Fed rate cut a case of good news/bad news

Friday, 21 September 2007

Page 2 of 2 Bernanke did, in fact, have such concerns. On Sept. 20, two days after the rate cut, in testimony before the House Financial Services Committee, he said global financial losses from the credit crisis had “far exceeded even the most pessimistic estimates of the credit losses on these loans.” At the same hearing, Treasury Secretary Henry Paulson said the administration would consider allowing the large mortgage companies Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities “jumbo loans,” or those that exceed $417,000, in order to infuse liquidity into the overburdened mortgage market. Bernanke’s explanation and Paulson’s suggestion come on the heels of a move by the House of Representatives to take the mortgage crisis in hand. The House passed H.R. 1852, an updating of the National Housing Act that would enable the Federal Housing Administration “to use risk-based pricing to reach underserved borrowers.” The bill, which would expand federal backing of mortgages to help homeowners struggling to avoid foreclosure, passed the House 348-72. A similar measure is being considered in the Senate, which, the week before, passed spending legislation that included $200 million in aid for groups that offer counseling and information to help homeowners with high-pried mortgages avoid foreclosure. The number of foreclosure filings more than doubled in August versus the same time last year and jumped 36% from July, a trend that signifies the inability of many homeowners to make timely payments on their mortgages or to sell their homes in the midst of a national housing slump. California-based RealtyTrac Inc., which tracks data in the real estate industry, counted 243,947 foreclosure filings in August, compared to 113,300 in August 2006. July foreclosures totaled 179,599. Many of the loans held on the foreclosed homes were adjustable rate mortgages issued in 2005 and 2006 during the height of the housing boom. “In South Carolina, businesses and individuals tend to be a little more conservative, so any impact will be less pronounced here,” Koch said. “But we still have a lot of speculative investment. For instance, with coastal development, instead of a severe downturn, it will slow down less quickly, but the rate cut won’t save it in any classic sense.” Koch predicted that the housing situation will continue to slow for a while. “But that’s not a bad thing,” he said. “It’ll get rid of excess inventory, and lenders will be less willing to advance credit today unless the borrowers are strong, but again, that’s not necessarily a bad thing.” Koch pointed to a “big picture view.” “Countrywide is a huge mortgage company, and it used to make one in five mortgages that are known as ‘exotic contracts,’ things like adjustable rate mortgages and interest-only loans,” he said. “A lot of lenders did not do their due-diligence as lenders, so a lot of people have been buying more home than they can afford. “Wall Street calls these ‘Ninja loans,’ meaning you can have ‘no income, no job, no assets and it’s no problem,’ you can still qualify. But that’s just feeding the addiction. And everybody’s guilty here. The question is who’ll benefit now if they lower rates and the lenders don’t learn the lessons?” Koch noted that, with the rates cut, some people will be able to afford their homes when they couldn’t otherwise. “And of course, it’s a good thing for them,” he said. “But this is obvious not a win-win at all.” The real question, he said, is where things will go from here. “We’ll keep tracking, but when we look at employment and housing and things like that, it’s a long lag,” he said. “If we get into worse inflation, we’ll really be in a box. “You know, some people are calling Bernanke ‘helicopter Ben,’ because they see him flying around dropping money on those with problems,” he said. “That description is pretty good. As for whether this is the best thing for the economy, time will tell. For now, this we know: Inflation will go up, so we’re probably just borrowing against our future.” << Start < Prev 1 2 Next > End >>