MBA (10/13/2008 ) Velz, Orawin
Equity markets around the globe hemorrhaged as the problems in the financial system threatened to cause a global recession. Commodities (including energy and agriculture products) were in free fall over the fear that a worldwide recession will lead to flagging demand. Crude oil futures fell below $80 a barrel on Friday, the lowest in a year.
Another week brought more fiscal and monetary policy actions to tackle the financial crisis. On Tuesday, the Federal Reserve made an unprecedented move to alleviate the frozen commercial paper market, which has shrunk for the fourth consecutive week. The Fed announced creation of the Commercial Paper Funding Facility to backstop issuers of the short-term debt used by many businesses to meet daily needs. The special-purpose vehicle will purchase three-month unsecured and asset-backed commercial paper. This essentially enables the Fed to lend directly to businesses rather than to just financial institutions.
On Wednesday, as a part of a coordinated effort by major central banks around the globe, the Fed cut the federal funds rate by 50 basis points. The Fed cited weakening economic activity and intensified financial market turmoil as a motive of this inter-meeting rate cut. (The next Federal Open Market Committee meeting will be on October 28-29 and fed funds futures expected a further rate cut then).
In his speech on the same day, Treasury Secretary Henry Paulson Jr. suggested the possibility of injecting capital directly into financial institutions and, in effect, partially nationalizing those institutions. The Treasury maintained that the Emergency Economic Stabilization Act gave it the authority to provide capital in exchange for ownership stakes.
These actions failed to inspire investor confidence. Banks still did not trust each other and were reluctant to lend to one another, which resulted in rising borrowing costs for interbank lending. The London interbank offered rate continued to climb on Friday, with the three-month Libor rising to 4.82 percent—the highest since late December 2007.
Economic data were sparse last week. The first drop in August consumer credit outstanding in 10 years underscored households’ concerns about their finances and pointed to a retrenchment in consumer spending ahead. The trade deficit in goods and services narrowed in August but its improvement was not a result of strong overseas demand for U.S. products, as both exports and imports fell. One housing report offered some good news: pending home sales surged in August, fueled by pending sales (i.e., contract signing) of distressed properties in the West, suggesting existing home sales (closing) may rebound in the near term.
Stock markets extended their decline into an eighth day Friday. Investors continued to shift money into safe-haven assets, especially short-term Treasuries. The yield on the three-month Treasury bill plunged to 0.18 percent from 0.52 percent on Thursday. Longer-term Treasury yields did not benefit from a flight to quality and moved higher throughout the week. The yield on the 10-year Treasury note stayed around 3.87 percent mid-Friday afternoon, 38 basis points higher than the rate at the start of the week and 23 basis points higher than the rate on the previous Friday.
Housing and Mortgage Indicators:
The National Association of Realtors Pending Home Sales Index surged 7.4 percent to 93.4. The index was up 6.8 percent from last August, the first year-over-year increase since September 2005.
Pending home sales increased in every region of the country, led by an 18.4 percent increase in the West. The relatively stronger performance of existing home sales for the region partly reflects rising shares of foreclosed and distressed homes that were sold through the Multiple Listing Service. Attractive bargain prices have helped lure some buyers back into some local markets.
Pending home sales also rose strongly by 8.4 percent in the Northeast and rose modestly in the Midwest and the South by 3.6 percent and 2.4 percent, respectively.
The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closings, as the signed contract for the purchase of a home generally precedes its closing by one to two months. The increase in June pending home sales suggests that existing home sales should increase in the near term.
Economic Indicators:
Total consumer credit outstanding fell $7.9 billion in August to $2.57 trillion—the largest decline in the level of consumer credit on record. The measurement of consumer credit does not include any loans secured by real estate. Revolving credit balances fell $600 million, while nonrevolving credit dropped $7.3 billion or 5.3 percent—the largest percentage decline since 1992, driven by a sharp drop in new vehicle sales.
The U.S. trade deficit narrowed to $59.1 billion in August from $61.3 billion in July. Exports decreased by 2.0 percent to $164.7 billion in August, while imports decreased by 2.4 percent to $223.9 billion.
Import prices declined 3.0 percent in September, the second consecutive decline and its largest since the 2003. Over the year, import prices were up 14.5 percent, decelerating from the 18.7 percent increase in August.
Prices for petroleum products declined 9.3 percent. Import prices excluding fuels fell 0.5 percent, the first month-to-month decline since February 2007.
Friday, October 17, 2008
GSEs Still a Good Thing, Ranieri Says
IDD Magazine (10/06/08); Rozens, Aleksandrs
Speaking before senior home builder executives at Harvard University's Joint Center for Housing Research on Oct. 2, Hyperion Partners Chairman Lewis Ranieri--an early pioneer of mortgage securitization--emphasized the importance of Fannie Mae and Freddie Mac in rebuilding the mortgage market. Ranieri said the structure of the agencies needs to be made "more responsible," however, and insisted that the agencies must maintain their government guarantee without the government assuming too much of their risk. He suggested a structure similar to the Federal Home Loan Bank system, in which lenders would purchase a stake in Fannie Mae and Freddie Mac while the government charges a fee to guarantee the securities. To bolster the mortgage market, Ranieri also recommended using covered bond structures, altering risk-based capital requirements on agency debt and beefing up regulation of the credit default swaps market.
Speaking before senior home builder executives at Harvard University's Joint Center for Housing Research on Oct. 2, Hyperion Partners Chairman Lewis Ranieri--an early pioneer of mortgage securitization--emphasized the importance of Fannie Mae and Freddie Mac in rebuilding the mortgage market. Ranieri said the structure of the agencies needs to be made "more responsible," however, and insisted that the agencies must maintain their government guarantee without the government assuming too much of their risk. He suggested a structure similar to the Federal Home Loan Bank system, in which lenders would purchase a stake in Fannie Mae and Freddie Mac while the government charges a fee to guarantee the securities. To bolster the mortgage market, Ranieri also recommended using covered bond structures, altering risk-based capital requirements on agency debt and beefing up regulation of the credit default swaps market.
Consumers' Credit Getting Not So Easy
Dallas Morning News (10/13/08)
More people were able to purchase homes as credit was expanded over the past three decades, but experts now believe it will become more difficult to borrow money for a prolonged period. The credit crunch means that prospective home buyers may no longer be able to purchase homes with interest-only loans or obtain loans that allow them to borrow more than the value of the property. Home buyers will need to make substantial payments and down payments, and they also may face higher interest rates; while borrowers across the board will find it more difficult to open a credit card and carry large balances. "This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity," says Greg McBride, senior analyst at Bankrate.com.
More people were able to purchase homes as credit was expanded over the past three decades, but experts now believe it will become more difficult to borrow money for a prolonged period. The credit crunch means that prospective home buyers may no longer be able to purchase homes with interest-only loans or obtain loans that allow them to borrow more than the value of the property. Home buyers will need to make substantial payments and down payments, and they also may face higher interest rates; while borrowers across the board will find it more difficult to open a credit card and carry large balances. "This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity," says Greg McBride, senior analyst at Bankrate.com.
5,000 Show Up at Foreclosure Showcase in Uniondale
New York Newsday (10/13/08); Amon, Michael
The New York Foreclosure Showcase drew a crowd of almost 5,000 to the Marriott Hotel and Conference Center in Uniondale on Oct. 12, when 35 foreclosed properties were put on the auction block. The current market has afforded "opportunities to buy that didn't exist before," says Todd Yovino of Island Advantage Realty, who organized the event. Bidders needed to arrive with a mortgage prequalification and a certified check for $10,000. On hand to speak with attendees were realtors specializing in foreclosures, real estate attorneys and home improvement specialists; and they also had access to seminars on mortgage prequalification and quick foreclosure sales.
The New York Foreclosure Showcase drew a crowd of almost 5,000 to the Marriott Hotel and Conference Center in Uniondale on Oct. 12, when 35 foreclosed properties were put on the auction block. The current market has afforded "opportunities to buy that didn't exist before," says Todd Yovino of Island Advantage Realty, who organized the event. Bidders needed to arrive with a mortgage prequalification and a certified check for $10,000. On hand to speak with attendees were realtors specializing in foreclosures, real estate attorneys and home improvement specialists; and they also had access to seminars on mortgage prequalification and quick foreclosure sales.
NAHB: Housing Jobs Key to State and Local Economic Recovery
RISMedia (10/13/08)
National Association of Home Builders Chairman Sandy Dunn urges state and local governments to consider innovative ideas to help shore up the slumping housing market. Dunn remarks, "While the federal government has stepped forward with a series of emergency actions to stabilize and restore confidence in the financial markets, it's now time for the same sort of innovative thinking at the local and state levels where public officials are grappling with budget shortfalls that are putting a squeeze on spending for everything from schools to public safety and other essential services." Such creative thinking could range from temporarily foregoing impact fees on new development to allowing higher density zoning to build more affordable housing. Dunn concludes that it is also vital that cities and counties extend existing zoning approvals while builders secure financing for new projects.
National Association of Home Builders Chairman Sandy Dunn urges state and local governments to consider innovative ideas to help shore up the slumping housing market. Dunn remarks, "While the federal government has stepped forward with a series of emergency actions to stabilize and restore confidence in the financial markets, it's now time for the same sort of innovative thinking at the local and state levels where public officials are grappling with budget shortfalls that are putting a squeeze on spending for everything from schools to public safety and other essential services." Such creative thinking could range from temporarily foregoing impact fees on new development to allowing higher density zoning to build more affordable housing. Dunn concludes that it is also vital that cities and counties extend existing zoning approvals while builders secure financing for new projects.
Paulson Speeds Consideration of Guarantees for U.S. Bank Debt
Bloomberg (10/13/08); Christie, Rebecca; Schmidt, Robert
U.S. Treasury Secretary Henry Paulson Jr. reportedly is fast-tracking a plan to guarantee debt issued by banks after a similar move was made by European policy makers over the weekend. Such a step would be part of a three-pronged strategy to free up credit markets that also calls for the government to buy shares in financial companies and invest in distressed assets under the $700 billion program recently approved by Capitol Hill lawmakers. In order to keep a level playing field for American lenders, the Treasury may also have to offer a backstop for U.S. banks' debt. At an emergency summit in Paris on Oct. 12, European leaders agreed to offer guarantees for new bank debt and committed to using taxpayer funds to bolster lenders' capital.
U.S. Treasury Secretary Henry Paulson Jr. reportedly is fast-tracking a plan to guarantee debt issued by banks after a similar move was made by European policy makers over the weekend. Such a step would be part of a three-pronged strategy to free up credit markets that also calls for the government to buy shares in financial companies and invest in distressed assets under the $700 billion program recently approved by Capitol Hill lawmakers. In order to keep a level playing field for American lenders, the Treasury may also have to offer a backstop for U.S. banks' debt. At an emergency summit in Paris on Oct. 12, European leaders agreed to offer guarantees for new bank debt and committed to using taxpayer funds to bolster lenders' capital.
Fannie Reaches Out to FHLBs
National Mortgage News (10/13/08) Vol. 33, No. 4, P. 15; Collins, Brian
Fannie Mae will purchase mortgages originated under the Federal Home Loan Bank of Chicago's Mortgage Partnership Finance program by its member banks. These MPF Xtra loans will not involve the program's trademark credit-risk sharing element once sold to the government-sponsored enterprise, however. Chicago FHLBank President Matt Feldman says the initiative "will make it easier for the majority of our members to continue to offer competitively priced fixed-rate mortgages to their customers in their communities." Fannie Mae will assume the member banks' interest rate risk, prepayment risk and credit risk, while the banks hang onto servicing rights and servicing fee revenues.
Fannie Mae will purchase mortgages originated under the Federal Home Loan Bank of Chicago's Mortgage Partnership Finance program by its member banks. These MPF Xtra loans will not involve the program's trademark credit-risk sharing element once sold to the government-sponsored enterprise, however. Chicago FHLBank President Matt Feldman says the initiative "will make it easier for the majority of our members to continue to offer competitively priced fixed-rate mortgages to their customers in their communities." Fannie Mae will assume the member banks' interest rate risk, prepayment risk and credit risk, while the banks hang onto servicing rights and servicing fee revenues.
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