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(BEVERLY HILLS) The man credited with developing the financing of the modern US mortgage industry says home values have fallen more than their listed prices suggest but they could hold steady with the help of a bill in Congress.

‘I think the actual price declines are bigger than the indexes are showing, since so little is being sold,’ Lewis Ranieri, CEO of Ranieri & Co, said in an interview on the sidelines of the Milken Institute Global Conference.

Credited as the ‘father’ of the market for bundling mortgages and selling them on Wall Street as debt investments, Mr Ranieri backs a bill by US Representative Barney Frank, a Democrat from Massachusetts, that would make lenders accept losses on teetering home loans in exchange for government guarantees.

‘What he is trying to do is part of what really needs to be done,’ he added.

Mr Frank’s bill would allow the Federal Housing Authority to insure US$300 billion of home loans. Lenders would erase some of the original loan amount and could even loosen loan terms in order to win the government backstop.

‘At this point in the crisis, those of us who are practitioners would take what we can get. I wouldn’t turn down less! Because we need a re-performing programme, which is what in effect the Frank bill is.’ Mr Ranieri said the key to success for lenders was keeping people in their homes and his main concern was to make sure that the relief targeted lower- and middle-income families buying homes to live in rather than helped investors.

The inventory of homes for sale swelled by 40,000 to 4.06 million homes in March, or a 9.9 months’ supply at the current sales pace from 9.6 months in February, according to the National Association of Realtors.

Meanwhile, the median national home price declined 7.7 per cent from a year ago to US$200,700.

Mr Ranieri, who helped create the mortgage ’securitisation’ market while at Salomon Brothers, also favours new regulation of those involved in selling loans.

From mortgage brokers selling loans to home buyers to Wall Street banks who sold the securitised bundles of mortgages to investors, no one in the mortgage industry had a legal duty to work in the best financial interests of the person taking out the loan, he said.

That is in contrast to Wall Street rules on selling appropriate products to investors. ‘The whole system could sell (a) person the biggest investment he ever had, his house, in an inappropriate structure, and it was fine. It makes no sense. It is on its surface patently nuts,’ he said. — Reuters

Source : Business Times - 30 Apr 2008

Over the last 150 years, in real terms, after allowing for inflation, commodity prices tend to fall. But the question is whether China and India are fundamentally changing this? The sheer scale of the demand for commodities as both countries open up will exert tremendous upward pressure on prices.

What remains to be seen is whether supply can respond. In terms of food prices, there is no shortage of land or labour, often the problem is low farm productivity and the absence of investment. That is, there needs to be a supply-side response, but that will take some time to be seen and, even then, it is not clear how effective it will be.

All in all, it adds to the perception that whilst commodity prices may ease during the coming cyclical slowdown, they will establish new, higher equilibrium levels, which whilst good for commodity exporters, will not be good for importers.

Former Fed chairman Alan Greenspan has come under criticism for not tightening monetary policy to curb asset price inflation earlier, but his response is understandable, he and the Fed can’t be blamed for the behaviour of private individuals, and for the fact that the asset price inflation seen in the United States was repeated in, as he said, about 20 other countries.

It has to be said that at the time there were many suggestions that the rapid pace of credit and lending growth and the rise in asset prices meant that monetary policy was too lax. Although Europe, it was said, opted for stability at the expense of growth, whilst the US favoured growth at the expense of stability, even within Europe there have been problems, with asset price inflation evident in a number of countries, such as Spain or Ireland.

In the late 1980s, a similar debate took place in Japan at a time when its economy was bubbling. Headline inflation was low, but asset prices were soaring. Then Bank of Japan (BOJ) governor Yasushi Mieno decided to tighten monetary policy, raising rates from 2 per cent to 6 per cent. The economy slumped! And the BOJ was partly blamed.

Thus it is vital to look at monetary growth and wider credit and liquidity. Measuring liquidity is hard; sometimes economists look at measures such as Marshallian k that look at monetary base in relation to an economy’s nominal GDP. Others prefer to look at overall monetary and credit growth. But, also, as has been seen in recent years, an increasing number of central banks have adopted inflation targets, although these may not give the full story.

What then should policy-makers do? It is important that they identify where the real problem lies. In the US, as we have said before, inflation is not the problem, a deep, long recession is. Firms will have to absorb higher costs in their margins, as weakening consumption means firms will not be able to pass on higher prices. In this environment the Fed will, rightly, ease, and as corporate profits are squeezed, bond yields will respond by heading lower.

In contrast, a number of countries that are tied to the dollar may see inflation problems escalate. Here, in particular, I am thinking of Hong Kong and the Gulf countries. Being tied to the dollar means lower interest rates, at a time when their buoyant domestic economies really need monetary tightening.

The result will be rising inflation, particularly asset prices, but also as wages have risen sharply across the Gulf, broader inflation measures may continue to rise. Of course, economies like China and India, where there has been strong domestic demand, have been tightening for some time with higher rates, rising reserve ratios and, in the case of China, loan quotas. China’s current account surplus gives it more room for policy manoeuvre. In the early 1990s, China suffered both inflation and a balance of payments problem.

Now, its external position is sound, and policymakers are more focused on inflation and trying to achieve a more sustainable pace of growth. In contrast, India’s deficit leaves its currency more vulnerable to near-term shifts in risk sentiment despite its many long-term positive factors.

As for Asian countries, policy-makers may opt for a combination of domestic monetary tightening or currency appreciation. For now, it seems many central banks are taking a proactive approach, with the attraction of currency appreciation to reduce imported costs potentially gathering ground.

Overall, there is still intense global competition. Furthermore the scope for large numbers of workers to join the global labour force, with low wages and potentially rising productivity, adds to the prospect of further competition for some time.

However, there is a need to look at each country’s situation on its own merits, taking into account credit and monetary growth, wage and inflation expectations, the amount of spare capacity and above all, the likely response of policy-makers.

Inflation may be a problem but the reality is far more complex and as Japan showed, an inflation fear, if badly handled, can soon turn into a deflationary reality.

By GERARD LYONS

The writer is the chief economist and group head of global research Standard Chartered Bank, UK

Source : Business Times - 30 Apr 2008

Ever since the US credit crisis broke out in August last year, the US Federal Reserve has been on a rate-cutting spree, slashing the Fed Funds rate six times, from 5.25 per cent on Sept 18 to its current level of 2.25 per cent. Since January alone, when the crisis intensified, the Fed has cut rates by a total of two percentage points.

It is widely believed that Fed chairman Ben Bernanke and his colleagues on the Federal Open Market Committee - the Fed’s rate-setting body - are now at the tail end of their current rate cutting cycle; the consensus view is that at today’s meeting, they will enact the seventh and last of the rate cuts, by 25 basis points, bringing the Fed funds rate to 2 per cent. A minority of economists however expect them to continue cutting, with some projecting that the Fed Funds rate could go as low as one per cent by the end of June.

The precarious state of the US economy has no doubt greatly complicated the task of monetary policy. On the one hand, there is a seriously weakening economy: Mr Bernanke has acknowledged that real GDP will not grow much, if at all, over the first half of 2008 and could even contract slightly. The IMF has indicated that the US will experience a recession during the twelve months from the fourth quarter of 2007. Indeed, several economists claim that the economy is already in recession, and soon enough the numbers will confirm it.

However, on the other hand, inflation - which the Fed is also mandated to control - is headed up, fuelled partly by soaring commodity prices. The IMF projects US consumer price inflation at 3 per cent this year, which means that the real rate of interest for the Fed funds rate is now negative - which is not good for inflation control.

Moreover, such low rates contribute to a decline in the US dollar - especially against the euro, which is underpinned by rates at 4 per cent. The decline of the dollar in turn drives commodity prices further up, which feeds back into still higher inflation. In such a spiralling situation, further rate cuts at this point would be risky. There is thus much merit in the Fed interrupting its rate cutting cycle. The need to allow previous rate reductions to work their way through the system underlines the case for a pause. In addition, the Fed needs to leave itself with some room for possible future cuts as well, even this year.

For it is clear that the weakness of the US economy - and in particular its housing market - still has a long way to go. And while the prospect of a systemic financial meltdown has probably passed, we have yet to see how the US financial system copes with a recessionary economy. If the recession is severe, the impact will be magnified, and further rate cuts may yet be needed.

Thus, even if the Fed does signal a break from rate cutting, it would be premature to suggest that US rates have bottomed out. Likewise for the US dollar. Which means that high commodity prices too, and thus inflation, will be with us for some time yet.

Source : Business Times - 30 Apr 2008

Remember the lessons from 1997 crisis

AMERICA’S sub-prime crisis has circled the world, taking a toll on banks, on stock markets struggling to find a footing, on jobs as companies hunker down, and on economic growth as consumers pull back on spending. Another way it has left its mark is on Asia’s corporate bond market.

In regional banks and ratings agencies, the word is that corporate bond issuance in Asia has fallen off the past six months. The reason is obvious when you think of it: an aversion among investors to holding any kind of debt instrument, including bonds. What has taken its place is just as obvious - bank loans. Put the two together and you get a worrying reminder of a decade ago, when corporate Asia’s over-dependence on bank financing brought down what was supposed to have been the ‘Asian Miracle’.

People are still trying to figure out how big is the new bank lending trend. It’s still very new, and what we have right now is just anecdotal evidence - and a growing unease among those who’ve seen it all before.

Here’s how it goes. Regional banks are swimming in US dollars. Although export growth has eased recently, export earnings are still significant. Manufacturers that earn US dollars exchange these for local currencies as quickly as they can because the American currency is rapidly declining.

The more US dollars they hold on to, and the longer they do so, the less they end up with in local currencies. So banks are obliged to buy the currency from clients and hold it themselves. But with US interest rates low and sliding, there’s no joy in owning dollars.

So why not lend it out? Seems like a good idea. But we’ve been down this road before. In the late 1990s, the sky fell when Asian central banks finally couldn’t support currencies that were essentially proxies to the dollar. As values collapsed, dollar-denominated loans became hugely expensive for a broad sweep of companies making money in local currencies.

The difference today is that Asian currencies float more freely. And from borrowers’ perspective, this is even better: As the dollar dips and dives, loans get cheaper by the day.

The caveat is that the dollar isn’t going to slide into oblivion. Moreover, though the signs say the dollar should remain weak for the medium term at least, over a shorter period markets don’t always behave in ways people think they should. Other things being equal - such as the US trade and fiscal deficits - even if the Federal Reserve, for example, were to pause its rate-cutting regime after today’s Federal Open Market Committee meeting and eventually start to reverse gear, this doesn’t mean the end of the weak dollar. Nevertheless, in this and other situations, the dollar can rally in ways out of proportion to the facts. Then, those dollar loans would become less of a bargain to hold and service, with the possibility of knock-on effects.

One thing those who’ve lived through a couple of crises can tell you is that there’s nothing predictable in market upheavals. Except that they always seem set off by a brigade of bright sparks with the next great idea for making pots of money.

Not incidentally, these smart things are unfailingly twenty-somethings with no memory of the last great idea that wasn’t. People blame the sub-prime crisis on a failure in surveillance, overly elaborate and exotic investment instruments, greed, and so on. But maybe, just maybe, blame also goes to the dependence of financial institutions on new ideas - and old new ideas - from just-minted MBAs with more theory under their belt than experience.

A positive outcome from the Asian crisis was a commitment all around to more robust and diversified financial infrastructure in the region, one centred on a deeper and broader local-currency corporate bond market. A reversion to old norms is a distraction from this goal at the very least, and at worst increases the risk to markets and economies.

So maybe someone should remind Asian bankers of a little history. In particular, the 25-year-olds and others too young to remember 1997.

The writer is currently a Bernard Schwartz Fellow with the Asia Society in the United States.

Source : Straits Times - 30 Apr 2008

One exec condo site and two 99-year leasehold suburban sites open for bids

Buying interest in private homes may be relatively low now, but the Singapore Government is offering developers three new residential sites to consider buying.

Two are 99-year leasehold suburban sites, and the other is an executive condominium site.

The first - in Woodleigh Close - is seen as an attractive site by property consultants, as it is a short walk from the Potong Pasir MRT station and the yet-to-be-opened Woodleigh MRT station.

Developers can build 260 to 290 apartments on the 1.08ha site, which has a maximum gross floor area of 30,167 sq m.

Property consultants expect the site to attract bids of $300 to $370 per sq ft (psf) of gross floor area. The apartments may then sell for between $800 psf and $880 psf, they said.

CBRE Research executive director Li Hiaw Ho said the site is close to the city and amenities in the Potong Pasir HDB estate and Upper Serangoon Road.

‘It is likely to be a popular location, as two freehold projects in the vicinity - Blossoms @ Woodleigh and Parc Mondrian - launched last year were fully sold,’ said Mr Li.

Recent caveats lodged for the 240-unit Blossoms @ Woodleigh have hovered between $770 psf and $922 psf.

The 100-unit Parc Mondrian sold for between $650 psf and $720 psf last April.

The tender for the Woodleigh Close site will close on June 24. The site is on the confirmed list, where sites are put up for sale on specific dates.

But the second site in Upper Thomson Road, close to Bishan Park and Lower Peirce Reservoir Park, is on the reserve list.

This means that it will be put up for sale only if a developer commits to a minimum bid acceptable to the authorities.

The site is not near any MRT station, but it is in an established private estate.

A developer could build 380 to 420 apartments on the 2.08ha Upper Thomson Road site, which can have a gross floor area of 43,758 sq m.

To attract buyers, developers may want to consider developing a condo with eco-friendly features, which is in line with the surrounding serene environment, said Mr Nicholas Mak, Knight Frank’s director of research and consultancy.

If triggered, this site could attract bids of $200 psf to $240 psf of gross floor area, and the apartments could sell for $650 psf to $700 psf, he said.

The third site, in Sengkang, is a 17,000 sq m executive condo site on the reserve list.

This 99-year leasehold site is the third executive condo site the HDB has made available for sale in the first half of this year.

The other two are in Jurong West and Yishun Avenue 11.

Source : Straits Times - 30 Apr 2008