The Music Stops for the Tribune Company

Given the times, the bankruptcy filing of a major communications company might perversely go all but unnoticed. Still, it’s worth our while to take a closer look at this one. Many of the reports this morning about the Tribune Company’s Chapter 11 bankruptcy have highlighted the precarious position of newspaper companies in an era of declining subscriptions and advertising revenue. But on the operations side, the Tribune Co. is actually very healthy: every one of the newspapers and television stations (including Seattle-area stations KCPQ and KMYQ) in its portfolio is profitable. The only reason Tribune had to file for bankruptcy is that Sam Zell, the real-estate billionaire who bought the company last year and serves as its CEO, saddled the company with $8 billion in debt as part of a heavily leveraged buyout in which Zell only put up 3 percent of the purchase price.

The analogy with the bursting of the housing bubble is hard to ignore: both are symptomatic of a financial culture that largely did away with traditional notions of risk in favor of a large-scale game of musical chairs in which all the players gambled that they’d be able to find a seat when the music stopped. Unfortunately, with every day that goes by there seems to be fewer and fewer seats to go around.

Credit Card Debt Forgiveness On the Horizon?

A pilot program currently under development could mean relief for distressed credit card borrowers:

Big banks have formed an unusual alliance with consumer advocates to urge the government to allow huge portions of credit card debt to be forgiven, a turnabout from recent years when the banking industry lobbied strenuously to make it harder for consumers to erase their credit card debts in bankruptcy.

The new pilot program — which the banks hope will become permanent — could involve as many as 50,000 people struggling with credit card debt. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower’s financial situation, up to a maximum of 40 percent.

It would have been nice if they’d come around to this way of thinking three years ago, but any relief is welcome, I guess.

Incidentally, if you’re wondering why the banks can’t just institute this program themselves without asking the government to get involved, it’s because they can’t:

Current government rules don’t allow lenders to offer repayment plans that reduce the amount of principal owed and borrowers to repay the balance over a period of several years. In cases where the principal can be reduced, under credit card settlements, borrowers normally are required to pay off the remainder over months rather than years.

Now He Tells Us

From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said a “once-in-a-century credit tsunami” has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

“Yes, I found a flaw,” Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. “That is precisely the reason I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

WaMu Death Watch: Board Fires CEO Killinger

Kerry Killinger, Washington Mutual’s CEO since 1990, was fired by the board of directors Sunday. The mortgage crisis, surprise surprise, was the culprit:

Critics charged WaMu put itself in an especially difficult position by its acquisition of a mortgage company that specializes in loans to people with poor credit histories. That segment, known as the subprime market, was the first in which problems appeared. WaMu also loaded up on other risky types of lending, such as option ARMs (adjustable rate mortgages), which allow borrowers to set their own payment, even if the result was that the principal actually grew from month to month. In addition, WaMu’s mortgage business is concentrated in hard-hit states such as California and Florida.

Weakness also is starting to show up in WaMu’s portfolio of more conventional home loans, as well as in home equity lines of credit and credit cards.

Biden?

For a candidate who is as undeniably committed to the cause of economic justice as Barack Obama is, his selection of Joe Biden to be his running mate is a severe disappointment. In 2005, when Obama was working with Sens. Durbin and Dodd to blunt the excesses of the harsh and punitive new bankruptcy bill, Joe Biden and the Republicans fought them every step of the way. Obama’s supporters need to make him understand that this is one area where he can’t afford to let Biden set policy.

WaMu Death Watch: “No Woo Hoo At WaMu”

The New York Post, of all publications, had a comprehensive article yesterday about the meteoric growth of Washington Mutual and the decisions it’s made that may spell its demise as an independent bank:

To many the situation is looking increasingly dire for WaMu, especially in the wake of the stunning collapse of IndyMac Bank last month. WaMu shares have fallen 85 percent in the past year, wiping out some $60 billion in market capitalization.

AND while it’s hard to believe that WaMu will face a similar fate as IndyMac – given its $180 billion-deposit base, its most recent capital-raising initiatives and its mix of assets – many Wall Streeters are uncertain about its fate as conditions continue to worsen in some of WaMu’s key markets in California and Florida.

“I don’t see Washington Mutual failing the way IndyMac did,” said Alexandria, Va., banking consultant Bert Ely at Ely & Co. “But it’s looking less and less likely that they’ll remain independent.”

(Sorry about the lack of posts last week. These are busy times.)

The People Have Shouted

…in the form of 56,000 comments received by the Federal Reserve during the comment period for proposed new regulations that would impose new restrictions on the abusive practices of credit card issuers. The comment period, which ended August 4, saw a record number of responses come in to the Fed, almost all in support of the proposed regulations.

The comments file is public information and can be accessed here. It’s sobering to pick a few at random and read the individual stories of ordinary, fiscally responsible Americans who’ve gotten fed up at the capricious and punitive way they’re treated by these companies. With this kind of response, these new regulations seem all but certain to be approved. Democracy in action!

The Candidates on Predatory Lending

This is the fourth in a series of weekly posts examining the positions of the major presidential candidates on bankruptcy, debt, and personal finance issues. This week, we’ll look at the candidates’ positions on predatory lending practices that trap unsuspecting borrowers into expensive and unnecessary debt. (Many of the other issues covered in this series include predatory lending aspects as well, so consider reviewing the candidates’ positions on bankruptcy, foreclosure, and credit card issues for the full story.)

Barack Obama (Issues Page)

Senator Obama supports a 36 percent APR interest cap on consumer debt. This is an interesting position in light of his response to Hillary Clinton at a January 2008 debate, which I wrote about last week, in which he explained a 2005 vote against a 30 percent cap on interest rates for credit cards and other consumer debt by saying he thought 30 percent was too high. However, it’s worth pointing out that Obama discusses this 36 percent cap specifically in the context of payday loans, which can achieve APRs as high as 5000 percent—amounting to just a few dollars over the course of a typical payday loan, but quickly becoming ruinous for someone who becomes trapped in the cycle of taking out new loans to pay off old ones. Obama would also require lenders to provide borrowers with clear and simplified information about fees, payments, and penalties during the application process, to make it harder for lenders to use “fine print” against borrowers.

During the primary season, Americans for Fairness in Lending (AFFIL) asked the candidates to endorse its statement of principles demanding reform in the credit industry. Obama endorsed the statement on September 25, 2007, saying “I am proud to support the important efforts of [AFFIL] to empower more Americans in the fight against consumer fraud and abusive lending practices.”

John McCain

Senator McCain hasn’t addressed predatory lending specifically, earning blasts from the Obama campaign over what they characterize as his inaction on the issue. His mortgage proposals do include provisions for homeowner relief from unmanageable loans in some circumstances, and a task force to investigate and punish criminal wrongdoing in the mortgage industry.

For insight into a potential McCain administration’s possible attitude toward predatory lending, we might turn to his chief economic advisor, former Senator Phil Gramm. McCain, who told the Boston Globe last year that “the issue of economics is not something I’ve understood as well as I should,” has all but ceded control of his campaign’s economic message to Gramm (who was forced to resign as McCain’s campaign co-chairman last month after his “nation of whiners” remark, but still advises the campaign on economic issues). Gramm was a staunch opponent of predatory lending protections when he was in the Senate, blocking several efforts to rein in some of the lending industry’s more outrageous abuses. “In Washington the buzzword today is predatory lending,” the always-quoteworthy Gramm said in 2001, “but there are predatory borrowers.”

AFFIL has asked McCain to endorse its statement of principles, but he has not done so.

Coming next week: The Candidates on Student Loan Issues

WaMu Death Watch: The Option ARM Problem

An interesting tidbit from one of the articles I linked to in my earlier post about option ARMs. From Slate, April 15, 2008:

Just two banks, Washington Mutual and Countrywide, wrote more than $300 billion worth of option ARMs in the three years from 2005 to 2007, concentrated in California. Others—IndyMac, Golden West (the creator of the option ARM, and now a part of Wachovia)—wrote many billions more.

IndyMac Bank failed last month. Countrywide Financial was on the brink of collapse in January when Bank of America announced that it would buy the failing lender. Shares in Wachovia, which absorbed Golden West, plummeted today after an analyst advised investors to sell. Fully one-fourth of Wachovia’s entire loan portfolio consists of option ARMs.

That leaves one…

Alt-A and Option ARMs: The Coming Storm

“The first wave of Americans to default on their home mortgages appears to be cresting,” writes Vikas Bajaj in this morning’s New York Times, “but a second, far larger one is quickly building.”

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

What’s especially interesting is how closely the scenario outlined in the Times article matches up with this chart, published last year by the International Monetary fund using data from Credit Suisse, showing the value of mortgage rate resets due to happen each month between 2007 and 2015. (A reset is when the repayment terms of a loan change—invariably by increasing—according to a schedule determined by the loan contract.)

[Monthly Mortgage Rate Resets]

Earlier this decade, as the ballooning housing market pushed the affordability index past the point where the average first-time homebuyer could afford a typical home in many areas, the real-estate industry kept the boom going by offering “teaser-rate” mortgages. These loans had artificially low annual percentage rates that were only good for the first few years of the contract, after which they would reset to a much higher APRs that the buyers in many cases would not be able to afford. As long as housing prices kept going up, the story went, buyers would be able to use the increased equity in their homes to refinance into more affordable loans. Then housing prices stopped going up.

As the IMF graph shows, the problem began a couple of years ago with a huge wave of resets in the subprime market, giving rise to talk about the so-called “subprime crisis.” It has been the failure of these loans that has been responsible for much of the turmoil in the housing market over the past couple of years. By early 2009, however, most of the subprime resets will be over and done with. Then, beginning in early 2010 and continuing for a couple of years, there will be another big wave of resets, this time in alt-A and option ARMs.

As this scarily prophetic Business Week article from nearly two years ago puts it, option adjustable rate mortgages — the so-called “pick-a-payment” mortgages — “might be the riskiest and most complicated home loan product ever created.” Option ARMs offer several payment choices each month, typically differing by thousands of dollars. The least expensive option doesn’t even cover the full amount of the interest due on the loan, so the leftover interest gets added to the principle (a situation called negative amortization). Option ARMs sold like hotcakes during the boom, accounting for 9 percent of the volume of all mortgages sold in the US in 2006, and significantly more in boom states like California and Florida.
According to Standard & Poor’s, more than 75 percent of option ARM holders were making only the minimum monthly payment in 2007.

Those attractive payment options come to an end when the mortgage resets. Faced with a monthly payment that’s nearly double what they’ve been making, a debt that’s tens of thousands of dollars bigger than it was when they took it out, and a home that may be worth less than their outstanding debt by a wide margin, many homeowners will be forced to default or to seek protection in bankruptcy court.

Option ARMs, it can’t be pointed out often enough, are prime loans, not subprime. As today’s Times article notes, prime and alt-A loans make up a much bigger percentage of most banks’ mortgage portfolios than subprime loans do, raising the specter of a new wave of defaults that may dwarf the troubles we’ve already seen:

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”