Greece must vote no to the bailout terms

Eurozone policymakers will view with horror George Papandreou's decision to hold a referendum on the Greek bailout package. Less than a week after agreeing a "comprehensive" deal to resolve Europe's sovereign debt crisis, the whole thing already seems to be coming apart at the seams. The Greek prime minister's commitment to a plebiscite introduces a further element of extreme uncertainty.

But for everyone, it could also be a blessing in disguise, for a vote on the bailout package would also in effect be a vote on continued membership of the euro. If it went against Mr Papandreou, his government would fall, and given that Greece could no longer deliver on the conditions attached to the bailout, public money to pay wages, pensions and bills would soon run out. The country would descend into chaos.

To restore order, whoever stepped into the ensuing vacuum would have to impose capital controls and leave the euro. It would be a cataclysmic economic event, but very probably better than the death by a thousand cuts that awaits if Greece agrees the bailout. The sudden death of a no vote is what Mr Papandreou will use as his chief weapon in presenting the case for acceptance of the bailout terms. But it is by no means clear he is going to win.

Things are about to get really interesting.

For housing market, economic worries trump downgrades

Concern over the future of the U.S. economy -- not ratings-firm downgrades of the U.S. or mortgage finance titans Fannie Mae and Freddie Mac -- remains the biggest threat to the nation’s housing market, experts said.

With investors dumping shares of U.S. stocks on Monday, yields on U.S. Treasuries continued to decline, as buyers poured into what is traditionally considered a financial safe haven. Because of that flight to Treasuries, mortgage rates, which are tied to Treasuries' yields, are likely to stay near their historic lows in the near term, Guy Cecala, publisher of Inside Mortgage Finance Publications, said Monday.

“The stock market continues to be in the toilet,” Cecala said. “Investors don’t really have the choice to abandon Fannie and Freddie debt or Treasuries, so actual rates are going down.”

On Friday, credit ratings firm Standard & Poor’s downgraded U.S. debt from AAA to AA+, a move that ignited the broad sell-off Monday. S&P also downgraded mortgage titans Fannie and Freddie, saying those companies -- which were placed under conservatorship by the U.S. government in 2008 -- have debt that is exposed to economic volatility and any further downgrade of long-term U.S. debt.

Under more normal markets conditions, those moves would probably lead to a spike in mortgage rates, said Cecala of Inside Mortgage Finance. Freddie Mac, in a filing with the Securities and Exchange Commission on Monday, warned that a downgrade of its credit rating could lead to an upending of the mortgage market.

“Such actions could lead to major disruptions in the mortgage market and to our business due to lower liquidity, higher borrowing costs, lower asset values and higher credit losses," the company said, in its quarterly filing.

Reporting a loss for the spring, the company requested $1.5 billion in additional aid from the government.

But Michael D. Larson, a housing and interest rate analyst with Weiss Research, said that the weak economy remained the overriding factor for the housing market's sluggishness. The plunge in stock markets and talk of a double-dip recession have added to continued concerns over the direction of the economy, which will serve as a drag on the housing market, he said.

“This is not a rate-driven issue,” he said. “We have low rates, but we don’t have confidence, we don’t have jobs.”

There is some evidence consumers are taking advantage of falling rates for fear they will eventually rise. The online mortgage referral company LendingTree said Monday that it experienced one of its biggest days ever in applications for home loans over the weekend -- with many of those being applications for refinancing.

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-- Alejandro Lazo

Twitter: @AlejandroLazo

Photo: Freddie Mac's corporate offices in McLean, Va. Credit: Pablo Martinez Monsivais / Associated Press

Banks use new Treasury funds to retire TARP debts

Trade in that nagging Troubled Asset Relief Program debt for a better deal with Uncle Sam.

That's the aim of most of the community banks participating in a U.S. Treasury investment program designed to increase loans to small businesses.

As reported here Wednesday, the holding companies for Redwood Capital Bank in Eureka, Calif., and Pacific Coast Bankers' Bank in San Francisco are taking part in the Treasury's Small Business Lending Fund program.

And both used some of the money they received to retire debts to the Treasury they had incurred through the Troubled Asset Relief Program, the financial crisis-era program with the acronym TARP, aka the bank bailout.

The new program designed to stimulate small-business loans works like this: Uncle Sam buys preferred stock in the bank, which initially pays the government a 5% annual dividend but can reduce that to as little as 1% in return for increased business lending.

That's a better deal than the 5% dividend banks must pay the Treasury every year for their TARP funds. TARP also reined in executive pay sharply, enough so that an expansion-minded small bank might not be able to hire a first-rate but pricey CEO, said Anaheim banking consultant Gary Findley.

The small-business lending fund "doesn't have the same draconian restrictions as TARP," Findley said. "And where else are you going to get capital at 1%?"

The new program, which has $30 billion to invest in banks with less than $10 billion in assets, began letting go of the money in late June.

A Treasury report Wednesday said that so far it had invested $590.5 million in 43 banks. They included five in California: Redwood Capital Bancorp, Pacific Coast Bankers' Bancshares, First California Financial Group Inc. of Westlake Village, Security Business Bancorp of San Diego and Founders Bancorp of San Luis Obispo.

All but Founders had been TARP recipients, a Treasury accounting report shows. Redwood got $7.3 million in new funds and paid off its $3.8-million TARP debt. Pacific Coast received $11.9 million and paid off $11.6 million in TARP funds. First California paid off $25 million in TARP money with a fresh infusion of $25 million. Security Business received $8.9 million in new funds and repaid a TARP debt of $5.8 million.

Banks have to be in reasonably good financial shape to qualify for the more attractive small-business lending program, Findley noted. That means certain banks that received TARP funds and then were roughed up in the Great Recession "are out of luck," he said. "They're stuck carrying that TARP investment on their backs until they can find another way to pay it off."

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-- E. Scott Reckard

Photo: Redwood Capital Bank repaid its $3.8-million TARP debt to the U.S. Treasury with a $7.3-million investment from a separate Treasury program. Credit: Redwood Capital Bancorp.