Platinum Lending Solutions

By Thomas Ferraro

WASHINGTON (Reuters) – President Barack Obama’s proposed financial regulatory overhaul could face big changes in Congress, where over the years members of both parties have permitted lax controls blamed for the U.S. economic meltdown.

Democratic and Republican lawmakers found fault with at least some of the ideas put forward in the president’s proposal, which seeks to clamp down on the country’s biggest financial firms in the hope of preventing another economic crisis.

The biggest sticking point may be the role of the Federal Reserve, the U.S. central bank. Obama envisions the Fed overseeing the largest financial firms to ensure that they are not taking excessive risks that could destabilize the economy.

But several top Democrats and Republicans questioned whether that would vest too much authority in an agency that has already drawn the ire of many lawmakers for its role in the costly bailouts of Bear Stearns and AIG.

“There’s not a lot of confidence in the Fed at this point,” Senator Christopher Dodd, chairman of the Senate Banking Committee, said on Wednesday.

Senator Richard Shelby, the committee’s ranking Republican, said the Fed had “utterly failed” as a regulator and putting it in charge of regulating systemic risk would be piling on too many responsibilities.

Still, Obama’s fellow Democrats, who control Congress, vowed to move ahead on legislation that aims to reduce risks and increase stability in financial markets rocked by scandals, incompetence and corporate failures.

It was unclear how quickly they could act with a number of lawmakers raising concerns and promising change.

Representative Louise Slaughter, a member of the House Democratic leadership, complained that the proposal needs to be tougher to prevent another financial crisis from wreaking havoc on the broader economy.

“It’s important that President Obama show the American people he is serious about clamping down on the financial industry, which has been far too loosely regulated for too long,” Slaughter said. “I will follow this legislation closely and intend to seek opportunities to further strengthen it.”

CONSUMER PROTECTIONS

Assistant Senate Democratic Leader Dick Durbin, however, hailed creation of a Consumer Financial Protection Agency, a centerpiece of Obama’s proposal, saying: “It’s time we put the needs of American families above the interests of Wall Street.”

House Republican Leader John Boehner, a frequent Obama critic, said, “There are clearly some ideas that we agree with” in the legislation, which include steps to streamline U.S. bank oversight and put the Federal Reserve in charge of monitoring big-picture economic dangers.

“But I do think that this idea of having this consumer board is very cumbersome, will limit the number of new financial products that come to the market and will give the government an awfully strong presence in an industry that’s been very creative,” Boehner said.

Ethan Siegal of The Washington Exchange, a private firm that tracks Congress for institutional investors, said the administration had put forward a pragmatic, reasonable plan. However, he said he was skeptical that Congress would pass any significant reform this year.

“Instead, in the near-term I think that oversight and regulatory changes will be implemented as best as possible at the agency and regulatory level by the Obama administration and the regulators themselves,” he said.

Since shortly after the Great Depression, there have been a number of drives to tighten regulation of the financial system. But they have been shot down by lawmakers in both parties who favored having the industry essentially regulate itself.

“Everyone has skin in this blame game,” said Siegal.

Obama wants to enact the plan into law before the end of the year. Its main components must be approved by Congress, and some preliminary language has been delivered.

The House is likely to move within months, but the outlook in the Senate, now busy with healthcare reform, is unclear.

Senate Judd Gregg, ranking Republican on the Budget Committee, said there is plenty of work to do.

“Today’s announcement by the White House is only a first step in starting the overdue improvements in monitoring America’s financial services industry,” Gregg said.

(Additional reporting by Jeremy Pelofsky, Susan Cornwell and Richard Cowan; Editing by Dan Grebler)

Copyright © 2008 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten, or redistributed without the prior written authority of The Associated Press.

The Federal Reserve released the Loan Officer Opinion Seurvey on Bank Lending Practices for April. The survey covers the supply of, and demand for, loans to businesses and households over the previous three months. The survey also included two sets of special questions: The first set asked banks about their expectations for delinquencies and charge-offs on existing loans to business and households; the second set queried banks about international trade finance.

“In the April survey, the net percentages of respondents that reported having tightened their business lending policies over the previous three months, although continuing to be very elevated, edged down for the second consecutive survey. In contrast, somewhat larger net percentages of domestic banks than in the January survey reported having tightened credit standards on residential mortgages. The net percentage of domestic respondents that reported having tightened their lending policies on credit card loans remained about unchanged from the January survey, whereas the net percentage that reported having tightened their policies on other consumer loans fell. Respondents indicated that demand for loans from both businesses and households continued to weaken for nearly all types of loans over the survey period, an exception being demand for prime mortgages, a category of loans that registered an increase in demand for the first time since the survey began to track prime mortgages separately in April 2007,” the report stated.

In response to the special questions on the outlook for loan quality, a significant majority of banks reported that credit quality for all types of loans is likely to deteriorate over the year if the economy progresses according to consensus forecasts. In response to the special questions on international trade finance, the majority of domestic institutions that provide such credit and a substantial fraction of foreign institutions reported having tightened standards over the previous six months.

The following is a summary of the responses for various types of lending:

Commercial and industrial lending. On net, about 40 percent of domestic respondents, compared with around 65 percent in the January survey, reported having tightened their credit standards on commercial and industrial (C&I) loans to firms of all sizes over the previous three months. On balance, domestic banks have reported tightening their credit standards on C&I loans to large and middle-market firms for eight consecutive surveys and to small firms for ten consecutive surveys. Although 40 percent is still very elevated, the April survey marks the first time since January 2008 that the proportion of banks reporting such tightening fell below 50 percent. Similarly, the net percentages of domestic respondents that reported tightening various terms on C&I loans over the previous three months remained elevated but were slightly lower than those reported in the January survey. Specifically, about 80 percent of domestic banks, on balance, indicated that they had increased spreads of loan rates over their cost of funds for C&I loans to large and middle-market firms, compared with around 95 percent in January. About 75 percent of domestic respondents, compared with about 90 percent in January, indicated that they had increased such spreads for C&I loans to small firms. A significant majority of banks reported having charged higher premiums on riskier loans and having increased the costs of credit lines over the survey period.

U.S. branches and agencies of foreign banks also tightened their business lending stance further over the previous three months. On net, about 30 percent of foreign banks, compared with 65 percent in Janaury, reported tightening credit standards for C&I loans. As with their domestic counterparts, significant percentages of foreign banks further tightened various terms on C&I loans, although these percentages were somewhat lower than those in January. On balance, over 65 percent of foreign respondents reported an increase in premiums charged on riskier loans and in the cost of credit lines, and about 60 percent of foreign banks reported an increase in spreads of loan rates over their cost of funds.

Large majorities of both domestic and foreign banks reported a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk as important reasons for tightening credit standards and terms on C&I loans. A substantial majority of foreign respondents also indicated that an increase in defaults by borrowers in public debt markets, decreased liquidity in the secondary market for business loans, and deterioration in their banks’ expected capital position were important reasons for the change in C&I lending policies over the survey period.

On balance, about 60 percent of domestic banks reported a further weakening of demand for C&I loans from firms of all sizes over the previous three months, a proportion similar to that reported in the January survey. In contrast, foreign banks, on net, saw little change in demand over the survey period, compared with about 25 percent that reported weaker demand in the January survey.

All foreign respondents and 37 of the 38 domestic banks that saw weaker demand for C&I loans over the previous three months indicated that a decrease in their customers’ needs to finance investment in plant or equipment was an important reason for the change in loan demand. Substantial majorities of the domestic institutions that had experienced such weaker demand also pointed to decreases in their customers’ needs to finance inventories, accounts receivable, and mergers and acquisitions. In addition, about 35 percent of domestic respondents, on net, reported that inquiries from potential business borrowers had decreased during the survey period, a percentage similar to that in the January survey. In contrast, only about 5 percent of foreign respondents, on net, reported a decrease in such inquiries.

Commercial real estate lending. About 65 percent of domestic banks, on net, reported tightening their lending standards on commercial real estate (CRE) loans over the previous three months, compared with about 80 percent in the January survey. On balance, domestic banks have been tightening credit standards on CRE loans for 14 consecutive surveys, and the April survey marks the first time since October 2007 that the net proportion of banks reporting such tightening fell below 70 percent. About 35 percent of foreign branches and agencies also reported tightening their lending standards on CRE loans over the survey period. The demand for CRE loans weakened further at survey respondents over the previous three months. About 65 percent of domestic banks, on balance, reported weaker demand for CRE loans, the highest net percentage so reporting since the survey began tracking demand for CRE loans in April 1995. In contrast, the net proportion of foreign banks that reported a decrease in demand for CRE loans–about 35 percent–was somewhat smaller than that in the January survey.

Residential real estate lending. In the April survey, somewhat larger fractions of domestic respondents than in the January survey reported having tightened their lending standards on prime and nontraditional residential mortgages. About 50 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages over the previous three months, and about 65 percent of the 25 banks that originated nontraditional residential mortgage loans over the survey period reported having tightened their lending standards on such loans. About 35 percent of domestic respondents saw stronger demand, on net, for prime residential mortgage loans over the previous three months, a substantial change from the roughly 10 percent that reported weaker demand in the January survey. About 10 percent of respondents reported having experienced weaker demand for nontraditional mortgage loans over the previous three months-a substantially lower proportion than in the January survey. Only two banks reported making subprime mortgage loans over the same period.

On net, about 50 percent of domestic respondents, down from roughly 60 percent in the January survey noted that they had tightened their lending standards for approving applications for revolving home equity lines of credit (HELOCs) over the previous three months. Regarding demand, about 30 percent of domestic banks, on net, reported weaker demand for HELOCs over the previous three months, slightly more than the proportion that had reported weaker demand in the January survey.

Consumer lending. Large percentages of domestic banks again reported a tightening of standards and terms on both credit card loans and other consumer loans over the previous three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card loans, about the same proportion as in the January survey. About 50 percent of respondents, down from 60 percent in the January survey, reported tightening standards on other consumer loans. About 50 percent of respondents reported having reduced the extent to which credit card accounts were granted to customers who did not meet their bank’s credit-scoring thresholds, and a similar fraction reported pulling back from granting other kinds of consumer loans to such customers. Roughly 55 percent of the respondents, a somewhat higher proportion than in the January survey, reported having raised minimum required credit scores on credit card accounts over the previous three months. About 45 percent of respondents reported having raised minimum scores on consumer loans other than credit cards, and about 65 percent of banks, compared with 45 percent in the January survey, indicated that they had lowered credit limits to either new or existing credit card customers. In contrast to the substantial net tightening reported for consumer loan standards and terms, only about 5 percent of domestic banks, on net, indicated that they had become less willing to make consumer installment loans over the previous three months; this proportion is down from 15 percent in the January survey and 45 percent late last year. Regarding demand, about 20 percent of respondents, on net, indicated that they had experienced weaker demand for consumer loans of all types over the previous three months-substantially less that the percentage so reporting in the January survey.

Existing Credit Lines. The April survey repeated a special question from the January survey that queried banks on how, over the previous three months, they had changed the sizes of credit lines for existing customers for a number of account types. On balance, banks had continued to trim lines for both businesses and households. Regarding existing accounts for businesses, roughly 55 percent of domestic respondents, on balance, reported a decrease in the limits on CRE accounts–a proportion slightly lower than that reported in the January survey. About 55 percent of respondents indicated a decrease in the limits on credit lines extended to financial firms–a proportion slightly above that in the January survey. About 30 percent (about the same as in the January survey) indicated a decrease in credit limits on business credit card accounts, and roughly 40 percent (significantly more than in January) noted a decrease in the size of C&I credit lines. On net, a large proportion of foreign banks also decreased limits on credit lines extended to financial firms, CRE credit lines, and C&I credit lines. Regarding existing accounts for households, about 40 percent of domestic banks, on net (about the same as in January), reported having reduced the sizes of existing HELOCs, and approximately 50 percent (up from 35 percent in the January survey) reported having trimmed existing consumer credit card account limits.

The outlook for loan quality in 2009. A set of special questions asked banks about their expectations for delinquencies and charge-offs on loans to businesses and households in 2009, under the assumption that economic activity progresses in line with consensus forecasts. The vast majority of domestic and foreign respondents indicated that they expect deterioration in credit quality for all types of business and household loans. For each major category of loans considered in the survey, more than 70 percent of respondents, on net, reported that the quality of their bank’s loan portfolio is likely to deteriorate this year, with more than 90 percent of domestic respondents reporting that loan quality is likely to deteriorate for nontraditional mortgages, credit card loans, and CRE loans.

International trade finance. A final set of special questions queried both domestic and foreign respondents about their provision of international trade finance (trade credit), which may consist of letters of credit guaranteeing payment, overdraft facilities, and other mechanisms for facilitating trade. About 65 percent of domestic and 80 percent of foreign respondents reported providing such credit. About 60 percent of the domestic respondents and nearly 45 percent of the foreign respondents that provided such finance reported tightening standards or terms over the previous six months. More than 80 percent of domestic banks that reported having tightened standards or terms cited a less favorable or more uncertain economic outlook abroad, increased concern about foreign country risk, worsening industry-specific problems, reduced tolerance for risk, and a less favorable or more uncertain economic outlook in the United States as reasons for the tightening. All of the eight foreign banks that reported tightening their standards and terms on international trade finance cited a less favorable or more uncertain economic outlook in the United States and abroad and an increase in concern about foreign country risk as important reasons for the tightening. On net, about 70 percent of domestic respondents and about 10 percent of foreign respondents reported experiencing weaker demand for trade credit over the previous six months.

Jeff Clabaugh of the Washington Business Journal, an affiliated publication, compiled this report.

The average rate for a 30-year, fixed-rate mortgage remained virtually steady last week, with Texas’ rates rising slightly.

For the week ended April 26, the average rate for a 30-year, fixed-rate mortgage in Texas was 5.03 percent, up 0.3 percent from the week before.

Nationwide, the average 30-year rate was 5.07 percent, up .2 percent from 5.06 percent the prior week, according to Zillow.

The national average for a 15-year, fixed-rate mortgage was 4.72 percent, up from 4.68 percent the week before.

Georgia (4.99 percent) and Florida (5.01 percent) had the lowest 30-year mortgage rates in the country, while Ohio (5.17 percent) had the highest.

Seattle-based Zillow compiles rates quoted by 4,000 participating mortgage lenders to potential borrowers on its site.

By BRIAN WITTE – 23 hours ago

BALTIMORE (AP) — More than 1,000 people were defrauded out of about $70 million by a group advertising the dream of homeownership in what turned out to be a nightmare Ponzi scheme, federal and Maryland officials said Monday.

Five officers for Laurel, Md.-based Metro Dream Homes company are accused of tricking homeowners into pouring money into the business with the promise that the revenue would be used to pay off their mortgages. The scheme ran from 2005 until October 2007, authorities said.

Newly confirmed Assistant U.S. Attorney General Lanny Breuer said the charges should send a message to those engaging in mortgage fraud.

“Our resolve as a group is great,” he said at a news conference in Washington. “We will find you. We will prosecute you, and we’re going to put you in prison.”

The indictment names company founder Andrew Hamilton Williams Jr., 58, of Hollywood, Fla.; financial officer Michael Anthony Hickson, 46, of Commack, N.Y.; president Isaac Jerome Smith, 46, of Spotsylvania, Va.; and vice president Alvita Karen Gunn, 31, of Hanover, Md. They had 48 hours to turn themselves in.

Gunn had an initial appearance Monday afternoon in U.S. District Court in Greenbelt, Md. Her attorney, Elita C. Amato, did not immediately return a call seeking comment. Other attorneys in the case also could not be reached for comment.

A fifth person, Carole Nelson, 50, of Washington, D.C., was named in a document normally filed as part of a plea deal.

“Some people hope to get rich quickly just by dreaming, without the hard work,” said Rod Rosenstein, the U.S. attorney for Maryland. “Usually, people can achieve that only by breaking the rules.”

Prosecutors say the company marketed the mortgage program in seminars at luxury hotels in Maryland, Washington and Beverly Hills, Calif. An investor had to put up a minimum of $50,000 for each home. The company was then supposed to pay off their mortgages within five to seven years.

More than half the victims were from the Washington suburbs of Prince George’s County in Maryland, said John McLane, a Maryland assistant attorney general. Other victims were in California, Delaware, the District of Columbia, Georgia, New York, North Carolina and Virginia.

Investors were told they were investing in ATM machines, television advertising and calling card kiosks that would raise money for the mortgage payments. But prosecutors say those businesses never made any money.

Instead, prosecutors say the investments were used to pay company salaries of up to $200,000 and maintain a fleet of luxury cars and a staff of 10 chauffeurs. And company officials allegedly traveled to the Super Bowl and the NBA all-star game with investor money.

“The name Dream Homes was truly a nightmare for so many people in the state of Maryland,” said Douglas F. Gansler, the state’s attorney general.

Authorities say the conspirators operated under several corporate names, including Metro Dream Homes, Metropolitan Grapevine LLC and POS Dream Homes.

Investigators said the scheme was elaborate — early investors whose monthly mortgage payments had been paid by money provided by later investors assured potential recruits that the program worked. Investors were told the company made as much as $10 million a month.

Dream Home representatives also encouraged investors to enroll more than one home in the program, with an additional $50,000 investment fee required for each home. Investors who put $100,000 or more into the program were told they would receive a seat on a “Junior Board of Directors.”

WASHINGTON (Dow Jones)–The Obama administration unveiled a fresh set of incentives Tuesday for mortgage servicers to help strapped U.S. homeowners.

Under a new program, the government will pay mortgage servicers $500 up front and $250 a year for three years for successfully modifying a second mortgage, such as a home equity loan.

Second mortgages have complicated government efforts to help borrowers avoid foreclosure. According to the U.S. Treasury Department, up to 50% of at-risk mortgages have second liens and many properties in foreclosure have more than one lien.

Senior administration officials Tuesday told reporters they expect a significant amount of big banks to sign up for the updated federal program to bring relief to troubled homeowners. Once those firms sign necessary contracts, they’ll generally be obligated to modify second liens when they’ve initiated a modification on the first, the officials said. They also noted that the second lien program will be funded by the $50 billion in Troubled Asset Relief Program, or TARP, funds the administration had already projected to use for home affordability efforts.

Additionally, the administration unveiled a schedule of incentives for holders of second mortgages to extinguish those liens voluntarily.

The administration also announced a set of incentives for servicers and lenders participating in the Hope for Homeowners program, which aims to restore homeowners’ lost equity by encouraging lenders to write down loan principal. The administration said it will take steps to incorporate Hope for Homeowners into its loan modification program. Servicers will be required to determine eligibility for a Hope for Homeowners refinancing and where it proves viable, the servicer would need to offer this option to the borrower.

While participation in the Hope for Homeowners program has been dismal, administration officials said they’re expecting strong investor interest as the program is wrapped into the broader federal loan modification program. The administration also said it supports legislation to strengthen the Hope for Homeowners program so that it can function effectively as a key part of the administration’s new housing efforts.

“With these latest program details, we’re offering even more opportunities for borrowers to make their homes more affordable under the administration’s housing plan,” Treasury Secretary Timothy Geithner said in a statement Tuesday. “Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall.”

During a conference call, senior administration officials said they are continuing to work on key elements of the president’s plan to stem foreclosures and agencies will be developing more details and guidelines going forward.

Tuesday’s announcements are expected updates. The issue of second mortgages has been dogging policymakers ever since the onset of the foreclosure crisis. A large share of troubled borrowers also have a second mortgage on their home, which is typically owned by a different investor than the first mortgage. Such borrowers may not be able to afford their monthly payments if only the first mortgage is modified.

The administration’s effort on second mortgages is also aimed at soothing the concerns of investors, who have been crying foul over the Obama housing plan’s incentives for servicers. They argue the first mortgage shouldn’t be modified if the second one is left untouched. They also contend the banks that dominate mortgage servicing are conflicted because they own more than $400 billion of second mortgages. Such banks stand to gain from modifying the first mortgage because the second mortgage is more likely to be repaid once the homeowner is saved from foreclosure.

Some of the largest U.S. banks, including Bank of America (BAC), Wells Fargo (WFC) and JPMorgan Chase (JPM), have already agreed to sign on to the program, the official said. The rest of the industry will be encouraged to participate.

Under the program, servicers must agree to modify all second mortgages where the first mortgage has already been modified. To qualify for payment, servicers must extend the term of the second mortgage and reduce the interest rate to match the first mortgage. Then, the government will share the cost with the servicer of reducing the rate down to 1% for amortizing loans and 2% for interest-only loans.

Borrowers will receive payments of up to $250 per year for as many as five years if they stay current on the loan. The payments will be applied to pay down principal on the first mortgage.

Changes to the Hope for Homeowners program are designed to place it in line with the taxpayer-assisted loan modifications. Launched last fall to help troubled borrowers refinance into more affordable government-backed loans, it has failed to gain traction due to onerous borrower requirements and the nagging problem of second liens.

The administration announced Tuesday a $2,500 up-front payment to servicers that refinance borrowers into the program. Meanwhile, lenders that originate the new loans will receive $1,000 a year for three years, if the loans stays current.

By Ken Bensinger

12:24 PM PDT, April 27, 2009

In a desperate bid to avoid bankruptcy, General Motors Corp. today launched a restructuring plan that would eliminate 2,600 dealers, 21,000 workers, $44 billion in debt and four brands, including Pontiac — while leaving the U.S. government owning at least half of the troubled automaker.

In addition, GM will accelerate the wind-down of its Hummer, Saturn and Saab brands, ceasing production by year’s end. Pontiac will be terminated after 2010.

The automaker announced the sweeping moves as part of a revised business plan it is submitting to the Treasury Department, from which it is requesting $11.6 billion in loans on top of the $15.4 billion it has already received.

The new plan is centered on a debt-for-equity offering GM is extending to holders of $27 billion in bonds. At least 90% of holders of outstanding bonds must accept, the company said, or it will file for bankruptcy by June.

“The objective here is not to survive, the objective is to develop an operating plan that helps us win,” said Fritz Henderson, GM’s president and chief executive in a morning conference call. “It’s a difficult period, it’s a challenging period, it’s a very painful period.”

Shares in GM rose 36 cents, or 21%, to $2.05, in early trading.

This is the third restructuring plan filed by GM since December. This time, it plans to incorporate cuts sufficient to allow the company to break even in a market with industry sales as low as 10 million vehicles in the U.S. on an annual basis.

Last year, 13.2 million cars and light trucks were sold in the U.S., but through the first quarter of this year, sales were on a 9.8-million-unit pace.

Last month, the Treasury Department’s autos task force rejected GM’s previous restructuring plan, submitted on Feb. 17, saying it was insufficient in scope and reach.

Instead, GM was given until June 1 to show the Obama administration it has a sustainable business model or it would face being pushed into bankruptcy.

To do that, the automaker was asked to reduce billions of dollars in obligations to the bondholders and unions for retiree healthcare and to reduce labor costs, as well as show it can turn a profit in a market that’s seeing its lowest sales level in three decades and repay its taxpayer funded loans.

The latest plan is based on far deeper cuts for all significant stakeholders than considered before, and as such calls for far greater sacrifices in order to keep the century-old automaker afloat in its most difficult hour.

“The depth of the pain inflicted on our workers, families and communities by these decisions should not be minimized,” Sen. Carl Levin (D-Mich.) said. “It appears GM was left no choice, and I now believe bondholders have no choice either but to accept significant losses as a better alternative to bankruptcy.”

Chrysler, which has borrowed $4 billion from the government, has been given until the end of this month to reduce its debt and to cut union costs. In addition, it has been asked to forge a merger with Italian automaker Fiat.

On Sunday, Chrysler reached a deal with the United Auto Workers union and the Canadian Auto Workers union, the latter of which has been ratified and is expected to save the company about $200 million a year in labor costs.

The Chrysler union deals are likely to set a framework for any agreement that GM reaches in coming weeks.

Although GM has already reached a tentative agreement with the UAW on labor costs — which has not yet been ratified — it is still negotiating reductions in payments due to a retiree healthcare trust. At the same time, its new plan contemplates further layoffs.

GM said it would eliminate 21,000 salaried and hourly jobs by the end of next year, 7,000 more than previously announced, and would shutter 13 plants in the process. By 2010, it will sell only 34 car models, down from 48 in 2007.

With Pontiac, Hummer, Saab and Saturn slated to be eliminated, GM will focus on four brands: Chevrolet, Cadillac, GMC and Buick. The company’s plan predicts that its share of the U.S. vehicle market will drop to between 18.4% and 18.9%, from 19.5% at present, as a result of the brand reductions.

On Friday, GM said it would shut down 13 plants for up to 11 weeks this spring and summer, reducing inventories by 130,000 units, in order to meet currently depressed levels of demand. GM’s sales through the first quarter of the year are down 43% compared with a year earlier.

GM lost $30.9 billion in 2008.

A major sticking point for the company has been reducing by as much as half $20 billion in cash obligations to a retiree healthcare trust established with the UAW in 2007. The automaker said it would accomplish that goal with a debt-for-equity swap, and would also offer equity to the Treasury in exchange for up to $10 billion in debt and to private holders of $27 billion in GM bonds.

A tender offer extended by the company today to bondholders would trade 225 shares in the company for every $1,000 in debt. To avoid a bankruptcy filing, Henderson said, at least 90%, or $24 billion, of that debt would have to be voluntarily swapped.

“If the tender doesn’t work, we will file into bankruptcy,” Henderson said in a call to Wall Street analysts today.

By combining its tender offer with its equity offers to the Treasury Department and the UAW, GM hopes to cut $44 billion in debt from its balance sheet.

Analysts reacted with skepticism, suggesting that the plan provided a far weaker offer to bondholders than to the UAW.

“The offer is unlikely to be accepted,” said Brian Johnson of Barclays Capital. He calculated that the tender would be worth 0 to 5 cents per dollar of outstanding debt to bondholders, compared with 50 to 60 cents a dollar to the union. Johnson called GM’s latest plan “final brinksmanship.”

If the offer is successful, however, it would give the U.S. government at least a 50% stake in the automaker, with the union holding up to 39% and bondholders with an additional 10% share. Current shareholders would effectively be wiped out.

As such, it would effectively nationalize the automaker.

GM’s Henderson did not give details on how it would be managed in that scenario, but said that the “administration is not interested in running GM.”

He did say, however, that the autos task force insisted on the specific ownership percentages to different stakeholders, and that it also asked GM to replace the majority of members of its board of directors. Both are strong indicators of how deeply involved the administration has been in the automaker’s planning to date.

Meanwhile, GM said it would soon begin contacting the approximately 2,600 dealers it has selected for elimination and make them undisclosed offers to surrender their GM franchises. That could cost billions of dollars, although Henderson declined to give specifics of the offer.

The cuts would leave GM with about 3,600 U.S. dealers by 2011, a 42% reduction. The closings would leave 500 fewer GM dealers than had been contemplated in the company’s previous restructuring plan.

A big part of that reduction would be eliminating Pontiac, which GM today added to the list of targeted brands. Hummer, Saab and Saturn were already slated for closure. Henderson said that production of all four brands would cease by 2010, although a few Pontiac models could be extended for another year.

Henderson said that several parties continued to show interest in Hummer and that “our gut judgment is we do have a reasonable chance there will be a sale of the brand.” He was less certain about Saab and Saturn.

Though an Oklahoma City-based private investment firm approached GM about purchasing Saturn two weeks ago, Henderson said that an offer sweet enough to keep Saturn vehicles in production beyond this year was not “on the table, at least one we would consider successful.”

The company plans “discussions” with Toyota Motor Corp. over the fate of the Fremont, Calif., plant they operate together to produce the Pontiac Vibe and Toyota Matrix. Henderson said the Vibe would continue production through 2010.

GM is also in discussions with potential investors in its European Opel division, including the possibility of giving up a majority stake in the unit.

“It’s been my theory that big is only good if you use it to your advantage,” said Henderson. “As a company, our overall performance has not been adequate.”

By Kristina Cooke

NEW YORK (Reuters) – Unemployment is a bigger reason for missed mortgage payments than high interest rates, according to a study from the Boston Federal Reserve that raises questions about President Barack Obama’s plan to stem foreclosures by modifying loans.

Borrowers are more likely to default on their payments because they have lost their jobs or because the price of their homes has plummeted than because of tough terms on their mortgages, the study found.

Loan modifications are not necessarily a better deal for investors either, wrote Boston Fed economists Christopher Foote and Paul Willen, Atlanta Fed economist Kristopher Gerardi and Lorenz Goette, a professor at the University of Geneva.

Their research found that policies that directly help homeowners overcome setbacks such as losing their jobs may be more effective in combating foreclosures.

“Foreclosure-prevention policy should focus on the most important source of defaults,” the economists wrote in a study released on the Boston Fed’s website late last week.

The findings challenge the thinking behind a White House plan announced in February that would give up to 9 million families the chance to refinance their mortgages. President Obama’s administration has made loan modifications a central plank of its efforts to tackle the housing crisis.

“One of the most influential strands of thought contends that the crisis can be attenuated by changing the terms of ‘unaffordable’ mortgages,” the economists wrote. But policies that focus on loan modification “face important hurdles in addressing the current foreclosure crisis,” they wrote.

The economists suggest that the government could instead replace part of an individual homeowner’s lost income from a job loss through loans and grants and help those whose predicament is more permanent become renters.

In addition, investors do not necessarily stand to gain if foreclosure is avoided, they said, and that could help explain the relatively small number of loan modifications to date. Estimates that total gains for investors from modifying rather than foreclosing can run to $180 billion may not take into account a number of key factors.

Investors can lose money when they modify mortgages for borrowers who would have repaid anyway. Borrowers with modified loans may default again later, especially if the reason they were driven to default remains, the economists said.

Kansas City Business Journal