The financial markets are essentially driven by two emotions – fear and greed. Greed induces rational people to make irrational decisions such as extending credit secured by a fixed asset to the total value and in some cases in excess of the asset value even after the value of the collateral started falling. Greed lets decision makers turn a blind eye to misstated assets, income and even the value of the collateral.  On the other hand fear convinces investors to dump their shares in companies such as Fannie Mae and Freddie Mac, making it virtually impossible to raise needed capital in the open market. Fear leads to depositors creating a run on the bank, guaranteeing failure of the bank even though most depositors are guaranteed by the FDIC. Before we now all succumb to the flavor of the time – fear – let us consider the facts:

• The total mortgage foreclosure rate is now around 1% of outstanding mortgages.
• Although Freddie Mac and Fannie Mae own or have insured $5 trillion in mortgages, the only problem are those borrowers who are not paying.
• Banks are learning that the best way out is to negotiate a deal with the owner occupant of the house, a program HSBC has been successfully implementing for some time.
• The demand for distressed loan portfolios and bank real estate owned (REO’s) from large investors such as hedge funds appear to be quite strong.
• The Government (i.e. the taxpayers, you and I) will now be forced to step in and secure Fannie Mae and Freddie Mac.  This is not all bad news because we all enjoyed higher home prices (still much higher than in 2000), cheaper interest rates, greater consumer spending and higher tax rolls supporting higher local authority spending. Now we have to give back some profit.

The strength of the free enterprise system is that it ultimately washes out excess at the top and rewards those prepared to look at the reality rather than the fear based emotion at the bottom.

We can be well advised to think about the words of Franklin D Roosevelt:

“We have nothing to fear but fear itself.”

When you bought into the gospel of "stocks for the long run," did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the Standard & Poor's 500-stock Index was at 1164; it closed Friday at 1239. That's an annualized average return of 0.63%. At that rate, it will take you 111 more years to double your money in the stock market.

Meanwhile, this newspaper, and most of Wall Street, has declared that stocks have officially entered a bear market now that the Dow Jones Industrial Average is 20% below its record high of last October. I think that's poppycock. We've been in a bear market for years; the Dow was almost 600 points higher in early 2000 than it is today. What about that 10% yearly return that U.S. stocks supposedly provide with near-certainty? To earn a 10% long-term return, according to Morningstar, you need to have bought at least 19 years ago and held on ever since.

This May, at the Berkshire Hathaway annual meeting, Warren Buffett boiled down what it means to be an intelligent investor into two startling sentences: "If a stock [I own] goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month." Knowing he owns good businesses, Mr. Buffett wants prices to go down, not up, so he can buy even more shares more cheaply before the bounce back.

In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000.

The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods -- and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.

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

Rates on 30-year fixed mortgages edged higher during the week ended Thursday, despite a recent dip in home sales for May.

Government-backed mortgage lender Freddie Mac (FRE, Fortune 500) said that 30-year fixed-rate mortgages averaged 6.37% with an average 0.6 point in the week ended Thursday, up from 6.35% last week. Last year at this time, the 30-year loan averaged 6.73%.

A report from the National Association of Realtors earlier in the week showed that mortgage applications dipped in May, "but April's increase was revised even higher," explained Freddie Mac chief economist Frank Nothaft in a statement.

Nothaft observed that the number of mortgage applications for the week ended July 4, just before the three-day U.S. holiday weekend, was almost 10% higher than the five-year low set two weeks prior, which he said helped temper the May decline.

Mortgage rates are in a bit of an uneasy equilibrium at the moment, which Mike Larson, real estate analyst with Weiss Research, described as a "tug of war between growth and inflation concerns, with a little bit of credit concerns sprinkled on top."

Other mortgage rates. The 15-year fixed rate mortgage this week averaged 5.91% with an average 0.6 point, down from last week when it averaged 5.92%. A year ago at this time, the 15-year fixed rate mortgage averaged 6.3%.

Five-year adjustable-rate mortgages (ARMs) averaged 5.82% this week, with an average 0.6 point, down from last week when it averaged 5.78%. A year ago, the 5-year ARM averaged 6.35%.

One-year ARMs averaged 5.17% this week with an average 0.5 point, unchanged from last week. At this time last year, the 1-year ARM averaged 5.71%.

 

 

Copyright © 2008 Mortgage-X.com
Source: www.mortgage-x.com
Reprinted with permission

For the entire article from CNNMoney click here:

The U.S. Senate passed an extensive package of housing legislation Friday, reacting to the continuing erosion of home prices and growing foreclosures by taking their most aggressive step yet to address the housing crisis.

Despite the vote, which came after weeks of political wrangling, House and Senate lawmakers will still need to overcome a number of impediments before President George W. Bush can sign the bill into law.

Senators voted 63-5 in favor of the package of tax relief for homeowners, changes to the Federal Housing Administration, and a $300 billion program to refinance mortgages headed toward foreclosure into affordable loans.

The legislation also overhauls regulation of faltering mortgage-finance firms Fannie Mae and Freddie Mac. The two companies have seen their stock prices drop precipitously this week because of solvency concerns, and lawmakers hope the creation of a new regulator with broader authority over the companies boosts market confidence.

Senate passage now kicks off a round of negotiations with the House of Representatives, with lawmakers hopeful they can reconcile competing versions of the bill. The two measures contain a number of differences, including nearly $4 billion in funding for community development block grants, provisions dealing with Fannie Mae and Freddie Mac's loan portfolios, and limits on the size of loans the two government-sponsored enterprises can purchase.

The centerpiece for both bills is a program offering up to $300 billion of FHA-insured mortgages to help refinance struggling borrowers into affordable loans. The program would rely on lenders voluntarily writing down the value of a distressed loan for the homeowner to qualify for the new FHA-backed loan, and in return borrowers would have to share future price appreciation with the federal government.

Senate Banking Chairman Christopher Dodd (D., Conn.) said his hope is that lawmakers can deliver the long-sought housing legislation to President George W. Bush by next week. Sen. Dodd said he and House Financial Services Chairman Barney Frank (D., Mass.) have spoken frequently about future steps they need to take with the legislation.

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

Analysts say hurdles for the stock market in the coming week include continued uncertainty about financial sector—specifically mortgage giants Fannie Mae and Freddie Mac as well as the unrelenting pressure of rising oil prices.

There is also a heavy calendar of economic data, corporate earnings reports, plus two days of testimony on the economy from Fed Chairman Ben Bernanke.

"The financials are going to have a tough go of it next week," said Jefferies and Co. Chief Strategist Art Hogan. In addition to the swirl of speculation that has driven Fannie and Freddie shares lower and lower, major banks are reporting results and are expected to unveil more write downs.

The announcement late Friday of the second biggest U.S. bank failure ever also adds to the gloom. After the bell, regulators reported that they seized IndyMac Bank, an aggressive mortgage lender with $32 billion in assets.

The Dow lost 1.7 percent, falling to 11,100 in the past week. For the first time in two years, it dipped below the key 11,000 level. The Nasdaq lost just 0.3 percent for the week and the S&P was down 1.9 percent, finishing at 1239. The financial sector declined 6.3 percent for the week, followed by consumer discretionary with a 4 percent loss. The winner was the S&P healthcare sector, up 1.3 percent.

A big event will be the two days of testimony from Bernanke. He gives his semiannual testimony on the economy before the Senate Banking Committee on Tuesday and then appears before the House Financial Services Committee Wednesday. Bernanke will include in his testimony the latest quarterly economic projections from Fed governors and bank presidents.

For the entire article from CNBC click here:

As the Bush administration scrambles to address the sudden decline of the country’s two largest mortgage finance companies, some of their longtime critics say the crisis has been building for years.

Among them is Jim Leach, a Republican former representative from Iowa, who argued in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.

They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.

“There are times in public policy making that one can feel like Don Quixote,” Mr. Leach said of his repeated legislative battles to rein in the two companies’ growth.

Congress established Fannie Mae during the New Deal to make homes more affordable for lower- and middle-income Americans, and Freddie Mac was established later with a similar purpose. Neither provides home loans. Instead, the companies buy mortgages from banks and take on the risks of possible defaults — allowing banks to make even more mortgages.

Today they own or guarantee about half of the country’s $12 trillion in mortgage debt, so the free fall of their share prices last week amid concerns that they were undercapitalized has sent Wall Street and Washington into a tizzy.

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and federal taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.

James A. Johnson, a longtime member of the Washington establishment who previously worked as a campaign adviser to former Vice President Walter F. Mondale, ran Fannie for most of the 1990s.

“Jim Johnson was the architect of Fannie’s lobbying strategy. He was the muscle guy, if you will. The guy who would walk the halls of Congress,” said Bert Ely, a banking consultant in Arlington, Va., and longtime critic of the companies. Freddie, Mr. Ely said, soon copied Fannie’s playbook.

Mr. Johnson could not be reached for comment. Fannie declined to comment; Freddie did not respond to an interview request.

An early, and for some analysts, seminal attempt to overhaul regulation of Fannie and Freddie occurred in the early 1990s when the country was still licking its wounds from the savings and loan debacle.

As legislators debated who would regulate Fannie and Freddie and what sort of capital cushions should be established for the entities, the two firms enlisted a bipartisan mix of Washington insiders to represent them.

For example, Fannie hired John Buckley, the former director of communications at the National Republican Congressional Committee and deputy press secretary to the Reagan-Bush campaign in 1984, while Freddie retained Mitchell Delk, the former chief lobbyist for the Securities and Exchange Commission.

They also hired members of top Washington law firms and a variety of former White House officials, like Kenneth M. Duberstein, who served as Ronald Reagan’s chief of staff.

The outcome of the regulatory tussle in the early 1990s did little to change things. Fannie and Freddie got a new but fairly weak regulator, the Office of Federal Housing Enterprise Oversight, while still having to meet less onerous capital requirements than some lawmakers wanted. The companies also stymied efforts to get the Securities and Exchange Commission more actively involved in regulating them.

Later on, Mr. Johnson ramped up the influence of its charitable arm, the Fannie Mae Foundation, by doling out money to thousands of nonprofit groups and similar organizations. (Mr. Johnson was compelled to step down as the head of Senator Barack Obama’s vice-presidential search team last month after he was criticized for receiving mortgages on favorable terms from Countrywide Financial.)

For the enitre article from THE NEW YORK TIMES click here:

The euro-region's economy probably contracted in the second quarter for the first time since the single currency was set up almost a decade ago, said economists at Citigroup Inc., JPMorgan Chase & Co. and Barclays Capital.

The 15-nation economy is buckling as record oil prices, a stronger euro and a global slowdown take their toll on growth, data showed this week. Exports and industrial output fell in May in Germany and France, while companies including Heidelberger Druckmaschinen AG and Renault SA said they're cutting jobs or sales targets.

While Europe may still avoid its first outright recession in 15 years, further pain may be on the way for consumers and executives. European Central Bank President Jean-Claude Trichet is refusing to give up the bank's fight against the worst bout of inflation in a generation and raised interest rates last week just as a housing-market slump worsens in parts of the euro- area.

``The ECB will get its way on inflation, but at the cost of the economy slowing to the brink of recession or worse,'' said Julian Callow, chief European economist at Barclays Capital in London. He estimates the economy shrank 0.1 percent in the last quarter and will expand 0.3 percent in each of the following three-month periods. It expanded 2.7 percent last year.

The euro-region's economy may display further evidence of cooling next week. Industrial output probably fell 2.3 percent in May, the most since 1989, according to a survey of economists by Bloomberg News. German investor confidence probably slid to the lowest in almost 16 years, according to another survey.

For the entire article from BLOOMBERG NEWS click here:

In economics, the majority is always wrong.

John Kenneth Galbraith

 

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