The doomsday naysayers continue to beat their drums, but economic facts are holding steadfast, the preliminary GDP numbers suggest that the economy still held on to an ever so slight gain in the first quarter thus avoiding the first of two required quarters of negative economic growth that would confirm the start of  an official recession; the Fed, in the face of rising inflation reduced interest rates yet again, but signaled the end of the trend thus strengthening the dollar and sending commodity prices down; housing prices seem to still be in a free fall but with much less wailing in the streets than before.

The distinct lowering of the fear level in the market was underscored by this week’s Bank of England report that the methodology of valuing the complex financial instruments associated with subprime mortgages have inflated to size of the potential loss. We commented on the same potential problem in our March 10, 2008 (http://www.ljlfunding.com/ljl_funding_newsletter.asp?id=20) newsletter.

Investors in trust deeds and mortgages have a specific interest in appraisals and the determination of property value. It is fair to say a large contributing factor in the subprime debacle was the high loan to value allowed, accentuated by a bias to inflated values. Restricting lender’s ownership, influence and ability to earn fees on the appraisal process in which an unfettered and independent value is paramount to an objective lending practice,  is definitely a step in the right direction.

A debate over plans to overhaul the U.S. home-appraisal business is raising a tricky question: Who should profit from appraisals?

The plan, spearheaded by New York Attorney General Andrew Cuomo, is aimed at protecting consumers, lenders and investors from inflated estimates of home values -- an abuse that has contributed to the surge in mortgage defaults.

Mr. Cuomo earlier this year threatened to sue government-sponsored mortgage investors Fannie Mae and Freddie Mac for allegedly failing to make sure appraisers were protected from pressure to fudge their estimates. In early March, to avoid a legal fight, Fannie and Freddie agreed with Mr. Cuomo on an appraisal code of conduct due to take effect Jan. 1. Because Fannie and Freddie buy or guarantee the bulk of all home loans, lenders will have to follow that code, making it a de facto national standard -- established without input from Congress or federal banking regulators.

Almost everyone agrees new rules are needed to ensure appraisers don't feel pressure to juice their numbers so homes can be financed and sold. But the debate is bringing to the surface resentments in the appraisal industry over how revenue from appraisals is divvied up.

Consumers seeking a mortgage loan typically are required by lenders to pay $300 to $500 for an appraisal of the property that would back the loan. In many cases, much of that fee never reaches the appraiser. Instead, a big cut goes to appraisal-management companies, known as AMCs, which assign work to appraisers and manage the process on behalf of lenders.

The planned code of conduct would bar lenders and their representatives from prodding appraisers to inflate their estimates. Bank employees involved in making loans wouldn't be allowed to choose appraisers. Lenders couldn't make loans on the basis of appraisals from their own employees or from other companies they control. Thus, big lenders like Countrywide would have to sell their appraisal-management businesses. The code also would bar lenders from using appraisals ordered by mortgage brokers.

For the entire article from THE WALL STREET JOURNAL click here:

The U.S. Federal Reserve announced steps to help ease persistent strains in credit markets, increasing the size of some cash auctions for financial institutions and the amount of U.S. dollars it provides to the European Central Bank and Swiss National Bank.

The U.S. central bank said it was stepping up the amounts offered in its Term Auction Facility auctions, which are held every two weeks, to $75 billion from $50 billion, beginning with an auction on May 5.

It also said it was increasing an existing temporary currency swap line with the European Central Bank to $50 billion from $30 billion and increasing a swap line with the Swiss National Bank to $12 billion from $6 billion.

The swap lines, which the Fed said it was extending through Jan. 30, 2009, are aimed at sating demand for dollars in European markets.

For the entire article from CNBC click here:

IS IT really over? In the middle of March investors were worried that the financial system was going to hell in a handcart. Analysts competed to produce the highest possible forecast for losses from the credit crunch. Just six weeks later, everything seems a lot calmer. Stockmarkets have stabilised and corporate credit spreads (the excess interest rates paid by risky borrowers) have come down sharply. Gold is cheaper. Bankers talk about having put the worst behind them. This week the Bank of England's twice-yearly Financial Stability Report was cautiously optimistic and America's Federal Reserve was relaxed enough to cut the pace of its monetary easing. Rates may even have reached the bottom.

Optimists can point to one big relief. When the Fed helped JPMorgan Chase to rescue Bear Stearns, it sent a signal to the markets—a kind of “No Bank Left Behind” Act. If the Fed was willing to save an investment bank, without any retail depositors, then the system would not be brought down by a “plumbing problem”, such as the collapse of a counterparty in the derivatives market. The boost to confidence has helped banks to repair their balance sheets by raising large sums from both shareholders and the bond markets. Maybe financial Armageddon had been avoided.

Maybe. But the fight ahead still looks bloody. Although the system as a whole is safer, plenty of problems remain for particular banks.

The malaise that started the crisis—the American housing market—is still getting worse. The month-on-month decline in the Case-Shiller index of house prices in 20 large cities is accelerating; on the latest reckoning, it was down by 12.7% over the 12 months to February 29th. As the decline continues, more homeowners will default on their loans.

Imagine that you had fallen asleep last July and that you had been spared the dread words “credit crunch” and “Bear Stearns”. On waking today, you would be astonished at how low American interest rates had fallen (especially in the light of headline inflation). But you would still be alarmed at the state of housing markets, the prospects for consumer spending and the trend in forecasts of economic growth. You would not assume that the worst was over. Nor should investors, just because they have had to live through it all.

For the entire article from THE ECONOMIST click here:

Wall Street turned in a mixed performance Friday as investors set aside some initial enthusiasm over a stronger-than-expected jobs report to lock in some of their recent gains. Blue chip stocks logged their third weekly advance in a row as investors grew more confident about the economy’s ability to outrun a deep downturn.

The reports on employment and the pace of orders at factories offered the market fresh evidence that the economy might not be in as worrisome a state as many had feared. But a surprise quarterly loss from Sun Microsystems Inc. weighed on the tech-laden Nasdaq composite index.

Still, buyers outnumbered sellers after a government report showed the nation’s employers cut far fewer jobs than expected last month, stirring optimism about the buoyancy of the economy.

The employment report Friday came at the end of a critical week for Wall Street. While corporate results dominated in previous weeks, investors focused this week on the Federal Reserve’s decision Wednesday to lower interest rates and on reports on the nation’s gross domestic product, personal spending and factory orders.

For the week, the Dow gained 1.29 percent, while the S&P 500 added 1.15 percent and the Nasdaq rose 2.23 percent. It was the third straight weekly advance for the Dow and the S&P 500.

Richard Sparks, a senior equity analyst at Schaeffer’s Investment Research, noted that on Thursday and Friday the S&P 500 closed over the 1,400 mark for the first time since January.

“If we’re able to continue above it, or if the S&P 500 is able to hold onto that level, that’s going to be a big positive for the market,” he said.

“We’ve had several good weeks running here so it doesn’t surprise me at all to see a little bit of a sell-off,” he said of Friday’s session.

For the entire article from MSNBC click here:

US employers laid off workers for a fourth consecutive month in April as businesses cut back on spending in the face of economic headwinds but overall job losses were far less severe than most economists had feared.

Investors were also cheered on Friday by stronger-than expected increase in March factory orders.

The unemployment rate dipped from 5.1 per cent to 5 per cent, having jumped by 0.3 percentage points last time round. Economists had forecast the jobless rate to edge higher to 5.2 per cent.

Although most economists believe the US economy fell into recession at the start of this year the number of jobs losses so far has been mild by the standards of previous recessions, even though size of the overall labour force has grown.

The US economy shed a total of 260,000 jobs in the first four months of this year at an average rate of 65,000 per month.

In contrast, in the same period at the start of the 2001 recession, employers cut an average of 121,000 jobs while at the beginning of the 1990-1 recession an average of 123,000 jobs were lost each month. Job cuts may be less severe because there is less spare capacity in the workforce.

“Employers were much more lean and mean in terms of how they built up their staffing in this [economic] recovery compared to others, so we may see fewer layoffs for that reason,” Jared Bernstein, economist at the Economic Policy Institute, said.

Few analysts therefore expect the unemployment rate to rise above 6 per cent this year, compared with a peak jobless rate of 7.8 per cent in 1992 and 6.3 per cent in 2003.

For the entire article from THE FINANCIAL TIMES click here:

The Bank of England said that the realized losses suffered by banks on illiquid assets such as mortgage-backed securities are unlikely to be as large as current-market prices indicate.

In its twice-yearly Financial Stability Report, due to be released Thursday, the central bank said the use of market prices that include large discounts for uncertainty and illiquidity to measure potential write-downs has created the perception that banks have yet to fully disclose their losses, and contributed to a lack of confidence among banks.

Left unchecked, that lack of confidence could become self-fulfilling, the BOE warned.

The International Monetary Fund last month estimated that potential losses for financial firms had reached $945 billion as of March. Of that, $565 billion was from the U.S. residential-mortgage market and $240 billion was from commercial real-estate securities, along with $120 billion in corporate loans and $20 billion in consumer credit.

But the BOE said such a mark-to-market approach to valuing illiquid securities could "significantly exaggerate" the scale of losses that financial institutions might incur.

For the entire article from THE WALL STREET JOURNAL click here:

From THE ECONOMIST:

 

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