Banks, in turn, are faced with higher bills from growing REO stock as foreclosed properties take longer to sell and require maintenance over longer stretches. Some institutions have also become concerned about the increased cost of keeping up with real estate-related laws and ordinances, the ratings agency’s structured finance research group said.

In some areas municipalities have started to keep mandatory lists of registered vacant properties – and demand payment for registration and fines for noncompliance, Fitch said.

Foreclosures across the U.S. shot up 7% from April to May, and almost doubled on a year-over-year basis, according to the most recent monthly foreclosure report from RealtyTrac.com, a real estate information service.

Nationwide, REO volume rose more than fivefold in 2007 over levels at the end of 2005, Fitch wrote in a separate report in May.

The rate of foreclosure starts and the percentage of loans in the process of foreclosure are at levels last seen in 1979, the Mortgage Bankers Association said in a report last month.

California, where REO filings in May numbered more than 20,000 according to RealtyTrac, has been hit particularly hard by the housing crash. In Solano County lenders took back 3,269 properties between July 1 last year and the end of May this year, up from 624 the prior-year period, county assistant assessor-recorder Lance Houser said. There are some 110,000 residential properties in the county.

Meanwhile, revenue from real estate taxes continues to fall in the county, as the assessed values of homes plummet. Following a state-mandated requirement, the Solano assessor-recorder’s office recently cut property taxes on 30,000 homes purchased from 2004 to 2007, and at the beginning of next year could further trim tax bills for another 10,000 homes purchased at earlier dates, Houser said.

Real estate taxes are “a big driver” for municipalities, FBR Capital Markets managing director Scott Valentin said in an interview. In the Washington D.C. area, Fairfax County “enjoyed a nice bull run when home prices were going up,” he said. But as home values soften, counties like Fairfax are looking at counting their losses and cutting budgets.

And delinquent property taxes can add up, alongside other local taxes. When unsold homes end up with liens that require any interested buyer to take on that unpaid debt, the vacant properties become less attractive to buyers, Valentin said.

While banks offering REO properties at auction once tended to set a minimum bid that covered the loan outstanding, the sheer volume of REO inventory is now forcing some lenders to reconsider how they deal with REO properties, and bulk sales are looking more attractive, Valentin said. Auction houses that handle REO sales are saying they are seeing record levels of business, he added.

Community banks, whose holdings tend to be centered in specific geographic areas, are likely to be hit particularly hard by the tax burden of non-performing real estate assets, he said. Real estate portfolios at larger regional banks are likely to be more diversified.

But as their REO holdings swell, some banks are also reluctant – in certain markets and at certain price points – to take title to properties that are unlikely to return anything close to a profit, Valentin noted, which in turn can bring further pain to communities already hurting from a weakening real estate tax base as assessed home values continue to fall.

The FDIC reminded banks in a letter Tuesday they should make sure to comply with state and local regulations concerning REO, including maintaining properties “in a marketable condition” and paying real estate taxes “in a timely manner to avoid unnecessary penalties and interest.” The agency also reminded lenders they must record foreclosure-related losses at the time a property is foreclosed upon.

Banks have already factored in some of the losses from non-performing residential mortgage loans. But mortgage loss rates appear to be accelerating and REO liquidation and short sales – where banks, sellers and buyers negotiate a sale that lets a homeowner off the hook for some portion of outstanding mortgage debt – are increasingly contributing to loss severities at financial institutions, Banc of America analyst Jeffrey Rosenberg wrote in a research note earlier this week.

In recent months the proportion of short sales to REO liquidations in loan resolutions has also started to skew sharply to the latter, Rosenberg noted, citing data from Banc of America and Loan Performance.

Foreclosures and REO are, of course, just part of a larger mortgage finance crisis.

“If 2007 was the year of the subprime, 2008 should count as the year for everything else,” Rosenberg said.

And that suggests further trouble ahead. Outside the subprime category, mortgage loans are more likely to be held by banks rather than securitized, which increases exposure to mortgage losses at financial institutions, and implies further credit constraints ahead, he said.

Stock futures are mixed Thursday before the long holiday weekend in the U.S. and after the previous day’s sell-off.

Futures on the Dow Jones industrial average rose 1 point to 11,212, Nasdaq futures fell 6.00 to 1,819, while Standard & Poor’s 500 futures rose 1.10 to 1,263.90.

The Dow fell 166.75, or 1.46%, to 11,215.51, the lowest close since August 2006. The S&P 500 index fell 23.39, or 1.82%, to 1,261.52, while the technology-laden Nasdaq composite index fell 53.51, or 2.32%, to 2,251.46. The yield on the benchmark 10-year Treasury note fell to 3.96% from 4.01% late Tuesday. Crude oil hit a record $144.32 a barrel in after-hours trading after reaching a record settlement of $143.57, an advance of $2.60 on the New York Mercantile Exchange.

ECONOMIC DATA:

• Non-farm payrolls for June, 8:30 a.m. ET, -50,000 estimate
• Unemployment rate for June, 8:30 a.m. ET, 5.5% estimate
• Initial jobless claims, 8:30 a.m. ET, 385,000 estimate
• Institute for Supply Management non-manufacturing index for June, 10 a.m. ET, 50.7 estimate

AFTER-HOURS ACTION:

Nvidia Corp. late Wednesday cut its second-quarter revenue outlook to between $875 million and $950 million and said it expects to post a one-time charge of $150 million to $200 million for the quarter. The company said global end-market weakness, price adjustments for GPU products and a delayed ramp in its next MCP lay behind the lower outlook.

The FDA approved Abbott Laboratories’s Xience V drug-coated stent for coronary disease, the Abbott Park, Ill.-based health-care company said. The stent will be launched in the U.S. immediately. Separately, Boston Scientific Corp. said the approval cleared the way for the immediate U.S. launch of its Promus stent, which is already available in some overseas markets.

American Airlines parent company AMR Corp. said it expects to record a non-cash impairment charge of about $1.1 billion to $1.2 billion in the second quarter, related to the company’s capacity reduction plans.

The coffee-giant on Tuesday said it plans to close 600 unprofitable stores in the next year as cash-strapped consumers forgo $4 lattes for cheaper alternatives and home-brewed varieties. Starbucks had previously planned for only 100 closures.

“While we expected more than the original 100 closings, we were surprised by the magnitude of this announcement,” Goldman Sachs analyst Steven Kron said in a client note. Given that the stores were unprofitable, Kron expects the closing to be incrementally positive to the company’s margins: the portfolio effect of closing unprofitable stores, and the reverse cannibalization benefit to surrounding stores’ sales. “If this benefit were 25% per store, as management indicated it may be, the benefit could be 2% to company same-store sales if each of the closed stores realized this benefit,” Kron said.

Deutsche Bank analyst Marc Greenberg agreed that the closures should provide some benefit to aggregate store-level profits and same-store sales. However, he expects the benefit to be offset by a de-leverage on fixed costs because of lost sales. Greenberg said the fact that Starbucks has taken “such aggressive action” to close additional stores suggests fundamentals remain “challenging.”

So, just how many bucks will this aggressive plan be costing Starbucks?

Given the planned closures, the coffee company expects to record pretax charges of $328 million to $348 million, including $200 million of asset write-offs to be recorded in the third quarter, $120 million to $140 million in lease termination costs in the fourth quarter and first half of 2009, and $8 million in severance costs in tandem with store closures.

William Blair & Co. analyst Sharon Zackfia said the underperforming locations are “roughly half as productive as the average store volume of about $1 million.” So, assuming roughly $500,000 in annualized per-unit sales, Zackfia said the closures would lessen overall sales by about $300 million.

Ouch. That’s got to burn.

Wall Street is on track to open higher Wednesday, helped by a media report that Microsoft Corp. is considering a fresh takeover bid for Yahoo Inc., with Starbucks Corp. also in focus after the coffee chain said it would close several hundred stores in the U.S.

According to spread bettors IG Index, the Dow Jones industrial average is expected to open 20 points up at 11,402. S&P 500 futures were up 2.10 at 1,288.30, while Nasdaq 100 futures climbed 4 to 1,873.

Wall Street began the third quarter with an erratic session and modest gain Tuesday after a mix of news made it clear the country is still deep in economic problems but may have some positive trends.

The Dow rose 32.25, or 0.28%, to close at 11,382.26, the Nasdaq composite gained 11.99, or 0.52%, to 2,304.97, and the Standard & Poor’s 500 index added 4.91 points, or 0.38%, to 1,284.91. The yield on the benchmark 10-year Treasury note rose to 4.01% from late Monday’s 3.98%, and oil settled at a new record of $140.97 a barrel on the New York Mercantile Exchange.

ECONOMIC DATA:

• Factory orders for May, 10 a.m. ET, 0.6% estimate

EARNINGS HIGHLIGHTS:

Company                    Symbol    Period    Estimate 

Family Dollar                FDO       3Q      $  .40

AFTER-HOURS ACTION:

After Tuesday’s close of trading, Starbucks Corp. said it will shutter 600 company-operated stores in the next year, up from its previous plan for 100 closures, impacting about 12,000 workers. In other after-hours action, Apollo Group Inc. said it earned $139.1 million as enrollment grew by 11% in its fiscal third quarter.

If true, this would not be without precedent. Attendance levels reached their peak during the Depression, driven by the allure of escapism and fewer entertainment alternatives. On Tuesday, analysts at Morgan Joseph argued that movie attendance and revenue were “bucking the trend,” showing themselves to be “somewhat recession resistant.”

The firm cited results from last weekend, which made 22% more than the equivalent week in 2007. Of course, this needs to be taken with an ocean’s worth of salt. The weekend saw the $62.5 million debut of Disney-Pixar’s “Wall-E” in first place and Universal’s “Wanted,” earning $51.1 million, in second place. Strong results to be sure, but in using comparisons, it’s as important to consider the previous year; The top two films a year ago were Disney-Pixar’s “Ratatouille” ($47 million) and Fox’s “Live Free or Die Hard” ($33.4 million).

This year’s Pixar release had an adorable love struck robot as its lead, who tested off the charts in audience response. Ratatouille starred a cartoon rat, not the most beloved animal to anchor a film. While “Live Free or Die Hard” was part of a well-known series, the previous entry was 12 years old, and there was no real desire for a continuation. “Wanted,” on the other hand, was a fresh franchise based on a popular comic book series. In short, it was the films themselves that drove the gross, not macroeconomic conditions.

Morgan Joseph noted that this past weekend represented the fifth consecutive period that beat its counterpart of 2007. True, but this doesn’t signify much. Memorial Day weekend was 14% below 2007 levels (it was the worst gross for the holiday in five years), and it was headlined by “Indiana Jones,” one of the most eagerly-anticipated films of this or any other year. Other weeks saw declines of as much as 28% from the prior year, hurt as unexpected flops (”Speed Racer,” “Prince Caspian“) failed to measure up to last year’s blockbusters (”Spider-Man 3,” “Shrek 3″ and “Pirates of the Caribbean 3″).

Currently, the year-to-date 2008 box office is 2.3% above the same point in 2007. But when higher ticket prices are factored in (which Morgan Joseph doesn’t do), the premium is much diminished, meaning attendance rates are steady with last year or down slightly. So while the firm argues that the year-to-date improvement “seems to be improving, despite apparently weakening economic conditions,” it’s not quite accurate and the two aren’t necessarily related.

The firm is right about one thing: most of 2007’s top movies had already came out by this time last year. This year still has “The Dark Knight” and the sixth “Harry Potter” film to look forward to. These could indeed put the current year safely over 2007 levels, but there have been so many ups and downs this year so far that it’s just too close and early to tell.

According to the “Exit Poll” report by the National Venture Capital Association (NVCA), the three months ended June 30 marked the first time since 1978 that there were no venture-backed IPOs brought to market. The trend has been clear: In the first quarter of 2008, five venture-backed companies went public, and in the first half of 2007, 43 companies made the leap.

Mark Heesan, president of NVCA, says this is a disconcerting sign for the capital markets, calling the IPO drought “the canary in the coal mine.” Heesan said that venture-backed companies that successfully enter the public markets represent a critical job creation engine for the U.S. economy and that the engine has completely shut down. “We need to put regulators, legislators, presidential candidates and the private sector on notice that this situation represents a serious problem that will have long-reaching economic implications if not addressed.”

Think Heesan is overreacting? “Imagine the implications if Genentech, Google or Intel decided to forgo a public offering and became acquired because the public market offering was unappealing,” said Dixon Doll, current NVCA chairman. “The ‘next Genentech or Google’ may be making that decision right now.”

A survey of NVCA members that yielded 660 plus responses showed that 81% of venture capitalists don’t see the IPO window opening in 2008 and two-thirds of venture capitalists believe that venture-backed companies are less likely to want to go public today than they were three years ago. The top two factors to which venture capitalists attribute the current drought? Skittish investors and the credit crunch/mortgage crisis.

Acquisitions of venture-backed companies are down sharply as well. The second quarter posted 50 mergers or acquisitions of venture-backed companies, down from 70 in the first quarter and compared to the 169 deals in the first half of 2007.

Fred Wilson, managing partner of Union Square Ventures and contributing writer to SeekingAlpha.com, also offered his opinion in regard to the slowing IPO and acquisition activity that is likely to effect big venture-back bets in biotech and cleantech: “We need capital markets in this country that can support the development of these industries. And the overly-regulated and cautious public market environment we have right now is clearly problematic.”

Wall Street is set to open sharply lower Tuesday, dragged down by a sharp pullback on European bourses as concern continued to mount over the impact on the economy of the lingering credit crisis and record oil prices.

According to spread bettors IG Index, the Dow Jones Industrial Average is expected to open down 115 points at 11,224. S&P 500 futures were down 11.70 at 1,269.40, while Nasdaq 100 futures dropped 25.50 to 1,820.50.

Wall Street ended an arduous first half Monday, closing mixed as investors again based their trades on what has become the dominant force in the market, the price of oil. The Dow Jones industrial average rose 3.50, or 0.03%, to close at 11,350.01, Nasdaq composite index fell 22.65, or 1.21%, to 2,292.98, and the Standard & Poor’s 500 index added 1.62, or 0.13%, to 1,280.00. The yield on the benchmark 10-year Treasury note rose to 3.98% from 3.97% late Friday, and light, sweet crude fell 21 cents to settle at $140.00 on the New York Mercantile Exchange.

ECONOMIC DATA:

• Construction spending for May, 10 a.m. ET, -0.5% estimate
• Institute for Supply Management index for June, 10 a.m. ET, 48.7 estimate
• U.S. car sales for June are released throughout the day, 10.1 million-unit annual rate estimate

EARNINGS HIGHLIGHTS:

Company               Symbol  Period  Estimate

Apollo Group          APOL    3Q      $ .78

Constellation Brands  STZ     1Q        .31

AFTER-HOURS ACTION:

After Monday’s close of trading, Manitowoc Co. said Enodis PLC plans to recommend Manitowoc’s $2.7 billion takeover offer over a competing bid from Illinois Tool Works. Fortune Brands Inc. lowered its estimate for second-quarter profit due to a slowdown in consumer spending and higher Australian taxes. VF Corp. said its second-quarter profit may beat its guidance because of stronger earnings from operations and a tax benefit.

The pressures weighing on Yahoo are three-fold: the Internet advertising market has been hurt by a slowing U.S. economy, billionaire investor Carl Icahn has begun a proxy battle to unseat Yahoo’s board, and the company has apparently lost the opportunity to sell to Microsoft at a significant premium. Since announcing that merger talks with Microsoft ended on June 12, Yahoo shares have fallen more than 20%.

According to Citigroup analyst Jason Bazinet, Time Warner’s AOL segment has had a similarly turbulent 2008, and a deal between Yahoo and Time Warner could provide long-term benefits for both stocks. Bazinet pointed out that the migration to a free AOL service hasn’t gone as smoothly as investors had hoped, the division’s recent acquisition of the social media network Bebo was frowned upon by investors and the dial-up business continues to contract. “The strategic logic (for a deal) is arguably compelling,” Bazinet said, “and the potential financial benefits are sizable.”

Citigroup estimates that a sale of the AOL unit to Yahoo could create $900 million in annual savings from duplicative content payments, sales force reductions, and the elimination of redundant research and development. Additionally, Yahoo would gain display scale and keep its search options open, while Time Warner would gain Internet scale via a passive equity stake in a larger entity by exchanging its advertising business for a position in Yahoo.

Yet, the broker expects a deal to be more positive for Time Warner. Citigroup estimates between 33 cents and $3.45 per share of earnings gains for the media and entertainment company, assuming a bid for AOL between $8 billion and $12 billion. For Yahoo, its share of synergies could be worth between 74 cents and $3.06 per share in earnings, but the transaction would likely remove any remaining Microsoft-inspired premium. Therefore, Citigroup expects Yahoo’s investor reaction to be muted on the purchase of AOL.

“The bottom line is that we think Yahoo and AOL could merge,” Bazinet said in a note to clients. “Although given the potential Microsoft-inspired premium that may still be embedded in Yahoo’s equity, the near-term benefits would seem materially greater for Time Warner than Yahoo.”

While “Wall-E”’s results were impressive, the biggest story of the weekend may have been Universal’s “Wanted,” which burst onto screens with a debut that was incredibly and unexpectedly strong. This weekend marks the first time that two films debuted with more than $50 million, making this the box office’s best week thus far in 2008. The top 10 films made $175.9 million, 30% above the equivalent week last year.

Some have argued that the recent Disney-Pixar partnership hasn’t paid off, as each new release since 2003’s “Finding Nemo” has made less money than the one before, cratering with last year’s “Ratatouille.” “Wall-E” bucked this trend, making $62.5 million to Ratatouille’s $47 million debut. That the film would be successful was never much in doubt.

Unlike other summer releases, “Wall-E” looks to benefit heavily from repeat viewings, as families take the kids multiple times. Ecstatic reviews from critics, who have hailed the metal stud muffin as this generation’s E.T., may expand the audience to teenagers, adults and couples. The film’s environmental message may also help, as eco-groups encourage its members to check it out.

Universal’s action extravaganza “Wanted” shot up the screen in second place with $51.1 million. It’s been a while since audiences have been treated to a straight action film. And, unlike last week, there was almost no overlap among the audiences for the new releases, meaning little cannibalization. A children’s film about an adorable robot wanting to hold hand with another robot doesn’t quite appeal to the same people who want to see a comic-book movie based around Angelina Jolie bad-assing it up with the world’s best shot. In short, there was breathing room for both.

Among the holdovers, Warner Bros.’s “Get Smart” dropped two places to third place, making $20 million in its second weekend. The film has banked a solid $51.1 million so far. Meanwhile, Paramount’s “The Love Guru” continued to get no love from audiences, plunging 61% to $5.4 million in sixth place. The film has made a weak $25.3 million thus far, and probably won’t make much more.

Next weekend brings the 4th of July holiday, always one of the biggest movie going points of the year. The always-successful Will Smith is leading the way over the weekend, with his superhero satire “Hancock,” a Sony release. While people are expecting the film to open strongly (BMO sees a $110 million to $120 million debut), it should probably fall short of the $150 million debut “Transformers” recorded last year. However, given the recent strength at multiplexes, the current premium over last year should be safe.

Wall Street is on track to open lower Monday on ongoing concern high oil prices and a financial sector hobbled by the credit crisis that will continue to act as a brake on economic growth.

According to spread bettors IG Index, the Dow Jones industrial average is expected to open down 30 points at 11,317. S&P 500 futures were down 0.70 at 1,279.30, while Nasdaq 100 futures dropped 6.75 to 1,859.00

Wall Street ended a depressing week with another big loss on Friday amid escalating worries about high oil prices and the fallout from the credit crisis. The Dow Jones industrial average fell 106.91, or 0.93%, to 11,346.51, the Nasdaq composite index lost 5.74, or 0.25%, to 2,315.63, the Standard & Poor’s 500 index slid 4.77, or 0.37%, to 1,278.38. The yield on the benchmark 10-year Treasury note fell to 3.96% from 4.03% late Thursday, and light, sweet crude for August delivery settled up 57 cents at a record $140.21 a barrel on the New York Mercantile Exchange.

ECONOMIC DATA:

• Chicago purchasing manager’s index for June, 9:45 a.m. ET, 48.0 estimate

EARNINGS HIGHLIGHTS:

Company                    Symbol    Period    Estimate 

H&R Block                   HRB        4Q      $   2.03

AFTER-HOURS ACTION:

After Friday’s close of trading, News Corp. and private equity firm Permira Advisers LLP proposed a deal to take News Corp. subsidiary NDS Group PLC private, with Permira owning 51% of the company and News Corp. 49%. In other after-hours action, Red Lion Hotels received a buyout offer of $9.50 a share from Columbia Pacific Opportunity Fund LP.