Monthly Archives: November 2014

“Lenders quickly tightened their standards beginning in 2007, sending much more of business to the agency, and the FHA has shouldered large losses to mortgages made between then and 2009, when it tightened its own standards and oversight. In part because of those losses, the FHA required a $1.7 billion infusion from the U.S. Treasury in 2013, which was its first bailout in 79 years.” Wall Street Journal

“Ironically, with the benefit of hindsight, had private mortgage-backed securities markets for non-prime and alt-a loans not existed prior to the financial crisis, FHA would have guaranteed many of those mortgages (just as they did when private mortgage lending tightened starting in 2007) and suffered tens, if not hundreds of billions more in losses. In other words, because there was a substantial, multi-trillion dollar private MBS marketplace pre-crisis, FHA’s losses were much lower than they otherwise would have been. In spite of being a small part of the mortgage market pre-crisis, FHA’s mortgage insurance fund became insolvent and taxpayers’ bailed them out to the tune of $1.7 billion. And to avoid a much larger taxpayer bailout, FHA decided to recapitalize themselves by dramatically raising their insurance fees for new mortgage borrowers and “extorting” (because they could) billions in settlements, related to unproven and highly questionable allegations of representation and warranty violations, from the private mortgage lenders and banks who did business with them. Because FHA has a federal government insurance monopoly (for low-down payment mortgage borrowers with average credit and debt-to-income ratio), they could increase their fees to new American borrowers to whatever level they wished. And they did. FHA increased their upfront insurance fee seven-fold and nearly tripled their annual insurance fee. The National Association of Realtors estimates that in 2013, nearly 400,000 creditworthy borrowers were priced out of the housing market because of these high FHA premiums. Finally, FHA has touted the mortgage financing they provided in 2008-2011; “we were the mortgage lender of last resort”. But did it really make sense to provide nearly 100% mortgage financing to prospective American homebuyers during this period? Weren’t these buyers essentially “catching a falling knife”; doomed to be underwater (their mortgage exceeding their homes value)? Was this mortgage lending, that FHA facilitated and encouraged, during this period really a benefit to these borrowers? It seems like the benefit accrued more to the housing and mortgage/banking industry, and maybe to the economy as a whole? I am not blaming FHA. I am just making the point that FHA, because it is part of the government, wasn’t a great lender or a saint and the pre-crisis mortgage industry, because it was for-profit, wasn’t a bad lender nor a sinner.” Mike Perry, former Chairman and CEO, IndyMac Bank

Federal Housing Administration in the Black for First Time Since 2011

Slow Pace of Improvement Could Complicate Agency’s Efforts to Boost Housing Recovery

By Joe Light

The Federal Housing Administration is projected to be in the black for the first time since 2011. But the FHA’s independent annual audit also found the pace of recovery remains slow, potentially complicating the agency’s efforts to help strengthen the housing recovery.

The audit, released Monday, found that the FHA’s insurance fund had an economic value of $4.8 billion at the end of September, up from negative $1.1 billion last fiscal year. Its capital reserve ratio, which the FHA is supposed to keep above 2%, grew to 0.41%. While an improvement, it was still short of last year’s projection.

More important, the report estimated that the FHA won’t return to the congressionally mandated 2% threshold until 2016, a year later than last year’s estimate. The FHA doesn’t issue mortgages but insures lenders against losses. Borrowers can pay for insurance on mortgages with down payments of as little as 3.5%.

Officials with the Department of Housing and Urban Development, which oversees the FHA, emphasized that the fundamentals of the FHA’s portfolio were sound and that the fund was on an upward trajectory. They attributed a large part of the unexpectedly slow growth to the FHA’s reverse-mortgage program, whose economic value dropped sharply.

“The improvement in the fund is very welcome,” said HUD Secretary Julián Castro. “We’re confident that the fundamentals of the fund are strong.”

But the weaker-than-expected financial results could make it more difficult for FHA officials to lower insurance premiums, which many groups have argued are too high and are hampering the housing recovery. Lower premiums would reduce the cost of buying a home and widen the number of people who could afford to become homeowners.

The FHA is “clearly on a pathway of growth. The question is that, with the trajectory of growth rates, are they excessively charging their borrowers?” said David Stevens, president of the Mortgage Bankers Association and former head of the FHA.

Current Acting FHA Commissioner Biniam Gebre said he thought that the independent report showed clear improvement in the fund but wouldn’t say whether it made it more or less likely for the agency to change premiums. The FHA last year saw lower serious delinquency rates, contributing to its improving health.

Since July 2008, the upfront cost for a borrower to receive a typical FHA loan has risen 0.25 percentage point to 1.75%, while the required annual premium has been raised five times to 1.35%, according to Moody’s Analytics.

The higher costs have helped to shore up the FHA’s finances, but they’ve also driven many of the most-credit-worthy borrowers to private lenders, where they can often still make low down payments and pay less for private mortgage insurance. That has given the FHA a smaller book of business than expected.

“The FHA doesn’t operate in a vacuum and it’s a competitive world out there,” said Brian Chappelle, a partner at consulting firm Potomac Partners who used to work at the FHA. In the year ended September, the FHA insured $134 billion in new loans, not including reverse mortgages, far less than the $191 billion that the FHA projected in the last audit.

That problem could get exacerbated next year, as Fannie Mae and Freddie Mac roll out new programs to allow the companies to guarantee mortgages with down payments of as little as 3%, rather than the current 5% limit for most mortgages. Executives at those companies have already said that they expect those mortgages to carry lower costs than FHA-backed loans for many borrowers.

“If the FHA keeps premiums at these levels, they could be adversely selected. The problem could be quite serious,” said Mark Zandi, chief economist at Moody’s Analytics, whose economic projections are used in the actuarial report.

The agency took little part in the housing boom, as lenders were willing to make loans with much easier terms. Lenders quickly tightened their standards beginning in 2007, sending much more of business to the agency, and the FHA has shouldered large losses to mortgages made between then and 2009, when it tightened its own standards and oversight. In part because of those losses, the FHA required a $1.7 billion infusion from the U.S. Treasury in 2013, which was its first bailout in 79 years.

Although Monday’s report indicated that the FHA won’t need another boost, it also showed that its coffers are further from health than hoped, which will provide support to those who think premiums should stay high.

“If they want to maintain risk levels where they are and protect the taxpayers, then they need to keep their premiums where they are,” said Edward Pinto, co-director of the International Center on Housing Risk at the right-leaning American Enterprise Institute.

Law mandates that the FHA keep reserves of at least 2% of the loans it guarantees, a test that the FHA hasn’t passed since 2009. Last year, the agency projected that the ratio would reach 1.2% by this year and more than the required 2% by 2015. Instead, the report showed that it reached 0.41%.

The report should give the agency enough confidence to continue in their attempts to ease mortgage access, said Jim Parrott, a senior fellow at the Urban Institute and former housing policy adviser in the Obama White House.

For the past several years, some lenders have eschewed lending to riskier borrowers, even if they could be backed by the FHA, for fear that they later be penalized for making mistakes on loans. For the past several months, the FHA has been clarifying its guidelines and punishments in an attempt to allay those fears.

“They will finally be able to return their focus to ensuring that credit-worthy borrowers who aren’t traditionally well served by the market can get a mortgage through the FHA,” said Mr. Parrott.

“As a reminder, only 25% of a VA (mortgage) loan is federally guaranteed which reportedly limits some lender participation. To that point, at the MBA conference last week HUD Secretary Castro stated that the 25% limitation ‘leaves a lot of small lenders awfully exposed and reluctant to offer veterans credit under this initiative.’”, November 2014 Mortgage Industry Newsletter

“I believe it. But think about this for a minute. Private mortgage lenders/banks are worried (“awfully exposed” according to the HUD Secretary) that a 25% guarantee from the VA (the first 25% of loss is paid by the VA) is not enough to fully protect them against loan losses. And smaller lenders might not be able to absorb these losses, so they won’t lend!!! Yet everyone in the mortgage and real estate industry, consumer housing advocates, the VA, and our politicians, seems fine with veterans borrowing nearly 100% of the purchase price to buy a home!!! Clearly, any homebuyer could either succeed and build home equity or fail and lose their home to foreclosure, hurting their credit and finances. And clearly (in most cases), it’s not the mortgage lender’s or the borrower’s fault if they do fail. It’s our national housing/mortgage policies that are responsible. Maybe those policies are good, except during a housing bubble/bust, and maybe those policies could be better? Like most, I am still not sure what the right answer is, but I do know (from hard experience acquired during the recent housing downturn) that low-to-no down payment mortgages (especially government ones where taxpayers are also directly exposed) are a big risk to everyone, if they were originated during an unsustainable housing price bubble.”, Mike Perry, former Chairman and CEO, IndyMac Bank

 

November 2014 Mortgage Industry Newsletter Excerpt (that includes the above and more):

 

“And the mortgage insurance business has been in the news. Isaac writes, “On October 28, Bloomberg ran an article focusing on HUD’s push to evaluate the merits of private mortgage insurers (PMIs) providing supplemental insurance on VA loans. As a reminder, only 25% of a VA loan is federally guaranteed which reportedly limits some lender participation. To that point, at the MBA conference last week HUD Secretary Castro stated that the 25% limitation ‘leaves a lot of small lenders awfully exposed and reluctant to offer veterans credit under this initiative.’ While it is far too early to assess the potential impact of supplementary coverage on VA loans, this policy conversation reinforces our longer-term belief that the forthcoming finalization of the PMIERs will soften the ground for the PMI industry’s efforts to increase and diversify the risks it insures.” Isaac notes it is too early to estimate the potential impact on the PMI industry but that, “The conversation surrounding supplementary insurance on VA loans reinforces our longer-term belief that governmental entities will become increasingly willing to allow PMIs to take additional and varying forms of risk given their improved capital position in the wake of the Private Mortgage Insurance Eligibility Requirements (PMIERs). We believe that the PMIERs will place the PMIs on sound financial footing which should soften the ground for industry efforts to increase and diversify the forms of risk they insure. These efforts could take the form of supplementary insurance on VA loans or deeper up-front risk sharing for PMIs (see MBA proposal). We continue to expect the FHFA to finalize the PMIERs by the end of 2015 or early Q1 2015 which should remove a meaningful policy overhang for the group and allow for the PMI conversation in D.C. to evolve.”

“Here’s my 2 cents on raising LTVs. I can’t stand the fact that we are even debating this idea. My issue is that if you lower the required down payment, you will have more potential homeowners, thus spurring on economic growth, yadda, yadda, yadda. These buyers couldn’t even save 5% for a down payment. What are they going to do about the increased costs of home ownership versus renting? Home maintenance, yard, increased energy bills, etc…

…What will happen when the heater completely dies? Will they have money in savings to fix the problem? No, they won’t. They will go into debt thus the downward spiral continues. Maybe we should start at the grade school level and teach kids about money. How to make a budget, manage debt, save for retirement. Most kids only know how to use their ATM card and check their balance online. I challenge you to ask a millennial if they balance their checkbook (or know how).”, Compliance Officer at a Bank, Mortgage Industry Newsletter, November 2014

“The old saying about skin in the game is all too true. With the four components of a loan being income, credit, property, and funds, taking the skin out of it makes the rest of the loan a far greater risk than say a 50% no doc loan, there are simply a number of other type loan products that could and should be reintroduced but in this current political environment those aren’t cool…

…I would rather move beyond the politics that favor the little or no down payments and put on our common sense hats and admit that a 100% no doc low credit score, interest lonely investment loan was irresponsible. But show me the default rate on a 50% no doc, interest only loan and I will show you a good loan. Interest only and no doc loans were never the culprits. It was the other irresponsible loosening of the guidelines for these products that made them bad loans.”, Comment from Mortgage Industry Veteran in Industry Newsletter, November 2014

“The report also tracked affordability by area code within L.A. County. They found that in the 626 – Pasadena and the San Gabriel Valley – just 11% of median-income-earning households could afford a typical house…

…In the 310 – the Westside and beach towns – 14% could. In the 213 – Downtown and Central L.A. – that figure was 16% while in 818 and 747 in the San Fernando Valley, it’s 16%.”, Tim Logan, “Barely 1 in 5 LA homes affordable to middle class, study finds”, Los Angeles Times

“Like it or not, the reality is that homes have become a luxury item in many world class cities around the world, like Los Angeles. In other words, in these cities it is no longer appropriate (and hasn’t been for a long time) to correlate home prices and price changes to median incomes. Only 1 in 5 homes are affordable to the middle class…so it makes sense to correlate them to the incomes of the upper third or so of Los Angeles residents. In a free market, this will mean that over time, median income jobs and families will move out of Los Angeles to cheaper locales. In our internet age, more people can work anywhere in the U.S. and even the world and from home. (Through Odesk, I have a guy in Russia doing some programming for me on a smart phone application right now and a Yale engineer, coordinating with him from his home in Escondido, in the evenings after his full-time job.) And as middle class jobs and families continue to leave LA, because of its high cost of housing, LA will become more and more a city of the rich and the poor and/or real estate values may decline over time until an equilibrium is reached, with other more affordable cities. Finally, any well-intended intervention by government (to provide more affordable housing), will likely only have a minor effect to this free-market trend and while PC, it probably is not a good use of limited government time and resources.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Barely 1 in 5 L.A. homes affordable to middle class, study finds

A median-income household in L.A. County can afford just 22% of homes for sale, according to a new study out Tuesday.

A median-income household in L.A. County can afford just 22% of homes for sale, according to a new study out Tuesday. (Bryan Chan / Los Angeles Times)

By Tim Logan

The bad news: Los Angeles County is the second-least affordable housing market in the country for a middle-class family.

The sort-of good news: At least it’s not getting much worse.

That’s according to a new report out Tuesday from real estate website Trulia, which found that a household earning the median income of $54,000 can afford just 22% of homes in L.A. County on 31% of their income or less. Only in San Francisco, at 15%, can fewer middle-class families afford to buy. Six of the seven least-affordable markets in the nation are in California, including San Diego (25%), Orange County (26%) and Ventura County (33%).

The report also tracked affordability by area code within L.A. County. They found that in the 626 – Pasadena and the San Gabriel Valley – just 11% of median-income-earning households could afford a typical house. In the 310 – the Westside and beach towns – 14% could. In the 213 – Downtown and Central L.A. – that figure was 16% while in 818 and 747 in the San Fernando Valley, it’s 16%.

The numbers would come as no surprise to anyone who tracks the housing economy in California, where sky-high prices coupled with soft income growth have driven home-buying out of reach for many. Indeed, considering that prices have climbed by roughly one-third in Southern California over the last two years, it might come as a surprise that affordability hasn’t gotten worse – this year’s affordability figure is just 2 percentage points lower than last year’s rate of 24%. But rock-bottom interest rates have helped to keep the monthly cost of ownership in check, noted Trulia chief economist Jed Kolko.

change eventually, Kolko wrote. Even though home price gains are slowing – the median price in the six-county Southland climbed 6.8% in October, according to CoreLogic DataQuick – they’re still growing faster than incomes. If interest rates start climbing, Kolko wrote, there’s just one likely outcome.

“Unless incomes increase substantially, homeownership will slip further beyond the reach of many households,” Kolko wrote.

“Real estate in Hong Kong defies logic. The city is one of the most expensive places in the world to live and it has smashed one real estate record after another for years. As property costs continue to soar, even once improbable living spaces are now getting snapped up at astronomical prices…

…Since a low point of Hong Kong’s property market in 2003, average house prices have increased by more than 300 percent, according to data from the Centa-City Index, which is compiled by the real estate agency Centaline and the City University of Hong Kong. Helping propel this rise has been Hong Kong’s thriving economy, which significantly expanded over the last 10 years after the rapid growth of China. Strong demand from wealthy mainland Chinese and limited land supply have also helped to prop up prices…. First-time buyers now dominate the market, spurred on by the ultracheap interest rates. “The mortgage rate is below 2 percent, so it is very attractive for the buyers,” said Patrick Wong, a property analyst at BNP Paribas. At Le Riviera, only one buyer so far did not need a mortgage, according to Hip Shing Hong, the project’s developer.”, Alexandra Stevenson, “In Hong Kong, One-Bedroom Apartments That Could Fit in a Bedroom”, New York Times

“Another housing bubble…this one in Hong Kong….driven by strong economic growth, limited supply relative to demand, and abnormally low interest rates kept low by our own Fed’s monetary policies (as Hong Kong’s currency and rates are pegged to the U.S.)….where are those evil mortgage lenders?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Commercial Real Estate  

In Hong Kong, One-Bedroom Apartments That Could Fit in a Bedroom

A 434-square-foot show apartment in Le Riviera, overlooking Hong Kong’s Victoria Harbor. Credit Lam Yik Fei for The New York Times

By ALEXANDRA STEVENSON

HONG KONG — There are breathtaking views of Victoria Harbor from a 23rd-floor apartment that recently sold for $722,000 in the new Le Riviera building. The high-end German appliances and marble countertops evoke European luxury. In the entrance of the building, colorful wire mesh sculptures by Spanish artists hang from the ceiling.

There is just one catch. The apartment is only 275 square feet, with a bedroom just large enough to accommodate a double bed.

“If we don’t buy now, we might not be able to afford it later,” said Frank Wu, 60, the new owner of this so-called microflat in Shau Kei Wan, a former fishing village on the northeastern edge of Hong Kong Island.

Real estate in Hong Kong defies logic. The city is one of the most expensive places in the world to live and it has smashed one real estate record after another for years. As property costs continue to soar, even once improbable living spaces are now getting snapped up at astronomical prices.

At Le Riviera, three-quarters of the units sold so far have been microflats like the one Mr. Wu purchased. And Hong Kong developers are putting smaller and smaller units on the market — one recently built 165-square-foot apartments.

Inside a 275-square-foot Hong Kong apartment. The selling price: $722,000. Credit Lam Yik Fei for The New York Times

But the housing boom, and the inequality it has exposed, has been taking a toll. The high property costs faced by young people added to simmering discontent that prompted tens of thousands to take to the streets in pro-democracy protests this autumn.

For many young adults who live packed and stacked in with their parents, it is becoming harder to imagine having a place to call their own. Rents have skyrocketed. And some here now worry that the real estate market could stumble, particularly if the United States Federal Reserve starts to raise interest rates next year. Lending in Hong Kong is tied to the American rates.

Speaking in her office down the street from the Le Riviera, To Pui-lui, a real estate agent who has sold two units of similar size in the building, hints at looming trouble ahead. She recently advised her daughter, a doctor, against buying right now.

“It’d be disastrous if the price falls from such a high point,” Ms. To said.

Since a low point of Hong Kong’s property market in 2003, average house prices have increased by more than 300 percent, according to data from the Centa-City Index, which is compiled by the real estate agency Centaline and the City University of Hong Kong.

Helping propel this rise has been Hong Kong’s thriving economy, which significantly expanded over the last 10 years after the rapid growth of China. Strong demand from wealthy mainland Chinese and limited land supply have also helped to prop up prices, although this effect has slowed since the government put into effect a series of cooling measures, like additional taxes paid on property purchases.

Three-quarters of the units sold in Le Riviera have been microflats, but some worry that the market could stumble. Credit Lam Yik Fei for The New York Times

First-time buyers now dominate the market, spurred on by the ultracheap interest rates.

“The mortgage rate is below 2 percent, so it is very attractive for the buyers,” said Patrick Wong, a property analyst at BNP Paribas. At Le Riviera, only one buyer so far did not need a mortgage, according to Hip Shing Hong, the project’s developer.

Mr. Wu, a retired structural engineer who lives in the Mid-Levels, a more expensive part of Hong Kong Island, bought his microapartment as an investment. He already has a potential tenant, a Canadian woman whose family lives in the neighborhood, and said he planned to charge about 16,000 Hong Kong dollars, or more than $2,000 per month.

Many middle-income families now populate areas away from Hong Kong’s center, in neighborhoods like Kowloon East, where the commute is longer but prices are cheaper. In Tseung Kwan O, a neighborhood to the northeast in the New Territories, new properties have recently sold for as little as 10,000 Hong Kong dollars, or $1,290, per square foot, about half that of the units at Le Riviera. Even in these neighborhoods, though, prices have been lifted by the overall market.

But the frenzy in Hong Kong’s property market may soon fade. The Hong Kong dollar is pegged to the United States dollar, so the interest rate policies are linked. When rates go up, those who have borrowed money to finance new homes will feel the effects as their mortgage payments rise. This concern is more pronounced in Hong Kong, where mortgages are not set at a fixed rate.

“They are making themselves slaves to the property market,” said Nicole Wong, a property analyst at CLSA.

A view from the Le Riviera development, in Shau Kei Wan, Hong Kong. Three-quarters of the units sold so far have been microflats. Credit Lam Yik Fei for The New York Times

Many Hong Kong residents still remember the last property bust, which was set off by the Asian financial crisis in the late 1990s. As Hong Kong’s economy took a hit, unemployment rose and deflation set in, chilling prices. The outbreak of SARS in late 2002 exacerbated the descent in prices. By mid-2003, property prices had hit rock bottom.

Ms. Wong remembered visiting a foreclosed apartment in 2003 where the family’s belongings had been left behind. Childrens’ backpacks were still on the table, their homework half finished, she recalled. In another room, she spotted gambling tickets.

“It was a shocking, shocking experience,” she said. “You could see all that struggle of a family right before they were taken away.”

Developers seem undeterred for now. They continue to build new properties, increasingly with incentives like tax waivers, which can amount to as much as a 10 percent discount. Microapartments are a small part of the offerings, but they are growing, with a handful of developers jumping in. This is partly because the overall price tag looks cheaper than bigger units — especially farther afield from Hong Kong Island — making them more affordable to a wider swath of buyers.

Even by Hong Kong standards, the latest apartments offered by Li Ka-shing, Asia’s richest tycoon, are remarkably small. At Mont Vert, developed by Mr. Li’s company Cheung Kong Properties, some units range from 165 square feet to 196 square feet.

Prospective buyers interested in a recent batch of similar units were not even able to see them before they agreed to buy, a common occurrence in Hong Kong.

Mr. Wu, who acknowledged the risks of buying the Le Riviera flat when prices were so high, does not seem too concerned. He said that he and his wife could always move in.

Surveying the empty bedroom, he added, “It’s all right for me.”

A version of this article appears in print on November 19, 2014, on page B1 of the New York edition with the headline: A One-Bedroom Apartment That Could Fit in a Bedroom

“The fascination with borrowing in foreign currencies spread through several countries in Central and Eastern Europe early in the current century. The benefits were obvious: Because interest rates in other currencies were much lower than those in local currencies, monthly payments on a mortgage denominated in euros or Swiss francs would be lower…

…The risks were also clear: If the local currency fell relative to the foreign currency, monthly payments would rise, perhaps precipitously. But at the time, that risk seemed manageable. Capital was flowing into the countries as they joined the European Union and began preparations to adopt the euro. Local currencies were strong and were expected to remain so. Hungarians were perhaps the most eager to borrow in foreign currency, particularly after the government cut back on a previous program to subsidize mortgage loans made in the local currency, the forint…In 2004 and 2005, many Hungarians borrowed foreign currencies, mostly Swiss francs, to buy homes. But from mid-2008 through 2009, the value of the Hungarian forint fell rapidly, raising home mortgage payments just as the country went into recession and unemployment soared.”, Floyd Norris, “Borrowers in Hungary Learn Tough Lessons”, New York Times

“Another mortgage, housing, and banking crisis in the world (there have been many)…this time in Hungary, but clearly not fueled by non-prime loans or securitization. As with the U.S. crisis, it was fueled by global trade, sovereign currency issues, and well-intended government mortgage/housing policies. As this article states “the risks were also clear”. In other words, everyone understood the risks….there was no fraud (there wasn’t in the U.S. either)…..they just didn’t believe the worst case scenario could occur, but it did.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Business Day

Borrowers in Hungary Learn Tough Lessons

By FLOYD NORRIS

For many people in Central and Eastern Europe, a new experience began a quarter-century ago. Communist governments collapsed, and the wide world of private ownership, democracy and free markets opened up suddenly.

It was not always a happy transition. This month, even as Germans were celebrating the anniversary of the fall of the Berlin Wall, the Hungarian government was passing laws and issuing edicts aimed at helping a large proportion of the populace recover from the mistake of buying houses with loans denominated in Swiss francs.

The story of how Hungarians wound up deeply in debt in Swiss francs — a currency many of them had never possessed and none of them earned at their jobs — is partly a story of European overconfidence during the boom that preceded the credit crisis. But it is also a story of how poor regulation of banks can be disastrous — at first for the customers and then for the banks.

The fascination with borrowing in foreign currencies spread through several countries in Central and Eastern Europe early in the current century. The benefits were obvious: Because interest rates in other currencies were much lower than those in local currencies, monthly payments on a mortgage denominated in euros or Swiss francs would be lower.

Viktor Orban, the Hungarian prime minister, last month. Credit Akos Stiller for The New York Times

The risks were also clear: If the local currency fell relative to the foreign currency, monthly payments would rise, perhaps precipitously.

But at the time, that risk seemed manageable. Capital was flowing into the countries as they joined the European Union and began preparations to adopt the euro. Local currencies were strong and were expected to remain so.

Hungarians were perhaps the most eager to borrow in foreign currency, particularly after the government cut back on a previous program to subsidize mortgage loans made in the local currency, the forint.

“Starting in 2004, people forgot the government-backed mortgages,” said Zoltan Torok, an economist for the Hungarian unit of Raiffeisen, an Austrian bank.

The government says half the households in the country ended up with foreign currency loans. And the situation was made worse by a lack of effective bank regulation. That enabled the banks to make a lot of money — until the disaster left them weak and the public furious.

Some of the loans were denominated in euros, which seemed to make sense at the time because it was widely — but wrongly — expected that Hungary would switch to the euro by 2009, five years after it joined the European Union. So someone who took out a 25-year mortgage in euros would have currency risk for only a few years.

But most of the loans were denominated in Swiss francs, simply because interest rates — and therefore initial monthly payments — were lower. When the Swiss franc appreciated relative to the euro after the financial crisis began in 2008, those borrowers were in even more trouble than those who borrowed in euros.

In nearby Poland, the government imposed some regulations. Foreign currency borrowers had to be better off than many borrowers and therefore better able to withstand the risk. The banks were limited in their discretion in choosing exchange rates and had to follow market interest rates in making adjustments — something that has helped tremendously. Polish borrowers have still suffered, but nothing like those in Hungary.

There, it turned out, only the banks were paying close attention to the details of the loan agreements people were signing. They gave the banks considerable discretion in determining the exchange rates they would follow and the interest rates that would be charged. The banks used that discretion to their own benefit.

From Debt to Disaster

In 2004 and 2005, many Hungarians borrowed foreign currencies, mostly Swiss francs, to buy homes. But from mid-2008 through 2009, the value of the Hungarian forint fell rapidly, raising home mortgage payments just as the country went into recession and unemployment soared.

Borrowers in Hungary Learn Tough Lessons - NYTimes.com - Google ... (11-18-2014 22.17.38)

Borrowers in Hungary Learn Tough Lessons - NYTimes.com - Google ... (11-18-2014 22.19.41)

Sources: Hungarian government via Haver Analytics, Bloomberg

Viktor Orban, the populist who has been Hungary’s prime minister since 2010, has tried a variety of measures to reduce the pain for the borrowers, including a moratorium on evictions of destitute homeowners and a scheme that reduced monthly payments but increased the amount owed. The government has imposed taxes on banks based on their assets, not their profits, of which there are not many.

The authoritarian tendencies of the Orban government have drawn criticism in other European capitals, but its promise to hold the banks accountable has not hurt its popularity at home.

In July, the government ordered the banks to pay compensation to borrowers who had been damaged by what the government viewed as unfair contracts. This week, Hungary’s constitutional court upheld that law, saying that fairness was always required, meaning the new law did not amount to retroactive legislation. The payments are expected to be made early in 2015.

“The amount the banks will have to pay back could be as much as 900 billion forints,” said Yves Lemay, the managing director of banking and sovereigns at Moody’s Investors Service in London, adding that amount, equal to about $3.5 billion, was “about 32 percent of the capital buffer of the entire system.”

The government announced this week terms of a conversion of outstanding foreign currency mortgage loans into forints. The banks were relieved that the government chose market rates and that it agreed to provide euros to banks, which had taken on euro obligations to hedge their risks on the mortgage loans.

But forcing conversion only assures there will not be more losses from future currency depreciation. It does nothing to offset the earlier depreciation. And the required compensation will not come close to making borrowers whole.

Susanne Urogdi Kocsis, a 57-year-old Budapest resident, says she borrowed the equivalent of 7.4 million forints, or around $42,000, in 2007 to buy a larger apartment for her family. She says she has already paid back 4.5 million forints, “but the bank is asking for 11 million.” She thinks converting the loan to forints, as the government is forcing banks to do, will be of little help. “A lot of people won’t be able to pay back, and we will never be able to get new loans,” she said this week.

Before the crisis, and the plunge in the forint, Hungary’s banking system appeared to be profitable and well capitalized. Now none of the banks have investment grade ratings. Moody’s, the credit rating firm, rates the only large Hungarian-owned bank, OTP Bank, at Ba1, the highest junk bond rating. Other banks, most of them controlled by Western European banks, have lower ratings. Several have needed capital infusions from corporate parents.

The forint is now worth about 36 percent less in Swiss francs than it was when Hungary joined the European Union in 2004. Hungary’s economy grew at an annual rate of 4.1 percent from 1999 to 2006. Seven years later, it was smaller than it had been in 2006, although it did grow 1.1 percent in 2013.

The banks have suffered huge losses, said Mr. Torok, the bank economist, mentioning both the economic slump and the government actions. “But it is not like somebody is winning. Everybody is losing. The households are losing. The government is not winning.”

Correction: November 14, 2014

An earlier version of this article misstated Moody’s credit rating of OTP Bank. It is Ba1, which is the highest junk bond rating, not Ba2.

Helene Bienvenu contributed reporting and Palko Karasz contributed research.

A version of this article appears in print on November 14, 2014, on page B1 of the New York edition with the headline: Borrowers in Hungary Learn Tough Lessons.

“The president is now operating outside the Constitution. That fact is something that certainly must have weighed heavily on him as he considered whether to ask Congress for a discrete authorization against Islamic State, as opposed to his earlier invitation for us to merely express our support.”, Rep. Adam Schiff (D-Burbank), senior member of the House Intelligence Committee

“As I understand it, by tradition, it is the President’s responsibility to make a formal request to Congress for war powers. To date, President Obama has elected not to do so. Despite Democratic Congressman Schiff’s inappropriate shifting of the responsibility to Congress, he does make clear that the President, however well-intentioned he may be, is currently violating the law and the Constitution and that should “weigh heavily on him”. Apparently not or he would follow precedent and promptly seek war powers from Congress, as required by the law.” Mike Perry

Op-Ed

Congress must exercise its war powers

Car bombing in Baghdad

Iraqi municipal workers remove debris from the scene of a car bombing in central Baghdad on Nov. 9, one of a string of attacks targeting mainly Shiite areas of the capital that has been linked to ongoing fighting between the government and Islamic State militants. (Ali Abbas / EPA)

By Adam Schiff

Before Congress leaves the capital for the holidays, House Speaker John A. Boehner (R-Ohio) and Senate Majority Leader Harry Reid (D-Nev.) must schedule a vote on an authorization for the war against Islamic State.

It’s a constitutional imperative. Here’s why.

The United States has been engaged against Islamic State militants since early August with operations against targets in Iraq and Syria. Aircraft have launched hundreds of airstrikes against Islamic State military and economic targets and struck the Khorasan Group — an Al Qaeda cell. At the same time, other U.S. forces are on a training and advisory mission to strengthen Iraqi and Kurdish forces, and the Pentagon is beginning its new effort to provide assistance to select elements of the anti-Assad opposition in Syria.

Administration officials have repeatedly told the American people to be prepared for a conflict that could last many years, an admonition reinforced by the Pentagon’s announcement this month that it would more than double the American troop commitment to the operation in Iraq against Islamic State, to almost 3,000. And President Obama is seeking $5.6 billion this year in funding.

After three months of White House-ordered airstrikes and other activities to “disrupt, dismantle and defeat” Islamic State, the issue is more than ripe for congressional action. And despite the reported hesitation of the speaker to bring up an authorization during the lame-duck session, there are good reasons Congress should meet its obligations under Article 1, Section 8 of the Constitution by deciding whether to grant the president the power to conduct this new war.

First, the administration’s use of the 2001 Authorization for Use of Military Force — which allowed action against those responsible for the Sept. 11 attacks — as legal justification for the current military operation requires an extraordinarily broad and problematic reading of that measure. Although Islamic State may share Al Qaeda’s hatred of the United States and the West, the group did not even exist in 2001 and had no role in the Sept. 11 attacks. Nor is Islamic State affiliated with or aiding Al Qaeda, having been expressly repudiated by the Zawahiri leadership. Despite reports of an agreement to coordinate efforts between the two groups, there is little evidence to suggest anything other than a temporary response to damage being inflicted on both by coalition strikes.

Vehement opposition to President Bashar Assad’s brutal government in Syria and to the harshly sectarian policies of former Prime Minister Nouri Maliki in Iraq, not Sept. 11 or allegiance to Osama bin Laden, has fueled the rise of Islamic State and allowed it to capture huge swaths of territory in those two nations. The group threatens tens of millions, and its extreme violence and barbarity must be confronted. But to claim the 2001 AUMF as the authority to do so gives that statute a scope that is as expansive as it is unending. And in a new authorization, we must look at sunsetting or repealing this and the previous Iraq war authorization.

Second, although Obama has made repeated reports, as required by the War Powers Resolution, detailing operations of the war, the timetable laid out in that law for authorizing action has expired. The president is now operating outside the Constitution. That fact is something that certainly must have weighed heavily on him as he considered whether to ask Congress for a discrete authorization against Islamic State, as opposed to his earlier invitation for us to merely express our support.

Third, the threat from Islamic State to our national security and to core American foreign policy interests is sufficient to warrant military force as an element of a multifaceted campaign. But no president has the power to commit the nation’s sons and daughters to war without authorization from Congress, and no Congress should ever abdicate its responsibility for reasons of political expediency or scheduling convenience. This is not a decision that can or should wait until 2015; this action was begun during the 113th Congress and it is well within our ability to authorize it properly before adjourning for the year.

I believe that Congress — both Democrats and Republicans — would support a narrowly tailored authorization that gives the president the authority he needs here.

Whether we act to pass a resolution I introduced this fall that would allow 18 months of continued airstrikes and limited special operations against Islamic State, or some other authorization such as the one proposed by Sen. Tim Kaine (D-Va.), Congress cannot avoid its duty to act. For more than two centuries, Congress and the president have shared the power of war — a bifurcation of authority deliberately written into the Constitution to prevent a president from committing the nation to hostilities on his own. Congress’ failure to act now would set a dangerous precedent — that Congress’ power to declare war is a meaningless anachronism that can be ignored by the White House.

As we prepare to close the book on what is regarded as the most unproductive Congress in the history of unproductive Congresses, the House and Senate can take an important step in demonstrating not only a capacity to act, but also a commitment to our constitutional duty.

Rep. Adam Schiff (D-Burbank) is a senior member of the House Intelligence Committee.

“Similarly, without scientific evidence, the president (Obama) said that global warming “means longer droughts, more wildfires” in Australia. He then urged his young audience – “keep raising your voices” – to make sure that their political demands on climate change are met.”, Greg Sheridan, Foreign Editor, Australian

Opinion

A Mystifying Obama Climate Slap at a U.S. Ally

In Brisbane, the president went out of his way to undermine Australian Prime Minister Tony Abbott. Why?

By Greg Sheridan

U.S. President Barack Obama

U.S. President Barack Obama Agence France-Presse/Getty Images

President Obama over the weekend made a bizarre decision to attack and damage his closest ally in Asia, and one of the most committed supporters of U.S. foreign policy.

The president was in Australia for the G-20 Summit in Brisbane. Unlike Britain’s David Cameron , China’s Xi Jinping and India’s Narendra Modi, he apparently had no interest in speaking to the Australian Parliament or making a formal, bilateral visit to Australia while in town.

Instead, Mr. Obama made a speech to an Australian version of his political core audience back home—undergraduates at a metropolitan university. Much of the speech at the University of Queensland in Brisbane was boilerplate. It lacked a plot but hit a few reliable notes, such as the U.S. commitment to Asia, defense of gay rights and the like.

But the longest passage was an extraordinary riff on climate change that contained astonishing criticism—implied, but unmistakable—of the government led by Australian Prime Minister Tony Abbott. Mr. Obama lavished himself with praise for signing, a few days earlier, a climate-change agreement with China that imposes no obligations on Beijing until 2030, when the Chinese will notionally reach a peak in their carbon emissions. The U.S., on the other hand, under this deal will greatly reduce its emissions by 2025, though Mr. Obama won’t be in office then and Congress may be inclined not to authorize such cuts.

Mr. Abbott is a sensible conservative, along the lines of Canada’s Stephen Harper . He accepts that climate change is a problem and that greenhouse-gas emissions should be reduced. He is skeptical of climate alarmism and does not believe that the solution lies in onerous carbon taxes or trading schemes in carbon permits, which are notoriously open to corruption and inherently ineffective.

The prime minister won a big mandate in last year’s parliamentary elections to repeal the former Labor government’s carbon tax, which he did. But Mr. Abbott’s government has maintained the previous commitment to cut Australia’s carbon emissions by 5% from 2000 levels. Given the high growth rates of Australia’s population and its economy, this equates to a huge 19% cut from business as usual. In measuring countries’ responses to carbon emissions, it makes a big difference what year you use as the base. According to the Australian government, if 1990 is the base year, then by 2020 Australia will have cut its emissions by 4%, the U.S. by 5%.

So Australia’s performance on carbon-emission reductions is comparable with America’s, and perfectly respectable. But Mr. Abbott doesn’t go in for climate-as-salvation, revival-meeting rhetoric. What he does do, unstintingly, is support U.S. interests and objectives.

In June, when Mr. Abbott first visited Washington as prime minister, he offered Washington tangible support in the Middle East—special forces, advanced fighter jets and much else—even before the president had decided to take action against the Islamic State terrorist group. Mr. Abbott did this not because he was charmed by Mr. Obama but because he believes that the world benefits from U.S. leadership. He wanted the U.S. to know that in difficult places it doesn’t walk alone.

Mr. Abbott has also done more than any regional leader to support the U.S. in Asia, and to support key U.S. strategic goals. He hosts U.S. troops and joint facilities. He publicly backs Japan’s reinterpretation of its constitution to allow it to participate in collective security and a properly mutual alliance with the U.S. Mr. Abbott’s government sternly criticized Beijing for declaring an Air Defense Identification Zone around the disputed Senkaku/Diaoyou Islands in the East China Sea. This is not without risk for Mr. Abbott. China is by far Australia’s biggest trading partner.

In short there is no more reliable U.S. ally than Mr. Abbott. So as a reward the president in his speech roped Australia to the U.S., saying “one of the things we have in common is we produce a lot of carbon” and “we have not been the most energy-efficient of nations, which means we’ve got to step up.” Mr. Obama demanded that Australia follow, in a general way, the example he set with his carbon deal with China.

He also repeatedly referred to the dangers that global warming poses to Queensland’s Great Barrier Reef. Australia’s carbon emissions are so low that any variation will make absolutely no difference to the fate of the Great Barrier Reef. But Mr. Obama, or his speech writers, knew that the reef has been a totemic issue in the debate on climate-change policy in Australia, used entirely by Mr. Abbott’s opponents to symbolize his supposed wickedness.

Similarly, without scientific evidence, the president said that global warming “means longer droughts, more wildfires” in Australia. He then urged his young audience—“keep raising your voices”—to make sure that their political demands on climate change are met.

How on earth could the White House think that blindsiding Mr. Abbott is a good idea? If the Obama White House cannot be bothered to manage the relationship with a close ally like Australia, how can it deal with the world’s real difficulties? As some congressional Democrats recently learned, the only thing fraught with more danger than being Mr. Obama’s enemy is being his friend.

Mr. Sheridan is the foreign editor of the Australian.

“The City of Los Angeles Fire and Police Pension System…is short $3 billion. The state’s pension goliath, the Calpers…needed an additional $57 billion to meet future obligations. The bill at the state teachers’ pension fund is even higher: It has an estimated shortfall of $70 billion.”, Marc Lifsher, Los Angeles Times

California pension funds are running dry

pensions

Cheryl A. Guerrero / Los Angeles Times

New data on California public pensions from a website created by state Controller John Chiang come at a time of growing anger from taxpayers over the skyrocketing cost of public workers’ retirements. (Cheryl A. Guerrero / Los Angeles Times)

By Marc Lifsher

A decade ago, many of California’s public pension plans had plenty of money to pay for workers’ retirements.

All that has changed, according to a far-reaching package of data from the state controller. Taxpayers are now on the hook for billions of dollars more to cover the future retirements of public workers, with the bill widely varying depending on where they live.

The City of Los Angeles Fire and Police Pension System, for instance, had more than enough funds in 2003 to cover its estimated future bill for workers’ retirement checks. A decade later, it is short $3 billion.

The state’s pension goliath, the California Public Employees’ Retirement System, had $281 billion to cover the benefits promised to 1.3 million workers and retirees in 2013. Yet it needed an additional $57 billion to meet future obligations.

The bill at the state teachers’ pension fund is even higher: It has an estimated shortfall of $70 billion.

The new data from a website created by state Controller John Chiang come at a time of growing anger from taxpayers over the skyrocketing cost of public workers’ retirements.

Until now, the bill for those government pensions was buried deep in the funds’ financial reports. By making this data available, Chiang is bound to stir debate about how taxpayers can afford to make retirement more comfortable for public workers when private-sector employees’ own financial futures have become less secure. For most non-government workers, fixed monthly pensions are increasingly rare.

“Somebody, who is knowledgeable and interested, is several clicks away from the ugly mess that will define California’s financial future,” said Dan Pellissier, president of California Pension Reform, a Sacramento-area group seeking to stem rising statewide retirement costs.

Chiang has assembled reams of data from 130 public pension plans run by the state, cities and other government agencies. It’s now accessible at his website, ByTheNumbers.sco.ca.gov.

In nearly eight years as controller, essentially the state’s paymaster, Chiang has made good on a commitment to make government financial records more transparent and accessible.

Chiang, who was elected last week as state treasurer, also has made it easy for consumers to search unclaimed property held by the state, such as utility deposits or forgotten bank savings accounts.

In 2010, after the city of Bell salary scandal, he started putting pay information online for elected officials and other employees in cities, counties, special government districts, higher education, schools and the judicial system. In September, he added details on the finances of the state’s 58 counties and more than 450 cities, allowing taxpayers to track revenues, expenditures, liabilities, assets and fund balances.

The pension debate in recent years has been fueled by controversy.

Vernon’s former city manager, for example, was receiving more than $500,000 in annual pension payments. Most public safety workers can retire as early as 50. And some public employees had cashed out unused vacation and other perks to unjustly spike their retirement pay.

Meanwhile, cash-strapped cities are facing escalating bills. Rising pension costs contributed to bankruptcies in Stockton, San Bernardino and Vallejo.

Critics contend that governments can no longer afford to pay generous pensions to retirees that aren’t available to most private-sector workers. Unions, meanwhile, have vehemently defended the status quo, saying these benefits were promised to workers for years of serving the public.

“In the months ahead, California and its local communities will continue to wrestle with how to responsibly manage the unfunded liabilities associated with providing retirement security to police, firefighters, teachers and other providers of public services,” Chiang said.

“Those debates and the actions that flow from them ought to be informed by reliable data that is free of political spin or ideological bias,” said Chiang.

A million items of new pension information online — covering the fiscal years 2002-03 through 2012-13 — should “empower greater citizen participation in how government handles a policy matter which is central to California’s long-term prosperity,” Chiang said.

Though pension lingo can be daunting, the online information being offered includes a range of easy-to-understand and more complicated data. There is even a glossary of terms to help.

Relatively proficient computer users, researchers and statisticians can use the data to compare different city and county pension systems.

The funds range from the giant California Public Employees’ Retirement System to a tiny fund for the city of Pittsburg in the San Francisco Bay Area, with only about $9,000 in assets.

In introducing his new website, Chiang pointed to trends that highlight the state’s growing pension costs. Employer retirement contributions rose 36% between 2003 and 2013, while employee contributions jumped 57%.

At the same time, the number of active government workers and retirees receiving pensions rose by 10% to 3.4 million.

Labor union leaders don’t share Pellissier’s dire forecast, but some praised Chiang for his transparency.

“It adds some facts to the discussion,” said Laphonza Butler, president of the California Council of the Service Employees International Union. “I think that can be helpful.”

Terry Francke, the general counsel of Californians Aware, a Sacramento-area group that supports open government, agreed. He praised Chiang’s initiatives as “a stellar model” for getting information to the public “in the most direct and painless way.”