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SATURDAY DECEMBER 29, 2007 Last modified: Monday, October 29, 2007 5:57 PM CDT

Oil, gold and agricultural futures rise as dollar falls

By LAUREN VILLAGRAN, AP Business Writer

NEW YORK — Commodities prices climbed broadly Monday as the dollar sank to a record low on expectations the Federal Reserve will cut interest rates this week. Oil, gold and agriculture prices all surged.

The dollar’s decline has raised the appeal of commodities as an investment class on the belief that raw materials will hold their value relative to all currencies. A weak greenback also makes commodities, which are priced in dollars, more attractive to foreign buyers when their currencies appreciate versus the dollar.

The Federal Reserve starts a two-day meeting on Tuesday, and investors widely expect the central bank to lower its benchmark federal funds rate, or the interest banks charge each other on overnight loans. The Fed cut the funds rate for the first time in more than four years in September to stimulate a slowing economy and mitigate the effects of a credit crunch.

Energy prices rose after Petroleos Mexicanos — Mexico’s state-owned oil company, known as Pemex — said it would shut down 600,000 barrels of daily crude production due to stormy weather, a fifth of its production. The supply disruption comes as tensions in the Middle East have heightened, adding to concerns about the stability of supplies, and as the dollar has spiraled lower.

Those concerns combined with last week’s report showing surprising declines in U.S. inventories of crude oil, gasoline and distillates to support prices. Light, sweet crude for December delivery jumped 95 cents to $92.81 a barrel on the New York Mercantile Exchange, off its peak of $93.20 reached in overnight electronic trading. Gasoline futures rose 3.5 cents to $2.309 a gallon.

The dollar was mixed against major currencies in afternoon trading, after sliding to a low against the euro. The 13-nation euro bought a record $1.4438 on Monday before paring its gains to $1.4424.

Higher energy prices and a weak dollar added to the allure of precious metals, which investors often use as a haven against inflation. December gold gained $4 to $791.50 an ounce, while December silver rose 10 cents to $14.38 an ounce on the Nymex.

Industrial metals prices mostly rose, with copper, zinc, lead and tin advancing on the London Metal Exchange. Nickel prices slipped on the LME, while copper traded on the Nymex edged lower. December copper dipped 1.2 cents to $3.5255 a pound on the Nymex.

Agriculture futures moved higher on the Chicago Board of Trade, bolstered by the dollar’s weakness and supply concerns. Wheat prices rebounded sharply following a downward correction last week that saw prices drop more than 71 cents. December wheat jumped 29 cents to $8.29 a bushel on the CBOT.

The markets for wheat, corn and soybeans are likely to move closely with each other in the coming months, said David Hightower of Hightower Futures Research in Chicago, as the market tries to assess how much acreage will be needed to meet the growing demands for each. Among other considerations, farmers watch the futures market to help determine which crops to plant in the next growing season.

“The markets are still very attuned to what acres are going where,” Hightower said. “They truly are trying to buy the appropriate amount of acres for next year.”

December corn added 5.5 cents to $3.775 a bushel, while January soybeans gained 9 cents to $10.2225 a bushel.

Congress reluctant to act on mortgage lending issues Lawmakers debated many bills, but passed few Friday, December 28, 2007 By Matt Carter Inman News

As 2007 came to a close, Congress had done a lot of talking about cracking down on unfair and deceptive mortgage lending practices, but didn't deliver on any major legislation. Although there's some consensus that tighter regulations or new laws governing lenders are needed, some lawmakers have been reluctant to impose restrictions that might worsen the credit crunch and the housing downturn. In the meantime, the Federal Reserve has proposed strengthening its implementation of the Truth in Lending Act, through new regulations that would require subprime lenders to verify a borrower's ability to repay a loan after a payment reset; document income and assets; and establish escrow accounts for taxes and insurance for a minimum of one year. The Fed, which has some authority to draft new regulations for mortgage lenders without congressional approval, also proposes that lenders be required to enter into written agreements before collecting yield spread premiums on any loans, and wants new regulations prohibiting the coercion of appraisers to inflate property valuations. Although new restrictions on lenders might make it harder -- or more expensive -- for borrowers to obtain loans, some say Congress could also ease the credit crunch by giving the Federal Housing Administration, Fannie Mae and Freddie Mac more leeway to guarantee and purchase loans. While there was widespread agreement among lawmakers and the Bush administration that it's time to modernize FHA loan guarantee programs and overhaul oversight of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the devil was once again in the details. The House and Senate both passed FHA modernization bills, but couldn't agree on what the upper limit should be for FHA-backed loans in high-cost areas -- or the minimum down payment. The House and Senate also took opposing stances on a plan to allow FHA to introduce risk-based pricing, charging higher premiums to borrowers who might not otherwise qualify. Those differences will have to be worked out in a House-Senate committee before a bill can be sent to President Bush to sign. When it came to GSE reform -- legislation that would create a new, independent regulator overseeing Fannie and Freddie -- the House passed a bill in May, but the Senate didn't follow suit. As was the case in 2006, there were disagreements over caps limiting growth in Fannie's and Freddie's loan portfolios. House lawmakers further complicated the issue by attempting to create a $500-million-a-year affordable-housing fund sponsored by Fannie and Freddie. Congress did succeed in passing legislation that would provide tax breaks for some homeowners with private mortgage insurance, and exempt debt forgiven in a foreclosure, short sale or workout from being classified as taxable income. Here's a roundup of legislation debated by Congress in 2007, which could provide the framework for lawmakers in the New Year: GSE reform WHAT: HR 1427, the Federal Housing Finance Reform Act of 2007. WHY: Federal regulators imposed caps on the loan portfolios of mortgage repurchasers Fannie Mae and Freddie Mac after accounting and management scandals forced both companies to restate several years of earnings. HR 1427 would strengthen oversight of the government-sponsored enterprises (GSEs) by creating an independent agency with powers similar to those of a bank regulator. While some Democrats want to increase the $417,000 conforming loan limit -- and raise the $1.5 trillion cap on Fannie's and Freddie's loan portfolios to allow them to buy up more loans -- the Bush administration has said it wants to see a stronger regulator in place first. STATUS: Approved by the House May 22 in a 313-104 vote. Referred to the Senate Committee on Banking, Housing and Urban Affairs. PROSPECTS: Iffy. The issue of the caps on Fannie's and Freddie's loan portfolios stalled Senate passage of a GSE reform bill in 2006. In 2007, compromise language worked out by Rep. Barney Frank, D-Mass., and the Treasury Department, would have given Fannie and Freddie's new regulator, the Federal Housing Finance Agency, the ability to limit their loan portfolios -- but only if they were determined to pose a systemic risk to banking and financial systems. The bill approved by the House backed away from the compromise by giving the FHFA less leeway to make such a determination -- potentially allowing for more growth in Fannie's and Freddie's loan portfolios. The Bush administration is also opposed to a provision of the bill that would require Fannie and Freddie to contribute about $500 million a year to an affordable-housing fund. FHA Modernization: WHAT: HR 1852, the Expanding American Homeownership Act of 2007. SB 2338, FHA Modernization Act of 2007. WHY: Congress and the Bush administration generally agree on the need to modify loan guarantee programs offered by the Federal Housing Administration, which lost market share to subprime lenders during the housing boom in part because of tight limits on the maximum dollar amounts of loans it could back. HR 1852 would increase the maximum amount for loans to be eligible for FHA backing in high-cost areas to up to 175 percent of the $417,000 conforming loan limit -- $729,750 -- or 125 percent of an area's median home price, whichever is less. The House bill would also allow the expanded use of risk-based pricing to serve borrowers with lower credit scores, and do away with 3 percent minimum down-payment requirements. A Senate version of the bill, SB 2338, would increase FHA loan limits in high-cost areas by a smaller amount -- raising them from $362,000 to $417,000. The Senate bill would also maintain a 1.5 percent minimum down-payment requirement on FHA loans, and place a 12-month moratorium on the implementation of a pilot program to test risk-based pricing. STATUS: The House approved its FHA modernization bill Sept. 18 in a 348-72 vote. A Senate version of the bill, SB 2338, was approved Dec. 14 in a 93-1 vote. PROSPECTS: Good. The Bush administration has made FHA loan guarantees a centerpiece of its foreclosure prevention efforts, creating the new FHASecure program to help qualifying borrowers already in default refinance into more affordable loans. The administration supports the more modest increases in FHA loan limits set forth in the Senate version of the bill. While the House bill would allow risk-based pricing, the administration is opposed to limitations it would impose on premiums. Tax issues WHAT: HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007. WHY: Under current law, the IRS considers many forms of forgiven debt to be taxable income. There's general agreement that Uncle Sam shouldn't penalize troubled homeowners who are able to convince their lenders to forgive part of their debt as part of a foreclosure, short sale or loan workout. As introduced, HR 3648 would have permanently changed the tax code to give homeowners a tax break if their lender forgives part of their debt. The bill would also extend the current deduction for private mortgage insurance to 2014, helping low- and moderate-income home buyers avoid costly -- and hard-to-find -- piggyback loans. A permanent tax break for borrowers on forgiven debt would have cost an estimated $1.38 billion over the next 10 years, and extending the deduction for private mortgage insurance would have eliminate about $570 million in tax revenue over the same period. The bill would have made up for the lost revenue by tightening the rules for claiming a deduction on the sale of a second home. STATUS: HR 3648 was passed by the House Oct. 4 in a 386-27 vote. The bill was amended by the Senate, which limited both tax exemptions -- for debt forgiveness and private mortgage insurance -- to three years, leaving intact existing provisions for claiming a deduction on gains from the sale of a second home. The House agreed to the amendments in a Dec. 18 voice vote. PROSPECTS: Excellent. The Bush administration objected to a permanent tax exemption for forgiven debt, and was opposed to tightening the rules that govern when a second home, vacation or rental property can be claimed as a primary residence for tax purposes. With the House's acceptance of the Senate's amendments on those issues, the president is expected to sign the bill into law. Restrictions on lenders WHAT: HR 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007. SB 2452, the Home Ownership Preservation and Protection Act of 2007. WHY: Democrats have introduced these bills to combat predatory lending, and have attempted to craft them to address industry concerns that some provisions could worsen the credit crunch and reduce borrowers' access to home loans. HR 3915 would create a national licensing system for loan originators and attempts to limit the payment of yield spread premiums or other incentives used to steer borrowers into higher cost loans. The bill would also require lenders to determine that borrowers have a reasonable ability to repay a loan, and create limited liability for companies that bundle mortgages for sale to Wall Street investors. SB 2452 would require loan servicers to attempt loss mitigation strategies before initiating foreclosure proceedings against borrowers, require lenders to follow existing federal guidelines for subprime and nontraditional mortgage loans, and lower the threshold for loans to fall under even stricter requirements for high-cost mortgages as defined by the Home Ownership Equity Protection Act, or HOEPA. STATUS: HR 3915 approved Nov. 15 in a 291-127 vote. SB 2452 was introduced Dec. 12 and referred to the Committee on Banking, Housing and Urban Affairs PROSPECTS: Iffy. Although HR 3915 enjoyed bipartisan support in the House, some of the bill's provisions could face tougher sailing in the Senate. The Bush administration can use its veto power to force compromise on any provisions it objects to in either bill. Borrower assistance WHAT: HR 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007. SB 2136, Helping Families Save Their Homes in Bankruptcy Act of 2007. WHY: Supporters of these bills want to give federal bankruptcy judges the power to modify the terms of subprime mortgage loans, saying courts could stem foreclosures. HR 3609 would give judges the ability to convert an adjustable-rate loan into a fixed-rate mortgage, and reduce the amount owed to reflect the actual value of the principle residence of a borrower filing for Chapter 13 bankruptcy protection. Lending industry opponents say the bill would create incentives for borrowers not to repay their home loans and lead to more bankruptcy filings. Because the bill would undermine confidence in the ability of lenders to collect payments, interest rates on all mortgages might go up as much as 2 percent, critics including the Mortgage Bankers Association claim. STATUS: HR 3609 was approved by the House Judiciary Committee Dec. 12 in a 17-15 vote. SB 2136 was the subject of a Dec. 5 hearing before the Senate Judiciary Committee, which took no action on the bill. PROSPECTS: Slim. Although the bill that emerged from the House Judiciary Committee included compromise language restricting its application to subprime loans originated after Jan. 1, 2000, and exempting loans originated after its enactment, Ohio Rep. Steve Chabot was the lone Republican supporting the bill. WHAT: HR 4178, the Emergency Mortgage Loan Modification Act of 2007. WHY: This bill, authored by Rep. Mike Castle, R-Del., would protect loan servicers who engage in workouts with borrowers from lawsuits by investors in securities backed by the loans. The bill would provide a "safe harbor" allowing loan servicers to restructure subprime loans in default or where default is imminent. STATUS: Introduced Nov. 14 and referred to House Committee on Financial Services. PROSPECTS: Iffy. The bill was intended to encourage loan servicers -- like those participating in the Bush administration's HOPE NOW alliance -- to engage in workouts without fear of lawsuits from investors. But Bush administration officials, including Comptroller of the Currency John Dugan and FDIC Chairwoman Sheila Bair -- say the bill could undermine confidence in the secondary mortgage market and question whether it could withstand legal challenges. Housing assistance WHAT: HR 2895, the National Affordable Housing Trust Fund Act of 2007. WHY: Democrats including California Rep. Maxine Waters say the federal government has done little to build affordable housing in recent years. HR 2895 would siphon off $800 million to $1 billion annually from Fannie Mae, Freddie Mac and the Federal Housing Administration to build, rehabilitate or preserve 1.5 million units of rental housing over the next decade. STATUS: Approved by the House Oct. 10 in a 264-148 vote, referred to the Committee on Banking, Housing and Urban Affairs. PROSPECTS: Iffy. The Bush administration objects to tapping Fannie and Freddie for an affordable-housing fund, and HUD Assistant Secretary Brian Montgomery told members of the House Financial Services Committee this summer that diverting revenue from FHA programs would be like "robbing Peter to pay Paul." Democrats have included similar provisions in House versions of GSE reform and FHA modernization bills that may not be embraced by the Senate. ***

Forecast Summary

The current housing recession is expected to run through early 2009 and will ultimately be severe enough to be characterized as a housing crash. Home sales are exptedted to hit bottom in early 2008, declining by over 40% from their peak, housing starts will reach their nadir in mid-2008, falling by 55%, and house prices are expected to decline by 12% through early 2009. After accounting for the plethora of non-price discounts home sellers are offering to buyers, effective house-price declines peak to trough will total well over 15%.

Awash in Inventory

The housing market’s most fundamental problem is it is awash in unsold inventory. According to the Census Bureau, as of the third quarter of 2007 there was close to 2.1 million vacant unsold homes that were for sale, equal to 2.6% of the stock of owner-occupied homes. Even a well-functioning housing market has a substantial amount of inventory. But in the quarter-century between the early 1980s and mid-2000s, the vacancy rate was an unwavering near 1.7%. The difference between the current over 2.6% vacancy rate and the 1.7% rate that consistently prevailed prior to the recent boom provides a good estimate of the amount of excess inventory in the market—it currently totals nearly 750,000 homes (see Chart 1-4). This is far and away the highest level of excess inventory in the post-World War II period. 2

Subprime Financial Shock

Subprime financial shock. Inventories of unsold homes will rise substantially further in coming quarters as the ongoing subprime financial shock results in a collapse in home sales and surging mortgage loan defaults and foreclosures. The global financial turmoil ignited this past summer by the rising credit problems on U.S. residential mortgage loans has significantly disrupted the flows of credit into the mortgage market. The issuance of bonds backed by subprime, Alt-A, and jumbo loans has fallen dramatically in recent months. At the peak of activity between 2005 through the first half of 2007, issuance of these bonds totaled close to $1 trillion annualized. During the third quarter—the shock began in late July and August—issuance plummeted to only $300 billion (see Chart 1-5). 5 So far in the fourth quarter, issuance has not measurably revived.

Where's the Bottom

Where’s the bottom? The outlook for the housing market thus appears very daunting. The mountain of housing inventory will only clear sufficiently for the market to find a bottom if homebuilders significantly further curtail construction, and thus new supply, and for home sellers to slash their prices to restore affordability and stimulate housing demand. To gauge just how much lower construction and house prices must decline for this to occur, the Moody’s Economy.com macroeconometric model of the U.S. economy was simulated under a number of different assumptions. Under the baseline (most likely) set of assumptions, the economy avoids recession but experiences slow job growth, the entire Treasury yield curve remains well below 5%, and loan modification efforts soon gain momentum. In this scenario, the housing market finds a bottom by early 2009 with average annual housing starts of approximately one million units over the entire period and a peak-to-trough decline in national house prices of 12% (see Chart 1-12). Housing starts in September were running at a 1.2 million unit pace and house prices are down 5% so far.

Financial Threat

Financial threat. The risks to this disconcerting near-term housing outlook seem skewed decidedly to the downside. Of most concern is that sliding house prices and eroding mortgage quality will reignite another wave of global financial turmoil. The ramifications of this for the economy, and thus housing, would be overwhelming. Behind this worry is the financial system’s substantial exposure to hundreds of billions in mortgage losses that are set to come. While financial institutions have begun to recognize these losses, as is evident from the recent string of billion dollar writedowns, they have fallen well-short of what they ultimately will have to realize.

Circumspect Consumers

Another negative risk to the outlook is posed by the intensifying negative housing wealth effects resulting from the severe and persistent decline in house prices and homeowners’ equity. As consumers turn more cautious in response to their eroding wealth, the economic expansion will surely waver, but if it falters significantly it will ignite a further devolution of the already reeling housing market. The wealth effect postulates that changes in household wealth measurably impact household spending. If household wealth is rising (falling), then households will spend more (less) out of their current income, and thus save less (more). The idea behind the wealth effect is simply that as households become wealthier they do not need to save as much today to be prepared for their future financial needs. It is no longer as necessary to save for such things as their children’s college education or their own retirement.

Engaged Policymakers

The most significant upside risk to the housing outlook is that policymakers appear fully engaged in stanching the financial turmoil and ensuring that the economy avoids recession. The Federal Reserve has aggressively lowered interest rates in recent weeks and Congress and the administration are working to aid the hard-pressed mortgage market. More help will be needed, but policymakers appear ready to provide whatever is necessary.

Strong Finish After a Volatile Week

Sunday, December 23, 2007; F06

U.S. stocks rose last week as higher consumer spending and the Federal Reserve's efforts to provide cash to banks spurred speculation that the economy will keep expanding.

Exxon Mobil and Hess led energy companies to the biggest sector gain in the Standard & Poor's 500-stock index after oil prices climbed for a second week. Earnings reports from Oracle and Research in Motion drove technology stocks to the second-steepest advance among 10 industries.

"You can just feel the tide turning here," said Jim Paulsen, who helps oversee about $200 billion as chief investment strategist at Wells Capital Management in Minneapolis. "Economic data keeps coming in better than expected, and I think it's part of the recovery story."

The S&P 500 added 16.51, or 1.1 percent, to 1484.46 last week, bringing its year-to-date advance to 4.7 percent. The Dow Jones industrial average rose 0.8 percent, to 13,450.65. The Nasdaq composite index climbed 2.1 percent, to 2691.99.

The yield on 10-year Treasury notes fell 0.06 points, to 4.17 percent, while two-year yields fell 0.11 points, to 3.20 percent.

Shares gained after the European Central Bank injected a record $500 billion into the financial system to help the economy withstand a deteriorating housing market. The Fed said it will also conduct emergency auctions of loans "as long as necessary" to help restore faith in the money markets.

A Commerce Department report showing that consumer spending rose more than forecast in November allayed concern that the slowest shopping season in five years may have already pushed the economy into recession.

Crude oil for February delivery rose 1.9 percent, to $93.31. The spending report signaled economic growth may spur demand for fuel. Prices have surged 53 percent this year.

Financial shares advanced even after the mortgage crunch caused Morgan Stanley and Bear Stearns to report the first quarterly losses in their history.

The Treasury will auction $20 billion in three-month bills and $19 billion in six-month bills on Monday, $22 billion in two-year notes and $15 billion in one-month bills on Wednesday, and $13 billion in five-year notes on Thursday. They yielded 2.97 percent, 3.33 percent, 2.38 percent, 3.19 percent and 3.58 percent, respectively.

For Christmas, stock markets close at 1 p.m. tomorrow and reopen at 9:30 a.m. Wednesday.

-- Bloomberg News

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Gov't Tries to Contain Mortgage Crisis

WASHINGTON (AP) - After a slow and stumbling start, official Washington is scrambling to try to prevent the unfolding mortgage crisis from pushing the country into recession during an election year. There is a strong feeling, though, that the government will need to do more to avert a financial disaster.

One former Treasury secretary advocates temporary tax cuts and emergency spending on the order of $50 billion to $75 billion. Such action could help the U.S. from slipping into what Lawrence Summers, who served under President Clinton, fears could become the worst downturn since the steep 1981-82 recession.

Some Republicans are worried, too.

From both Martin Feldstein, who was President Reagan's top economic adviser, and former Federal Reserve Chairman Alan Greenspan have come calls for deeper government intervention to deal with the threat.

Before it is all over, the government may have to resort to measures last used in the savings and loan crisis of the 1990s. Back then, it was a new agency to take over failing thrifts sunk by bad loans. Today, it could mean a government agency to buy up billions of dollars of mortgage-backed securities that investors are shunning.

The Bush administration thus far has opted for less dramatic measures. In fact, the administration came reluctantly to the biggest step taken to date - the "teaser freezer" announced two weeks ago.

A deal with the mortgage industry will freeze the low introductory "teaser" rates for five years on some subprime mortgages - loans to people with spotty credit histories. The rates were to climb much higher, making the mortgages unaffordable for many people and putting their homes at risk of foreclosure.

The hope is that this agreement will buy time for the housing market to rebound. That would make it easier for these homeowners to refinance to more affordable fixed-rate loans.

But estimates are that only about 250,000 people will end up getting a rate freeze - a fraction of the 3.5 million home loans that could go into default over the next 2 1/2 years.

The administration also is working with Congress to increase the $417,000 cap on the size of loans that the big mortgage companies Fannie Mae and Freddie Mac can handle. This step could help in high-cost housing areas such as California.

In addition, the administration is supporting legislation that would boost aid to lower-income homeowners by increasing the scope of mortgage insurance programs handled by the Federal Housing Administration.

These efforts may help at the margins. They do not, however, address one of the biggest threats to the economy: a spreading credit crisis triggered by the soaring defaults on subprime mortgages.

Some of the biggest names in finance have suffered multibillion-dollar losses as a result, and critical segments of the credit markets have frozen up. Banks and investors fear making further loans or buying securities backed by debt because they do not know how many more loans might go into default.

Ben Bernanke, facing his first major test as Fed chairman, is getting mixed reviews. The Fed was embarrassed when the credit crisis hit in August. That happened only two days after the central bank had decided to keep interest rates unchanged and declared that inflation was a bigger risk than weak economic growth.

The Fed has cut interest rates by a full percentage point since that time. But only the September cut - a bigger-than-expected one-half of a percentage point - elicited cheers on Wall Street. The two quarter-point moves brought about market declines as investors worried the Fed did not recognize the severity of the problem.

The trouble is that the credit crisis is occurring at the same time that a run-up in energy prices is increasing inflationary pressures.

And that is the dilemma.

If the Fed cuts interest rates to keep the economy out of a recession, it could sow the seeds for higher inflation and perhaps give the country the worst of both worlds, bringing back that 1970s bugaboo, "stagflation," in which growth is stagnant and inflation is getting worse.

In a novel approach, the Fed is auctioning off money to the banks in an attempt to get them to open up their loan spigots. The first two auctions, for a total of $40 billion last week, went well. But the amount of the cash provided to the banks paled in comparison with the $500 billion from the European Central Bank.

Many economists believe the Fed will have to cut its federal funds rate, the interest that banks charge each other, at least three more times and strengthen the wording of its statements. In that way, the markets would know the Fed will do whatever is needed to fight economic weakness in spite of its lingering worries about inflation.

"The difference between a soft economy and a recession is confidence. If the Fed appears reticent to do what is needed, like they did at their last meeting, that does not help confidence," says Mark Zandi, chief economist at Moody's Economy.com.

As for the administration and Congress, a tax cut possibly in the form of a rebate probably will be debated in the coming year. President Bush told reporters at the White House on Thursday that "we're constantly analyzing options available to us." He insisted that the economy's underlying fundamentals remained strong.

Summers, however, in a speech last week, urged bolder action. "For the last year, the economic consensus, and the policy actions that have flowed from it, has been consistently behind the curve," he said.

Gaining some currency is the idea of a government agency modeled after the Resolution Trust Corp. of the S&L days that would buy up mortgage-backed securities as a way of dealing with bad loans. About $100 billion in such loans have surfaced and an additional $200 billion are likely, according to market estimates.

If the government spent $150 billion to $200 billion to purchase mortgage-backed securities, the thinking goes, it would prevent a fire-sale that would drive prices of these securities even lower.

When the housing market stabilizes, the price of the government-held securities would begin to rise, allowing the government to sell them back to investors.

Whatever approach the government decides to take, economists said it will take time for the current problems to resolve themselves. They expect this housing downturn, which followed a five-year boom, to last through most of next year even under a best-case scenario in which the country avoids a full-blown recession.

"We have the fundamental problem that we built too many houses and we charged too high a price for them," says David Wyss, chief economist at Standard & Poor's in New York. "We have to stop building houses for a while and the prices have to come down. We are trying to make sure that process doesn't derail the rest of the economy."

___

EDITOR'S NOTE - Martin Crutsinger has covered economic issues for The Associated Press in Washington since 1984.

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Legislation > 2007-2008 (110th Congress) > H.R. 3648 H.R. 3648: Mortgage Forgiveness Debt Relief Act of 2007 Bill Status Introduced: Sep 25, 2007 Sponsor: Rep. Charles Rangel [D-NY] Status: Enacted Go to Bill Status Page Use the View which version? panel on the left to view the different versions of this bill available on its way to becoming law. You are viewing the following version of this bill: Enrolled Bill: This is the final text of the bill or resolution as approved by both the Senate and House, as it is sent to the President in the case of a bill. Colorized Changes Key: Removed Text Changed Text Inserted Text Colors show changes between the following two versions of this bill: Engrossed Amendment Senate: This is the text of the bill approved by the Senate after a conference committee that worked out differences between the Senate and House versions of the bill. Enrolled Bill: This is the final text of the bill or resolution as approved by both the Senate and House, as it is sent to the President in the case of a bill. (Hide Colorized Changes) Text of Legislation H.R.3648 One Hundred Tenth Congress ?? of the United States of America ?? AT THE FIRST SESSION Begun and held at the CityDecember 14, 2007. Resolved, That the bill from the House of Washington on Thursday, ?? the fourth day of January, two thousand and seven An Act To amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes. Be it enacted byAMENDMENT:Strike out all after the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE. This Act may be cited as the `Mortgage Forgiveness Debt Relief Act of 2007'. SEC. 2. DISCHARGES OF INDEBTEDNESS ON PRINCIPAL RESIDENCE EXCLUDED FROM GROSS INCOME. (a) In General- Paragraph (1) of section 108(a) of the Internal Revenue Code of 1986 is amended by striking `or' at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting `, or', and by inserting after subparagraph (D) the following new subparagraph: `(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.'. (b) Special Rules Relating to Qualified Principal Residence Indebtedness- Section 108 of such Code is amended by adding at the end the following new subsection: `(h) Special Rules Relating to Qualified Principal Residence Indebtedness- `(1) BASIS REDUCTION- The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer. `(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS- For purposes of this section, the term `qualified principal residence indebtedness' means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting `$2,000,000 ($1,000,000' for `$1,000,000 ($500,000' in clause (ii) thereof) with respect to the principal residence of the taxpayer. `(3) EXCEPTION FOR CERTAIN DISCHARGES NOT RELATED TO TAXPAYER'S FINANCIAL CONDITION- Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. `(4) ORDERING RULE- If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness. `(5) PRINCIPAL RESIDENCE- For purposes of this subsection, the term `principal residence' has the same meaning as when used in section 121.'. (c) Coordination- (1) Subparagraph (A) of section 108(a)(2) of such Code is amended by striking `and (D)' and inserting `(D), and (E)'. (2) Paragraph (2) of section 108(a) of such Code is amended by adding at the end the following new subparagraph: `(C) PRINCIPAL RESIDENCE EXCLUSION TAKES PRECEDENCE OVER INSOLVENCY EXCLUSION UNLESS ELECTED OTHERWISE- Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E).'. (d) Effective Date- The amendments made by this section shall apply to discharges of indebtedness on or after January 1, 2007. SEC. 3. EXTENSION OF TREATMENT OF MORTGAGE INSURANCE PREMIUMS AS INTEREST. (a) In General- Subclause (I) of section 163(h)(3)(E)(iv) of the Internal Revenue Code of 1986 (relating to termination) is amended by striking `December 31, 2007' and inserting `December 31, 2010'. (b) Effective Date- The amendment made by this section shall apply to amounts paid or accrued after December 31, 2007. SEC. 4. ALTERNATIVE TESTS FOR QUALIFYING AS COOPERATIVE HOUSING CORPORATION. (a) In General- Subparagraph (D) of section 216(b)(1) of the Internal Revenue Code of 1986 (defining cooperative housing corporation) is amended to read as follows: `(D) meeting 1 or more of the following requirements for the taxable year in which the taxes and interest described in subsection (a) are paid or incurred: `(i) 80 percent or more of the corporation's gross income for such taxable year is derived from tenant-stockholders. `(ii) At all times during such taxable year, 80 percent or more of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential purposes or purposes ancillary to such residential use. `(iii) 90 percent or more of the expenditures of the corporation paid or incurred during such taxable year are paid or incurred for the acquisition, construction, management, maintenance, or care of the corporation's property for the benefit of the tenant-stockholders.'. (b) Effective Date- The amendment made by this section shall apply to taxable years ending after the date of the enactment of this Act. SEC. 5. EXCLUSION FROM INCOME FOR BENEFITS PROVIDED TO VOLUNTEER FIREFIGHTERS AND EMERGENCY MEDICAL RESPONDERS. (a) In General- Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to items specifically excluded from gross income) is amended by inserting after section 139A the following new section: `SEC. 139B. BENEFITS PROVIDED TO VOLUNTEER FIREFIGHTERS AND EMERGENCY MEDICAL RESPONDERS. `(a) In General- In the case of any member of a qualified volunteer emergency response organization, gross income shall not include-- `(1) any qualified State and local tax benefit, and `(2) any qualified payment. `(b) Denial of Double Benefits- In the case of any member of a qualified volunteer emergency response organization-- `(1) the deduction under 164 shall be determined with regard to any qualified State and local tax benefit, and `(2) expenses paid or incurred by the taxpayer in connection with the performance of services as such a member shall be taken into account under section 170 only to the extent such expenses exceed the amount of any qualified payment excluded from gross income under subsection (a). `(c) Definitions- For purposes of this section-- `(1) QUALIFIED STATE AND LOCAL TAX BENEFIT- The term `qualified state and local tax benefit' means any reduction or rebate of a tax described in paragraph (1), (2), or (3) of section 164(a) provided by a State or political division thereof on account of services performed as a member of a qualified volunteer emergency response organization. `(2) QUALIFIED PAYMENT- `(A) IN GENERAL- The term `qualified payment' means any payment (whether reimbursement or otherwise) provided by a State or political division thereof on account of the performance of services as a member of a qualified volunteer emergency response organization. `(B) APPLICABLE DOLLAR LIMITATION- The amount determined under subparagraph (A) for any taxable year shall not exceed $30 multiplied by the number of months during such year that the taxpayer performs such services. `(3) QUALIFIED VOLUNTEER EMERGENCY RESPONSE ORGANIZATION- The term `qualified volunteer emergency response organization' means any volunteer organization-- `(A) which is organized and operated to provide firefighting or emergency medical services for persons in the State or political subdivision, as the case may be, and `(B) which is required (by written agreement) by the State or political subdivision to furnish firefighting or emergency medical services in such State or political subdivision. `(d) Termination- This section shall not apply with respect to taxable years beginning after December 31, 2010.'. (b) Clerical Amendment- The table of sections for such part is amended by inserting after the item relating to section 139A the following new item: `Sec. 139B. Benefits provided to volunteer firefighters and emergency medical responders.'. (c) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2007. SEC. 6. CLARIFICATION OF STUDENT HOUSING ELIGIBLE FOR LOW-INCOME HOUSING CREDIT. (a) In General- Subclause (I) of section 42(i)(3)(D)(ii) of the Internal Revenue Code of 1986 (relating to certain students not to disqualify unit) is amended to read as follows: `(I) single parents and their children and such parents are not dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of another individual and such children are not dependents (as so defined) of another individual other than a parent of such children, or.'. (b) Effective Date- The amendment made by this section shall apply to-- (1) housing credit amounts allocated before, on, or after the date of the enactment of this Act, and (2) buildings placed in service before, on, or after such date to the extent paragraph (1) of section 42(h) of the Internal Revenue Code of 1986 does not apply to any building by reason of paragraph (4) thereof. SEC. 7. APPLICATION OF JOINT RETURN LIMITATION FOR CAPITAL GAINS EXCLUSION TO CERTAIN POST-MARRIAGE SALES OF PRINCIPAL RESIDENCES BY SURVIVING SPOUSES. (a) Sale Within 2 Years of Spouse's Death- Section 121(b) of the Internal Revenue Code of 1986 (relating to limitations) is amended by adding at the end the following new paragraph: `(4) SPECIAL RULE FOR CERTAIN SALES BY SURVIVING SPOUSES- In the case of a sale or exchange of property by an unmarried individual whose spouse is deceased on the date of such sale, paragraph (1) shall be applied by substituting `$500,000' for `$250,000' if such sale occurs not later than 2 years after the date of death of such spouse and the requirements of paragraph (2)(A) were met immediately before such date of death.'. (b) Effective Date- The amendment made by this section shall apply to sales or exchanges after December 31, 2007. SEC. 8. MODIFICATION OF PENALTY FOR FAILURE TO FILE PARTNERSHIP RETURNS; LIMITATION ON DISCLOSURE. (a) Extension of Time Limitation- Section 6698(a) of the Internal Revenue Code of 1986 (relating to failure to file partnership returns) is amended by striking `5 months' and inserting `12 months'. (b) Increase in Penalty Amount- Paragraph (1) of section 6698(b) of such Code is amended by striking `$50' and inserting `$85'. (c) Limitation on Disclosure of Taxpayer Returns to Partners, S Corporation Shareholders, Trust Beneficiaries, and Estate Beneficiaries- (1) IN GENERAL- Section 6103(e) of such Code (relating to disclosure to persons having material interest) is amended by adding at the end the following new paragraph: `(10) LIMITATION ON CERTAIN DISCLOSURES UNDER THIS SUBSECTION- In the case of an inspection or disclosure under this subsection relating to the return of a partnership, S corporation, trust, or an estate, the information inspected or disclosed shall not include any supporting schedule, attachment, or list which includes the taxpayer identity information of a person other than the entity making the return or the person conducting the inspection or to whom the disclosure is made.'. (2) EFFECTIVE DATE- The amendment made by this subsection shall take effect on the date of the enactment of this Act. (d) Effective Date- The amendments made by subsections (a) and (b) shall apply to returns required to be filed after the date of the enactment of this Act. SEC. 9. PENALTY FOR FAILURE TO FILE S CORPORATION RETURNS. (a) In General- Part I of subchapter B of chapter 68 of the Internal Revenue Code of 1986 (relating to assessable penalties) is amended by adding at the end the following new section: `SEC. 6699. FAILURE TO FILE S CORPORATION RETURN. `(a) General Rule- In addition to the penalty imposed by section 7203 (relating to willful failure to file return, supply information, or pay tax), if any S corporation required to file a return under section 6037 for any taxable year-- `(1) fails to file such return at the time prescribed therefor (determined with regard to any extension of time for filing), or `(2) files a return which fails to show the information required under section 6037, such S corporation shall be liable for a penalty determined under subsection (b) for each month (or fraction thereof) during which such failure continues (but not to exceed 12 months), unless it is shown that such failure is due to reasonable cause. `(b) Amount Per Month- For purposes of subsection (a), the amount determined under this subsection for any month is the product of-- `(1) $85, multiplied by `(2) the number of persons who were shareholders in the S corporation during any part of the taxable year. `(c) Assessment of Penalty- The penalty imposed by subsection (a) shall be assessed against the S corporation. `(d) Deficiency Procedures Not To Apply- Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by subsection (a).'. (b) Clerical Amendment- The table of sections for part I of subchapter B of chapter 68 of such Code is amended by adding at the end the following new item: `Sec. 6699. Failure to file S corporation return.'. (c) Effective Date- The amendments made by this section shall apply to returns required to be filed after the date of the enactment of this Act. SEC. 10. MODIFICATION OF REQUIRED INSTALLMENT OF CORPORATE ESTIMATED TAXES WITH RESPECT TO CERTAIN DATES. The percentage under subparagraph (B) of section 401(1) of the Tax Increase Prevention and Reconciliation Act of 2005 in effect on the date of the enactment of this Act is increased by 1.50 percentage points. Speaker of the House of Representatives. Vice President of the United States and President of the Senate.

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December 23, 2007

John F. Wasik: Federal measures will not reverse housing slump

The Federal Reserve's quarter-point cut of its benchmark rate to 4.25 percent last week looks like a big lump of coal in the stocking of the U.S. housing market. While some buyers and refinancers may benefit, home prices may be headed for more declines in the most overheated markets, no matter what the Fed does.

As with most things in the financial world, home prices eventually had to regress to a historical rate of return. This realignment may eventually translate into a 15 percent nationwide decline, and even more in the markets with the highest appreciation and greatest supply.

Buried in the middle of the Office of Federal Housing Enterprise Oversight home-price report for the third quarter is an article on the relationship between areas that experienced the highest gains over the past half-decade and those facing higher-than-average foreclosures. Ofheo is the regulator of mortgage giants Freddie Mac and Fannie Mae.

As the U.S. housing market experienced its first quarterly decline in 13 years, Ofheo analysts observed that "prices fell approximately 5.4 percent over the latest four quarters in the most foreclosure-prone areas, more than double the pace of price declines elsewhere."

What happened in the most volatile markets? Home appreciation passed the threshold of economic reality, something the Fed can't restore by itself.

Rapid descent

In 2004, Ofheo's Home Price Index exceeded a 30-year historical average price trend, eventually outpacing it by about 15 percent at the height of the bubble.

Where they were most out of line with average household income, home values are plummeting. The reasons for the rapid descent vary.

States such as Arizona, Nevada and Florida were boosted by overbuilding, cheap land, retiree relocations, population growth and rampant speculation.

California was burned because thousands of desperate homeowners did anything they could to buy houses in an already expensive market.

Ohio and Michigan were hurt by cutbacks in the U.S.-based auto industry.

Then there's the question of liquidity. Nothing will change in housing markets until prime borrowers have full access to credit and until the inventory of about 4.5 million listed but unsold homes drops significantly. Foreclosures also need to be curtailed.

Foreclosures continue

Many bankers are shell-shocked. They don't want foreclosed properties on their books and have to sell them at steep discounts. That makes the housing market even more prone to price falls.

"As banks' capital needs increase, some may be forced to fire-sale the assets, further pressuring land prices," according to a November home building survey by Zelman & Associates, a New York-based research firm.

The worst-rated areas, according to Zelman, are Atlanta; Detroit; Fort Myers, Jacksonville, Tampa and Southeast Florida; and Los Angeles, San Diego, San Bernardino and Riverside counties in California.

Little relief is on the horizon. New foreclosures reached a 20-year high in the third quarter, according to the Washington-based Mortgage Bankers Association.

One in five adjustable subprime borrowers fell behind on payments. That number may worsen as more resets are triggered next year.

Subprime subterfuge

The five-year rate freeze on a minority of subprime loans proposed by President Bush and Treasury Secretary Henry Paulson two weeks ago will buy some time for a fraction of the estimated 2 million homeowners facing foreclosure.

There's little substance to the Bush plan. It lacks force of law because it's voluntary. It does nothing to change federal-bankruptcy and mortgage-disclosure legislation or pave the way for unrestricted refinancing.

Only about 145,000 households are expected to be helped by the administration's plan, according to the Durham, N.C.-based Center for Responsible Lending, a consumer group that monitors predatory lending.

Those whose mortgages have already reset to unaffordable monthly rates are trapped. Investors in those loans may not even agree to modifications.

ON THE WEB: Visit our Web site, www.app.com, and click on this story for a link to a bonus William Pesek column.

Foreign investment funds: vultures or St. Bernards?