Da “Economist”, sob a manchete “Pesadelo em Wall Street”:

_ Um fim de semana de alta dramaticidade remodela a finança americana… Os acontecimentos de domingo 14 e do dia anterior foram extraordinários. A situação permanece fluida e os investidores desembestaram para a segurança relativa dos títulos do Tesouro americano. Bolsas tropeçam ao redor do mundo. A crise está entrando em uma nova e perigosa fase. O fim do Lehman sublinha a incapacidade ou a falta de vontade do setor de resgatar seus doentes. O Washington Mutual está lutando pela sobrevivencia. Ainda mais preocupante, também a AIG, maior seguradora da América. A dor está longe de terminar _e pode muito bem se espalhar. Por mais espetacular que tenha sido o fim de semana, vem aí mais drama.

Nelson de Sá - Toda Mídia

American finance

Nightmare on Wall Street

Sep 15th 2008 | NEW YORK AND WASHINGTON,DC
From Economist.com

A weekend of high drama reshapes American finance

AP

EVEN by the standards of the worst financial crisis for at least a generation, the events of Sunday September 14th and the day before were extraordinary. The weekend began with hopes that a deal could be struck, with or without government backing, to save Lehman Brothers, America’s fourth-largest investment bank. Early Monday morning Lehman filed for Chapter 11 bankruptcy protection. It has more than $613 billion of debt.

Other vulnerable financial giants scrambled to sell themselves or raise enough capital to stave off a similar fate. Merrill Lynch, the third-biggest investment bank, sold itself to Bank of America (BofA), an erstwhile Lehman suitor, in a $50 billion all-stock deal. American International Group (AIG) brought forward a potentially life-saving overhaul and went cap-in-hand to the Federal Reserve. But its shares also slumped on Monday.

The situation remains fluid, and investors stampeded towards the relative safety of American Treasury bonds. Stockmarkets tumbled around the world (though some Asian bourses were closed) and the oil price plummeted to well under $100 a barrel. The dollar fell sharply, and the yield on two-year Treasury notes fell below 2% on hopes the Federal Reserve would cut interest rates at a scheduled meeting on Tuesday. American stock futures were deep in the red too. Spreads on risky credit, already elevated, widened further.

With these developments the crisis is entering a new and extremely dangerous phase. If Lehman’s assets are dumped in a liquidation, prices of like assets on other firms’ books will also have to be marked down, eroding their capital bases. The government’s refusal to help with a bail-out of Lehman will strip many firms of the benefit of being thought too big to fail, raising their borrowing costs. Lehman’s demise highlights the industry’s inability, or unwillingness, to rescue the sick, even when the consequences of inaction are potentially dire.

The biggest worry is the effect on derivatives markets, particularly the giant one for credit-default swaps. Lehman is a top-ten counterparty in CDSs, holding contracts with a notional value of almost $800 billion. On Sunday, banks called in their derivatives traders to assess their exposures to Lehman and work on mitigating risks. The Securities and Exchange Commission, Lehman’s main regulator, said it is working with the bank to protect clients and trading partners and to “maintain orderly markets”.

Government officials believed they had persuaded a consortium of Wall Street firms to back a new vehicle that would take $40 billion-70 billion of dodgy assets off Lehman’s books, thereby facilitating a takeover of the remainder. But the deal died when the main suitors, BofA and Barclays, a British bank, walked away on Sunday afternoon. Both were unwilling to buy the firm, even shorn of the worst bits, without some sort of government backstop.

But Hank Paulson, the treasury secretary, decided to draw a line and refuse such help. After the Fed had bailed out Bear Stearns in March and the Treasury had taken over Fannie Mae and Freddie Mac last weekend, expectations were high that they would do the same for Lehman. And that was precisely the problem: it would have confirmed that the federal government stood behind all risk-taking in the financial system, creating moral hazard that would take years to undo and expanding taxpayers’ liability almost without limit. Conceivably, Congress could have denied Mr Paulson the money he needed even if he had been inclined to bail Lehman out.

This left Lehman with no option but to prepare for bankruptcy. Though the bank has access to a Fed lending facility, introduced after Bear’s takeover by JP Morgan Chase, the collapse of its share price left it unable to raise new equity and facing crippling downgrades from rating agencies. Moreover, rival firms that had continued to trade with it in recent weeks—at the urging of regulators—had begun to pull away in the past few days. The inability to find a buyer is a huge blow to Lehman’s 25,000 employees, who own a third of the company’s now-worthless stock; in such a difficult environment, most will struggle to find work at other financial firms. It also makes for an ignominious end to the career of Dick Fuld, Lehman’s boss since 1994, who until last year was viewed as one of Wall Street’s smartest managers.

Merrill’s rush to sell itself was motivated by fear that it might be next to be caught in the stampede. Despite selling a big dollop of its most rotten assets recently, the market continued to question its viability. Its shares fell by 36% last week, and hedge funds had started to move their business elsewhere. Its boss, John Thain, concluded that it needed to strike a deal before markets reopened. It approached several firms, including BofA and Morgan Stanley, but only BofA felt able to conduct the necessary due diligence in time.

Not only has Mr Thain managed to shelter his firm from the storm, but he has also secured a price well above its closing price last Friday, $29 per share compared with $17. How he managed that in such an ugly market is not yet clear. Ken Lewis, BofA’s boss, is no fan of investment banking, but he is a consummate opportunist, and he has coveted Merrill’s formidable retail brokerage. Still, the deal carries risks. It will be a logistical challenge, all the more so since BofA is in the middle of digesting Countrywide, a big mortgage lender. Commercial-bank takeovers of investment banks have a horrible history because of the stark cultural differences. And it is not clear if BofA has a clear picture of Merrill’s remaining troubled assets.

The takeover of Merrill leaves just two large independent investment banks in America, Morgan Stanley and Goldman Sachs. Both are in better shape than their erstwhile rivals. But this weekend’s events cast a shadow over the standalone model, with its reliance on leverage and skittish wholesale funding. Spreads on both banks’ CDSs, which reflect investors views of the probability of default, soared on Monday.

Wall Street has company in its misery. Washington Mutual, a big thrift, is fighting for survival under a new boss. Even more worryingly, so is AIG, America’s largest insurer, thanks to a reckless foray into CDSs of mortgage-linked collateralised-debt obligations. Investors have fled, fearing the firm will need a lot more new capital than the $20 billion raised so far. Prompted by the weekend bloodletting, AIG brought forward to Monday a restructuring that was to have been unveiled on September 25th. This was expected to include the sale of its aircraft-leasing arm and other businesses. It is also reported to be seeking a $40 billion in bridge loan from the Fed, to be repaid once the sales go through, in the hope that this will attract new capital, possibly from private-equity firms.

With Lehman left dangling, official attention is now turning to putting more safeguards in place to soften the coming shock to markets and the economy. The first step has been to encourage Lehman’s counterparties to get together and try to net out as many contracts as possible. On Sunday the Fed also expanded the list of collateral it will accept for loans at its discount window, to include even equities; and dealers may lend any investment-grade security, not just triple-A rated, to the Fed in exchange for Treasury bonds.

Markets are also pricing in some possibility that the Fed will cut its short-term interest rate target from 2% when it meets for a regularly scheduled meeting on Tuesday. That would be an abrupt turnaround from August, when officials figured their next move would be to raise rates, not lower them.

In a sign of how bad things are, even straitened banks are stumping up cash to help the stabilisation efforts. On Sunday, a group of ten banks and securities firms set up a $70 billion loan facility that any of the founding members can tap if it finds itself short of cash.

Even if markets can be stabilised this week, the pain is far from over—and could yet spread. Worldwide credit-related losses by financial institutions now top $500 billion, of which only $350 billion of equity has been replenished. This $150 billion gap, leveraged 14.5 times (the average gearing for the industry), translates to a $2 trillion reduction in liquidity. Hence the severe shortage of credit and predictions of worse to come.

Indeed, most analysts think that the deleveraging still has far to go. Some question how much has taken place. Bianco Research notes that while the credit positions of the 20 largest banks have fallen by $300 billion, to $1.3 trillion, since the Fed started its special lending facilities, the same amount has been financed by the Fed itself through these windows. In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. As spectacular as this weekend was, more drama is on the way.

Suffering a seizure

Sep 8th 2008 | NEW YORK
From Economist.com

America’s government takes control of Freddie Mac and Fannie Mae

AFP

FOR many Americans, Sunday is for church, family lunches or catching a ball game. For the country’s financial authorities, it has become the day of the dramatic announcement: the takeover of Bear Stearns; the Treasury’s promise in July to stand behind Fannie Mae and Freddie Mac; and, most momentous of all, on Sunday September 7th, what had recently come to be seen the inevitable culmination of that pledge: the government’s seizure of the two giant mortgage agencies.

Hank Paulson, the Treasury secretary, had hoped that the July announcement would calm nerves sufficiently that he would not have to take out his “bazooka”. The opposite happened. The firms’ shares collapsed amid fears that investors would be wiped out in a government rescue. This severely curtailed their ability to issue much-needed capital, also infecting their mortgage-backed securities and the $1.6 trillion of debt they had issued to buy mortgages for themselves. It was only a matter of time before the government was forced to launch its largest-ever financial rescue. The action was greeted warmly on the world’s stockmarkets, which rallied on the news.

Though some had wanted to see the agencies fully nationalised, obstacles stood in the way—not least that this would have required an act of Congress. So the Treasury had to get creative. The plan has four planks. First, Fannie and Freddie will be taken into “conservatorship”, a watered-down form of receivership, by their revamped regulator, the Federal Housing Finance Agency, until they are once again “sound and solvent”. Second, they will have access to a loan facility, secured against their assets, until the end of 2009. Intriguingly, this will also be available to the 12 Federal Home Loan Banks. James Lockhart, the FHFA’s head, stressed that these bank-owned co-operatives, also designed to grease housing markets, are mostly in good shape. But they have a lot of short-term debt and the quality of their borrowers’ collateral is falling. Allowing them to tap the credit line may be a shrewd precautionary measure.

The third plank highlights Mr Paulson’s wish to protect the taxpayer and avoid “moral hazard”. The Treasury will buy preferred shares as needed, whenever the agencies’ net worth dips below zero, and this paper will be repaid ahead of their existing preferred and common stock (whose dividends are being eliminated). Lowly shareholders could yet lose everything.

Indeed, the deal could have been a lot worse for the taxpayer. In exchange for vowing to keep the firms above water, the government will receive $1 billion “fee” in preferred stock at no cost, along with warrants giving it the right to 80% of the firms’ common stock at a nominal price. The two chief executives will leave. Fannie and Freddie, whose unparalleled political connections helped them to keep regulation toothless and expand on threadbare capital cushions, will no longer be allowed to lobby lawmakers.

The final piece of the plan may unnerve some taxpayers. To keep mortgage markets chugging along, the Treasury will become a buyer of last resort for bonds packaged by the agencies, purchasing them in the open market if demand slackens. Could it end up burdened with piles of toxic paper? Mr Paulson was upbeat, pointing out that since the Treasury would hold the securities to maturity it might one day reap net gains.

But the eventual cost to the public purse is unknown and potentially huge. The Treasury says it could buy as much as $100 billion of preferred stock in each of the two firms, though it deems that highly unlikely. Ultimately, the size of the bill will depend on their ability to recover, and that is far from clear. Under American accounting standards they have adequate capital, despite the rapid deterioration of their portfolios. But on a fair-value basis, marking their assets to the current market price, Freddie is insolvent and Fannie not far off. Moreover, with house prices still sliding and foreclosures rising sharply, worse may be ahead.

The taxpayer is on the hook elsewhere, too. Bank failures, almost unheard of in recent years, are ticking up. The Federal Deposit Insurance Corporation, which steps in and covers deposits up to $100,000 when lenders go belly-up, is nervously watching its fund shrink. It, too, may soon need to tap the Treasury for funds, especially if a big bank fails. On Monday one of the most vulnerable large lenders, Washington Mutual, forced out its boss in a bid to shore up confidence. More and more pundits are predicting the return in new guise of the Resolution Trust Corporation, which was tasked with taking over and offloading duff assets in the savings and loan crisis of the early 1990s. The tab this time is likely to far exceed that institution’s total losses, $124 billion by the end of 1999.

While the short-term goal is to stabilise Fannie and Freddie, thereby bringing down mortgage rates, the longer-term aim should be to avoid an expensive repeat. Mr Paulson stressed that the seizure of the agencies is merely a “time out”; it will be for the next administration and Congress to determine their future form. He is clearly in favour of scrapping their hybrid business model, which delivers profits to shareholders but leaves the public to shoulder life-threatening losses. Both presidential candidates have joined the criticism, with Barack Obama calling the agencies “a weird blend”.

Winding them down is not yet an option. With private mortgage finance barely registering a pulse, Fannie and Freddie have become crucial cogs in the market. Acknowledging this, the Treasury’s plan envisages allowing them to increase the size of their portfolios modestly by the end of next year. But from 2010 they will be forced to shrink by 10% a year until they reach an undefined “less risky size”. Once markets recover, pressure to dismantle the firms—and nurture alternatives, such as covered bonds—will grow. Until then, conservatorship will have to do

Paul Krugman* - O Estado de São Paulo

E chegamos à etapa seguinte da nossa aparentemente interminável crise financeira. Desta vez são Fannie Mae e Freddie Mac que ocupam as manchetes, com alertas funestos de um colapso iminente.

Até que ponto devemos ficar preocupados? Bem, eu assumo a posição contrária: o clima criado em torno dessas instituições de créditos particulares é exagerado. Fannie e Freddie precisam de um socorro governamental. Mas como já está claro que esse socorro virá, seus problemas não vão arrasar a economia.

Além disso, embora Fannie e Freddie sejam instituições problemáticas, elas não são as responsáveis pelos apuros que estamos passando.

Vamos aos antecedentes: Fannie Mae - Federal National Mortgage Association (Associação Hipotecária Federal) - foi criada na década de 30 para facilitar o acesso à casa própria, comprando hipotecas de bancos, liberando dinheiro que poderia ser utilizado para fazer novos empréstimos. Fannie Mae e Freddie Mac, que operam quase da mesma maneira, hoje financiam a maior parte dos empréstimos feitos nos Estados Unidos para aquisição de imóvel residencial.

Os argumentos contra Fannie e Freddie começam com relação ao seu estatuto peculiar: embora sejam companhias privadas, com acionistas e lucros, elas são “empresas subvencionadas pelo governo”, estabelecidas por lei federal, o que significa que têm privilégios especiais.

O mais importante desses privilégios está implícito: é a crença dos investidores de que, se as duas empresas estiverem ameaçadas de falência, o governo federal partirá em seu socorro.

Essa garantia implícita significa que os lucros são privatizados, mas os prejuízos são socializados. Se Fannie e Freddie prosperam, seus acionistas colhem os benefícios. Porém, se as coisas andam mal, Washington paga a conta. Cara, eles ganham, coroa, nós perdemos.

Esse tipo de aposta que vai num único sentido pode encorajar a assunção de um mau risco porque o inconveniente disso vai ser problema de algum outro. Exemplo clássico de como isso pode acontecer foi a crise das instituições de poupança e empréstimo, nos anos 80. Essas instituições ofereciam altas taxas de juro para atrair grande volume de depósitos garantidos pelo governo federal, e depois especulavam com esse dinheiro. Quando muitas das suas operações deram errado, os fundos federais acabaram pagando o pato. O custo final da arrumação da casa aos contribuintes foi de mais de US$ 100 bilhões.

Mas essa é a questão. Fannie e Freddie não tiveram nada a ver com a explosão dos empréstimos de alto risco iniciada há alguns anos, uma explosão que fez parecer insignificante o fiasco das instituições de poupança e empréstimo dos anos 80. Na verdade, Fannie e Freddie, depois de um veloz crescimento na década de 90, praticamente sumiram de cena durante o pico da bolha imobiliária.

Em parte porque os órgãos reguladores, reagindo aos escândalos contábeis nas empresas, impuseram algumas limitações temporárias para as duas instituições que restringiram suas operações de empréstimos, exatamente quando os preços das habitações estavam realmente decolando.

Além disso, elas não operaram com empréstimos considerados de alto risco porque não podem: um empréstimo de alto risco, ou suprime, pode ser definido precisamente como o empréstimo que não atende aos requisitos, impostos por lei, e Fannie e Freddie só compram hipotecas emitidas para tomadores de empréstimo que dão uma entrada substancial e cuja renda é cuidadosamente documentada.

Assim, quaisquer incentivos negativos criados por essa garantia federal implícita são contrabalançados pelo fato de que Fannie e Freddie foram e são fortemente regulamentadas no tocante aos riscos que podem assumir. Você pode dizer que a experiência de Fannie e Freddie mostra que a regulamentação funciona.

Nesse caso, porém, como elas acabaram em dificuldade? Parte da resposta está na magnitude da bolha imobiliária e no porte das quedas de preço que vêm ocorrendo hoje com o estouro dessa bolha.

Em Los Angeles, Miami e outros lugares, qualquer pessoa que fez um empréstimo para adquirir uma casa quando o mercado estava no pico provavelmente está hoje com patrimônio negativo, mesmo que tenha dado originalmente 20% de entrada. O resultado é uma taxa crescente de inadimplência, mesmo no caso de empréstimos que atenderam às diretrizes de Fannie e Freddie.

Além disso, Fannie e Freddie, embora fortemente regulamentadas quanto à concessão de empréstimos, não precisam constituir capital suficiente - ou seja, dinheiro captado pela venda de ações em vez de levantar empréstimos. Isso significa que mesmo um pequeno declínio no valor dos seus ativos pode fazê-las submergir, devendo mais do que têm.

E claro, existe um real escândalo político nesse caso: reiteradamente vinha sendo alertado que a capitalização insuficiente das duas instituições apresentava riscos para os contribuintes, porém a administração das empresas subornou o processo político, contratando sistematicamente figuras influentes de ambos os partidos. Mas, embora alarmantes, as maquinações políticas de Fannie e Freddie não tiveram um papel significativo nas causas dos nossos problemas atuais.

Contudo, não é vergonhoso que os contribuintes acabem tendo de socorrer essas instituições? Na verdade, não. Estamos atravessando uma grande crise financeira e essas crises quase sempre acabam com algum tipo de ajuda do contribuinte socorrendo o sistema financeiro.

E vamos ser claros: não se deve permitir que Fannie e Freddie vão à falência. Com o colapso dos empréstimos subprime, essas empresas hoje são mais do que nunca fundamentais para o mercado imobiliário e a economia como um todo.

*Paul Krugman escreve para o “The New York Times”

Brendan Smialowski for The New York Times

Treasury Secretary Henry M. Paulson Jr. presented a series of proposals to overhaul the regulation of Wall Street on Monday in Washington.

By STEPHEN LABATON - The New York Times

Published: March 31, 2008

WASHINGTON — Treasury Secretary Henry M. Paulson Jr. on Monday formally laid out an ambitious plan to overhaul the regulatory apparatus that oversees the nation’s financial system. Senior lawmakers and industry lobbyists predicted that most of the plan would run into difficulty.

The product of a lame-duck Republican administration facing a Democratically controlled Congress, the plan would consolidate federal agencies that regulate the nation’s securities and commodities futures markets and eliminate a third agency, the Office of Thrift Supervision, which oversees savings and loans. It proposes to create a commission that would set new minimum licensing standards for mortgage originators.

By his own account, Mr. Paulson, along with other senior officials, do not want lawmakers to act on the proposal until after the housing crisis is over — and that is likely to be after a new president takes office.

“Some may view these recommendations as a response to the circumstances of the day,” Mr. Paulson said in a speech Monday at the Treasury Department. “That is not how they are intended.”

Democratic leaders are already drafting bills to impose tougher supervision over Wall Street, and some say that Mr. Paulson’s plan does not go far enough in reining in risky practices among banks.

Insurance and some banking groups began over the weekend to formulate plans to oppose various provisions. And several features were criticized by regulators appointed by the Bush administration.

Senior lawmakers, while praising the administration for raising important points for further discussion, said the odds of a major overhaul in the remaining days of the Congressional session were long.

“Since this is opening day in baseball, I might as well make a baseball metaphor,” said Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee. “This is a wild pitch. It is not even close to the strike zone.”

Mr. Dodd and other Democrats were hoping to move legislation this week that would help homeowners facing foreclosure.

Still, elements of the Paulson plan — including a proposal to expand the authority of the Federal Reserve to examine investment banks and other financial institutions that have previously roamed free of federal oversight — clearly speak to the recent tumult on Wall Street that has hurt the economy. And President Bush, through his spokeswoman, urged Congress to quickly approve the proposed changes.

“Secretary Paulson has been working on this package for about a year, so it’s not like pulling a rabbit out of a hat,” Dana Perino, the White House press secretary, told reporters on Air Force One on Monday.

The administration’s proposal will do almost nothing to regulate the alphabet soup of sophisticated financial products that have fueled the financial crisis. And it will not rein in practices that have been linked to the mortgage crisis, like packaging risky loans into securities carrying the highest ratings.

Hedge funds and private equity firms, which have enjoyed freedom from government oversight for years, would finally fall under federal watch. But that oversight would be minimal, enabling the government to do little beyond collecting information until a widescale crisis has already occurred.

The checks and balances in the plan reflect the mindset of Mr. Paulson, the plan’s architect, who came to Washington after a long career on Wall Street, including a stint as chief executive of Goldman Sachs.

Mr. Paulson has worried that any effort to substantially tighten regulation could hamper the ability of American markets to compete with foreign rivals — and, in fact, the proposal stemmed from a series of policy discussions that began well before the current tumult that has rocked the nation’s economic underpinnings.

The plan began last year as an effort by Mr. Paulson to streamline the different and sometimes clashing rules for commercial banks, savings and loans and nonbank mortgage lenders.

“This blueprint addresses complex, long-term issues that should not be decided in the midst of stressful situations,” Mr. Paulson said in his remarks on Monday. “These long-term ideas require thoughtful discussion and will not be resolved this month or even this year.”

Mr. Paulson also deflected blame for the current tumult away from the Bush administration. “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil,” he said.

Under the plan, the Fed would have some authority over Wall Street firms, but only when an investment bank’s practices threatened the financial system as a whole. The Fed would be able to examine internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system.

The plan would also merge the Securities and Exchange Commission with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like. And the blueprint suggests several areas where the S.E.C. should take a lighter approach to its oversight, including allowing stock exchanges greater leeway to regulate themselves.

Some agencies within Washington’s patchwork system of financial regulation would be consolidated. One new agency, which the Treasury calls a “prudential financial regulator,” would focus on the safety of financial institutions that have explicit government guarantees. The other watchdog would oversee business conduct to protect public investors and customers of financial firms.

Congress would have to approve almost every element of the proposal, and Democratic leaders are already drafting their own bills to impose tougher supervision over Wall Street investment banks, hedge funds and the fast-growing market in derivatives like credit default swaps.

Administration officials acknowledged last week that they did not expect the proposal to become law this year, but said they hoped it would help frame a policy debate that would extend well after the elections in November.

David Maxwell for The New York Times

Charles and Tammi Eggleston, with their daughters, Shelby and Sydney, have been trying to sell their home in Maple Heights, Ohio, since May 2006. Nearby houses sit vacant.

Published: September 2, 2007 The New York Times

Maple Heights, Ohio

TAMMI and Charles Eggleston never took out a risky mortgage, never borrowed more than they could afford and never missed a monthly payment on their neat, three-bedroom colonial in the Cleveland suburbs. But that hasn’t prevented them from getting caught in the undertow of the subprime mortgage mess now submerging this town.

Over the last 18 months, the Egglestons have watched one house after another on their street, Gardenview Drive, end up foreclosed and vacant. Although lawns are still tidy and empty homes are not boarded up and stripped as they are in inner-city Cleveland, the Egglestons say Maple Heights no longer feels safe after dark. Nor do they have the confidence they had when they moved in a decade ago that this is the ideal place to raise their 6-year-old twin girls, Sydney and Shelby. So, in May 2006, they put their home on the market in order to move closer to Mrs. Eggleston’s parents in another middle-class Cleveland suburb, Richmond Heights.

They have had no takers. Although they lowered the asking price to $99,000 from $109,000, no one has even come to look at it in more than six weeks. “My heart panics every time I drive down the street and I see another for-sale sign,” says Mrs. Eggleston, pointing past the placards in front of her porch to others that dot surrounding yards like lawn furniture. “Some people on the street couldn’t pay, so they just left. The competition to sell is just ridiculous.”

It is a scene being repeated in cities and towns across America as loans that were made to borrowers with little or no credit history, many of whom could not even afford a down payment, fail in ever-growing numbers. It is also a story of how local economic trends are intersecting with national politics, with local foreclosures drawing the attention of Democratic presidential candidates, including John Edwards and Representative Dennis J. Kucinich of Ohio.

On the Republican side, President Bush announced on Friday several steps aimed at alleviating the impact of the subprime crisis on homeowners. In a Rose Garden appearance, he ruled out a federal bailout, citing both “excesses in the lending industry” and unduly optimistic homeowners who took out “loans larger than they could afford,” as reasons for the mortgage woes.

Indeed, what was once a problem confined mostly to economically struggling areas is quickly becoming a national phenomenon. Last year, there were 1.2 million foreclosure filings in the United States, up 42 percent from 2005, according to RealtyTrac, a firm that analyzes such data. At current rates so far this year, RealtyTrac expects foreclosure filings to hit two million in 2007, or roughly one per 62 American households — a rate approaching heights not seen since the Great Depression.

Analysts also say that the fallout from mortgages gone bad is spreading well beyond borrowers now in default. It has begun to engulf middle-class communities like Maple Heights, where nearly 10 percent of the houses — or 910 properties — have been seized by banks in the last two years. And it foreshadows what could lie in store if mortgage holders default on what the Federal Reserve conservatively estimates to be $100 billion in risky subprime loans. Many of these loans were made in 2005 and early 2006, when standards were at their most lax and cities like this were blanketed with aggressive pitches from mortgage providers.

“I don’t think we’ve hit bottom,” says Michael G. Ciaravino, the mayor of Maple Heights. “My fear is that foreclosure rates could go to double where they are today.”

IN terms of the subprime mortgage meltdown, Ohio has been among the hardest-hit states, according to the Mortgage Bankers Association. In Cuyahoga County, which includes Cleveland and surrounding suburbs, roughly 30 percent of subprime mortgages are either delinquent or in foreclosure, says Jim Rokakis, the county treasurer.

But this leafy community of bungalows and small family homes built after World War II could be described as its epicenter. Already, Maple Heights, with a population of 27,000, ranks No. 1 in Cuyahoga County in foreclosures per capita, according to Policy Matters Ohio, a nonprofit research group. Ranked by ZIP code, the number of foreclosures here puts Maple Heights in the top one-half of 1 percent nationally, RealtyTrac says.

Mayor Ciaravino has already had to shut his town’s two swimming pools, cut the ranks of police officers and firefighters and eliminate services like free plowing for senior citizens with snow-covered driveways. More…