Last week the stock market decisively started down the track of testing the July lows,  a test that will have to be successfully completed before a true bottom in the market can be confirmed. During the weekend Treasury Secretary Paulson stepped in and fired his “bazooka” taking control of Fannie Mae and Freddie Mac, which in all likelihood will restore confidence to the mortgage market and set the stage for the recovery. The Wall Street Journal reported that, Fannie and Freddie got into trouble largely because they embraced riskier types of loans just as the housing market was starting to crumble in 2006 and 2007 in an effort to regain from Wall Street rivals a bigger share of the mortgage market. As those loans started to go bad, the companies began recording big losses in the second half of last year. They then failed to raise enough capital late last year, when investors were still fairly bullish on their prospects, to see them through the current storm. The companies have recorded combined losses totaling about $14 billion over the past four quarters, eating deeply into their meager capital holdings, and most analysts expect them to report sizable losses for at least another couple of years as the costs of foreclosures mount. If  “flawed business model” (Paulson)  in the mortgage market is to be corrected a clear distinction between public and private funding should be made and the participants then allowed to suffer the consequences of their actions.

Even though data Friday from the Mortgage Bankers Association indicated that U.S. foreclosures hit a record in the second quarter, that won’t necessarily translate into big declines in home prices.

“Even in the face of an extreme foreclosure wave such as that experienced in 2007, our evidence indicates that foreclosure shocks have relatively small effects on U.S. house prices,” the authors, Charles Calomiris of Columbia University and Stanley Longhofer and William Miles of Wichita State University wrote.

The authors’ model incorporated MBA foreclosure and Ofheo home price data from 1981 to 2007, and used home foreclosure forecasts for 2008 and 2009 from Economy.com. The model included data on employment, building permits and existing home sales. In their paper, the authors said the study was first to estimate the effect of foreclosures on home prices for all the U.S.

Even under an “extreme” foreclosure shock scenario, with foreclosures up 75% compared to the baseline in 2008 and 2009, U.S. home prices only decline about 5.5% between the the second quarter of 2007 to the end of 2009, the authors estimated.

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

Economic data were largely negative on economic growth this week, rattling investors, resulting in stock market declines on growth concerns.   Treasuries rallied as investors shunned risk and yields steadily declined throughout the week.  The yield on the 10-year Treasury note stayed around 3.54 percent by mid-Friday afternoon -- 29 basis points lower than the rate on the previous Friday and the lowest rate since mid-April.  This is good news for near-term mortgage demand.  Unless the spread between the yields on 10-year Treasury notes and conforming fixed-rate mortgages widens further from the current gap of about 260-265 basis points, as large as that seen during the Bear Stearns crisis, mortgage rates should see a meaningful decline in the coming week.  Thirty-year fixed rate mortgage yields averaged slightly less than 6.4 percent this week after declining for three consecutive weeks.

 

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

For the entire article from the MORTGAGE BANKERS ASSOCIATION click here:

The U.S. government, increasingly alarmed by a housing slump that threatens to pull down the whole economy, is taking over the business of ensuring that funding is available for home mortgages.

The U.S. Treasury announced a plan Sunday that provides as much as $200 billion of new capital plus new credit lines for the country's main suppliers of funds for home loans, Fannie Mae and Freddie Mac, and puts the two companies under management control of their regulator, the Federal Housing Finance Agency, or FHFA. Treasury Secretary Henry Paulson said the moves will increase the availability of credit for home buyers.

The Treasury also plans to buy an unspecified amount of mortgage-backed securities issued by Fannie and Freddie in an effort to bring down borrowing costs for home buyers. Despite steep interest-rate cuts by the Federal Reserve, the cost of a typical 30-year fixed-rate mortgage has remained well over 6% for most of the past year.

The moves are likely to nudge down interest rates for consumers and help prevent a worsening of what is already the worst housing bust since the 1930s. At least in the short run, the actions also further entrench the government in a mortgage industry, leaving taxpayers exposed to default-related losses that could run into the scores of billions. In the longer run, Mr. Paulson aims to drastically shrink the amount of mortgages and related securities held by the companies, but he noted it will be up to Congress and future administrations to decide what shape Fannie and Freddie ultimately take.

To ensure that the companies don't run out of capital, the Treasury agreed to acquire $1 billion of senior preferred stock from each company immediately. The preferred stock comes with an annual dividend yield of 10% and warrants giving the Treasury the right to acquire 79.9% of the companies' common stock "at a nominal price." In addition, the Treasury will stand ready to acquire as much as $100 billion of preferred stock in each company, though it said it doesn't expect them to need that much capital.

The Treasury also announced an arrangement under which it will stand ready to make short-term loans to Fannie, Freddie and the 12 regional Federal Home Loan Banks, privately owned cooperates that were created by Congress to help banks fund housing. The borrowings would be backed by mortgage securities or other approved collateral and bear interest at 0.50 percentage point above the London interbank offered rate, or Libor, a measure of the fees banks charge one another for short-term loans. Under normal conditions, Fannie and Freddie typically can borrow money for less than Libor, but these Treasury loans would be a backstop.

Mr. Paulson signals that he wants to remake the U.S. housing-finance system in the longer term, ditching the "flawed business model" of government-sponsored enterprises like Fannie and Freddie. This model has produced conflicts between the companies' desire to earn maximum profits for their shareholders and the public mission of supporting housing that has persuaded investors that the government would have to rescue them in a crisis.

The plan limits the size of each companies' mortgage portfolios to a maximum of $850 billion as of the end of 2009. After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company. But that is subject to decisions that may be made by Congress and future administrations.

 

THE STOCK INDEX OF HOMEBUILDERS:

For the entire article in THE WALLSTREET JOURNAL click here:

Despite Friday's rebound, the market is down sharply for the month so far and well over 20% from its October highs. In other words, bear-market territory.

There are any number of reasons why the market is still in sell-off mode—fears over employment, housing and inflation high among them. But the true motivator may be much simpler: Investors don't know what else to do.

Uncertainty is always the market's biggest enemy. And with a close presidential election and an economy that may be sliding back towards recession, many investors just don't see much reason to own stocks.

For the entire article from CNBC click here:

The US unemployment rate unexpectedly jumped to a five-year high of 6.1 per cent, suggesting a bleaker picture of the world’s largest economy than thought.

Labor Department data released on Friday showed that employers shed 84,000 jobs in August – the eighth consecutive month of job losses – significantly worse than economists were expecting.

The news dented hopes for a stronger US economy that were stirred last week when the government announced an upward revision to its assessment of gross domestic product growth in the second quarter.

The August jobs report could have a substantial effect on thinking at the Federal Reserve. Hawkishness at the US central bank had already largely subsided after falls in commodity prices, and policymakers now have to worry that unemployment may be climbing faster than they anticipated.

An influential minority of Fed officials now think that further rate cuts cannot be ruled out. However, most policymakers still have what some call a “soft inflation bias”.

For the entire article from the FINANCIAL TIMES click here:

The U.S. economy is ``stagnant,'' Europe is falling into a recession, and central banks won't have much room to cut borrowing costs amid elevated prices, the Conference Board said today.

``This is a period of rolling adjustments, that goes from sector to sector, that will keep the U.S. growth rate low in the 1 percent-to-2 percent range for the foreseeable future,'' said Gail Fosler, president of the group known for its consumer- confidence survey. ``Europe is in somewhat more peril.''

The euro slumped to an 11-month low against the dollar today after European Central Bank President Jean-Claude Trichet said yesterday the economy is ``weak.'' The U.S. government needs to start using more of its money to support markets and stem a burgeoning ``financial tsunami,'' said Bill Gross, manager of the world's biggest bond fund.

``We are looking for the U.S. economy to slow significantly in the coming quarters,'' said Michael Buchanan, Hong Kong-based chief economist for Asia excluding Japan at Goldman Sachs Group Inc. ``U.S. consumption growth is turning down very sharply. The U.S. consumer is finally going to roll over.''

For the entire article from BLOOMBERG NEWS click here:

Politics is the ability to foretell what is going to happen tomorrow, next week, next month and next year. And to have the ability afterwards to explain why it didn’t happen.

WINSTON CHURCHILL

 

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