Here are the quotes:

Obama said today that the U.S. is suffering from a “massive hangover” from years of risk-taking and that some banks remain “very vulnerable.” In an interview on NBC’s Today show, he said it’s likely some banks haven’t fully disclosed their losses.

“They’re going to have to write down those losses, and some banks won’t make it,” he said. Referring to the administration’s plan for the financial industry, he said “I do have confidence we’re going to get it right but it’s not going to be overnight.”

Here’s how Bloomberg reported the story:

In the recent mortgage and housing boom, significant percentages of home loans were originated by independent brokers. As salespeople their interests didn’t always align with the interest of the lender or the borrower. In many cases the drive to “get the loan done”, and the multithousand dollar commissions for doing so influenced brokers and their clients to stretch the truth to qualify. Lenders were just as anxious to create loans they could package and sell. Since the loan was being sold off to an invisible investor, the risk would soon leave the lenders books. Overall it created a tremendous incentive to cheat in ways large and small to get the loans written and placed.

Unfortunately, it is very difficult to underwrite for fraud. The rating agencies judging the quality of the bonds based on these mortgages could easily understand the likelihood of default in a standard marketplace, they didn’t account for the weakness and deceptiveness of the underlying data. Unfortunately there has been no easy way to easily identify trends of loan failures and tie them back to individual participants in the system. Next year that will change. Starting in January 2010 the Office of Federal Housing Enterprise is requiring a system where every participant in the loan origination process will be assigned an id number, and those numbers will be attached to the loan. Once in place the system will allow regulators to look at the aggregate loan performance of any appraiser, broker, banker and identify those whose loans are statistically bad, fraudulent or under-performing.

When combined with more stringent standards for borrowers to prove their actual incomes, the new standards should grind much of the fraud out of the origination process. So if you are gonna cheat, get it over with now.

More room to fall?

For every $100 spent on a house in 1950 the investment rose slightly through 2002, then soared to about $192 in 2006, adjusting for inflation. Then credit dried up, and the bust began.

Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.

The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.

“We’re so far underwater it’s not funny,” says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home’s value in three years.

His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can sink.

As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.

“We will never see these prices again in our lifetime, when you adjust for inflation,” says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. “These were lifetime peaks.”

The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era’s over.

So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.

The price plunge has wiped out trillions of dollars in home equity and caused the worst financial crisis since the Great Depression. Susan Wachter, professor of real estate at the University of Pennsylvania, fears that foreclosures and tight credit could send home prices falling to the point that millions of families and thousands of banks are thrust into insolvency.

“Homes are different than other goods and services,” she says. “The fragility of our banking system is tied to the value of homes.”

Home values have fallen before — during the Great Depression and in Texas after a 1980s oil boom, for example — but those drops were a response to other economic forces. This time, the housing price collapse is the cause of the nation’s broad economic troubles, not just an effect.

“If we have another 20% decline in prices, we’ll need another bailout of banks similar to what we just did,” Wachter says.

Other economists see a brighter picture in the long term. Wachovia economist Adam York expects home values to keep falling until 2010 but is optimistic they will recover.

“The one saving grace is the population is growing by 3 million people a year,” he says. “They need to live somewhere. That means more roofs.”

Until recently, homes were stable, unspectacular investments, not get-rich-quick schemes.

Nationally, the typical existing home was worth roughly the same in 2000 as it was in 1950, after adjusting for inflation, according to Yale University economist Robert Shiller.

Newly built homes generally were bigger and more expensive than older houses. As time passed, that meant Americans lived in larger, more valuable homes overall. But a house, once constructed, grew slowly in value. California in the 1970s, Texas in the 1980s and Florida on-and-off for a century were conspicuous exceptions to the rule.

Despite only modest increases in value, homes were smart investments. Owners lived in a house, then got their money back when they sold. That’s a better deal than renting. Borrowers got tax breaks, too, and built equity that could be leveraged into bigger houses as their incomes grew.

From 2002 to 2006, houses went from being a tortoise to a hare in the investment world. Home sale profits and relaxed lending standards such as lower down payment requirements and adjustable-rate mortgages (ARMs) made it possible for buyers of all income levels to pay more for houses.

When the housing bubble began to deflate in 2006, history had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:

•Income — Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.

•Rent — Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.

•Appreciation — Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005. Housing prices began to fall in the second quarter of 2006.

Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, home prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don’t adjust for inflation, says Schiff, the investment manager.

He points out that gold peaked in 1980 at $850 an ounce in response to inflation and the Iranian hostage crisis. It never recovered. Today, it sells for about $750 an ounce and would have to top $2,000 an ounce when adjusted for inflation to match its value in 1980.

“That’s the nature of bubbles,” Schiff says. “The price never comes back.”

An extreme relaxation of lending standards inflated the housing bubble.

“Shoddy underwriting on mortgages” is the primary cause of the housing crisis, says York, the Wachovia economist. “People got caught off-guard by how bad it was.”

Millions of home buyers — poor, rich and middle class — were approved to buy homes at prices that had been out-of-reach just a few years earlier. Lenders offered low introductory “teaser” rates on adjustable rate mortgages and approved borrowers based on artificially low mortgage payments, not the higher ones that took effect later.

What else changed:

•Optional payments on principal — In 2005, 29% of new mortgages allowed borrowers to pay interest only — not principal — or pay less than the interest due and add the cost to the principal. That was up from 1% in 2001, according to Credit Suisse, an investment bank.

• No verification of income — Half of mortgages generated in 2006 required no or minimal documentation of household income, reports Credit Suisse.

•Tiny down payments — In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%.

Low down payments and ARMs gave homeowners enormous financial leverage to pay high home prices. Leverage boosts buying power through debt, the same way a 100-pound woman uses a lever to jack up a 3,000-pound car.

Consider a couple with $20,000 cash. In 2006, they easily could get a 5% down mortgage to buy a $400,000 house. Today, a 10% down payment would limit the couple to a $200,000 house.

“Leverage matters a lot when you buy a house,” says University of Wisconsin economist Morris Davis, an expert on housing prices and rents. “We’re not going to go back to the days of only 20% (down payment) mortgages, but the days of putting nothing down are long gone.”

Easy access to borrowed money reset all housing prices, even those paid by cautious borrowers. People of all income classes moved up a notch, Census Bureau housing data show.

The sale of new homes costing $750,000 or more quadrupled from 2002 to 2006. The construction of inexpensive homes costing $125,000 or less fell by two-thirds. The biggest boom was in the middle. Homes costing $200,000 to $300,000 became affordable to millions of families.

The failed titans of home lending — Countrywide Financial, IndyMac Bank and Washington Mutual — specialized in high-risk, highly leveraged loans.

“The price correction has been severe, rapid and probably permanent because lending standards have changed,” says mortgage credit analyst Suzanne Mistretta, a senior director at Fitch Ratings, a bond rating company. “We are not going to see 2006 peak levels for a very, very long time.”

The Great Depression of the 1930s was preceded by a real estate bubble, also fueled by loose lending standards and shrinking down payment requirements. Those real estate problems — and solutions — echo today’s.

Florida real estate was the epicenter of speculation in the mid-1920s. Developers ran up prices by selling to borrowers who put as little as 10% down. Those were shockingly risky loans at a time when the standard mortgage lasted five years and required a 50% down payment.

The risky loans went bad first, but it was the spread of credit problems to the supposedly safe loans — five years and 50% down — that caused the housing market to collapse.

The five-year loans required no payments to reduce principal. Homeowners expected to refinance mortgages when the loans expired, usually with the same lender. The stock market crash led to a “liquidity crisis” — no money to borrow — that dried up mortgage refinancing.

Millions of families lost their homes to foreclosure. Falling prices on nearly everything — homes, farm crops, wages — made consumers reluctant to buy and banks afraid to lend.

As part of the New Deal, the government took control of millions of loans and restructured them into something new: the modern mortgage, with 20% down and principal that is repaid over the life of the loan. The government extended the mortgages to 15 years, then 25 and finally 30.

When World War II ended in 1945 and the Baby Boom began the following year, the 30-year, fixed-rate mortgage became a cornerstone of society and led to unprecedented levels of homeownership.

This resilient home finance system should recover in a few years, some analysts say.

National Association of Realtors chief economist Lawrence Yun predicts home prices will keep falling in 2009 but could return to their 2006 peak in three years, not counting inflation.

He says the bubble largely was confined to four states — California, Nevada, Florida and Arizona. “People who bought at the peak in those states will need time for prices to recover, even up to five years,” he says. Yun says people who buy now “have much less risk of price declines and a great possibility of price gains.”

The danger of rapidly falling home prices is that — similar to the Depression — potential buyers and lenders will stay away, fueling even sharper price declines.

During the housing boom, buyers expected prices to rise, so they were quick to buy, borrow and pay a premium. As prices drop, home buyers wait for better deals. says economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.

Lenders want bigger down payments to protect against the falling value of collateral. Homeowners lose equity, so they can’t buy other houses. “Price declines can be a self-reinforcing mechanism,” Wachter says.

An out-of-control price collapse would have dire consequences, Baker says. Even the most conservative banks would find themselves carrying portfolios of toxic mortgage loans.

If housing prices don’t stabilize at traditional levels, financial troubles could spread everywhere — to credit cards, car loans and commercial mortgages, Baker says. “The waves of bad debt will just keep coming,” he says.

Baker and Wachter want the U.S. government to take aggressive steps to help homeowners, not just financial institutions. They support expanding programs that restructure troubled mortgages to prevent a flood of foreclosed homes from coming on the market and driving prices below their traditional level.

Rick Wallick is an example of how even cautious borrowers can be hurt by a price collapse. He made a 35% down payment on his house and got a 15-year, fixed-rate mortgage at 5.75%.

Arizona’s real estate mess wiped him out anyway. Now that he’s in Oregon, he’s renting out his Arizona house at a loss and can’t afford to keep two homes.

Wallick’s Arizona house is surrounded by countless foreclosed homes and empty lots. He told his mortgage company that his December payment will be his last. “It may ruin my credit rating, but I can still buy food,” he says.

Shelley McComb used a no-money-down, interest-only ARM to pay $199,000 in December 2006 for a new three-bedroom home near Birmingham, Ala. The house’s assessed value briefly rose to $225,000.

Now, she needs to move to Atlanta where her husband got a promotion. The McCombs put their home up for sale in March. After getting no offers, they dropped their price to $179,000. They’d settle for $160,000.

Shelley McComb, 30, who manages a doggie day care center, says, “I wish we’d rented.”

Flexible payment loans, called Option ARMs are adjustable rate mortgages with several flexible payment options. Generally they allow a homeowner to make a full payment according to a standard payoff schedule, or to pay only the interest with no payment towards the loans principal, or even a lesser “negative amortization” amount which would allow some of the interest owed to add to the original principal. These loans existed for only one reason, to create a lower initial payment structure to allow a buyer to acquire a property that she couldn’t afford. Unfortunately, the low payments always had a sunset provision, in the case of many homeowners, a true drop dead provision. At the end of two years or perhaps three, the loans would reset to the higher full payoff paced payment which the borrower generally couldn’t afford. The only possible salvation to a homeowner in these time bomb loans was to refinance or sell. In a down market, with tight credit, these homeowners are facing a perfect storm with no way out. The risk was never a mystery, it was just ignored.

Warnings came from all sides of the mortgage market.

We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products,” Kevin Stein, associate director of the California Reinvestment Coalition, wrote to regulators in 2006. The group advocates on housing and banking issues for low-income and minority residents.

But bankers, afraid of having their opportunities limited fought the regulations. “To conclude that ‘nontraditional’ equates to higher risk does not appropriately balance risk and compensating factors of these products,” said Lilian Gavin, the Chief Investment Officer of Downey Savings which carried over 50% of its loan portfolio in these products. Downey insisted these loans were safe — maybe even safer than traditional 30-year mortgages.

In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:

_Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.

_Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.

_Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.

_Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.

_Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.

Those proposals all were stripped from the final rules. None required congressional approval or the president’s signature.

“In hindsight, it was spot on,” said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.

Unfortunately for the rest of us, the regulators bent to the banks and the financial fallout has trashed everything.

“The feds agreed to spend a half a trillion dollars to buy up mortgage backed securities and another $100 billion to fund lending for Fannie and Freddie; we’re not talking chump change anymore,” said Keith Gumbinger of HSH Associates, a publisher of mortgage information.

Rates averaged 5.77% for the day on a 30-year, fixed rate loan, down from 6.06% Monday, according to Gumbinger. They fell as far as 0.75 percentage points during the day, according to Orawin Velz, Associate Vice President for Economic Forecasting at the Mortgage Bankers Association.

That could save a typical homebuyer more than $90 a month on a $200,000 mortgage.

“The government action was geared to bringing mortgage rates down,” said Velz, “and it did.”

The drop was the largest since early September, when the administration announced that it was taking control of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), and stemmed from similar market sentiment.

Both actions sought to give confidence to the investment community. Most mortgages are sold to investors in so-called secondary markets but with foreclosure rates so high and expensive write downs of mortgage-backed securities so common over the past several months, investors had fled the mortgage market.

Instead of buying mortgage bonds, they’ve been snapping up Treasurys, a virtually risk-free investment. That showed up in the falling yields of Treasury bonds and the greater difference between Treasury yields and mortgage interest rates.

Nov. 20 (Bloomberg) — Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, will suspend foreclosures and evictions over the holidays.

The six-week halt will begin Nov. 26, a day before the U.S. Thanksgiving holiday, and last through Jan. 9, the companies said in separate statements today. The hiatus is designed to give servicers more time to implement a streamlined loan modification program for struggling borrowers.

“It’s a giant time out,” Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said today in a Bloomberg Television interview. “I wouldn’t be surprised to see this across the board.”

Fannie and Freddie, government-sponsored enterprises that own or guarantee $5.2 trillion of the $12 trillion U.S. home mortgage market, were placed under federal control Sept. 6. They have since been pushed to work harder at modifying troubled single-family and multifamily mortgages to curtail foreclosures.

Until a streamlined modification program is up and running, “we felt it was in the best interest of both borrowers and Fannie Mae to take this extra step to ensure that homeowners with the desire and ability to prevent foreclosure have an opportunity to stay in their homes,” Fannie Chief Executive Officer Herb Allison said in a statement.

Fannie and Freddie have partnered with HOPE Now, a government-organized coalition of the largest U.S. mortgage servicing companies, to offer borrowers who are at least 90 days delinquent and have high loan-to-income ratios the chance to modify mortgage terms to cut their monthly mortgage payments.

Incremental Steps

The companies plan to reduce interest rates for up to five years and lengthen repayment terms to as much as 40 years to trim monthly payments to roughly 38 percent of a homeowner’s monthly pretax salary. In some cases, borrowers may qualify to temporarily reduce the principal amount of the loan, which would be due without interest if the house is sold or refinanced.

“The Hope Now program is not going to be enough. It’s an incremental step,” said housing advocate John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington. “Obviously, we’re pleased that they’re doing this, but absent a substantive foreclosure program, I wonder if this is this just another problem they’re leaving for the Obama administration.”

Fannie and Freddie posted record third-quarter net losses totaling $54.3 billion last week. Freddie said it needs $13.8 billion from the U.S. Treasury by Nov. 29 to stay solvent, and Fannie said it may need federal aid early next year. Treasury Secretary Henry Paulson set up $200 billion in backup financing for Fannie and Freddie in September, saying the companies were failing and threatened the safety of the broader U.S. economy without federal intervention.

Foreclosures

The worst U.S. housing slump since the 1930s is being compounded by a recession that began in the third quarter and may last a year or more, according to Jay Brinkmann, chief economist for the Mortgage Bankers Association. Home prices in 20 U.S. metropolitan areas fell in July at the fastest pace on record, and sales of previously owned homes in August were 32 percent below the peak reached in September 2005.

A total of 765,558 U.S. properties received default notices, which warns of a pending auction, or were foreclosed on in the third quarter, the most since records began in January 2005, according to default data from Irvine, California-based RealtyTrak. Filings rose 3 percent from the second quarter and fell 12 percent in September from August as state laws created to keep people in homes slowed the pace of defaults.

security pacific national bank logo

Here’s the story from the associated press newswire:

WASHINGTON (AP) — Regulators shut down Houston-based Franklin Bank and Security Pacific Bank in Los Angeles on Friday, bringing the number of failures of federally insured banks this year to 19.

The Federal Deposit Insurance Corp. was appointed receiver of Franklin Bank, which had $5.1 billion in assets and $3.7 billion in deposits as of Sept. 30, and of Security Pacific Bank, with $561.1 million in assets and $450.1 million in deposits as of Oct. 17.

The co-founder and chairman of parent Franklin Bank Corp., Lewis Ranieri, is credited with inventing mortgage-backed securities two decades ago, but apparently was unable to save his own company from getting ensnared in the home-loan bust.

The bank’s failure is a bitter irony because it is the mortgage securitization business of which Ranieri is known as a pioneer — the repackaging of home loans as bonds that are sold to investors — that was at the heart of the mortgage and credit crises. Last spring, the audit committee of the company’s board found in an investigation certain weaknesses in accounting, disclosure and other issues relating to residential real estate loans.

Franklin Bank Corp. just Sunday said it had received proposals for transactions to strengthen Franklin Bank’s capital position and was keeping regulators informed of the talks’ progress.

The FDIC said all of Franklin Bank’s deposits will be assumed by Prosperity Bank of El Campo, Texas. Its 46 offices will reopen as branches of Prosperity Bank with their normal business hours, including those that open on Saturday. In addition to assuming Franklin Bank’s deposits, Prosperity Bank also will acquire about $850 million of the failed bank’s assets.

Parent company Franklin Bank Corp. just Sunday said it had received proposals for transactions to strengthen Franklin Bank’s capital position and was keeping regulators informed of the talks’ progress.

Meanwhile, all of Security Pacific’s deposits will be assumed by Pacific Western Bank of Los Angeles. Its four offices will reopen Monday as branches of Pacific Western, a unit of PacWest Bancorp. In addition, Pacific Western will purchase around $51.8 million of Security Pacific’s assets.

The FDIC will retain the remaining assets of the two banks for eventual sale.

The agency said depositors of Franklin Bank and Security Pacific Bank will continue to have full access to their deposits, which will continue to be insured by the FDIC.

The FDIC estimated that the resolution of Franklin Bank will cost the federal deposit insurance fund between $1.4 billion and $1.6 billion, while that of Security Pacific Bank will cost the fund $210 million.

Regular deposit accounts are now insured up to $250,000 as part of the new financial rescue law enacted in early October. The limit on individual retirement accounts held in banks remains at $250,000.

The 19 bank failures so far this year compare with three for all of 2007 and are more than in the previous five years combined. It’s expected that many more banks won’t survive the next year of economic tumult. The pressures of tumbling home prices, rising mortgage foreclosures and tighter credit have been battering many banks, large and small, across the nation.

The failures this year include that of Seattle-based thrift Washington Mutual Inc. in late September, the biggest bank collapse in history. It had $307 billion in assets. In July another big savings and loan, IndyMac Bank based in Pasadena, Calif., failed and was seized by regulators with about $32 billion in assets.

The FDIC estimates that through 2013 there will be about $40 billion in losses to the deposit insurance fund, including an $8.9 billion loss from the failure of IndyMac Bank. The FDIC is raising insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $45.2 billion, below the minimum target level set by Congress and the lowest level since 2003.

In addition, the FDIC may guarantee nearly $2 trillion in U.S. banks’ debt and deposit accounts in an effort to break the crippling logjam in bank-to-bank lending.

Well over half of the roughly 8,500 federally-insured banks and savings and loans are expected to tap the FDIC’s temporary guarantees. The agency will provide as much as $1.4 trillion in insurance for more than three years for loans between banks, guaranteeing the new debt in the event the issuing bank fails or its holding company files for bankruptcy.

Of the 8,500 FDIC-insured banks, 117 were considered to be in trouble in the second quarter — the highest level in about five years and up from 90 in the first quarter. The agency doesn’t disclose the banks’ names.

Franklin Bank customers seeking more information can contact the FDIC toll-free at 1-800-591-2845. Security Pacific Bank customers can call 1-866-934-8944.

All in all a situation that needs to unwind through the decisions of millions not just a handful in Washington, Wall street or London.

Here’s what CNNMoney has to say about it.

NEW YORK (CNNMoney.com) — Lending rates fell again Friday, but as the cost of borrowing eases, some government data suggest private lending is not expanding.

The 3-month Libor rate dropped to 2.29% from 2.39% on Thursday, according to Dow Jones, marking the rate’s lowest point since Nov. 12, 2004.

The overnight Libor rate held steady at 0.33%, according to Bloomberg.com. The overnight rate is just a hundredth of a percentage point above the all-time low.

About a month ago, 3-month Libor was at 4.82%, and the overnight rate was at an all-time high of 6.88%. Lower rates are a major boost for the strangled credit markets because more than $350 trillion in assets are tied to Libor.

A number of U.S. government programs aimed at easing funding concerns for banks and encouraging lending between financial institutions have also helped lower Libor rates. Such initiatives include lowering interest rates, injecting capital into banks and providing insurance on all non-interest bearing accounts.

Falling Libor rates are “a very important ingredient” in the recipe for economic recovery, said Michael Strauss, chief economist at financial research firm Commonfund.

“Improvement in the Libor market is an important first step towards getting banks to act like banks again,” Strauss said.

As financial institutions become more confident in lending to each other, they will become more willing to lend to businesses and consumers, according to Strauss.

But with the economy likely in a recession, some indications show the Federal Reserve’s programs and lower rates have not yet encouraged banks and free market investors to lend to businesses.

The Fed announced Thursday that it lent another $100 billion to companies over the past week through a new short-term funding program. In its so-called Commercial Paper Funding Facility, the Fed has provided critical short-term financing to businesses and financial institutions in desperate need of cash.

But in a separate report, Fed data showed the market for commercial paper expanded by just $50.5 billion. Even as the Fed’s program has dragged down borrowing rates, the difference of $49.5 billion between the Fed’s injection and the market’s growth suggests that the commercial paper market would have contracted without the Fed’s involvement.

Read the rest of the story here

The specter of a ResCap failure grew after parent GMAC LLC on Wednesday said “substantial doubt exists regarding ResCap’s ability to continue as a going concern” absent more support from GMAC, best known for lending to GM customers.

GM owns 49 percent of GMAC, and both are trying to conserve cash as auto sales plummet, vehicle leases lose value, and more borrowers miss payments. Private equity firm Cerberus Capital Management LP owns the rest of GMAC.

GMAC is also trying to become a banking holding company, letting it tap the U.S. Treasury Department’s $700 billion bailout fund, and may refinance much of its debt.

Some analysts said ResCap may not survive beyond early 2009 despite having already slashed risky lending, reduced risk on its balance sheet, and shed some 10,000 jobs over two years.

“It’s not a foregone conclusion that they’re done, but they’re close,” said David Lykken, president of the consulting firm Mortgage Banking Solutions in Austin, Texas, who said he has clients that may want to buy ResCap assets.

A sale of all or part of the unit would be one possibility, but likely only at a distressed price.

“Given market conditions, and given that collateral values are still falling in markets where they lent, I think a bankruptcy is imminent, within the next 60 days,” Lykken said.

Christopher Wolfe, an analyst at Fitch Ratings, added: “If GMAC can’t provide support that ResCap needs, then bankruptcy is an option for ResCap.”

GMAC and Cerberus declined to comment. GM and ResCap did not immediately return requests for comment.

ResCap was the nation’s seventh-largest mortgage lender from January to June, the newsletter Inside Mortgage Finance said. But loan volume fell 59 percent in the third quarter to $11.9 billion as ResCap shut dozens of retail mortgage offices, and halted lending outside the United States and Canada.

The lender has lost $9.1 billion in the last two years, and said that as of September 30 it wasn’t receiving interest payments on 21.8 percent of loans, up from 5 percent a year earlier.

“We can only describe credit quality trends as ugly,” CreditSights Inc analyst Richard Hofmann wrote.

“With equity down to $2.3 billion, clearly ResCap cannot survive much longer at its current quarterly loss rate,” he added. “Absent of any government support, we believe GMAC’s statement points toward the filing of ResCap for bankruptcy.”

If ResCap were to fold, it would join hundreds of rivals to stop mortgage lending since the beginning of 2007.

Many have gone bankrupt in that period, including American Home Mortgage Investment Corp AHMIQ.PK, IndyMac Bancorp Inc (IDMCQ.PK: Quote, Profile, Research, Stock Buzz), New Century Financial Corp and Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz). Others scrambled to find buyers, including Countrywide Financial Corp and Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz). JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) bought Washington Mutual’s banking units.

ResCap has about $67 billion of assets, and oversees a $426 billion loan servicing portfolio. It said it expects to employ 3,800 people by year end, down from 14,000 at the end of 2006.

At a time of scarce capital and depressed asset prices, it’s unclear what ResCap is worth, as a whole or in pieces.

A transaction that became a bellwether was Merrill Lynch & Co’s (MER.N: Quote, Profile, Research, Stock Buzz) agreement in July to sell $31 billion of toxic debt to private equity firm Lone Star Funds for 22 cents on the dollar. It also provided 75 percent financing, suggesting that Lone Star had only had 5.5 cents on the dollar at risk.

“Anyone who has cash is the absolute king right now, and it’s a total buyer’s market,” said Thomas Salerno, who heads the financial restructuring department at the law firm Squire, Sanders & Dempsey LLP in Phoenix.

“Everything is valued with a depressed price, but that is where the market is right now,” he said. “You’re going to value ResCap’s portfolio on a loan-by-loan basis, and look at the collateral, and the creditworthiness of the borrowers. It’s all going to be easy to sell, the question is the price.”

NOT YET, NOT YET

Brian Johnson, an analyst at Barclays Capital, wrote that an abandonment of ResCap in early 2009 “may be the price” necessary for GM to obtain government aid to help it merge with rival automaker Chrysler LLC. This, he said, would “support auto lending and hence auto sales and jobs.”

But if housing conditions deteriorate well into 2009, as many expect, ResCap’s business might not yet be at a trough, depressing amounts that even eager suitors might offer.

“My concern is that there is a long, extended bottom,” Lykken said. “One of our hedge fund clients is salivating over this opportunity. There are a lot of people who might be interested in buying. I feel like a guy riding a horse and holding back the reins: ‘Not yet, not yet, not yet, not yet.’”