Citi Announces Plan to Help Unemployed U.S. Homeowners

Citigroup has announced that it will lower the payments of some qualified unemployed homeowners to an average of $500 per month for three months in order to help stem the tide of foreclosures plaguing the American real estate market. The United States government recently exchanged $25 billion in additional bailout money for a 36% stake in Citigroup, whose common stock has fallen to $1.20 per share as of this morning.

The recent $25 billion in bailout money is the third U.S. government cash infusion for Citi over the previous five months, yet the troubled bank continues to experience problems. Many analysts have dubbed Citi a 'zombie bank'; meaning that Citi is likely already insolvent and is just being kept alive through regular government bailouts while the U.S. Treasury hastily cobbles together a yet another plan for removing troubled mortgaged-backed securities from the books of major banks.

The recent U.S. cash infusion of $30 billion to the giant international insurance company AIG came on the heels of AIG's announcement yesterday of the biggest loss in corporate history. AIG lost $61 billion in its fourth quarter, most of it due to insurance it wrote on bank-held mortgage-backed securities. Because insurance on those kinds of securities was not subject to regulation (the securities themselves are unregulated and speculative) AIG did was not required to set aside the funds to back the insurance it wrote on those financial instruments.

The AIG investment arm that decided to insure mortgage-backed securities was so convinced those investments would continue to appreciate indefinitely (because they thought American homes would appreciate indefinitely), that they saw no need for cash reserves. They did not anticipate many, or any, payouts. One of the reasons Wall Street reacted so negatively to AIG's announced $61 billion loss (the DOW dropped below 7,000 for the first time in 12 years) was that AIG's loss told confirmed what they feared most(but likely already knew): That the mortgage-backed securities on the books of huge banks like Citi are in so much trouble that AIG is having to actually pay out on these policies. If AIG were to fail, Citi, Bank of America, and any number of other huge banks would also instantly fail.

Citi and BOA are two of the largest banks in the world.

So Citi's announcement of its plan to 'help' some of its unemployed mortgage holders can hardly be taken as a sign of its benevolence or its solvency. More likely, the U.S. government is now in a much stronger position to make some demands of Citi since it is currently the only thing keeping Citi alive. It remains to be seen whether other U.S. banks  will embrace mortgage modifications to keep people in their homes. Nothing compels them to do so.

Foreign investors are beginning to more aggressively enter the U.S. housing market, but predicting trends in U.S. real estate and deciding where to buy continues to be very challenging, even for experts. Figures released for January today showed that U.S. home sales fell another 7% in the first month of 2009, a sign that buyers are still waiting for the bottom of the decline in home values.

In some American cities, prices have fallen by 50% or more already and show no sign of bottoming out. Las Vegas has seen a 47% average drop in home values over the past two years, and the average cost of a home in Detroit is now a mere $18,000.  Even Warren Buffet is making dire pronouncements about the housing market for the rest of 2009 and 2010.

Most people aren't Warren Buffet though. For anyone who just wants a cheap, decent place to live for the next five to ten years, the U.S. could still be a pretty good deal.  Just don't plan to sell that beast any time soon.