you're putting in, it's about how much potential gain you may be missing out on by not making other investments.

"If you're in your 30s, 40s, 50s, investing may potentially give you the higher returns," he says.

Even with the disastrous losses of 2008, the average return on the stock market for the last 15 years has been 6.5%, he says. Assuming you pay 6% interest on your mortgage and are in the 25% tax bracket, your after-tax cost for the mortgage is 4.5%, which is how much you benefit by prepaying.

Clemens Sialm, a finance professor at the University of Texas at Austin, says under certain circumstances, it's actually better to contribute to your 401(k), especially if your company offers a match.

He says one factor to consider is the interest rate, which right now is relatively low.

Using data from the Federal Reserve System's Survey of Consumer Finances, Sialm and his fellow researchers found that many people are so risk-averse that they opt for the lower returns of a prepaid mortgage rather than investing in a 401(k) plan.

Even assuming that the 401(k) investments are in conservative Treasury securities earning 5%, the researchers found that at least 38% of households would have earned 11 cents to 17 cents more on the dollar by investing in a 401(k) plan instead of prepaying the mortgage. Those extra earnings would have resulted in additional savings of $1.5 billion a year, or almost $400 per household.



Assuming the investors received a company match for their 401(k) of 50% on the first 6% of their contribution, they would add $2.6 billion in national savings, or $468 a year per household, if they contributed the maximum amount to an employer-sponsored retirement account.

McBride says investors make the mistake of staying away from the market when its down and moving in when it's up and prices are higher.

"This is the time to buy," he says. "The big picture is if you're in a 401(k), IRA or 529 saving with a long-term horizon, you should not let short-term volatility deter you from your long-term goals."


Source

Prepaying the mortgage sounds perfect because the interest rate are low but their are a lot people unemployed and for those who invest their investments are losing ground.

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Why Asia looks less vulnerable than the rest of the world

By Cris Sholto Heaton

"Neither a borrower nor a lender be," says Polonius in Hamlet. It's fortunate for his sanity that he wasn't part of today's world. For the last couple of decades, the desire to borrow, borrow, borrow has been insatiable for both businesses and consumers. Or at least it was until the credit markets buckled last year.

But Polonius might be coming into his own again. We're likely to face a world obsessed with deleveraging instead of gearing up for some time. That has big implications for companies and investors. The good news is that Asia is less leveraged than much of the world - but it certainly isn't immune…

Why Tata should never have bought Jaguar

A few weeks ago, car-maker Jaguar Land Rover (JLR) picked up a trick from its US peers and went cap in hand to the British government. It was rebuffed (although perhaps not for long) and instead its parent, India's
Tata Motors, agreed to inject more cash into the struggling firm.I suspect quite a few people were baffled by this story. After all, wasn't the sale of JLR by cash-strapped Ford to Tata supposed to secure its future? Why is its rescuer now lobbying the UK government for a reported £1bn?

I'm less surprised. I can't say I expected it to unravel this quickly, but I could never understand why Tata was paying a cent for JLR, let alone $2.3bn. All along, it looked like an expensive mistake. Groups like JLR tend to be cash-swallowing black holes rather than cash cows. The main attraction was how Tata could use the brand to raise its image, yet if a brand like Jaguar becomes too closely associated with a mass-market car and commercial vehicle firm such as Tata, it devalues the very thing you've just paid over the odds for.

And today, JLR looks like the worst possible deal at the worst possible price at the worst possible time. Tata structured the deal in a way typical of the buyout boom's excesses: it took out a $3bn bridge loan to fund the purchase and provide working capital, intending to pay part of it back through a rights issue, sales of stakes in other subsidiaries and raising some longer-term debt.

Unfortunately, in today's climate, refinancing that short-term loan is looking more difficult. Tata's plans for a $600m international rights issue seem to be on hold and an $840m domestic one in October was undersubscribed. Instead, the firm is now trying to raise money through small investors and savers, offering 11% interest on three-year fixed term deposits – which scarcely speaks well of its other options for raising money.

Tata shares have further to fall

Tata has other problems. The launch of its much-touted ultra-low cost car, priced at one lakh – about $2,000) has been delayed, while sales at its core commercial vehicles business are plummeting (down 51% year-on-year in December).

So it's no surprise that S&P recently downgraded its debt to BB- or speculative. Asset sales or a bailout by other parts of the sprawling Tata comglomerate look quite likely in the months ahead. The already-ugly share
price chart below could get a lot worse.

Which country's companies carry the most debt?

Tata is by no means alone. There are plenty of companies out there that are over-leveraged thanks to peak-cycle acquisitions and investments - and any that need to refinance will find it a lot tougher than it was three
years ago. I think India could be one of the worst hit parts of Asia in this respect.

Take a look at the chart below, which shows the median total-debt-to-equity ratio and interest cover for the Asian markets, plus a few other international ones for comparison. A higher debt-to-equity ratio indicates a higher debt burden, while higher interest coverage - the number of times that interest payments are covered by earnings - indicates a lower debt burden.
It's important to be cautious when drawing conclusions from this, because it only refers to listed firms and so may not give a complete picture of the whole corporate sector. But bearing that in mind, the results are pretty much what you'd expect. US firms are clearly the most heavily leveraged, thanks to the fad for gearing up to 'enhance shareholder returns'.

However, India is not far behind, which fits with the impression I get from analysing individual companies. Broader economic statistics also point to overheated credit growth there: outstanding lending from banks
tripled between 2003 and 2007, compared with a doubling of GDP. A corporate sector that's grown by gearing up over the last few years is going to find things much tougher in this environment, especially given
that a good amount of the funding came from overseas because of India's relatively-underdeveloped bond market.

China's leverage is also relatively high, but I'm not as concerned about this, since the trend there has been deleveraging rather than gearing up over the last few years. With the government now pushing banks to lend
more, Chinese firms - which largely depend on domestic sources for borrowing - are likely to find it easier rather than harder to access finance.

I mentioned in the last issue that Chinese loan growth is an indicator to keep your eye on this year. The latest figures (below) show lending picked up again in December. While these are very early days and it's impossible to know if this money is being channelled productively, this is an encouraging sign for Chinese investment and the domestic economy.

It's important to be cautious when drawing conclusions from this, because it only refers to listed firms and so may not give a complete picture of the whole corporate sector. But bearing that in mind, the results are pretty much what you'd expect. US firms are clearly the most heavily leveraged, thanks to the fad for gearing up to 'enhance shareholder returns'.
However, India is not far behind, which fits with the impression I get from analysing individual companies. Broader economic statistics also point to overheated credit growth there: outstanding lending from banks tripled between 2003 and 2007, compared with a doubling of GDP. A corporate sector that's grown by gearing up over the last few years is going to find things much tougher in this environment, especially given
that a good amount of the funding came from overseas because of India's relatively-underdeveloped bond market.

China's leverage is also relatively high, but I'm not as concerned about this, since the trend there has been deleveraging rather than gearing up over the last few years. With the government now pushing banks to lend
more, Chinese firms - which largely depend on domestic sources for borrowing - are likely to find it easier rather than harder to access finance.

I mentioned in the last issue that Chinese loan growth is an indicator to keep your eye on this year. The latest figures (below) show lending picked up again in December. While these are very early days and it's impossible to know if this money is being channelled productively, this is an encouraging sign for Chinese investment and the domestic economy.

Among the other markets, Indonesia and South Korea are probably at some risk as well. That's not because leverage is exceptionally high relative to the region, but because conditions in the banking systems are still
tight and many firms in both countries have substantial foreign currency borrowings.

At the other end of the spectrum, Hong Kong and Singapore-listed firms look fairly lowly-geared overall. Hong Kong-listed Chinese firms - which are the China stocks that most funds and individual investors own - seem to be considerably less geared than the China average, with the 50 largest stocks having a median debt to equity ratio of 44.40% and interest cover of 11.90 times.

Overall, Asia's corporate debt position looks fairly sound, especially compared with the overburdened firms of the West. There's probably a substantial shakeout to come in India and South Korea, but taken with an
even healthier consumer debt position in most countries, Asia looks well-placed to thrive in this new, everaging world – once, that is, we get through what is bound to be a miserable few months.

Who controls those shares?

But from a shareholder's point of view, it's not just debt directly owed by companies that can cause trouble. In some markets, it's been pretty common for owner-founders to use their holdings as collateral against loans: in fact, common to the extent that it "has clearly been aggressively encouraged by private bankers in recent years when they were not flogging 'guaranteed' structured finance products", as Christopher

Wood of CLSA puts it in the latest issue of Greed & Fear.

The carnage among Russia's oligarchs was the most widespread example, but there have been plenty of other examples, including the Satyam scandal in India, where the plummeting value of the founder's shares pledged as collateral for loans seem to have played a major part in exposing the fraud. And lest anyone think this is an emerging market problem, a flick back through the financial pages will reveal some remarkably similar tales
in the USA and Britain.

In fact, adds Wood dryly, "this is one area where China's quoted SOEs [state-owned enterprises] should prove much less risky for fund managers… for the simple reason that senior executives who engage in heavy borrowing against their own share prices risk being shot." Perhaps the FSA and SEC could take note.

Strange goings-on at Bumi

One case that's still rumbling on is the fate of Indonesia's Bakrie & Brothers in November. Bakrie, which is controlled by the family of welfare minister Aburizal Bakrie, is one of those sprawling conglomerates that are
almost extinct in the West but still popular in Asia. Its investments span natural resources, telecoms, property and more, including a major shareholding in coal giant Bumi Resources.

As markets fell late last year, Bakrie-owned stocks pledged against $1.2bn in loans no longer provided enough collateral. Once this became common knowledge, investors dumped shares in anything Bakrie-controlled for fear that the conglomerate would have to sell its holdings at knockdown prices to repay the loans. This rout contributed to Indonesia's stockmarket being losed for several days at the peak of the crisis.

At the time, Bakrie seemed on the verge of collapse. Today, though, it seems to have survived – but it's not completely clear how. It's known that it managed to arrange deals with hedge funds and private equity groups to take over some of its debt in exchange for equity stakes in some of its companies. But details have been scarce.

Indeed, the latest move looks rather worrying for Bumi shareholders. The firm announced a rights issue a few weeks ago, then revealed it plans to buy three smaller coal miners for $565m. But analysts suggest the deals
will destroy value for Bumi shareholders – in one case, it appears to be paying $2.6 a tonne of reserves compared with the valuation of $0.93 a tonne that it puts on reserves it already owns. Others question who the ultimate owners of the companies are and whether these deals could be channeling money into other cash-strapped parts of the Bakrie empire.
Bapepam, the Indonesian market regulator, is investigating the deals, while foreign investors – who have long used Bumi both as a resources play and a proxy for Indonesia in portfolios – are reportedly shunning the firm. Shares have been hammered: after falling 90% since the summer, they have been halved again since rumours about this deal began circulating at the start of the year.

The warning from this – apart from the importance of corporate governance, which much of Asia is still not hot on – is that it's not just leverage that counts, but links to anything with high leverage. Unfortunately, in a
market like Indonesia's, that can be pretty hard to determine.
Equity markets across Asia sold off with the rest of the world last week, with Hong Kong especially hard hit. Among other fallers, HSBC was down 14% after a Morgan Stanley analyst suggested that it would need to raise as much as $30bn in new capital.
Economic data was poor across the region, with Singapore reporting a 20.8% year-on-year drop in non-oil domestic exports. Japanese machinery orders dropped 16.2 month-on-month, the biggest since the survey began in 1987.

In Thailand, the central bank cut its base rate by a larger-than-expected 75 basis points (one basis point equals 1/100th of a percentage point).

China's exports fell for a second consecutive month, down 2.8%, while imports were down 21.3%.

In the hard-hit steel industry, China's Baosteel cancelled a planned plant in Brazil with local mining giant Vale, citing falling demand. Separately, several Chinese steelmakers reported sharp drops in profit on weak sales
and falling prices late last year. Prices within China have rebounded 43% from their November lows after the government announced its RMB4trn, infrastructure-heavy stimulus package, but remain 30% down from their
highs.

There were limited sign of improvement in Asian credit markets. Over $30bn in bonds has been issued since the start of the year, almost three times is much as this time in 2008, as markets begin to unfreeze. Export-Import Bank of Korea (Kexim) and Korea Development Bank (KDB) both issued $2bn in dollar-denominated bonds yielding around 675 basis points more than US treasuries, towards the lower end of what they were expected to have to offer. However, spreads remain very high by past standards; a year ago,
KDB issued bonds at just 218 basis points more than Treasuries.


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Logjam in delayed foreclosures to hit U.S. real estate values in 2009

Today's Financial News

The root cause for most foreclosures boils down to choices, not circumstance. Government delaying tactics may delay the inevitable… but they stand a snowball’s chance in hell to remedy the bad financial decisions that lead to the situation.

by J. Christoph Amberger

In 2008, U.S. foreclosures rose 81% over the previous year. And thanks to the various “philantropic” efforts of state and local governments—such as extending the “grace period” before a bank could file papers on a
delinquent borrower—theres’ a logjam of foreclosures waiting to burst in early 2009.

A lot of these foreclosures are hardship cases: Illness, death, injury, and unemployment making it difficult for people to keep up with mortgage payments.

Bad things happening to good people.

Many others are not quite the heart-tugging stories you’d expect. Some are peculations gone sour. Others are cases of mathematic illiteracy… greed… stupidity… or pure, good-old-fashioned entitlement mentality.

I find it difficult to commiserate with the family with the half-million-dollar McMansion, the three leased luxury cars, and a plasma TV in every room, who “unexpectedly” finds the bills piling up. I wonder “what were they thinking” when I hear of single parents with five-figure incomes foreclosing on $600,000-dollar homes they were “tricked” into buying with unaffordable ARMs and fraudulent net worth and income statements.

And I’m not surprised to read that Federal aid and refinancing extended to many throughout 2008 was unsuccessful.

Some people may be able to calculate football scores, vacation bargains, the thickness of Arctic sea ice in the year 2050, or the decline of the dollar vs. the yuan by 2012.

But they don’t understand the basic math of wealth building and management. (Look no further than the proposed new head of the U.S. Treasury: His job would be to determine monetary policy, but he apparently thought it wasn’t up to him to figure out (let alone pay!) his personal income tax obligations!)

And that’s exactly where the limits of being able to help begin:

You see, it is not like personal finance is a secret science. Books and tapes on the subject could fill entire libraries. There were months when you’d flip through your cable channels and all you saw was Suze Orman. And all of them pretty much carry the same message:
* You build wealth increment by increment.

* You can’t build interest-earning residual if you spend your principal.

* And you can’t build wealth when you take on debt that you cannot reasonably expect to pay back.

It’s simple. It’s obvious. It’s everywhere.
But it’s not easy, mind you. Nor is it sexy, exciting, and enjoyable: That extra principal-only mortgage payment you make is the equivalent of a week’s vacation in the Bahamas. One bi-weekly contribution to your 401(k) equals three minimum payments on credit card statements. And the money
spent on a good accountant would pay for two grand nights out on the town… and enough aspirin to take care of the hangover.

Which is why many people decide they’re simply not rich enough to get rich.
In the end, it’s a matter of choice, not circumstance.

How can you remedy a situation that was built on a series of wrong but deliberate decisions?

There are plenty of ways to delay the inevitable. But there’s no simple fix: You don’t repair a faulty foundation by replacing the guest room curtains with cheaper ones.

In the end, you might just have to tear the whole place down and start over.

It’s rarely possible to refinance defaulting home-owners into liquidity… at least not without drastic re-calculation of asset values. And that means sticking homeowners with paying off upside-down mortgages forever.

Or force them to take them (and their bank) to take the loss now.

Overall, I’m looking at rising foreclosure rates as an indicator that the free market is still working… despite the government’s best efforts to interfere.

An over-supply of cheap, foreclosed properties translates into low cost of entry-level homes for the Echo Boom generation three, four years from now.

And into a solid opportunity for qualified investors to build wealth the old-fashioned way: To buy depressed assets cheap when there’s no demand… and selling them high again when demand picks up.


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For those who are being a hardship borrowers they have a grace-period which can help them to seek money.

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