By Josiane Kremer

The Oslo-based bank raised the

overnight deposit rate

to 1.5 percent, becoming the first European central bank to reverse its easing cycle since the credit crisis started to abate. Nineteen of 20 economists surveyed by Bloomberg had predicted the move, while one had…

By Josiane Kremer

The Oslo-based bank raised the

overnight deposit rate

to 1.5 percent, becoming the first European central bank to reverse its easing cycle since the credit crisis started to abate. Nineteen of 20 economists surveyed by Bloomberg had predicted the move, while one had expected a half-point increase.

“It appears that unemployment over the next few years will remain lower and wage growth somewhat higher than previously projected,” the bank said in a statement. “This suggests higher Inflation, indicating that the key policy rate should be raised somewhat more rapidly than previously projected.” The key rate will average 4.25 percent in 2012, compared with a June forecast for 3.75 percent, the bank said.

The world’s fifth-biggest oil exporter came out of recession in the second quarter after investment in its petroleum industry, a stimulus package equivalent to 4.7 percent of gross domestic product and record-low borrowing costs fuelled domestic demand. Prime Minister

Jens Stoltenberg

, whose coalition government was re-elected last month, has pledged to raise next year’s spending in excess of national fiscal guidelines even after recovery took hold.

Economic Outlook

The krone was trading 0.3 percent lower against the Euro at 8.3914 at 4:13 p.m. in Oslo after having lost as much as 1.1 percent earlier in the day. Against the dollar, the krone lost 0.6 percent to 5.6807.

“Norway’s huge oil surplus and supportive fiscal policy have helped to insulate the economy from the worst of the global economic downturn,”

Ben May

, an economist at Capital Economics in London, said in a note. “Accordingly, it is unlikely that other central banks in the region will follow suit and hike rates any time soon. What’s more, we doubt that today’s hike will mark the start of an aggressive tightening of monetary policy in Norway itself.”

The bank expects underlying Inflation, which adjusts for energy and taxes, to average 2.75 percent this year and 1.75 percent in 2010. The mainland economy will shrink 1.25 percent this year and grow 2.75 percent in 2010, it estimates.

The key rate will average 1.75 percent this year and 2.25 percent in 2010, rising to an average 4.25 percent by 2012, the bank said.

Not Aggressive

“This is by no means an aggressive path,” said

Harald Magnus Andreassen

, chief economist at First Securities ASA in Oslo. “Norges Bank looks to take quite a long time to come back to normal rates.”

A “natural” key interest rate level is 5 percent, Governor Svein Gjedrem said on Sept. 25. The benchmark was last at that level in October last year.

Gjedrem “has to take into account that fiscal policy is very loose,” said

Torgeir Hoien

, a former Norges Bank external board member who manages the equivalent of 2 billion kroner ($350 million) in bonds at Skagen AS.

Fiscal stimulus has helped keep Norway’s

jobless rate

the lowest in Europe, with registered unemployment falling to 2.7 percent in September. Survey unemployment was 3.2 percent in the August quarter, Statistics Norway said today.

Benefits

Households were quick to benefit from monetary easing earlier this year, with about 90 percent of mortgage holders using floating rates, according to the Finance Ministry. That’s boosted demand, with retail sales rising in the last three months for which data are available.

Cheap loans and low unemployment have helped push the housing market up in the last three quarters, with prices now matching their peak from the summer of 2007, the Finance Ministry estimates.

“The strong boost to households’ disposable income and relatively low unemployment rates have had significant effects on the housing market, home prices have topped the pre-crisis peak levels,” Bjoern-Roger Wilhelmsen, senior economist at First Securities in Oslo and a former Norges Bank economist, said in a note to clients yesterday.

While signs of a strong recovery may support a rapid reversal of monetary easing, the central bank must balance the needs of the domestic economy against the prospect of hurting exporters by spurring gains in the krone, economists have said.

‘Overshooting’

“If they don’t do anything about it, you will have an overshooting of the Inflation target,” Hoien said. “If they adjust monetary policy to the fact that fiscal policy is very loose, you will get a stronger krone.”

The krone has gained 7.5 percent against the Euro since the end of June, making it the second-best performer of the 16 major currencies tracked by Bloomberg in the period. A further strengthening would hurt exporters including Norsk Hydro ASA, Europe’s third-largest aluminum producer, and Norske Skogindustrier ASA, the world’s second-biggest newsprint maker.

“The development of the krone exchange rate is a risk for us” when setting interest rates, Gjedrem said at a press conference in Oslo. “It can be a headache.”

“We believe the krone will weaken somewhat in the next years, both because it is very strong now and because it has a tendency to weaken when we have higher inflation than our trading partners,” Norges Bank Chief Economist Jon Nicolaisen said during the conference.

Exports will recover more slowly than consumer demand, the government forecasts, rising 0.1 percent in 2010 after slumping 6.5 percent this year.

‘Extremely Low’

The bank uses policy to target consumer price gains of 2.5 percent. inflation was 2.4 percent last month, adjusting for the effect of taxes and energy. This year, the rate has exceeded the central bank’s target in six out of nine months.

“Since the last monetary policy meeting in September, economic data, on average, were stronger than market expectations,” Gizem Kara, an economist at BNP Paribas in London, said in an Oct. 9 note after the inflation report.

Gjedrem said on Sept. 30 that asset prices “have risen sharply and probably excessively,” characterizing policy rates as “extremely low.

Gjedrem

is the third central bank chief to raise rates this year after the Bank of Israel lifted its lending rate a quarter point in August and Australia’s Reserve Bank raised its overnight cash target rate by 0.25 point this month.

To contact the reporter on this story:

Josiane Kremer

in Oslo at

Jkremer4@bloomberg.net

.

Last Updated: October 28, 2009 11:20 EDT

U.S. Halfway to Depression Level

U.S. Debt Hits $12 Trillion, Will Double By 2019

U.S. pays $57,077 a minute in Afghanistan

Morgan Kelly’s paper can be found here: http://www.ucd.ie/t4cms/wp09.32.pdf

On a personal level:  my daughter was just born 3 days ago so I don’t have sufficient time to give a proper response to his paper but the following is one area that I feel he’s overstated the downside risk. I don’t believe there is no downside risk only that it isn’t as great as he presents it to be.

The issue is with this quote:

“From being almost entirely funded by domestic deposits in 1997, by 2008 over half of Irish bank lending was funded by wholesale borrowers through bonds and inter-bank borrowing. This well of easy credit has now run dry. In the words of Bank of England Governor Mervyn King: “But the age of innocence—when banks lent to each other unsecured for three months or longer at only a slight premium to expected policy rates—will not quickly, or ever, return.”4 As foreign lenders have become nervous of Irish banks, their place has increasingly been taken by borrowing from the European Central Bank and short-term borrowing in the inter-bank market. Payments from NAMA will allow Irish banks to reduce their borrowing by a trivial amount. Without continued government guarantees of their borrowing and, more problematically, continued ECB forbearance, the operations of the Irish banks do not appear viable. Borrowing in wholesale markets at 5.6 per cent5 to fund mortgages yielding 3.5 per cent is not a sustainable activity, and Irish banks face no choice but to shrink their balance sheets by repaying debt and returning to their earlier state of being funded mostly by deposits.

From being almost entirely funded by domestic deposits in 1997, by 2008 over half of Irish bank lending was funded by wholesale borrowers through bonds and inter-bank borrowing. This well of easy credit has now run dry. In the words of Bank of England Governor Mervyn King: “But the age of innocence—when banks lent to each other unsecured for three months or longer at only a slight premium to expected policy rates—will not quickly, or ever, return.”4 As foreign lenders have become nervous of Irish banks, their place has increasingly been taken by borrowing from the European Central Bank and short-term borrowing in the inter-bank market. Payments from NAMA will allow Irish banks to reduce their borrowing by a trivial amount. Without continued government guarantees of their borrowing and, more problematically, continued ECB forbearance, the operations of the Irish banks do not appear viable. Borrowing in wholesale markets at 5.6 per cent5 to fund mortgages yielding 3.5 per cent is nota sustainable activity, and Irish banks face no choice but to shrink their balance sheets by repaying debt and returning to their earlier state of being funded mostly by deposits.”

Essentially, Irish banks will be forced to go back to a deposit only model where their current levels of assets vastly outstrips their current level of liabilities so they’ll have to trim the asset side of their balance sheet. Because much of these assets are long term assets that are difficult to liquidate (if not impossible in some cases), the Irish banks will be forced to cut back on new lending and “rolling over” old lending. Thus very very bad for the Irish economy.

The problems I see with this are:

a) The idea that wholesale funding won’t be made available to Irish banks at attractive rates if there is an obvious availability of good investment opportunities being left go seems to run against basic economic logic. Short term mismatches between available credit and potential demand for credit do occur but is there good evidence to suggest that such short term fluctuations can become long term in a country? The examples of the Latin Debt crises and South-East Asian crises would say no.

b) Mortgage rates aren’t fixed at 3.5%. Most commentary on the residential market that I’ve read indicates that variable rate mortgages are the norm not fixed or tracker mortgages. If wholesale money costs more, mortgage rates will be forced upwards. The issue comes from whether one believes that wholesale money will decrease for Irish banks or not. I’d argue that we’re seeing the high point for the medium term right now with respect to the difference from the ECB rate over the past year and a half not the norm for the next 5 – 10 years. Market confidence is weak, risk aversion is high and so on. This isn’t a new market norm though, we’re simply in a global recession with a nastier national recession, of course wholesale money is going to be expensive for Irish banks right now but that doesn’t mean it will necessarily stay this way over the medium term! Higher mortgage rates bring problems for the banks, but this is inevitable given the abnormally low ECB rate.

c) The problem of the level of mortgage debt versus GDP/GNP is undoubtedly a real and very worrying problem. There are some aspects of it that are less apocalyptic though compared to the problems seen in the US.  First, bankruptcy law is very different here and encourages the debtor to avoid default at all costs in a falling market versus in the US where no-recourse loans make walking away from debt easy. Second, we thankfully only had minimal activity in the sub prime market and minimal “no paperwork” mortgages and similar. While we do have too much mortgage debt, that debt is generally sitting on the laps of people with goodly sized incomes. Yes these incomes are now under threat but we have nothing close to the problem we would have if lending practices had been as loose as they were in the US.  Finally, those that hold the mortgages income streams are far closer to the borrower than in the US with CDOs. This closer banking relationship should allow for a smaller default rate through banks being able to offer easier terms if temporary repayment difficulties are encountered. This isn’t a panacea and Irish banks will have to deal with defaults but we might be spared the meltdown that the US property market saw.

Overall, I agree that the Irish banks will have serious problems to deal with in both the short and medium term. I don’t agree that the downside risk on this side of things (i.e. wholesale market funding especially) is as bad as this paper would have us believe. Then we are dealing with large unknowns here and perhaps I’m being overly optimistic but I think I have history on my side with regard to credit inflows after banking crises and recessions.

Senate sends $1.1 trillion spending bill to Obama ADDING TO THE DEBT

No End in Sight to Govt. Spending Spree: $12.1T Debt Ceiling Set to Be Raised

By Kevin G. Hall G. Hall | McClatchy Newspapers

WASHINGTON — Ten months after the Obama administration began pressing lenders to do more to prevent foreclosures, many struggling homeowners are holding up their end of the bargain but still find themselves rejected, and some are even having their homes sold out from under them without notice.

These borrowers, rich and poor, completed trial modifications of their distressed mortgage, and made all the payments, only to learn, often indirectly, that they won’t get help after all.

How many is hard to tell. Lenders participating in the administration’s Home Affordable Modification Program, or HAMP, still don’t provide the government with information about who’s rejected and why.

To date, more than 759,000 trial loan modifications have been started, but just 31,382 have been converted to permanent new loans. That’s averages out to 4 percent, far below the 75 percent conversion rate President Barack Obama has said he seeks.

In the fine print of the form homeowners fill out to apply for Obama’s program, which lowers monthly payments for three months while the lender decides whether to provide permanent relief, borrowers must waive important notification rights.

This clause allows banks to reject borrowers without any written notification and move straight to auctioning off their homes without any warning.

That’s what happened to Evangelina Flores, the owner of a modest 902 square-foot home in Fontana, Calif. She completed a three-month trial modification, and made the last of the agreed upon monthly payments of $1,134.60 on Nov. 1. Her lawyer said that in late November, Central Mortgage Company told her that it would void her adjustable-rate mortgage, which had risen to a monthly sum above $2,000, and replace it with a fixed-rate mortgage.

“The information they had given us is that she had qualified and that she would be getting her notice of modification in the first week of December,” said George Bosch, the legal administrator for the Law Firm of Edward Lopez  and Rick Gaxiola, which is handling Flores’ case for free.

Flores, 58, a self-employed child care worker, wired her December payment to Central Mortgage Company on Nov. 30, thinking that her prayers had been answered. A day later, there was a loud, aggressive knock on her door.

Thinking a relative was playing a prank, she opened her front door to find two strangers handing her an eviction notice.

“They arrived real demanding, saying that they were the owners,” recalled Flores. “I have high blood pressure, and I felt awful.”

Court documents show that her house had been sold that very morning to a recently created company, Shark Investments. The men told Flores she had to be out within three days. The eviction notice had a scribbled signature, and under the signature was the name of attorney John Bouzane.

A representative in his office denied that Bouzane’s law firm was involved in Flores’ eviction, and said the eviction notice was obtained from Bouzane’s Web site, www.fastevictionservice.com.

Why would a lawyer provide for free a document that gives the impression that his law firm is behind an eviction?

“We hope to get the eviction business,” said the woman, who didn’t identify herself.

Flores bought her home in 2006 for $352,000. Records show that it has a current fair-market value of $99,000. The new owner bought it for $78,000 at an auction Flores didn’t even know about.

“I had my dream, but now I feel awful,” said Flores, who remains in the house while her lawyers fight her eviction. “I still can’t believe it.”

How could Flores go so quickly from getting government help to having her home owned by Shark Investment? The answer is in the fine print of standard HAMP documents.

The Aug. 25 cover letter from Central Mortgage Company, the servicer that collects Flores’ mortgage payments, offered Flores a trial modification with this comforting language:

“If you do not qualify for a loan modification, we will work with you to explore other options available to help you keep your home or ease your transition into a new home.”

CMC is owned by Arkansas regional Arvest Bank, itself controlled by Jim Walton, the youngest son of Wal-Mart founder Sam Walton.

A glance past CMC’s hopeful promise finds a different story in the fine print of HAMP document, which contains standardized language drafted by the Obama Treasury Department and is used uniformly by lenders.

The document warns that foreclosure “may be immediately resumed from the point at which it was suspended if this plan terminates, and no new notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will be necessary to continue the foreclosure action, all rights to such notices being hereby waived to the extent permitted by applicable law.”

This means that even when a borrower makes all the trial payments, a lender can put the house up for auction if it decides that the homeowner doesn’t qualify — assuming that foreclosure proceedings had been started before the trial period — without telling the homeowner.

Until now, lenders haven’t even had to notify borrowers in writing that they’d been rejected for permanent modifications.

In January, 11 months after Obama’s plan was announced, homeowners will begin receiving written rejection notices, and the Treasury Department finally will begin receiving data on rejection rates and reasons for rejections.

The controversial clause notwithstanding, the handling of Flores’ loan raises questions.

“Foreclosure actions may not be initiated or restarted until the borrower has failed the trial period and the borrower has been considered and found ineligible for other available foreclosure prevention options,” said Meg Reilly, a Treasury spokeswoman. “Servicers who continue with foreclosure sales are considered non-compliant.”

CMC officials declined to comment and hung up when they learned that a reporter was listening in with permission from Flores’ legal team. Arvest officials also declined comment.

McClatchy did hear from Freddie Mac, the mortgage finance agency seized by the Bush administration in September 2008. Freddie owns Flores’ loan, and spokesman Brad German insisted that Flores was reviewed three times for loan modification.

“In each instance, there was a lack of documentation verifying that she had the income required for a permanent modification,” German said.

That response is ironic, said Michael Calhoun, the president of the Center for Responsible Lending, a nonpartisan group in Durham, N.C., that works on behalf of borrowers.

“These lenders gave loans with no documentation and charged them a penalty interest rate for doing so. And now when the people ask for help, they are using extravagant demands for documentation to give them the back of their hand and continue to foreclosure,” Calhoun said.

German said that Flores was sent a letter on Nov. 24, which would have arrived several days later, given the Thanksgiving holiday, informing her that she’d been rejected for a permanent modification. Flores and her attorney said she never got a letter, and neither Freddie Mac nor CMC provided proof of that letter.

Exactly one week after the letter supposedly was sent, Flores’ home was sold to Shark Investments. That company was formed on Aug. 19, according to records on the California Secretary of State’s Web site. Shark Investments, apparently an unsuspecting beneficiary of Flores’ woes, has no phone listing. The Riverside, Calif., address on the company’s filing as a limited liability company traces to a five-bedroom, four-bath house with a swimming pool.

German didn’t comment on whether Flores received sufficient notice under Freddie Mac rules, or how the home could move to sale so quickly.

Flores’ legal team, which specializes in foreclosure prevention, thinks that lenders and servicers are gaming Obama’s housing effort.

“It seems servicers are giving people false hopes by sending them a plan, and they are using the program as a collection method, getting people to pay them with no intention of modifying the loan,” said Bosch. “I believe they are using this as a tool to suck people dry.”

Dashed hopes aren’t exclusive to the working poor such as Flores.

David Smith owns a beautiful home in San Clemente, Calif., the location of the Richard Nixon Presidential Library. Smith purchased his five bedroom home four years ago for $1.3 million. Today, the real estate Web site Zillow.com estimates the value of Smith’s home at $981,000, slightly below the $1 million he still owes on it.

Smith said he went from “making a lot of money to making hardly any” as the national and California economies plunged into deep recession. He’s a salesman serving the hard-hit residential and commercial construction sector. On top of his hardship, Smith’s mortgage exceeds the limits for the HAMP plan.

In late August, Smith signed and returned paperwork in a prepaid FedEx envelope to Bank of America that said it had received the contract needed to modify the adjustable-rate mortgage he originally took out with the disgraced lender Countrywide Financial, which Bank of America bought last year.

The modification agreement shows that Bank of America agreed to give Smith a 3.375 percent mortgage rate through September 2014, and everything Smith paid between now and through 2019 would count as paying off interest. He’d begin paying principal and interest in October 2019, with the loan maturing in 2037.

The deal favors the lender, but Smith, 55, jumped on it because it kept him in the home.

Armed with what he thought was “a permanent modification,” Smith returned a notarized copy of the agreement and made subsequent payments on time.

In return, he got a surprising notice from Bank of America saying that his house would be auctioned off on Dec. 18.

“It looks like they’re trying to sell this out from underneath me,” Smith said. “My wife cries all the time.”

After a Dec. 16 call from McClatchy asking why Bank of America wasn’t honoring its own modification, the lender backed off.

“The case has been returned to a workout status and a Home Retention Division associate will be contacting Mr. Smith for further discussions,” said Rick Simon, a Bank of America spokesman. “The scheduled foreclosure sale will be postponed for at least 30 days to allow for review of the account in hope of completing a home retention solution for Mr. Smith.”

The Center for Responsible Lending says such problems are common.

“Everyone acknowledges that the system is not working well,” Calhoun said.