The Mortgage Man

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Archive for government intervention

What Does Wall Street Bailout Mean To Main Street?

With so many opinions about what is happening with the economy, what does this mean to you?

Wow, what a week.  There is no shortage of fireworks on Capitol Hill as the Senate Banking Committee continues to throw Fed Chairman Ben Bernanke and Secretary of Treasury Hank Paulson on the grenade.  The one constant that continues to be thrown around by members of the committee is that this unprecidented measure will “cost” tax payers $700 billion.  I am afraid that this term is being lost on the committee as it is also being lost by tax payers and citizens due largely to a misunderstanding of what this “bailout” actaully involves.

Let me qualify this by saying that I am a very large opponent of gevernment intervention at any level.  There is nothing that the government gets involved with that makes anything cheaper, more effective or more efficient.  That being said, we have reached a monumental point in the financial markets where intervention is necessary to avoid a total collapse of the financial markets that is nearly immeasurable by most people alive today.  Unless you are in your 80’s, it is unlikely you can truly appreciate what affect the depression had on this country (myself included).  The argument being made is that tax payers are being asked to foot the bill for mistakes made by people and organizations that they had nothing to do with, and to a limited extent that is true.

What is really going on is a total lack of faith in the system due to the unwillingness of financial institutions not only to lend money to consumers, but also to each other to keep the system fluid and capitalized.  When using the term bailout, you must see the bigger picture of what is actually going on.  The Fed and Treasury Department are proposing to the Senate Banking Committee that the government purchase certain mortgage backed securities from financial institutions that need help to liquidate these securities to continue in business.  If you own a pizza parlor, you can only remain in business if you sell pizzas for more than the cost to make them, use the proceeds to buy supplies, and repeat the process.  The same is true in the financial industry.  Banks can only lend money after taking certain securities, liqudating them in the open market, recovering the cash, and lending it again for a profit.  This is a highly simplified version of what is happening, but it has very complicated and wide reaching implications in all of our lives.

Some of these securities are owned by your pension fund, or your local municipality, or even your investment banker (as we have already seen with Bear Sterns and Lehman Brothers).  While it is pertrayed in the media and misunderstood by elected officials that this is a $700 billion line item expense to the tax payers, that in fact is not true.  It is actually the government purchasing assets with the intention of holding them and selling later.  The proposal is also suggesting that the securities be purchased in a reverse auction fashion where the banks most desperate will sell first at the lowest coupon rate, and as the value rises, the market will dictate what is reasonable to sell for each individual company.

In the end, the actual cost to the tax payer will be much less than $700 billion, in fact, it will more likely be a fraction of that.  The result of this action would be to open up a logjam in the system allowing institutions to become more liquid, be able to lend more money to consumers, and increase consumer confidence in the economy as a whole.

As you sit in Smallville, USA and wonder why you would go along with such a deal, be aware of the fact that farmers who need short term financing to get their crops to market are affected.  Car companies that employ thousands of people to build and sell cars are affected.  And, small businesses that need money to expand and grow and create more jobs are affected.  This may have originated on Wall Street, but there is a very real impact on Main Street that could create real problems if it is not done.

Fannie Mae And Freddie Mac Get Taken Over

Markets react to the government takeover of mortgage giants Fannie Mae and Freddie Mac.

I wrote a post last thursday about how the bond market was looking good to align yourself for a refinance.  Then, over the weekend, the government stepped in and took control over Fannie Mae and Freddie Mac, and what a difference it has made.  At the time of this post, mortgage bonds are trading nearly 70 basis points higher than the close on Friday, and the Friday numbers were already steller.

So the post Thursday that suggested it might be a good time to refinance has now become a battle cry.  If you have been waiting for the right time to refinance your home, it is time to get the application started and wait for the right day to lock your rate.  If this trend continues, we may very well see rates below 6% on a 30 year fixed this week.  This morning, rates are as low as 6.125%, and there will likely be an improvement on those later today based on current market conditions.  You can check current rates at SteveRussellOnline.com.

Thursday July 10, 2008

Weekly jobless claims fall, market reacts.

The Weekly Initial Jobless Claims report came out today much better than forecast.  With 58,000 fewer claims, the report sank to 346,000, the lowest level since April.  This news, which is good for the economy, would normally be seen as bad news for mortgage bonds.  But, mortgage bonds appear to be remaining relatively flat on the news.

Treasury Secretary Henry Paulson and FED chairman Ben Bernanke testified before the House Financial Services Committee today to suggest ways that Congress could “fix” the financial regulatory system to prevent future crises.  I managed to make it through about 30 minutes of the meeting before the barage of stupid questions followed by equally predictable answers gave me a head ache.  At least they do agree on one thing…we need more government intervention.  AWESOME!!  Nothing says efficiency and dependability like putting it in the hands of the government.

Back to the matter at hand; if you are currently working on a mortgage loan, I would suggest locking your rate now.  Bond prices are currently testing the topside support level of the 200 day moving average.  Given the difficulty of crossing that major threashold, combined with the fact that no other significant economic data is due out this week, mortgage bonds are probably about as good as they are going to get in the near term.