Foreclosing on purpose seems to be a trend mortgage lenders don't like

More than ever, there are mixed messages out there for homeowners thinking about walking away from their mortgage obligations.

The Federal National Mortgage Association, better known as Fannie Mae, recently announced that it would penalize borrowers who purposely forego their home loan payments and go into default—even when they can afford them—because the value of their home has fallen below the amount they owe the bank. Fannie Mae, in an effort to discourage these so-called “strategic defaults,” said it would prevent borrowers who walked away from obtaining “a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.” Of course, the rules only apply to homeowners who have the capacity to pay and choose not to.

At the same time in California, state lawmakers are debating proposed legislation that would protect homeowners who strategically default from debt collectors. The California state Senate passed a bill earlier this month that would prevent lenders from seeking recourse for the amount of the borrower’s original home loan. If the borrower subsequently refinanced and took cash out of their equity in the home, however, the homeowner would be liable for what they borrowed above the original loan amount. The legislation is still pending and has yet to be reviewed by California’s State Assembly.

Though media reports have noted the rise of strategic defaults as the U.S. housing market attempts a recovery, the exact number of purposeful foreclosures are hard to come by. One Morgan Stanley analysis released in February estimated that these defaults accounted for about 12% of all foreclosures in the U.S.

Critics argue that California’s proposed law creates an incentive for homeowners to walk away. Here at Black Enterprise, we’ve advised that it’s almost never a good idea to engage in a strategic default. (See “Don’t Walk Away,” April 2010 issue) The repercussions are too steep.

John Simons is an editorial director and personal finance editor at Black Enterprise.

Ted Parrish, principal of Hennsler Financial Group, says those who invested in the flailing companies during the crash of the housing market now need to re-evaluate their investment goals. As for mortgage holders, Parish says the delisting will have little to no impact. “Operations are still going on with the government backing the companies, and government will back existing mortgages.”

As it stands right now, Fannie Mae and Freddie Mac shares will trade on the Over-the-Counter Bulletin Board, according to the Federal Housing Finance Agency, the companies’ regulator. The OTC is a trading exchange for many penny stocks, says Parrish, not a place you would look to find high quality, long-term investments. “Typically, getting removed from the New York Stock Exchange is a clear indication that a company is going to cease to exist at some point,” he adds.

Friday, Freddie Mac closed at 40 cents per share while Fannie Mae closed at 35 cents per share.

Hamilton

Following the collapse of Wall Street, the swell in national unemployment, and the meltdown of the housing mortgage market, crisis leadership is proving to be the new corporate discipline.

“Solely practicing crisis avoidance is insufficient,” says Amber Hamilton, senior program manager for Fannie Mae, the government-sponsored enterprise charged with funding mortgage investments in U.S. and international markets. “In a climate fraught with unpredictability, the reality is that no organization can be adequately prepared for every crisis.”

Amid the mortgage lending turmoil, Hamilton enrolled in Georgetown University’s Executive Master’s in Leadership program to better equip herself as a leader. “Simply managing the variables of a crisis is reactive and severely limits an organization’s ability to benefit—learn, grow, and excel—from a problematic occurrence,” says Hamilton.

The 13-month, weekend-formatted master’s degree accelerates the development of leadership competencies and supports their practical application in the workplace.

Hamilton recommends EML because unlike traditional leadership programs, it offers a comprehensive approach that addresses leadership on a personal, team, and organizational level while integrating critical subject matter from a variety of disciplines: business, government, public policy, history, international relations, behavioral sciences, and ethics. “These subjects give participants added context and greater insight into impacting leadership,” says Assistant Dean of Executive Degree Programs Mary Anne Waikart.

Hamilton says the coursework has aided her in assessing the breadth of market threats, formulating creative alternatives, honing broad decision-making skills, and implementing solutions to address multifaceted challenges.

She leads in crisis situations by using the following strategies:

Lead from the front. Hamilton takes a visible stance during crisis periods and serves as the go-to-person in charge. In this role she provides direction, assurance, and inspiration.

Look for opportunities. Hamilton scrutinizes each exigency for opportunities to adapt, alter, or advance her organization to the changing operating environment.

Employ emotional intelligence. Hamilton prioritizes people over problems. She manages stress at a tolerable level while unifying organizational stakeholders with a common purpose and set of goals before tackling the technical aspects of the crisis.

For more information, contact Georgetown University’s McDonough School of Business at http://msb.georgetown.edu.

This article originally appeared in the October 2009 issue of Black Enterprise magazine.

Charles Weems

Charles Weems, 27, Decatur, GA
Tip for Beginners: The best advice from my boss: “start early,” find a mentor who is investing and exchange ideas. Hang around and listen to those who are where you want to be in life.

My Favorite Holdings: Fannie Mae (FNM) and Freddie Mac (FRE)

Why I like these stocks: I still believe these two are going to be good holdings for the long term. The government is not going to let those two companies fold because of their important standing with the housing market, investors, and the economy as a whole. I believe with the new stimulus package beginning to take effect, we should start seeing the housing market turn around over the next five years.

The Professional Opinion

Analysts Consensus on Freddie Mac:
Hold: 1
Sell: 2
Analysts Consensus on Fannie Mae:
Hold: 1
Sell: 2

Matthew Warren of Morningstar:
“We recommend against speculating in Fannie shares. Fannie Mae posted another enormous loss in the fourth quarter ending in December. Severity of loss has increased as steady home price declines chew through homeowners’ equity and inadequate credit enhancement on Fannie Mae loans. Increased severity combined with an acceleration and broadening of credit problems suggests that things will get worse before they get better. With Fannie slowing foreclosures, stepping up modification efforts, refinancing (high-risk) high loan/value loans to lower rates, and reversing some recently implemented guarantee fees, it is clear that Fannie Mae is working toward policy goals rather than shareholders’ benefit. Freddie Mac posted a fourth-quarter loss of $25 billion, contributing to a $50 billion loss for the year ending in December, which wiped out decades’ worth of profitability. With net worth again in the red, Freddie’s conservator has submitted a request for another $30.8 billion in funding from the U.S. Treasury. With this new senior preferred investment from Uncle Sam, the total amount of these securities will rise to $45.6 billion. We would avoid speculating in this firm’s shares.”

Ted Parrish of Henssler Financial Group:
“Fannie Mae and Freddie Mac have basically been taken over by the federal government. The government infused a lot of cash and that’s why most stock analysts don’t cover the companies anymore. Once a company gets below a certain price level per share, they loose coverage from a lot of the major research firms. That particular price can be anywhere between $5 and $10. The chances of those companies being major forces as independent organizations are not going to happen. Fannie and Freddie are not good for long-term growth. Their existence as a “going concern,” [or a business entity] is in question at this point. Shareholders will be the first in line to take a hit if there is any more trouble in their business.”

Kevin Njeru

Kevin Njeru, 18, Gainesville, FL
Tip for beginners: Join an investment club. Collaborating with others allows you to pool resources and financial sources. It also allows for feedback and additional research on companies.

My favorite holding: Procter & Gamble Co. (PG)

Why I like the stock: It’s an easy to understand company for young investors because it manufactures products such as Tide laundry detergent, Pampers diapers, and Crest toothpaste. Procter & Gamble’s products are daily essentials and as a company, it’s trustworthy. They’ve recently increased prices on products, which has helped generate a profit in the sagging economy. The stocks value has taken a hit, falling more then one-third since last September. Long term, I see them performing well because of brand equity and the fact that consumer goods will always be a profitable industry.

The Professional Opinion

Analysts Consensus:
Strong Buy: 1
Buy: 3
Hold: 12

Wendy Nicholson of Citigroup Inc.:
“We rate the shares of Procter & Gamble hold/low risk. Our hold rating primarily reflects the stock’s valuation, which we find to be full. Indeed, while we view the acquisition of Gillette to be a positive for Procter & Gamble and its shareholders over the long term, we believe that it will become increasingly difficult to generate accelerating sales growth given Procter & Gamble’s size. While we believe Procter & Gamble has impressive long term growth momentum, we also worry that various pressures on Procter’s business may eat into any potential upside to earnings per share estimates; especially given that we think some of the company’s higher-margin businesses (e.g., pharmaceuticals) are currently decelerating.

Overall, though, with Procter & Gamble’s excellent track record in integrating acquisitions, continued success at launching higher-priced, higher-margin new products, and management’s proven ability to manage exceptionally well its increasingly large and diverse business, we are hopeful the company will continue to meet, if not exceed, our earnings expectations.”

Michelle RhodesBrown, of Profit Investment Management:
“Procter & Gamble is a well-run, large, global consumer staples company. In any dogfight you want this company on your side, for the most part. They have huge mega brand large advertising budgets they use to gain market share.

It’s not a “buy” because they’re so large that growing is difficult. If you look at their sales growth, it’s more driven by price increases than by volume increases. That makes people nervous. Procter & Gamble attributes its volume declines to customer (retailer) destocking. Because energy and commodity prices have come back, they worry about whether they can keep their prices.”

Andrew Simon

Andrew Simon, 23, San Francisco
Tip for Beginners: Do your research. Find companies that have valuable assets, aren’t loaded with debt, and have a competent management team that can take them through the economic downturn.

My favorite holding: Intel Corp. (INTC)

Why I like the stock: With a large portion of the corporate and consumer market corned, coupled with the fact that the tech industry is growing, not shrinking, Intel will soon be back on the rise. Intel’s top competitor, AMD Inc. (AMD) recently announced its plans to restructure the company to reduce expenses. These plans primarily involve the termination of employees, contract or program terminations, and facility closures. Meanwhile, Intel has plans to build a new factory to begin mass production of their newest chips. While AMD plans to reduce manufacturing output, Intel is receiving rave reviews on its two newest processors.

The Professional Opinion

Analysts Consensus
Strong Buy: 13
Buy: 13
Hold: 14
Underperform: 1
Sell: 1

JoAnne Feeney of FTN Equity Capital Markets Corp.:
“We remain cautious regarding the second half of 2009 because signals of a seasonal increase in end-market demand have yet to materialize. Longer term, we view Intel as likely to deliver results outpacing the broader economic recovery. The company released its next-generation mainstream server CPU (central processing unit) at the end of March, code-named Nehalem EP. This product closes the architectural gap with AMD by adding an on-board memory controller (AMD did this in 2003). Experts are enthusiastic about this new CPU, and anticipate higher sales of servers as a consequence. Intel’s high-end version of Nehalem is not due until the first quarter of 2010, although it was originally expected by year-end. It looks like Intel has worked out the bugs. We remain positive on the shares.”

Eugene Profit, Profit Investment Management:

“Intel’s last quarter earnings came in eight cents better than Wall Street estimates, even though revenue fell 26% year-over-year. The problem with that is basically people like to see revenue going up. By cutting expenses Intel’s growth margins were a little bit better and we know that demand is down because of the economy. You’re starting to see computer inventory bottoming out. Because you’re going to have computer upgrade cycle starting even though you have a weakened economic environment, Intel will benefit because the inventory of semiconductor chips are very low. There’s going to be and increase in the demand for Intel chips. It’s rated a hold, because with revenues down, that’s a concern. But the reason they were down has as much to do with the weak economy as anything else.”

Erika Smith

Erika Smith, 25, Atlanta
Tip for Beginners: Understand what type of investor you are. Use investment questionnaires to develop a mix that is suitable for your financial goals based on your time horizon and risk tolerance.

My favorite holding: Oracle Corp. (ORCL)

Why I like the stock: My interest began in 2005 when Oracle acquired Siebel Systems Inc. This signaled the company was making a serious effort to increase market share and challenge the dominance of German enterprise software maker SAP (SAP). Oracle’s products will be increasingly relevant as the world continues to look for information technology solutions to reduce costs and innovate how we do business. For example, reduction of administrative costs will be important to U.S. healthcare reform. Oracle should be able to provide solutions that will streamline healthcare processes and reduce costs to gathering and use patient data.

The Professional Opinion

Analysts Consensus
Strong buy: 10
Buy: 10
Hold: 7

John DiFucci of JP Morgan Chase:
“We believe that Oracle Corp. is better equipped than most software companies to weather a soft economic environment given its ability to rationalize its cost structure that has been temporarily burdened by a myriad of acquisitions. Our analysis indicates that Oracle shares are attractively valued at current levels. Oracle is running its business assuming a prolonged economic downturn persists for the foreseeable future, resulting in an environment of declining corporate IT budgets. Oracle will look to gain share in this environment through up-selling and cross-selling into its 320,000 strong customer base of primarily large corporations (versus small businesses). Management expects to grow margins by growing revenue by greater than the rate of expense growth. While Oracle’s strategic relationship with its customers may position it better than most software companies, its top line is not immune to a macro slowdown.”

Ted Parrish of the Henssler Financial Group:
“Oracle has a solid base of customers and a lot of their revenue is “recurring revenue,” which means it’s stable and predictable since they lock their customers into multi-year contracts. The reason to buy right now is because the stock is very cheap on any relative measure, price to earnings, price to sales, price to cashflow. It’s trading for a multiple that’s lower than the market (technology sector) and for a company of its quality, that’s hard to believe. But its expected growth in earnings is above average and right in line with its price/earnings ratio.”

* When investing or making any type of financial decision, it is important to do your own research before making any decisions.
** Analysts consensus taken from Yahoo Finance

Erika Smith

Andrew Simon wishes he had been one of those lucky investors who bought Google at $100 back when the company first offered shares to the public in August 2004. The 23-year-old teller at Chase Bank in San Francisco watched with envy as the search engine’s share price rose to a peak of $715 by December 2007. Now, Simon is getting his chance to buy one of his favorite stocks on sale. Last October, after the Dow Jones dipped and the S&P sagged, he purchased a small stake in Google (GOOG) at $356 per share—almost half of what it traded for a year earlier. At the same time, Simon loaded up on Intel (INTC), buying 30 shares at $14. When the price dropped to $13 in December, he bought 70 more shares. “It was like shopping on Black Friday, but the prices were even better,” he says.

Simon started investing in early 2008 after watching the share prices of many solid companies fall in lock step with the rest of the market. Believing that those companies and their prospects are destined to rebound, he decided to devote half of his biweekly paycheck to investing. Over the last year, Simon has scooped up stocks such as China Mobile Ltd. (CHL), a mobile telecommunications company, and Korean steelmaker POSCO (PKX). At Simon’s time of purchase, both companies’ shares and price-to-earnings ratios had fallen considerably from their 2007 heights.

Simon isn’t unique. Erika Smith, a 25-year-old technology consultant for IBM, is also taking advantage of low prices. Smith started investing after her parents opened a Roth IRA account for her as a graduation gift and provided seed money to get her started. Now she has expanded her stock portfolio. In December, Smith purchased shares of General Electric (GE), Duke Energy (DUK), and Honeywell (HON). Her logic: “I’ve been trying to identify cheap energy stocks since that has been a major focus of the Obama administration,” explains Smith. “When his plan is kicked out, I’m sure I’ll see an increase in their value.”

Even as older generations continue to grumble about how 2008 depleted their nest eggs, twenty-somethings—many starting to invest for the first time—are aggressively plunging into the market. What they’re finding are attractive valuations. For Simon and his peers, investing requires a sense of youthful optimism, a belief that the market and the U.S. economy will rise again. A new study commissioned by Scottrade showed that 54% of Gen Y investors have confidence in the market recovering and expect to see improvement by the end of 2009. Of course, it’s easy to have that kind of bright-eyed attitude if you won’t need retirement money for another 40 years or so.

Broadly, the trend is hard to quantify, but during 2008, nearly 200,000 investors age 30 and under opened new accounts with ShareBuilder, the investment arm of ING Direct. That represented an 81% increase over the number of new accounts opened by the group in 2007. TradeKing, an online stock trading and options trading broker, saw a 28% year-over-year increase in accounts opened by people under 30.

By no means do Smith and Simon represent the norm. There are still large numbers of young adults, particularly African Americans, who fail to invest early. According to the advocacy group United Fair Economy’s most recent report on U.S. saving and investing, only 18% of blacks have retirement accounts, compared to 43.4% of their white counterparts. Furthermore, younger workers are less likely to participate in a retirement plan than older workers with the same earnings, according to the Employee Benefit Research Institute. “In their minds retirement is a really long time away and they don’t realize that the 30 or 40 years that a person can invest are valuable years,” says Ed Fullbright of Fullbright Financial Consulting in Durham, North Carolina.

Here’s an example to bolster Fullbright’s point: If a 20-year-old deposits $50 in the bank each month for 45 years with an interest rate of 3% compounded monthly with an initial starting balance of $500, the final savings balance, assuming retirement at 65, will be $58,944.11. By contrast, if the same person waits until 30 to start investing that same $50 per month, the total at retirement would equal $38,505.14.

Charles Weems III

That’s a message young investors have a hard time communicating to their friends. Charles Weems III, a 27-year-old software engineer, says many of his peers think investing will take away from having fun. “Most young people are more concerned with driving a nice car and going on trips; they want this lavish lifestyle,” he says. Weems is speaking from experience. When he started working he spent most of his money eating out, taking road trips, and picking up the tab during nights out with friends. Now he realizes he can put money away and still live life. A few years ago, he started contributing 10% of his income to his 401(k). He also puts $400 each month into a Roth IRA. Since last September, he has devoted between $400 and $700 a month to investing. Weems recently purchased more than 250 shares of Fannie Mae (FNM) while it was trading at $2.38. He believes that the government bailout will help the company regain its footing.

Young investors find that they often have to dispel myths when talking to their friends about delving into the markets. One of those myths: Investing is too complicated. Kevin Njeru, an 18-year-old junior at the University of Florida, decided to jump into the market during the fall of 2008 after joining the campus investment club. “When I first started I thought [investing] was going to be difficult, but it’s not difficult at all if you’re willing to put in the time,” he says.

Njeru bought $400 worth of shares in the exchange-traded fund Vanguard Information Technology (VGT), which tracks the performance of several large, medium, and small U.S. companies. Exchange-traded funds (ETFs), allow him to hold dozens, hundreds, or even thousands of companies under one umbrella. Njeru’s excitement about the fund stems from his belief that the economy will recover, and that companies such as Apple and Intel will continue to be innovative and power future U.S. growth. “Young people spend so much time on Facebook and MySpace, but they can just as easily have another tab open researching stocks,” he says.

The second big myth about investing: You need a lot of money to start. So not true. It doesn’t matter how little you start with, the key, say many Generation Y investors, is that you begin while you’re still young. “You don’t need hundreds of thousands of dollars to invest. Warren Buffet and Bill Gates started out small, they started out with what they had,” says Simon.

“There’s definitely a reward at the end of this.”

– Additional reporting by Renita Burns.

President Barack Obama hailed his administration’s efforts to help homeowners avoid foreclosure during a housing refinance roundtable that he hosted at the White House April 9. He also urged the millions of homeowners who are eligible for the federal program he launched in March to take advantage of near-record low mortgage rates.

“The main message that we want to send today is there are seven to nine million people across the country who right now could be taking advantage of lower mortgage rates. That is money in their pocket,” Obama said after the event. “We estimate that the average family can get anywhere from $1,600 to $2,000 a year in savings by taking advantage of these various mortgage programs that have been put in place.”

A handful of local homeowners who participated in the roundtable shared their experiences which included refinancing a 15-year loan to a 20-year conventional mortgage and refinancing a 30-year mortgage to a 15-year one (which also included a second mortgage the family had taken to cover household expenses.) The savings reported ranged from $400 to $1,200.

Obama’s program enables borrowers with little or no equity in the home to refinance if they owe no more than 5% more than the home is worth and the federally controlled Fannie Mae or Freddie Mac backs their mortgage. The president encouraged people to learn more about how they can get help with their loans by visiting a government web site Makinghomeaffordable.gov.

He also warned homeowners to beware of scam artists. “If somebody is asking you for money up front before they help you with your refinancing, it’s probably a scam,” he said.

Obama noted a rise in refinancing due to lower rates, which are now at 4.78% for 30-year mortgages. And according to the Mortgage Bankers Association, applications are up 88%. Fannie Mae refinanced $77 billion in mortgages in March, nearly twice the amount it did in February and its highest volume for one month since 2003.

“Typical homeowners around the country can benefit from those record lows by refinancing their homes and saving on average up to $2,000 a year for the average family, and for many families it’s much, much larger than that,” said HUD Secretary Shaun Donavan in a conference call with reporters. He also pointed to an uptick in new home buyers, adding that “Combined with the tax credit that was part of the recovery bill, we’ve also seen a 19% increase since our plan was announced in terms of home purchase loans.”

Donovan also said that some banks that have agreed to participate in the program are still getting the process up and running, but in the meantime have agreed to hold off on foreclosures. If, however, homeowners feel they are not getting the proper level of responsiveness from their banks, they should contact one of the more than 2,600 HUD-approved counseling agencies located around the nation in every state.

Joseph Pigg, vice president and senior counsel at the American Bankers Association, agrees that there’s never been a better time to refinance, “but there’s still a big gap between the folks who can be helped by the refinancing and modification programs and those who can refinance on their own, and that’s the soft spot, if you will.” Those programs don’t help those who may have a home equity loan or a second lien on their homes, which Pigg says is a “huge chunk” of the market.

“The other part is the administration’s plan thus far is up and running for Fannie and Freddie loans, but it still hasn’t issued guidelines for the non-agency loans, if it’s a portfolio loan, or a loan owned by a federal home loan bank, so we’re still waiting on those aspects,” Pigg says.

During the conference call, Donovan said that the administration is working on a provision and hopes to release more details of its programs for second loans.

Treasury Secretary Henry Paulson (Source: Treasury.gov)

“The consumer asset-backed securities market is a source of liquidity to financial institutions that provide federally guaranteed small business loans and consumer lending such as auto loans, student loans, and credit cards,” said Treasury Secretary Henry Paulson at a news conference today.

However, “credit market stresses have led to a steep decline in the third quarter of 2008, and the market essentially came to a halt in October. As a result, millions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy.”

The Federal Reserve will purchase up to $100 billion in direct obligations from mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The Fed also will purchase another $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The Fed and the Treasury Department will also lend up to $200 billion to securities dealers and other financial firms that hold AAA-rated securities backed by consumer loans, such as credit cards and auto loans. The program will also cover loans originated by the Small Business Administration (SBA). The Treasury will provide $20 billion from the $700 billion economic bailout to cover potential losses from the program.
The new loans, announced as fresh economic data, are the latest modifications to the largest government bailout in history, a program designed to keep the financial system from pushing the country into a deep and prolonged recession.
The government is seeking to instill confidence in the credit markets, and is hoping to see lenders like credit card companies return to normal levels of lending to help stimulate the economy. Since September, financial institutions have been hesitant to lend money for fear they won’t be repaid.

If successful, the new programs will stimulate consumers and businesses, which the government hopes might push the country’s gross domestic product higher, and increase consumer confidence to help the crippled housing and auto markets.

Meanwhile, the Commerce Department revised reading on the economy’s performance showed gross domestic product shrank at a 0.5% in the third quarter, weaker than the 0.3% decline first estimated a month ago. It is the worst showing since the third quarter of 2001. GDP measures the value of all goods and services produced in the U.S. and is considered the best barometer of the country’s economic fitness.

Quarterly housing prices also dropped by 16.6% compared to the same period a year ago, reports the Standard & Poor’s/Case-Shiller U.S. National Home Price Index earlier this morning. This was the lowest price drop since the first quarter of 2004. Meanwhile, the consumer confidence index, also released today, improved moderately for November was 44.9, up from a revised 38.8 in October.

In that spirit, we went with a completely different source. Here’s what the Associated Press had to say about some of the “facts” presented last night by the vice presidential candidates:

GOV. SARAH PALIN: Said of Democratic presidential candidate Obama: “94 times he voted to increase taxes or not support a tax reduction.”

THE FACTS: The dubious count includes repetitive votes as well as votes to cut taxes for the middle class while raising them on the rich. An analysis by factcheck.org found that 23 of the votes were for measures that would have produced no tax increase at all, seven were in favor of measures that would have lowered taxes for many, 11 would have increased taxes on only those making more than $1 million a year.

***

SEN. JOE BIDEN: Complained about “economic policies of the last eight years” that led to “excessive deregulation.”

THE FACTS: Biden voted for 1999 deregulation that liberal groups are blaming for part of the financial crisis today. The law allowed Wall Street investment banks to create the kind of mortgage-related securities at the core of the problem now. The law was widely backed by Republicans as well as by Democratic President Clinton, who argues it has stopped the crisis today from being worse.

***

PALIN: Criticized Obama’s “plan to mandate health care coverage and have universal government run program” for health care, and added: “I don’t think it’s going to be real pleasing for Americans to consider health care being taken over by the Feds.”

THE FACTS: Wrong on several counts. Obama’s plan does not provide for universal coverage, only mandates insurance for children and doesn’t turn the system over to the government. Most people would still get private insurance through their work. Obama proposes that the government subsidize the cost of health coverage for millions who have trouble affording it and he’d set up an exchange to negotiate prices and benefits with private insurers — with one option being a government-run plan.

***

BIDEN: Warned that Republican presidential candidate John McCain’s $5,000 tax credit to help families buy health coverage “will go straight to the insurance company.”

THE FACTS: That’s not surprising – the money is meant to pay for health insurance. The Obama campaign tried to capitalize on the candidates’ healthcare exchange by issuing an ad Friday contending that the Republicans can’t explain “the McCain health tax.”

***

PALIN: “Two years ago, remember, it was John McCain who pushed so hard with the Fannie Mae and Freddie Mac reform measures. He sounded that warning bell.”

THE FACTS: Republican Sen. Chuck Hagel of Nebraska led an effort in 2005 to tighten regulation on the mortgage underwriters — McCain joined as a co-sponsor a year later. The legislation was never taken up by the full Senate, then under Republican control.

***

BIDEN: Said McCain supports tax breaks for oil companies, and “wants to give them another $4 billion tax cut.”

THE FACTS: Biden is repeating a favorite saw of the Obama campaign, and it’s misleading. McCain supports a cut in income taxes for all corporations, and doesn’t single out any one industry for that benefit.

***

PALIN: Said the U.S. has reduced its troop level in Iraq to a number below where it was when the troop increase began in early 2007.

THE FACTS: Not correct. The Pentagon says there are currently 152,000 U.S. troops in Iraq, about 17,000 more than there were before the 2007 military buildup began.

***

BIDEN: “As a matter of fact, John recently wrote an article in a major magazine saying that he wants to do for the healthcare industry — deregulate it and let the free market move — like he did for the banking industry.”

THE FACTS: Biden and Obama have been perpetuating this distortion of what McCain wrote in an article for the American Academy of Actuaries. McCain, laying out his health plan, only referred to deregulation when saying people should be allowed to buy health insurance across state lines. In that context, he wrote: “Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.”

***

PALIN: Said Alaska is “building a nearly $40 billion natural gas pipeline, which is North America’s largest and most expensive infrastructure project ever to flow those sources of energy into hungry markets.”

THE FACTS: Not quite. Construction is at least six years away. So far the state has only awarded a license to Trans Canada Corp., that comes with $500 million in seed money in exchange for commitments toward a lengthy and costly process to getting a federal certificate. At an August news conference after the state Legislature approved the license, Palin said, “It’s not a done deal.”

***

PALIN: “Barack Obama even supported increasing taxes as late as last year for those families making only $42,000 a year.”

BIDEN: “The charge is absolutely not true. Barack Obama did not vote to raise taxes.”

THE FACTS: The vote was on a nonbinding budget resolution that assumed that President Bush’s tax cuts would expire, as scheduled, in 2011. If that actually happened, it could mean higher taxes for people making as little as about $42,000. But Obama is proposing tax increases only on the wealthy, and would cut taxes for most others.

***

PALIN: Said a McCain-Palin administration “will support Israel,” including “building our embassy … in Jerusalem.”

THE FACTS: Moving the U.S. Embassy from its present location in Tel Aviv to Jerusalem is a perennial promise of presidential candidates courting the Jewish-American vote. In fact, moving the embassy is actually required by U.S. law. But successive administrations of both parties, including George W. Bush’s, have made the same pledge only to find that the realities of Middle East peacemaking have forced them to invoke a waiver to delay it. Jerusalem is claimed as a capital by both Israel and the Palestinians and Israel’s occupation of east Jerusalem is not internationally recognized. The city’s status is one of the key issues of disagreement in peace negotiations between Israel and the Palestinians.

(The Associated Press contributed to this report.)

Deborah Creighton Skinner is the editorial director of BlackEnterprise.com.

The federal government yesterday took control of mortgage giants Freddie Mac and Fannie Mae in a dramatic attempt to shore up the nation’s weakened housing market.

“Through the four actions we have taken today, [the Federal Housing Finance Agency] and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible,” Treasury Secretary Henry M. Paulson said Sunday. Over the next 30 days, the Treasury Department will be purchasing nearly $5 billion in mortgage bonds. Many expect that this will cause interest rates to decrease. Additionally, dividends on both common and preferred shares will be eliminated in an effort to conserve $2 billion. The Treasury Department will also buy preferred stock in Fannie and Freddie to provide security to debt holders and bolster housing finance.

Paulson said that he could not in good conscience provide an equity subsidy to the banks in their current form at the expense of taxpayers. The conservatorship, which began today, will eliminate the positions held by Fannie CEO Dan Mudd and Freddie CEO Dick Syron, but they will remain on board for a period of time to help with the transition. The FHFA will assume control of the board, and the vast majority of key professionals will remain in their jobs.

Together Freddie and Fannie own or back about $5.3 trillion in mortgages, which is about half the nation’s mortgage debt. The two government-sponsored enterprises were established to help create affordable mortgages and increase the availability of mortgage financing.

The situation to bail out Fannie and Freddie became evident last week when Freddie Mac was not able to sell mortgage bonds at a reasonable market value. The two enterprises have lost billions of dollars from high-risk bonds composed of defaulted home loans. Increased foreclosures over the past year have made it difficult for Fannie and Freddie to sell the debt and raise capital.

Jim B. Lockhart III, director of the FHFA, says yesterday’s action was attributed to a flawed business model embedded in the government sponsored enterprise (GSE) structure and to the ongoing housing correction.

“I have long said that the housing correction poses the biggest risk to our economy,” Lockhart says. “It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

David Moffett, former CFO of U.S. Bancorp and senior adviser at the Carlyle Group, a private-equity firm, has been chosen to head up Freddie Mac. Herbert M. Allison, a former TIAA-CREF executive, was named chief executive officer of Fannie Mae.

The Treasury is hoping to help policymakers chart a course to resolve the systemic risk created by the inherent conflict in the GSE structure and minimize the near term costs to the taxpayer.

“The taxpayers will have to come up with some of this bailout,” says Joy Jamison, president of the National Association of Black Mortgage Brokers. “It helps to destabilize the market and that is very important to us because it will allow us to continue the programs in the community. Those would have been affected the most.” According to Jamison, consumer confidence will get a boost. “People are afraid in the market right now. They are afraid to buy and do refinances. They will look to buy houses again and will help to energize folks and bring this whole market back.

“Half of the loans in this country are backed by Fannie Mae and Freddie Mac,” Jamison says. “It affects all of the industries. They are all down right now-the appraisal and title industries, mortgage insurance, and individual mortgage companies.”

In recent months, the housing crisis has shattered many banks and reduced the amount of consumers seeking mortgages. The Federal Reserve reported recently that consumer borrowing grew at a rate of just 2.1% in July, the slowest pace since a 1.9% rise last December.

Since the announcement was made, Wall Street has responded favorably. The Dow Jones industrials gained more than 150 points, and there was a rally among banks with exposure to mortgages.

Samuel D. Melvin, a mortgage planner at Dessert State Mortgage, says that although taxpayers will see an initial increase in taxes, they will receive dual benefits from the seizure, first as a decrease in new mortgage interest rates and also first with lower mortgage interest rates, and secondly with government making a profit on their investment.

“Whenever the government steps in, there’s an initial cost to the taxpayer. These activities will add to the federal budget deficit since the U.S. Treasury will use borrowed funds for this arrangement,” Melvin says. “But because there is typically a positive spread between the borrowed funds and the yield on the Freddie/Fannie bonds, the government earns a profit on the difference.”

The Treasury’s temporary authorities will expire at the end of next year and the GSE portfolios will begin to gradually run off. Fannie and Freddie will then begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements.

For more information:

• Government Sponsored Enterprise Credit Facility Factsheet
• Paulson’s statement
• FHFA Conservatorship FAQ

Stock predictions for the first week in August do not seem too promising.

Early last week, the economy seemed to improve slightly after President George W. Bush signed into law a $300 billion bill aimed at rescuing the housing market. The bill also included a rescue plan for bleeding mortgage finance firms Fannie Mae and Freddie Mac. But by Friday, the Dow had dropped 51.7 points and the Department of Labor reported that employers cut 51,000 jobs in July.

Also adding to the bad news, the auto industry’s annualized selling rate for July decreased to 12.6 million vehicles, the lowest since 1992. Sales of cars and light trucks at Chrysler, Ford, and GM fell by 29%, 26% and 15%, respectively. Chrysler says it plans to cut 1,000 white-collar posts by the end of September. After posting a $15.5 billion quarterly loss, GM shares closed 84 cents lower to $10.23.

In addition, Standard & Poor’s Case-Shiller Home Index reported that prices for homes fell 15.8% in May, the most since 2001.

Instead of a recession—which requires two straight quarters of negative growth for gross domestic product (GDP)—analysts are calling the current situation an economic slow down. Many believe that speculation from institutional investors is driving energy prices higher.

“The good news is oil prices came down quite a bit,” says Eugene Profit, CEO of Profit Investment Management (No. 14 on the BE 100s Asset Managers list with $1.4 billion under management). “The bad news is no one expects for them to stay down for long.” Additionally, Profit says housing sector improvement won’t be seen until 2010.

From day to day, oil prices and stock points are rising and falling on the New York Mercantile Exchange. “The good news is oil prices came down quite a bit,” says Eugene A. Profit, CEO of Profit Investment Management (No. 14 on the BE 100s Asset Managers list with $1.4 billion in assets under management). “The bad news is no one expects for them to stay down for long.” Also, Profit says, housing sector improvement won’t be seen until 2010.

In response to the lagging markets in the U.S., India and countries in Africa have instructed their farmers to reduce production and decrease exports so that the demand for oil—both crude and corn—will not affect the prices in their countries.

“As exports shrink and imports grow, the deficits [will] get larger until we get our house in order,” says Maceo Sloan, CEO of Durham-based NCM Capital (No. 6 on the BE 100s Asset Managers list with $2.9 billion in assets under management. “Hopefully it doesn’t fall to the point where the world doesn’t think the dollar is how currency should be judged.”

The dollar remains weak because the Federal Reserve Board is reluctant to increase interest rates at a time when a rise may send consumers further into hibernation. “But if they lower interest rates they weaken the dollar further and that is inflationary,” Profit says. “So we are stuck hoping that energy prices come down without us going in and raising interest rates.”

The market fluctuations seem even more volatile considering the government’s bailout of Fannie Mae, Freddie Mac, and Indy Mac. Despite the FDIC guarantee—which insures bank accounts up to $100,000—when rumors predicted the banks downward spiral two weeks ago consumer’s lined up outside of Indy Mac and demanded their money.
“These are times that are clearly volatile,” says Dail St. Claire, president and managing director for Williams Capital Management, who suggests that investors leg into recession-proof stocks. “We don’t know when the next shoe will drop and where it will come from.”

However, the climate isn’t gloomy for everyone. “In the long term, it might be a good idea to buy high-quality companies that you want to hold for a long time,” Profit says.