Food price rise could last another two years

You may have to get used to paying more for your groceries for another two years or more.

Experts say an increase in global food consumption combined with increasing use of crops such as corn and soybeans for alternative fuel production are partly to blame.

Agricultural economists who've studied food price fluctuations cite historical trends that show run-ups in farm commodity prices typically happen in five-year cycles.

Prices flare up in the first two to three years of the cycle and then start to moderate by the fourth or fifth year, said Chris Hurt, agricultural economist at Purdue University .

If 2007 was the first year of this latest cycle, Hurt said farm supply could start catching up to demand by 2010, helping to push down milk, bread, cereal and other grocery prices.

Until then, "Americans will be moving backward in their [food] lifestyle." By that he means that more families will trade down to cheaper food alternatives, or eat out less often, in order to adjust their budgets to both higher food and fuel costs.

Wal-Mart (WMT, Fortune 500), the No. 1 discounter and supermarket chain, said Tuesday that spending patterns in its stores already support the trend. The retailer said shoppers are buying more white meat and less red meat, stocking up on larger package sizes and buying more boxed frozen meals as eating at home replaces going out.

"This is the first price boom we've seen since the 1970s," said Bill Knudson, professor of agricultural economics at Michigan State University, agreed. "There's an old industry saying that high prices cure high prices. My personal opinion is that food prices will remain high for another two or three more years."

The good news, however, is that "there's no grave concern" of a pending food shortage in the United States, Hurt said.
Why is food more expensive now?

Experts point to four main global trends for the rise in food prices.

First, growing incomes in developing countries such as China, India, Malaysia mean citizens in these countries are eating better and more frequently, thereby putting more demand on the global food supply.

"People are consuming more quantity and higher-quality foods," said Hurt. "They are eating more meats, eggs, grains and [drinking] milk."

Second, adverse weather patterns over the past four years have harmed crop production in Australia, southern Europe, Ukraine and even parts of the United States.

American Farm Bureau Federation (AFBF) economist Jim Sartwelle said a prolonged drought in Australia - a major wheat and dairy producer - has led to big drops in world exports of wheat and milk.

Third, the United States is normally a big food surplus nation but, "with a weak dollar, there's been a run on our pantry of food supplies," Sartwelle said. "A lot of our excess production is going overseas and this is pushing up domestic prices."

Fourth, burgeoning demand in the European Union and the United States for ethanol and other biofuels has sparked a price surge in corn, soybeans, sugarcane and other commodities used to produce those alternative fuels.

It's not only consumers feeling the price pain, Sartwelle said.

He said that "even with higher retail prices, farmers and grocers get very little increase in their profit margin," because it's being offset by higher packaging costs, energy cost to produce and stock food and fuel to transport products.

Bill Ferriera, president of the Apricot Producers of California, also sees a bump-up in the costs of farming.

"Fertilizer costs have doubled from last year and farm labor availability is a big problem," he said. "Many farmers are choosing not to grow produce that is labor intensive."

Despite these food price hikes, Americans still spend only about 10% of their disposable income on food and beverage purchases per year, according to the Department of Agriculture.

That's below the 15% share of disposable income that Europeans spend on food and drinks, and the whopping 70% that citizens of Pakistan and Bangladesh budget for consumables, said Hurt.

So even with a 4.5% expected rise in overall food prices, Americans, per person, will only spend an extra $87 this year on groceries, according to the Economic Research Service of the Department of Agriculture.

But that's little consolation for consumers whose budgets are already stretched amid the the worst food price inflation in 17 years, according to government reports.

The latest nationwide quarterly survey from the AFBF, which tracks supermarket prices for 16 basic grocery items, showed the total cost of its basket of goods rose to $45.03 in the first quarter of 2008, up 8% from the prior quarter.

Products with the steepest retail price jumps were a 5-pound bag of flour, up 69 cents to $2.39; cheddar cheese, up 61 cents to $4.71 a pound; corn oil, up 58 cents to $3.01 a 32-ounce bottle; and dozen large eggs, up 55 cents to $2.16.

But higher prices aren't here to stay, Hurt said. He's confident that producers will allocate more land to production over the next two to three years. "I expect greater use of technology to increase crop yields and better use of genetics to create drought-tolerant crops," he said.

Knudson said the United States this year is expected to dedicate 2 million acres of land from its federal Conservation Reserve Program to farming in order to increase production during lean times.

"In Canada more land will also be committed to farming this year," he said. "All this should help to eventually increase food supplies through the [price] boom cycle."

Source: Cnn

Dollar falls after Fed

The dollar fell against a mixed bag of currencies and long-term treasury prices retreated from their highs Wednesday after the Federal Reserve announced it again is cutting interest rates.

In a widely-anticipated move, the central bank trimmed its key federal funds rate by a quarter of a percentage point to 2%. But the Fed also signaled its intention to put rates on hold to fight inflation.

The Fed's decision follows a government report that indicated the economy continues to be hampered by higher energy and food prices. The Commerce Department estimated that the U.S. gross domestic product during the first quarter rose at a very modest seasonally adjusted annual rate of 0.6% during the first quarter, though the figure came in better than the market anticipated.

Joe Balestrino, a portfolio manager at Federated Investors, said most fixed-income investors are focusing on what the central bank says about the economy. He said recent statements by the Fed have taken a softer tone in describing economic conditions, indicating that its rate cut campaign has been working.

"They've acknowledged strains in the financial markets driving their monetary policy, and those strains have now been somewhat reduced," Balestrino said. "Right now you have the combination of an economy that stopped going backward, and a financial market that has significantly improved."

Treasurys: The 30-year long bond rose 14/32 to 96 20/32 and yielded 4.58%, up from 4.38% just prior to the Fed's announcement, according to BGCantor Market Data.

Prices and yields move in opposite directions.

The benchmark 10-year Treasury note rose 3/32 to 97 15/32 and yielded 3.75%. Bond prices and yields move in opposite directions.

The 2-year note fell 5/32 to 99 22/32 and yielded 2.27%, down from 2.40%.

The Treasury Department said Wednesday it plans to sell $21 billion of new securities in its quarterly refunding. The government plans to auction $15 billion of 10-year notes on May 7 and $6 billion of 29 1/2-year bonds on May 8.

In addition, the Treasury said it plans to revive the sale of one-year bills as a way to raise money to combat the federal budget deficit. The government said the economy's decline has hurt tax receipts, and increased its funding needs.
Check the latest currency rates

Dollar: The dollar fell against foreign currencies after the Fed's announcement.

The euro bought $1.5615, up from $1.5564 just prior to the release, and the British pound rose to $1.9877 up from $1.9847.

The dollar rose versus the yen to ¥103.95, down from ¥104.55 before the Fed.

Lower interest rates can boost the economy, but they tend to be inflationary, leading traders to transfer funds to countries where they can earn higher returns.

Source: Cnn

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Japan holds the line on interest rates

Japan's central bank decided Wednesday to keep its key interest rate unchanged amid lingering worries about a global slowdown.

The Bank of Japan policy board meeting unanimously decided to keep the rate at 0.5%, the bank said in a statement.

The decision was widely expected amid continued uncertainty over the U.S. economy and its impact on global markets.

Japan's economy is slowing, and the bank will carefully examine downside risks at home and abroad before taking any concrete monetary policy steps, the policy board said in its semiannual outlook report released later Wednesday.

Housing and business investment "have been weaker than expected while exports have been stronger," the BOJ said, adding that capital spending will pick up gradually in fiscal 2008, which ends March 31, 2009.

The bank said uncertainty over the global economy and financial markets persists, citing "downside risks" to the U.S. economy as a potential threat to Japan.

"Given the current situation where the outlook for economic activity and prices is highly uncertain, it is not appropriate to predetermine the direction of future monetary policy," the report said.

It said the bank will "carefully assess the future outlook for economic activity and prices."

Higher CPI expected. For next fiscal year, the board said it expected the consumer price index, which excludes fresh food prices, to rise by 1%, and real gross domestic product to rise 1.7%, compared with 1.5% growth for financial year 2008.

The market was also awaiting signs about the future direction of monetary policy from comments later in the day from new Bank of Japan Gov. Masayuki Shirakawa.

Wednesday's decision is the first since Shirakawa took the helm of the central bank earlier this month. His assumption of the post followed weeks of a power vacuum after the term of his predecessor, Toshihiko Fukui, ended in March.

Much of last year, market watchers had expected the BOJ would soon start raising its key interest rate. The global economic turmoil set off at midyear by the U.S. subprime mortgage crisis has scotched that view.

Source: CNN

Why the Fed's not done cutting rates

The market is eager to see Ben Bernanke heading for the sidelines. But with the U.S. economy softening, he may not stay there for long.

The Federal Open Market Committee is due to conclude a two-day policy meeting Wednesday afternoon. Trading in futures markets predicts the Fed will cut its key fed funds overnight lending target by a quarter-point, to 2%, and hold the line there in coming months. If the markets are right, the Fed is ready to go on hold for the first time since it began cutting rates last summer in response to troubles in the credit markets. The shift wouldn't come a moment too soon for some observers.

"Lower fed funds?" wrote Bill Gross, managing director at bond investor Pimco in Newport Beach, Calif., in his May investment outlook. "They would, in Pimco's opinion, likely do more damage than good from this point forward." Gross wrote Tuesday it's imperative that the Fed hold rates steady because "foreign and domestic investors are being fleeced with negative real interest rates, and the weak dollar, stratospheric commodity prices and steadily rising import inflation are the result."

But while surging food and energy prices have stolen the headlines this month, some observers believe falling house prices will force a substantial consumer retrenchment that could turn the Fed's attention back to economic growth. So while the Fed will surely be eager to show Wednesday that it hasn't forgotten that inflation is a concern, it could find itself cutting rates again later this year.

"The Fed is very likely going to find a way to signal a wait-and-see approach," Merrill Lynch economist David Rosenberg wrote this week. "That should not, by the way, be confused with an end-of-the-cycle approach."

For now, a pause in Fed action would be a welcome development after months of unrest. In addition to cutting the fed funds rate from 5.25% back in September, the Fed has expanded the scope of emergency loan programs to keep financial institutions lending to consumers and businesses. Since last month's Fed-brokered rescue of Bear Stearns (BSC, Fortune 500), fears of a default at rival brokerages such as Merrill Lynch (MER, Fortune 500) and Lehman Brothers (LEH, Fortune 500) have fallen sharply, judging by trading in the firms' credit default swaps.

But if Bernanke's policies have succeeded in easing the market's liquidity problems, signs of a slowdown in the United States economy have only become more pronounced. Rosenberg points to steep declines in home sales, retail sales and consumer confidence over the past three months. Merrill Lynch now expects second-quarter gross domestic product to fall 2.3% from a year ago, in the first quarterly contraction of U.S. economic output since the 1990 recession.

Rosenberg, who has been saying the Fed will cut its target rate as low as 1% during this cycle, isn't the only one talking about a prolonged slowdown. Merrill chief John Thain made a similar point in the firm's first-quarter earnings call two weeks ago. He said the firm believes the worst of the capital markets dislocation is past, but that related problems could just be coming to light.

"I think the real risk going forward here is how much do all of the problems in the financial and credit markets seep into the real economy," Thain said. "What is the impact of higher energy prices, higher food prices, higher unemployment, and falling home prices on the consumer and what's the impact of that in terms of the U.S. economy and ultimately the global economy?"

More bad news on the home-price front came this week, when Standard & Poor's said prices in 20 major markets dropped an average of almost 13% from a year ago in February. "There is no sign of a bottom in the numbers," said David M. Blitzer, chairman of the Index Committee at S&P. "Prices of single family homes continue to drop across the nation."

Falling house prices are likely to weigh on consumer spending, by preventing homeowners from funding consumption by tapping their home equity. That slowdown makes Dan Libby, a senior portfolio manager of the Sands Brothers Select Access Management fund, skeptical of the prospect that the economy will bounce back fast enough to permit the Fed to hold rates steady for long.

Libby said he believes Bernanke has staved off a deep recession and a market panic by acting as quickly as he did. But he said that he sees little sign that a strong recovery is at hand. While Libby said the Fed doesn't want to repeat its mistakes of the last cycle, when it left interest rates at very low levels even as economic growth picked up, he believes rates could fall to 1.5% before Bernanke & Co. are forced to confront a possible monetary tightening.

"I expect to see a slow, grinding muddling-through type of economy" for the next year or two, Libby said. He added that the Fed must "be careful about sounding too hawkish" when it issues its statement Wednesday laying out how it sees the risks confronting the economy.

That statement is what investors expect to be focusing on at 2:15 p.m. EST, when the Fed announces the results of today's meeting. "What is critical is what signal the Fed provides in the press statement," Rosenberg wrote this week, "and how much emphasis they put on inflation."

Source: CNN

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Dollar rally stymied by consumer data

The dollar was mixed against major currencies Friday after a consumer sentiment reading fell to its lowest level in more than 25 years.

The pound rose to $1.9826 in late New York trading from $1.9755, while the Japanese currency was unchanged at ¥105.26.

The euro slid to $1.5635, down from $1.5686 Thursday. The 15-nation currency has slid since it reached the latest in a string of records on Tuesday, breaking through the $1.60 mark for the first time and rising as high as $1.6018.

On Thursday, the euro lost more than two cents after a downbeat German business confidence survey and an unexpected drop in American claims for jobless benefits.
Track currency values

The Reuters/University of Michigan released its consumer sentiment index Friday, which fell to 62.6 for April from 69.5 a month earlier. It was the lowest reading since the early 1980s.

The dollar has been weighed down recently by a combination of gloomy U.S. economic data and high European inflation.

That has fueled expectations that the Federal Reserve will cut interest rates yet again while the European Central Bank leaves rates unchanged - or even raises them, a possibility deflated by Thursday's German business confidence survey.

"We are just seeing a continuation of upward adjustment for the dollar on a combination of exhaustion of the euro surge, and market expectations that there may not be a lot more easing on interest rates by the Fed," said Bob Sinche, head of global foreign exchange strategy at Bank of America Corp.

UniCredit analysts said in a research note that "the U.S. dollar recovery across the board ... looks fairly excessive at this stage." They noted that "nothing has really changed on the current economic scenario."

In other trading Friday, the dollar edged down to 1.0347 Swiss francs from 1.0356 Swiss francs, but rose to 1.0178 Canadian dollars from 1.0139 Canadian dollars.

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Hedge fund manager rakes in $3.7B

Hedge fund manager John Paulson of Paulson & Co. took home $3.7 billion last year, making him the biggest earner in the industry, according to Alpha Magazine.

Alpha's annual survey of hedge fund pay found that the top five fund managers - Paulson, George Soros of Soros Fund Management, James Simons of Renaissance Technologies Corp., Philip Falcone of Harbinger Capital Partners and Kenneth Griffin of Citadel Investment Group - each made more than $1.2 billion. That's about the price JPMorgan Chase (JPM, Fortune 500) paid to acquire troubled Wall Street firm Bear Stearns (BSC, Fortune 500).

Alpha's survey took into account each manager's share of their firm's performance and management fees, as well as personal capital gains, and did not include any benefit from the sale of a firm or an initial stock offering.

Fund managers are enjoying massive paydays at a time when financial markets are in turmoil and millions of homeowners face foreclosure. As a result, hedge funds are likely to draw the ire of Congress and face more regulation in the future, the magazine said.

Source: CNN

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Paulson: 'Expect more bumps' ahead

Top financial leaders, faced with the biggest crisis to hit the global economy in at least a decade, are pledging to strengthen their regulation of banks and other financial institutions while anxiously hoping the slump in the United States will be a short one.

After an opening round of talks among the world's seven richest industrial countries, financial officials were scheduled to reconvene Saturday for discussions focused on the 185-nation International Monetary Fund and the IMF's sister lending institution, the World Bank.

The IMF, the lender of last resort for countries in trouble, is facing its own economic hard times. Officials were to discuss a proposal that would trim 15 percent of the agency's staff and sell about $11 billion in the institutions' vast gold reserves.

The biggest agenda item during the three days of meetings was the severe credit crisis that hit last August and could result in losses approaching a staggering $1 trillion before it is over, according to an IMF estimate released this week.

Treasury Secretary Henry Paulson assured the IMF's policy-setting panel on Saturday that the Bush administration was moving aggressively to deal with the economic slowdown in the United States, but he said risks remain.

"The weak housing market, together with high energy prices and stress in financial markets, is penalizing U.S. economic growth," he said. "We must expect more bumps in the road."

In a joint statement after talks Friday, the Group of Seven nations -- the United States, Japan, Germany, Britain, France, Italy and Canada -- endorsed an action plan to bolster regulation of big banks, investment houses and other financial firms that have already announced billions of dollars in losses from a credit crisis that began with rising defaults on subprime mortgages in the United States, but quickly spread to other types of investments around the world.

"The turmoil in global financial markets remains challenging and more protracted than we had anticipated," the G-7 officials said in their joint statement. In their comments, the officials left no doubt that they are all watching to see how developments unfold in the United States.

"The U.S. economy has to get over the economic unrest," Japanese Finance Minister Fukushiro Nukaga told reporters, because what happens in the United States will affect Asia and other parts of the world.

The IMF issued an economic outlook that predicted the United States would endure a mild recession this year and that weakness in the world's biggest economy raised the risks of a global recession to one in four.

Paulson and Federal Reserve Chairman Ben Bernanke tried to reassure their colleagues that U.S. policymakers are doing everything possible to unfreeze credit markets in the United States so that businesses and consumers will be able to get loans more easily and the economy will start to pull out of the slowdown.

The crisis claimed its biggest victim last month with the forced sale of Bear Stearns (BSC, Fortune 500), the nation's fifth largest investment house.

Axel Weber, head of Germany's central bank, said the "measures that were taken in the US have already had some effect" and the aggressive interest rate cuts from the Federal Reserve should help bolster growth in the second half of this year.

While Democrats in Congress are pushing for a more aggressive program to help an estimated 2 million homeowners at risk of defaulting on their mortgages, Paulson said the administration believed its plan, which relies heavily on voluntary efforts by the private sector, was the best approach.

Regarding the larger proposals, Paulson told reporters Friday night, "I see very little likelihood that anything like that will pass."

The G-7 communique's biggest change from the joint statement the group issued at their last meeting in February revolved around the discussion of currencies.

Europeans won in an effort to note "concern" about the sharp fluctuations that have been occurring in currency values. It was the first major change in the G-7 language on currencies in four years and was meant to underscore European worries about the dollar's decline to record lows against the euro. That has led to cries of protests from European manufacturers losing sales to American producers whose goods are now more competitive.

French Finance Minister Christine Lagarde said the true test of the changed currency language would come on Monday when currency markets reopen. However, there was no expectation that the words would be backed up by any joint intervention to prop up the dollar.

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Techs fuel bigger advance

Stocks rallied Thursday, building on the recent market advance, as investors welcomed an upgrade of Intel, lower commodity prices and improved earnings forecasts from Dow stocks Wal-Mart and DuPont.

The Dow Jones industrial average (INDU) and the broader Standard & Poor's 500 (SPX) index both added 0.4%. The Nasdaq composite (COMP) and the Russell 2000 (RUT) small-cap index both added 1.3%.

A bullish analyst note on the chip sector and talk that Yahoo and AOL may team up were among the factors supporting technology shares. Meanwhile, investors also welcomed improved first-quarter earnings estimates from chemical maker DuPont and retailer Wal-Mart.

"We're looking at some good earnings forecasts today and that really got the market going," said Greg Church, president of Church Capital. "Everyone is expecting poor first-quarter earnings, so to have a couple of Dow components say things are looking better sets a good tone."

First-quarter earnings are expected to have fallen around 13% from a year earlier, due largely to weakness in the financial sector.

The gains Thursday were also reflective of a better mood on Wall Street that seems to have emerged since the near-collapse and rescue of Bear Stearns a few weeks ago, with JP Morgan and the Federal Reserve stepping in. (Full story).

"Conditions in the credit market have improved and that's been helping the tone," said Robert Philips, president and chief investment officer at Walnut Asset Management.

"While there are lots of issues that still need to get resolved, a fear of the whole system falling apart has passed," he said.

Friday brings results from Dow component General Electric (GE, Fortune 500). Investors will also see the March reading on import and export prices as well as the April consumer sentiment index from the University of Michigan.

Also in focus: News that Yahoo (YHOO, Fortune 500) and Time Warner's (TWX, Fortune 500) AOL are reportedly in talks to combine their Internet operations, in a move that would challenge Microsoft's (MSFT, Fortune 500) attempt at buying Yahoo (YHOO, Fortune 500). Time Warner is the parent company of CNNMoney.

In response, Microsoft is now talking with News Corp. (NWS, Fortune 500) about a joint bid for Yahoo, according to reports.

Meanwhile, Yahoo is also looking at a potential advertising deal with Google (GOOG, Fortune 500).

Intel (INTC, Fortune 500) rallied after Banc of America securities upgraded it to "buy" from "neutral," according to published reports. The upgrade was part of a broader bullish note on the chip sector.

All the activity gave a boost to the tech sector, enabling the Nasdaq composite to advance more than the other major gauges.

Retailers' tough March. Wal-Mart Stores (WMT, Fortune 500) said that first-quarter earnings would top forecasts. However, the world's largest retailer also reported a smaller-than-expected rise in March sales at stores open a year or more.

Wal-Mart's sales were representative of a maddening month for merchants, in which cooler weather and sluggish spending cut into profits.

Among other companies, Limited Brands (LTD, Fortune 500), Pacific Sunwear (PSUN), Gap (GPS, Fortune 500), Saks (SKS) and Abercrombie & Fitch (ANF) all reported March sales declines.

Discount retailer Costco (COST, Fortune 500) said March sales rose 7%, topping forecasts. Shares gained.

Other corporate news. Lehman Brothers (LEH, Fortune 500) liquidated three funds last month, worth about $1 billion, after their assets began to deteriorate amid the credit crisis. (Full story).

Virgin Media (VMED, Fortune 500) plunged 11% after the company said it was selling $1 billion in bonds to pay off debt.

Millennium Pharmaceuticals (MLNM) rallied almost 50% on news that Japan's Takeda Pharmaceutical will buy the biotech in an $8.8 billion all-cash offer.

Market breadth was positive. On the New York Stock Exchange, winners topped losers three to two as 1.28 billion shares changed hands. On the Nasdaq, advancers trumped decliners four to three on volume of 2.21 billion shares.

Economic news. The February trade balance showed imports outweighed exports, surprising economists.

A separate report showed the number of Americans filing new claims for unemployment last week fell more than expected.

In another bad sign for the struggling economy, more than 50% of panelists who participated in the Blue Chip Economic Indicators Survey say the economy is already in or will soon fall into a recession.

Federal Reserve Chairman Ben Bernanke, speaking Thursday afternoon, said that regulators have to get going putting measures in place to prevent a future financial crisis from happening. (Full story).

Commodity prices. U.S. light crude oil for May delivery fell 76 cents to settle at $110.11 a barrel on the New York Mercantile Exchange.

COMEX gold for June delivery fell $5.30 to $932.20 an ounce.

Other markets. The dollar gained versus the euro and rose against the yen. The greenback briefly touched an all-time low versus the euro before rebounding after the Bank of England cut its base lending rate by a quarter-percentage point to 5%, a 17-month low. The European Central Bank held rates steady at 4%.

Treasury prices fell, raising the yield on the benchmark 10-year note to 3.54% from 3.48% late Wednesday. Bond prices and yields move in opposite directions.

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$15B housing fix gets fast-tracked by Senate

With unusual speed, leading Senate Democrats and Republicans have negotiated a bipartisan, $15 billion housing relief package that the Senate will start debating Thursday, and will likely vote on by next week.

The package contains funding to help borrowers refinance unaffordable loans and help boost activity in neighborhoods with properties in foreclosure. It also includes a big business tax break for homebuilders, as well as a new tax credit and deduction for homeowners and home buyers. Additionally, the package has measures to make loans insured by the Federal Housing Administration more accessible.

Lawmakers have been under election-year pressure to do more about the mortgage crisis. The Senate package reflects concessions from both sides of the aisle. But the package will be subject to amendments and the House will have its say next week after the Senate votes.

"It's not the end of the road, but it's a very strong beginning," said Senate Banking Committee Chairman Christopher Dodd, D-Conn., in a press briefing Wednesday evening.

The Democrats allowed two provisions they've been pushing for to be excluded from the package: a measure that would let bankruptcy judges reduce residential mortgage debts, and a measure that would let the Federal Housing Administration insure up to $400 billion in troubled loans if lenders agree to write them down to affordable levels for borrowers.

The bankruptcy measure is expected to be introduced as an amendment in the Senate, and the FHA measure may be added to the bill when the House takes it up.

Senate Democrats also yielded ground on a provision to change the down payment requirements for FHA loans. Democrats have been pushing to reduce them, but the bipartisan agreement actually increases them by half a percentage point. That may not fly in the House, when it considers the package.

In exchange, Senate Republicans agreed first to not block a housing stimulus package. They also gave the nod to a $4 billion provision that would let states and local governments buy and refurbish foreclosed properties, a measure the White House had characterized as a bailout for lenders and speculators. And they agreed to include a number of other provisions that had been included in Democrats' earlier housing relief proposals.
Home builders get big boost

Forty percent of the cost of the bill will fund a business tax break expected to help home builders. One construction workers' union characterized the provision as a "taxpayer funded giveaway to big corporate homebuilders, many of which helped cause the mess by pushing subprime loans through their mortgage subsidiaries."

But supporters of that measure say it will help keep all homebuilders - large and small - out of bankruptcy and will preserve thousands of jobs.

The Mortgage Bankers Association gave the total package high marks. "A more modern and effective FHA, mortgage revenue bonds for state housing finance agencies, additional money for counseling -- these are all things that will be of great help to struggling homeowners," said MBA Chairman Kieran P. Quinn in a statement.

Housing advocates like some elements of the package but don't think it goes far enough, particularly because it excludes the bankruptcy provision, which they estimate could keep up to 600,000 homeowners out of foreclosure.

Ellen Schloemer, research director for the Center on Responsible Lending, said the point of the provision isn't to encourage homeowners to file for bankruptcy. Rather, she said, "it would give loan servicers air cover to modify loans. And it [gives them] incentives to do it."

Currently loan modifications are done on a voluntary basis. And servicers, who fear being sued by investors who own the loans, are only allowed to modify mortgages when they can justify why doing so would be a better solution than anything else.

Republicans object to the bankruptcy provision, contending it would raise mortgage costs for everyone, since lenders would price in more risk if they knew a third party could alter the loans' terms. Some studies have shown, however, that cost increases would be minimal.

In proposing the bankruptcy provision as an amendment, Democrats may modify it further to win some Republican support. One approach: judges would only be allowed to change the interest rate on the loan, but not the principal.

Lawmakers in the House - led by Financial Services Committee Barney Frank, D-Mass. - are expected to take up housing measures at hearings next week. Experts say that lawmakers must act swiftly if they hope to prevent a substantial number of foreclosures this year.

Below are some of the provisions in the proposed bill:

Modernize the FHA: Measures in the bill would overhaul the Federal Housing Administration's loan insurance program, which helps homebuyers with weak credit or little cash get an affordable mortgage.

The changes proposed in the bipartisan bill would raise the FHA loan limits from 95% of an area's median home price to 110%. But in high-cost areas, the FHA loan limit may not exceed $550,000.

Under the bipartisan economic stimulus package passed in February, the cap for FHA loans in high-cost areas was temporarily raised to $729,950. The Senate package also calls for FHA loan down payment requirements be raised to 3.5% from 3%.

Help for troubled borrowers trying to refinance: The bill lets states offer $10 billion in tax-free municipal bonds, the proceeds of which would be used to subsidize mortgage refinancing for subprime borrowers trying to get out of unaffordable loans.

Under current law, state and local housing agencies are allowed to issue tax-free bonds only to help subsidize mortgages for first-time homebuyers, or those purchasing property in distressed areas.

Tax credits for buying troubled properties: The bill creates a tax credit of $7,000 for homebuyers who buy foreclosed homes or homes where the current owner is in default.

New property tax deduction: For the 28.3 million homeowners who take the standard deduction on their federal tax return, the bill would allow them to take a second standard deduction for the property tax they pay. The new standard property tax deduction will be $500 for single filers and $1,000 for couples filing jointly.

Currently only homeowners who itemize their deductions can deduct their property taxes.

Bigger tax break for homebuilders and other businesses: The bill would expand the so-called net operating loss carryback. The provision would extend to four years from two the time company may apply its 2008 and 2009 losses to past tax bills.

Money to aid areas hit by foreclosures: The bill would allow $4 billion in grants to state and local governments to buy and rehabilitate foreclosed home.

More money for consumer counseling: The bill calls for an additional $100 million for housing counselors working with homeowners at risk of foreclosure.

Greater transparency for borrowers: The bill might call for greater disclosure in the mortgage application process, so consumers could more easily understand the terms of their loans and won't be surprised by big payment increases.