Las Vegas real estate, mortgage, appraisal blog

It's official, Citigroup is being bailed out. Last night the government agreed to invest $20 billion more into Citigroup as well as take on the majority on the $300 billion in troubled mortgage assets. The Los Angeles Times reported that this is the largest single rescue to date.

The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. will shoulder 90% of the losses on most of a $306-billion portfolio of toxic mortgages and related securities.

 

The company will cover the first $36 billion of losses, but beyond that will see its risk of loss shrink drastically.

In return for the protection and aid, Citigroup will grant Washington nearly $30 billion of preferred shares and warrants. The firm will give the government sweeping powers over its operations, allowing it to effectively prohibit stock dividends for the next three years and pass judgment on all executive pay packages.

 

And the company will agree to try to modify mortgages in the huge portfolio, using standards designed by the FDIC after the collapse of IndyMac Bank in Pasadena to keep as many homeowners as possible in their houses.

Citigroup already has received $25 billion from Treasury as part of the department's $700-billion financial rescue scheme. In return, Washington received an ownership stake in the firm. The $20-billion investment also comes from the department's Troubled Asset Relief Program.

"This weekend, the U.S. government and Citi worked together in an unprecedented way to address market confidence and the recent decline in Citi's stock price," said Chief Executive Vikram S. Pandit. "We appreciate the tremendous effort by the government to assure market stability."

Government officials, briefing reporters late Sunday, made clear they believed that permitting any further trouble at Citigroup could shake investor and depositor confidence in the global financial system and dramatically deepen what already is the country's worst financial crisis since the Great Depression.

"With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the three agencies said in a statement.

 

As recently as last Thursday, Pandit was declaring that the stock drop posed no financial danger to the company and that he had no intention of selling off pieces of the business in order to raise money.

But by Friday with Citigroup shares still falling even amid a market rally, executives had little choice but to seek help. The shares ended up losing $5.75 for the week, closing Friday at $3.77 a share. The executives presented a rescue plan Friday evening, setting off around-the-clock negotiations that lasted well into the night Sunday.

Among those at the table: Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke and Timothy F. Geithner, the head of the Federal Reserve Bank of New York and President-elect Barack Obama's pick for the top Treasury post.

Terms of the new rescue package are considerably more lenient than those the government imposed on failing insurer behemoth American International Group Inc. In AIG's case, Washington required that the company's current management leave and demanded a near-80% ownership stake before helping the firm.

Government officials made it clear that they did not want to impose punitive terms on Citigroup because its stability was crucial to protecting the financial system.

In March of this year, the Fed agreed to assume the management -- and risk -- of nearly $30 billion in troubled assets from Bear Stearns Cos. to pave the way for the investment house's fire sale to J.P. Morgan Chase & Co.

Last month, the FDIC agreed to bear losses above a certain threshold on troubled assets of Wachovia Corp. to facilitate Citigroup's purchase of the country's No. 4 banking firm. The deal ultimately fell through when Citigroup found itself outbid for Wachovia by Wells Fargo & Co.

Countrywide has caused even more woes for Bank of America as they have had to suspend foreclosure notices on nearly 2000 homes in Phoenix. Although there are lenders that are willing to work with those that are having problems making their mortgage payments this instead is forcing them to help out any mortgage heading towards foreclosure, including those of the same speculators and those who are able to afford their payments but simply do not want to pay.

The move, which will lead to cuts in people's mortgage payments, is part of the bank's recent settlement agreement with the office of Arizona Attorney General Terry Goddard and could help stem the growing number of foreclosures that has crippled the local housing market.

Last month, BofA agreed to modify loans for struggling borrowers if attorneys general from Arizona, Texas, Ohio, Iowa and Washington halted legal action against Countrywide. That action is based on the lender's "alleged use of deceptive practices" in its mortgage-lending business, according to Goddard.

The deal requires BofA to place a temporary hold on foreclosures on loans made up until the end of 2007 and work with buyers to make their mortgage payments more affordable so they have the option of staying in their homes.

Rick Simon, spokesman for BofA, said the bank will contact homeowners when its home-retention program is ready at the beginning of December.

It seems almost a veiled threat to other lenders that they follow suit.

"Now, we are asking other big mortgage firms to take on the same obligations to work with struggling borrowers as (BofA)," Goddard said.

"We have asked them to do it voluntarily without us filing a lawsuit, but investigations do continue into fraud and the possible inducement (of homeowners) into some of these mortgages by firms."

Money from the national housing-bailout plan passed last summer will be available in Arizona to help more struggling homeowners next year.

Until then, other big lenders are expected to step up efforts to help borrowers facing foreclosure.

On Friday, JPMorgan Chase announced that it would modify up to $110 million in mortgages nationwide. It expects to assist 400,000 families who need help making their home-loan payments.

"It's a far better solution to have companies working with buyers than foreclosures," Goddard said.

"This is important in getting us out of this mortgage meltdown and getting property values to firm up."

Some argue that this will only prolong the problem and encourage others to foreclose. Even those who are turned to for advice seem to have gotten in on the act. Here's a video of Jim Cramer with advice on what to do when you've lost equity.

Walk Away

If that seems unreal, he clarifies it the next day.

No really, I mean it

If that doesn't sound like encouragement to just dump I'm not sure what does. Not terribly encouraging for lenders or those looking to buy.