Defaults on privately insured refinances were up 38 percent in February compared to the same period a year ago, but fell for the first time since July, according to data released today by the Mortgage Insurance Companies of America (MICA).
MICA said 60,911 borrowers were at least 60 days behind on their monthly refinance payments [...]
Treasury Secretary Henry Paulson today unveiled a 218-page plan aimed at revamping the financial framework of the U.S. economy to promote economic growth and stability.
The so-called “Blueprint for a Modernized Financial Regulatory Structure” proposes a series of sweeping changes, including “short term” and “intermediate term” recommendations to improve and reform the U.S. regulatory structure.
“The current [...]
Thornburg Mortgage, the beleaguered home loan lender that struggled to meet margin calls over the last few months that could have forced the company into bankruptcy protection, said it expects to resume lending soon, the Wall Street Journal reported.
The company’s Chief Executive Larry Goldstone told the Journal in an interview that “within weeks, if not [...]
Mortgage loan application volume plunged 28.7 percent on a seasonally adjusted basis for the week ending March 28, 2008 compared to a week earlier, the Mortgage Bankers Association (MBA) said today.
On an unadjusted basis, the refinance application index decreased 28.1 percent compared with the previous week and was up 4.8 percent compared with the same [...]
It’s that time again. Time to remind everyone that that there are plenty of other disasters-in-the-making coming down the pike — aside from all those poorly-managed financial institutions that are poised to go under — that will require an urgent seeing-to in the not-too-distant future. They include the nation’s taxpayer-financed social safety net for aging Americans. In “Medicare Running Out of Funds, Requiring Changes,” Bloomberg gives us the latest.
Spending on Medicare, the U.S. health-care program for the elderly, will reach a legal limit by 2014, requiring the next president to propose changes.
The report issued today is the second consecutive year that Medicare’s trustees have pulled the so-called trigger, a law mandating that the president introduce legislation the following year to protect the program’s financing.
President George W. Bush proposed in February that wealthier seniors pay higher premiums for Medicare’s prescription drug benefit to increase revenue. Bush’s plan, which Democrats in Congress dismissed as insufficient, was required by the trustees’ report of 2007. Because of the new report, Bush’s successor will have to offer proposals next year. The trustees also urged action to shore up Social Security, the government’s retirement program.
“As the baby boom generation moves into retirement, these programs face progressively larger financial challenges,” said Treasury Secretary Henry Paulson, one of the trustees, in a press conference. “The Medicare program poses a far greater financial challenge than Social Security.”
The trustees, all members of the Bush administration, offered projections for Medicare and Social Security similar to those in last year’s report. They again estimated that Medicare’s hospital fund will be insolvent by 2019, although earlier in that year than previously predicted, and that Social Security will run out of assets by 2041.
Medicare’s Share
Medicare’s share of the U.S. economy is expected to grow to 10.8 percent by 2082, the end of the 75-year projection period, from 3.2 percent in 2007, according to the report.
Medicare, started in 1965 to guarantee medical coverage to elderly and disabled patients, currently covers 44 million Americans. The program, which spent about $440 billion last year, is financed through a mix of payroll taxes, general tax revenue and beneficiary premiums.
When general tax revenue is projected to reach 45 percent of Medicare funding, the president is required under a 2003 law to propose legislative changes to reduce the share. The law was passed by Congress to keep spending on Medicare within bounds as the “baby boom” generation born from 1946 to 1964 qualifies for coverage and health-care costs grow faster than the economy.
Bush proposed in his fiscal 2009 budget holding the annual growth in Medicare spending to 5 percent, down from the projected 7.2 percent, largely by reducing payments to medical providers.
Democratic presidential candidates Hillary Clinton and Barack Obama have said they plan to hold down the rise in health-care spending through more cost-effective treatments, better preventive care and wider use of electronic records.
John McCain, the presumptive Republican nominee, has suggested similar measures, while proposing that Medicare reduce spending by paying a single fee for treatment of a disease, rather than reimbursing providers for individual procedures.
Research and consulting firm Celent released a study yesterday titled, “Pathology of the US Mortgage Crisis,” which examines the evolution of the credit crunch from its humble beginnings as a U.S. subprime refinance problem to the subsequent global liquidity crisis that ensued.
The Boston-based firm noted that the global credit market saw a “flight of uncertainty” [...]
One of the arguments that the optimists have been making is that corporate balance sheets are strong and businesses are therefore in good enough shape to weather a downturn.
Unfortunately, their reasoning involves a number of assumptions which may not hold water.
For one thing, the “it’s all good” types continue to believe that we are headed for, at worst, a brief, garden-variety recession, whereas it seems more likely, based on the many indicators I’ve noted here at Financial Armageddon, that the downturn will be a painful and long-drawn-out affair.
They also seem to be discounting the dramatic impact that credit market turbulence is having on the entire economy, including the business sector. In “Corporate Liquidity Begins to Dry Up,” Financial Week gives us the lowdown.
The credit crunch is taking a toll on corporate liquidity, as the soaring cost of debt—for both commercial paper and private placements—pinches the balance sheets of all but the most highly rated non-financial companies.
Cash and short-term investments of non-financial companies dropped by $250 billion in the second half of 2007, the first decline in the nine years that consultancy Treasury Strategies has been tracking the data.
Corporate liquidity had risen steadily, from $3.9 trillion in 1999 to $5.5 trillion in June 2007. But at the end of last year, it had fallen to $5.25 trillion, a 5% drop.
The findings are part of a survey of 135 corporate treasurers conducted by Treasury Strategies between July 1, 2007, and Jan. 1, 2008. Treasury Strategies then adjusted that data with findings from its annual survey of 600 corporate treasurers.
Anthony J. Carfang, a co-founder of Treasury Strategies, attributes much of the drop to a decline in commercial paper issuance. Many companies issue commercial paper not just to finance operations but to bolster the cash on their balance sheet. “As companies have tightened up, they’re shrinking balance sheets just a little bit by borrowing less,” Mr. Carfang said. “A lot of companies had been directly issuing commercial paper because it was easy to do, and keeping a little cash cushion as a result.”
But when the credit crunch began, it became expensive for all but the most highly rated companies to issue paper. As a result, he said, cash balances dropped.
For non-financial issuers of 30-day A2/P2 commercial paper, spreads jumped as high as 150 basis points in the second half of 2007, according to Federal Reserve data. Prior to that, spreads had hovered around 15 basis points for much of the last five years.
Commercial paper has become so expensive for some firms that they can’t issue it at all. Last week, commercial financier CIT Group reported it needed to tap $7.3 billion in unsecured credit lines because it was unable to raise dollar by selling commercial paper.
The jump in spreads caused a slowdown in issuance of commercial paper by non-financial firms. After increasing in the first half of 2007 by $14.2 billion, to $185.5 billion, the amount of commercial paper outstanding issued by non-financial firms fell by $10.3 billion, to $175.2 billion, during the following six months, according to Fed data.
One Treasury Strategies client, which Mr. Carfang declined to name, had $500 million in commercial paper outstanding prior to the credit crunch. That amount had to be cut to $200 million because the company found it difficult to issue amounts larger than that.
Commercial paper issuance by non-financial firms has bounced back since the end of last year, increasing by $7.8 billion, to $183 billion, through February. But spreads are still higher than normal, at around 80 basis points.
As a result of rising credit costs, said Treasury Strategies partner Dave Robertson, companies have been forced to use excess cash to pay down debt. And the cost increase isn’t limited to commercial paper, he added, noting that issuing debt via the private placement market has also become “significantly more expensive.”
The reason, Mr. Robertson explained, is the investment banks that aid companies with private placements don’t have the same access to the assets of a company—such as their cash balances—that a company’s primary commercial bank would. So, as fears of defaults grow, investment banks are forced to charge more to issue debt.
As part of the same study, Treasury Strategies found that approximately one-fifth of companies had invested in securities that had been affected by the credit crunch, also causing a hit to liquidity. In reporting their earnings for the fourth quarter, some companies have cited year-over-year declines in cash and short-term equivalents due to poor investment decisions made by management.
Teen retailer Hot Topic, for instance, earlier this month announced a 4% year-over-year decline in cash and cash equivalents and short-term investments, to $53 million, in part because it spent $7.2 million on its stock-buyback program. In addition, it reported that $21 million, or nearly half of its cash, was in auction-rate securities, of which the company had only been able to liquidate $8 million.
“We are looking at the long-term future of our business, and we want to be very prudent with our capital resources in terms of how we utilize them,” CFO Jim McGinty said in a conference call with analysts. “At this point in time, in the current environment, we feel like the preservation of cash should be our key concern.”
The beleaguered newspaper publisher Sun-Times Media Group, formerly known as Hollinger International, announced in its third-quarter earnings release that cash and short-term investments had declined to $132 million from $212 million at the end of the second quarter, in part because it held $48 million in Canadian commercial-paper investments that had become frozen when the asset-backed commercial paper market there seized up. By the end of the fourth quarter, cash had increased to $143 million, but that still reflected a 24% year-over-year decline.
Despite these incidents, Mr. Carfang notes that for the most part, balance sheets are in remarkably good shape, especially in a recessionary environment. “Corporate balance sheets are the strongest we’ve ever seen for non-financials heading into an environment such as this one,” he said. But while the higher costs won’t be fatal to most companies, “in some cases it hurts.” FW