US MARKETS

          Industrial production in the U.S. rose more than anticipated in January as factories churned out more consumer goods and business equipment, leading the recovery of the world’s biggest economy.

          The 0.9 percent increase in production at factories, mines and utilities followed a 0.7 percent gain the prior month, according to the Federal Reserve in Washington. Figures from the Commerce Department today showed housing starts climbed to a 591,000 annual pace, exceeding the median forecast in a Bloomberg News survey.

          Fannie Mae and Freddie Mac would no longer be able to rely on subprime mortgages to meet their government-mandated goals for helping lower-income Americans obtain mortgages, according to proposed regulations.

The Federal Housing Finance Agency is seeking to restrict the companies from using so-called private-label securities backed by risky mortgages to achieve certain affordable housing goals, the agency said in proposed rules on its Web site today.

          Fannie Mae and Freddie Mac, the largest sources of money for U.S. residential mortgages, have relied on private-label debt backed by Alt-A and subprime mortgages to satisfy federal goals of financing loans for low- and moderate-income homebuyers, according to FHFA. Fannie Mae and Freddie Mac were seized in 2008 largely because of regulators’ concern that the companies wouldn’t have enough capital to cover losses on that debt.

          “The results of providing large-scale funding for such loans were adverse for borrowers who entered into mortgages that did not sustain homeownership and for the enterprises themselves,” the agency said in the proposal.

          The companies have been required to devote a certain amount of their annual business to low- and moderate-income borrowers, economically depressed neighborhoods and other disadvantaged groups. Those goals were suspended after the companies were seized by federal regulators in September 2008.

          Humana Inc., the best-performing U.S. health-insurance stock this year, will reduce its workforce by 5 percent as the company faces shrinking private-sector enrollments and cuts in government-backed Medicare payments.

          About 2,500 jobs will be eliminated through attrition, outsourcing and shedding positions, the Louisville, Kentucky- based company said today in a statement. The insurer also plans to hire 1,100 people in the growth areas of medical-cost containment, pharmacy management and specialty products, for a net reduction of 1,400 workers.

          Marsh & McLennan Cos., the insurance broker that paid $850 million to end a probe by Eliot Spitzer in 2005, won release from restrictions on commissions criticized as conflicts of interest that hurt consumers.

          The broker and its biggest rivals, Aon Corp. and Willis Group Holdings Inc., can again accept contingent commissions, the New York Insurance Department said yesterday. The once- secret payments from insurers had prompted bid-rigging probes from Spitzer, former New York attorney general.

          “These are firms who have paid dearly in some cases in terms of a penalty in lost revenue over the last four or five years,” said Illinois Insurance Director Michael McRaith, whose office agreed with New York and Connecticut officials to lift the ban. “You can have a balanced approach which allows for the generation of legitimate revenue and at the same time it gives consumers the information to make the best choice,” McRaith said in an interview.

          Marsh & McLennan and Chicago-based Aon appealed to officials for redress in 2008 as regulators opened a review. No. 4 broker Arthur J. Gallagher & Co., which won release in July from a ban of its own, has said it expects to make an extra $10 million annually by again accepting contingent payments. Marsh & McLennan said in 2004 that the payments totaled about $845 million a year, or 12 percent of brokerage revenue.

          Prices of goods imported into the U.S. rose in January as the global economic recovery boosted costs for fuel, food and metals, a government report showed.

          The import price index increased 1.4 percent in January, more than economists forecast, compared with a revised 0.2 percent gain the prior month that was higher than previously estimated, Labor Department figures showed today in Washington. Prices excluding petroleum rose 0.4 percent last month and were up 1.3 percent from a year earlier.

          Housing starts in the U.S. rose in January to a higher level than anticipated, a sign that government support is helping to stabilize the real estate market.

          Work began on 591,000 houses at an annual rate last month, up 2.8 percent from December, figures from the Commerce Department showed today in Washington. Permits, a sign of future construction, fell less than anticipated after rising in December to the highest level since October 2008.

          The extension and expansion of a homebuyer tax credit may boost demand in the coming months. At the same time, builders will have to contend with mounting foreclosures and an unemployment rate that’s projected to end the year at 9.5 percent.

          For all of 2009, builders broke ground on 554,500 houses, the fewest since records began in 1959. The annual rate was down 39 percent from 905,500 in 2008, the second-lowest level on record.

Today’s report showed building permits in January decreased 4.9 percent to a 621,000 pace from a 653,000 rate in December. Permits were forecast to fall 5.1 percent to a 620,000 rate.

          Construction of single-family houses increased 1.5 percent to a 484,000 pace.  Work on multifamily homes, such as townhouses and apartment buildings, climbed 9.2 percent to an annual rate of 107,000.  Three of four regions showed an increase in starts in January, led by a 10 percent gain in the Northeast. The West showed an 8.9 percent increase and the South posted a 1 percent gain.

          Part of the increase in January housing starts may reflect warmer weather, compared with the monthly average and colder- than-average temperatures in December. The previous month was the 14th coldest December and the 11th wettest in 115 years of record-keeping, according to the National Climatic Data Center in Asheville, North Carolina.

          Mortgage applications in the U.S. fell last week as demand for loans to purchase homes and refinance declined.

          The Mortgage Bankers Association’s index dropped 2.1 percent in the week ended Feb. 12. The group’s purchase gauge decreased 4 percent, while the refinancing measure fell 1.2 percent.

          Blizzards along the East Coast and winter storms in the South last week may have discouraged home buying and refinancing. While government incentives have helped stabilize housing, a lack of job growth and limited access to credit are hurdles for the real estate market.

          The market is “going to be gradually recovering but it’s not going to be a straight-line trajectory over the next two or three years or so,” Derek Holt, an economist with Scotia Capital Inc. in Toronto, said before the report.

          The average rate on a 30-year fixed loan held at 4.94 percent, the group said. The rate reached 4.61 percent at the end of March 2009, the lowest since the association’s records began in 1990.

          At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be $533.16, or about $3 less than a year ago, when the rate was 4.99 percent.

          The average rate on a 15-year fixed mortgage held at 4.33 percent. The rate on a one-year adjustable mortgage decreased to 6.67 percent last week from 6.68 percent.

          The share of applicants seeking to refinance a loan fell to 69.3 percent last week, from 69.7 percent the prior week.

          The US Federal Reserve is sitting on significant paper losses on the real estate assets it acquired in the Bear Stearns rescue, with much of the red ink coming from debt used to back some of the most high-profile buy-out deals of the bubble years.

          Among the debts weighing on the central bank’s portfolio are those used in financing the acquisitions of Hilton Hotels, which is being restructured, and hotel operator Extended Stay, which is in bankruptcy, people familiar with the matter say.

          The Fed holds these and other real estate assets in a vehicle known as Maiden Lane I, which was set up to pave the way for JPMorgan Chase’s purchase of Bear. At the time the deal was struck in March 2008, JPMorgan feared that if it bought all of Bear’s assets it would be left with too much exposure to the real estate market. Bear, for example, originally had $5.4bn of Hilton debt, a huge concentration.

          The assets in Maiden Lane I – all of which came from Bear’s mortgage desk – were originally valued at $30bn when a final agreement on the portfolio was reached in June 2008 by the New York Fed, its advisers at asset managers BlackRock and JPMorgan. At the end of 2009 the Fed said the assets were worth $27.1bn (€20bn, £17.4bn).

          People familiar with the portfolio said Maiden Lane I’s losses were concentrated in commercial real estate assets, which had a face value of $8.4bn and an estimated worth of $7.7bn when they were acquired by the Fed.

          As of September they had been marked down to $4bn, filings show.

          About two-thirds of the Maiden Lane I portfolio involved mortgage debt backed by government-created entities, people familiar with the matter said. Those people describe the debt as highly illiquid, a factor that has resulted in its failure to rally strongly as credit markets recovered and interest rates fell.

          “It was the scrapings off the slaughterhouse floor,” said one person. “It started with the things that were not good enough to get securitised.”

          The Fed has disclosed little detail on these or other assets in the Maiden Lane I portfolio, fearing such revelations could hurt sales efforts, a person familiar with the matter said. JPMorgan and the New York Fed declined to ­comment.

          Maiden Lane I was funded with $28.8bn from the New York Fed and $1.15bn from JPMorgan, which agreed to absorb the first $1bn of any losses.

          The struggles of the portfolio could stir the debate on Wall Street over whether the New York Fed, then run by Tim Geithner, who is now Treasury secretary, struck a particularly good deal for taxpayers in the Bear rescue.

          In a typical restructuring, creditors are made whole before shareholders are paid. In the Bear case, shareholders received $10 a share while creditors – in this case, the Fed – may lose money.

          Mr. Geithner told Congress in 2008 that the central bank had three “risk mitigants” to protect its interests in the Bear deal: JPMorgan’s agreement to take the first $1bn in any losses; the Fed’s long-time horizon as an investor; and the fact that the central bank’s $28.8bn loan was backed by “a pool of professionally managed collateral”.

          Testifying before Congress last month, Jamie Dimon, JPMorgan’s chief executive, said the New York Fed received “the less risky mortgage assets” on Bear’s books. He added: “It would have been irresponsible for us to take on the full risk of all those assets at the time.”

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