Saturday, January 24, 2009

This Week in Review 1/23/09

Earnings drag stocks down

Earnings season is upon us again – and few are bringing good cheer. Financials in particular have resurfaced with greater vulnerability than expected. It turns out that improvement in the credit crisis has not been as much as previously believed. Meantime, inflation fears are making a comeback in the bond markets.

Stocks got no bounce from Obama taking office this past Tuesday. While there is considerable opinion that the new administration’s expected fiscal stimulus plan will speed up recovery, the latest earnings reports more than offset that optimism. Equities were pulled in particular by financials. Lowlights included huge losses at Royal Bank of Scotland. RBS warned that it may report a loss of $41.3 billion.

Also, equities were spooked by news that State Street needs to raise large amounts of capital. This raised fears that major banks are likely strapped for capital as well. Bank of America’s firing of CEO John Thain (formerly CEO of Merrill Lynch) left markets wondering about whether or not bank management in general is successfully dealing with the current financial crisis. For financials overall, sentiment definitely turned more negative.

Key tech companies were mixed. Apple dramatically topped expectations with its sales of Macs. In contrast, Microsoft continued to disappoint.

Broader based companies posted earnings that led equities to believe that more bad news is to come from more cyclically sensitive companies. GE had disappointing earnings.
Finally, a record low for housing starts in December was announced this past week, adding to negative sentiment in equity markets.
Equities were down this past week. The Dow was down 2.5 percent; the S&P 500, down 2.1 percent; the Nasdaq, down 3.4 percent; and the Russell 2000, down 4.7 percent.

For the year-to-date, major indexes are down as follows:
Dow down 8.0 %;
S&P 500 down 7.9 %;
Nasdaq down 6.3 %;
Russell 2000 down 11.0 %.

Current monetary policy and expected fiscal policy played key roles in the bond markets this past week. The Fed is keeping short-term rates extremely low with the fed funds target range of zero to 0.25 percent. Treasury bill yields remained not far from zero in sympathy with the fed funds rate. In contrast, with Barack Obama taking office this past Tuesday, credit markets have become more nervous about how much debt the U.S. government and governments world wide will be issuing to combat recession. Hence, the long-bond rose sharply this bond week with rising inflation fears also contributing to the boost in long-term yields.

For this past week Treasury rates were mostly up as follows: 3-month T-bill, down 1 basis point, the 2-year note, up 8 basis points; the 5-year note, up 15 basis points; the 10-year bond, up 28 basis points; and the 30-year bond, up 44 basis points.

Yields on long-term Treasuries jumped this past week. Key factors were a resurgence in inflation expectations and a fear of increased supply to fund fiscal stimulus plans and financial bailouts.

This past week, limited economic news was negative. Nonetheless, crude oil posted a strong net gain for the week. Boosting prices on Tuesday was the expiration of the February futures contract as the lower priced February contract converged with the higher priced March contract. A significant number of traders had been playing a “contango” situation in which current prices are low but are expected to consistently rise in coming months. But with the expiration of the February contract, there was considerable short-covering, boosting crude prices.

Not all factors lifted prices. Two geo-political issues keeping oil prices firm appear to have been resolved at least temporarily. Russia and the Ukraine have agreed upon a natural gas deal and Israel pulled its military out of the Gaza Strip. Government reports on petroleum stocks indicated that inventories were somewhat higher than expected but news of additional bailouts for banks helped boost prices.

But by the end of the week, oil industry consultant PetroLogistics Ltd. Indicated that OPEC will cut supplies by about 5 percent this month, which helped bolster crude prices. Even though crude rose notably this past week, prices are still relatively soft due to ongoing recession worldwide.

Net for the week, spot prices for West Texas Intermediate jumped $8.14 per barrel to settle at $44.65 – and coming in $100.64 below the record settle of $145.29 per barrel set on July 3.

The Economy
On the indicator front, it was a mostly quiet week – the only market moving indicator was housing starts. According to nearly all of the economic pundits, housing has to recover before the overall economy can. But the latest housing starts numbers indicate that’s not happening yet.

Housing starts drop to new low
Indeed, housing starts in December continued to be pushed down by oversupply of unsold homes on the market. Starts fell another 15.5 percent, following a 15.1 percent plunge in November. The December pace of 550 thousand units annualized was down 45.0 percent year-on-year and was sharply below the consensus forecast for 615 thousand units. December’s pace of new construction was the lowest since the starts series began in 1959.

For the latest month, the fall in starts was led by the multifamily component which dropped 20.4 percent while the single-family component fell 13.5 percent.

By region, the decline in starts was led by a monthly 24.5 percent drop in the Midwest. Starts also declined in the South, down 22.2 percent, and the West, down 2.2 percent. The Northeast rose 12.7 percent.

Permits also continued in freefall in December, posting a 10.7 percent drop, following a 15.8 percent falloff in November. The December pace of 0.549 million units annualized for permits was down 50.6 percent year-on-year.

Other housing news out last week point to continued weakness or even further deterioration. The housing market index, compiled by the National Association of Homebuilders together with Wells Fargo, fell 1 point in January to a record low of 8 -- a level indicating that nearly all respondents are reporting month-to-month contraction. This index compiles respondents’ views on present sales of new homes, sales of new homes expected in the next six months, and traffic of prospective buyers in new homes.

Overall, the picture for housing continues to be bleak. But the silver lining is that homebuilders are facing the reality that inventories of unsold homes must be worked off before starts pick up. Meanwhile, construction jobs will continue downward and there will be collateral damage to spending for the likes of appliances, furniture, and other home improvement purchases. Not only is the fourth quarter looking very negative, but the direction for the first quarter is clearly down for the overall economy.

Looking ahead at the Fed
This coming week, the highlight may well be the Fed’s FOMC statement. Given that at the December 15-16 FOMC, the Fed cut the fed funds rate target to a record low range of zero to 0.25 percent, the Fed can’t cut any further. Importantly, the FOMC went out of its way to emphasize that the effective fed funds rate is likely to remain low “for some time.”

Indeed, the fed funds futures market was paying attention to the statement. Based on fed funds futures, traders expect the effective fed funds rate to stay below 0.25 percent at least through mid-2009 and below 0.5 percent for the rest of 2009.

Since we will not be seeing a statement from the Fed saying that the fed funds target is going lower, what can we expect? The Fed is now focusing on quantitative easing or credit easing as stated by Fed Chairman Bernanke. Without a doubt, the Fed has expanded its balance sheets immensely over the last few months.

Over the past decade from 1999 until late 2008, Reserve Bank credit outstanding had been slowly rising from $500 billion to $1 trillion. But credit outstanding surged from $894 billion this past September to an astonishing $2.2 trillion in December! Now, the focus is expanding credit into specific segments of the credit markets that will have the most impact on economic recovery. The Fed emphasized this targeting of credit in the December FOMC statement.

“As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.”

So, at this FOMC meeting, we may see more specifics about what the Fed may be purchasing to expand credit. There now is an unusual intra-Fed political angle. The FOMC – which is a committee comprised of Fed governors and Fed regional bank presidents - is charged with making decisions on setting the fed funds rate. But the regional presidents are not involved with the official decisions on new lending facilities – just the Fed governors. It will be interesting to see what role the regional Fed presidents will be playing while the fed funds target is stuck on hold. The debate will likely continue over whether the Fed should set numerical targets for balance sheet items. Separately, any FOMC comments on to what degree the economy may be worsening could move markets.

The bottom line
The latest economic numbers not surprisingly confirm that the recession is more than just a mild dip and fourth quarter earnings are falling in line with that view. It’s going to be a while before any significant fiscal stimulus will be coming out of the new administration and Congress. So, it is still up to the Fed to loosen the credit markets and specifically to begin restoring faith in mortgage markets. Wednesday FOMC meeting statement likely will give new details on the Fed’s plans.

courtesey Econoday

Market Reflections 1/23/2009

Google saved Friday's session. The online portal posted powerhouse earnings that exceeded already high expectations, overshadowing weak results from Advanced Micro Devices and lifting technology shares. The Nasdaq composite rose 0.8 percent in contrast to the Dow industrials which lost 0.6 percent.

Gold was a big mover, up 5% at just over $900 in late electronic trading. Front page news on the Obama administration's stimulus plan is reminding investors that inflation pressures will once again be a concern. The gain in gold is being made despite strength in the dollar, raising hope among gold bugs that safe-haven demand for the dollar won't come at the expense of gold. The dollar firmed slightly in the session to end at $1.2986 against the euro.

The energy markets are stunned by how bloated inventories have become. Yet oil rose on the day, up 7% to $45.81. An explanation is difficult but there is talk that Saudi output cuts will begin to cut into supply by mid-February.

Friday, January 23, 2009

Inflation IS coming, house values still decline

The Fed's FOMC meet's next Wednesday... I don't expect the Fed to reduce rates the remaining 25 Basis Points (1/4%) to zero.

It's been my position, that it's not a case of the cost of credit causing the credit crisis, it's a case of the lack of liquidity causing the credit crisis... and the resulting decline in value of residential/commercial property.

What lender in his/her right mind would lend against collateral that is declining in value! Politicians and Government..wake up! The problem is the value of every American home is declining.
Stop that decline by giving the Federal Reserve Bank the mandate to buy the mortgage on every residents primary residence and replacing it with an affordable mortgage at a 4% rate for 30 yrs based on the owners ability to pay, and you have a chance of stopping this death spiral.

So... In my mind... I didn't see the need to cut rates all along, and especially not to near zero!

But, the longer we're here at near zero, the better the chance is for soaring inflation by 2010!

Market Reflections 1/22/2009

Stocks fell Thursday after Microsoft missed estimates and announced a massive layoff. The Dow industrials dipped below 8,000 briefly but did end off lows at 8,122 for a 1.3 percent decline on the day. Shares of Microsoft fell 12% to $17.11. Earnings after the close were mixed with Google beating estimates mildly but Advanced Micro Devices missing estimates badly and warning of a continuing steep decline in sales.
Economic data were dismal as usual including major declines in housing starts and permits, results that aren't pointing to any recovery in the housing sector or the banking sector for that matter. Weekly jobless claims showed significant increases that point to another month of major payroll contraction. But the most talked about economic data was GDP out of China which showed the greatest slowing since 2001. The day's data had little effect on the dollar which ended at $1.3002 against the euro.
Inventory data on petroleum products showed another week of major builds, builds indicating contraction in demand and which weighed on oil prices. Oil for March delivery fell more than $1 to end at $42.89. Gold firmed slightly to $858.

Thursday, January 22, 2009

Obama stimulus expectations- Stem cell research

Almost half of Obama’s proposed $825 billion stimulus package won’t get injected into the economy for at least two years, the Congressional Budget Office forecast today.

In its Economic Outlook, the CBO took a gander at the “discretionary” portion of the proposed stimulus -- spending on infrastructure, renewable energy and other “job creating” initiatives -- and suggested it would be late 2010 before those projects got off the ground.

The CBO report was chock-full of economic forecasts. Here’s the highlight reel:
The U.S. economy will contract in 2009 by 2.2%
GDP will grow again in 2010, but by just 1.5%
Unemployment will peak at 9% in early 2010
Consumer inflation will be a nonissue in 2009, increasing only 0.1% for the whole year
Home prices will fall another 14% between the third quarter of 2008 and the middle of 2010
Government deficit will exceed $1.2 trillion this year, 8.3% of GDP
The American recession will end sometime in the second half of this year.
We’ll be lucky if the U.S. economy turns out as well as the CBO projects.

As President Obama was inaugurated, the White House Web site was being transformed.

In the Agenda section, the new administration set forth a range of ambitious technological goals. Most were stated in general, if not vague, terms. One goal, however, was blunt and straightforward.

“It says, simply, the administration will ‘Advance Stem Cell Research: Support increased stem cell research. Allow greater federal government funding on a wider array of stem cell lines.’

This can be done by executive order, so there is little uncertainty that it will come to pass.”

Housing Starts Down, Unemployment up

Housing Starts
Home builders cut groundbreakings a sixth time in a row during December and brought construction to a new low.
Housing starts decreased 15.5% to a seasonally adjusted 550,000 annual rate compared to the prior month, the Commerce Department said.
The number of U.S. workers filing new claims for state unemployment benefits soared last week to match the quarter-century high reached in December, suggesting layoffs continued unabated into the new year. Initial claims for jobless benefits jumped 62,000 to 589,000 after seasonal adjustments in the week ended Jan. 17.

Banks and the TARP

Courtesy of Casey Research:

Since August, banks have built their cash position in the form of Treasuries, agencies and deposits at the Fed by $865 Billion, while their loans and leases have increased by only $325 Billion.
So you can imagine a chart with one line for cash position rising, and the other line for loans falling...
Here are the people at Casey Research's thoughts... "In other words, rather than lending the billions of dollars received from the Treasury's Troubled Asset Relief Program (TARP), as was originally intended, the recipient banks have squirreled away the bailout funds in order to shore up their balance sheets.
Concurrently, the Federal Reserve is exchanging its excess reserves for toxic waste from the financial institutions.
The combined affect is a "circular bailout" with the Treasury borrowing. in order to lend money to banks. that then lend it back by purchasing more Treasuries.
Of course, the expense of this entire bailout scheme ultimately falls onto the back of the tax-paying public."

China and the rising Renminbi

Did you see that China's 4th QTR GDP grew at a 6.8% clip?

Now, compared to the plus 10% growth rates China was posting for the past few years, 6.8% looks pretty measly... But! Let's look around the world right now and see who has a GDP that even compares?

Well, that roster would be pretty small... In fact, I can't think of anyone other than China that has GDP of 6.8%!
This 4th QTR drop puts the annual growth rate in China for 2008 at 9%... Again... you'll have to show me a country, other than China that posts a figure that strong!

In the whole scheme of things, this is pretty significant for China though. And all the reason I believe the Chinese officials will continue the slow appreciation of the renminbi... This is going to put a lot of people, investors, traders, into a lull regarding renminbi, as everything around the world slows down... But in China, inflation is still a problem, and that can be dealt with by allowing the renminbi to continue its slow appreciation...

Gold Bounces

Gold... The shiny metal broke its recent trend of rallying along side the dollar yesterday, but the sell off was small... Negligible at best... But a breaking of the trend nevertheless.

I believe that Gold will get caught up with the currencies in the Obama bounce, but that will be a temporary thing...

Wednesday Market Review


Stocks rallied strongly on Wednesday, nearly making up for Tuesday's rout. Financial shares posted big gains on bargain hunting led by PNC, up 37 percent, and Bank of America and Citigroup, both up 31 percent. Shares of IBM gained 12 percent after the computer giant easily estimates and raised 2009 guidance. Apple is likely to be a big gainer on Thursday's opening after the computer and digital device maker also easily beat estimates. But not all companies will be posting gains as disk drive maker Seagate and online marketplace eBay both missed estimates after the close.

Economic data was once again bleak as the housing market index edged down to new depths that point, despite lower mortgage rates, to further declines in home sales. The dollar retraced some of its steep gains on Tuesday, giving back about 1-1/2 cents to $1.3043 against the euro. Money moved out of the safety of Treasuries but only very slightly with the 2-year yield ending at 0.76 percent, up 6 basis points from yesterday.

Crude oil, moving in line with the stock market as a barometer of economic growth, rose 8% to $44.16. Gold edged slightly lower to $851

Wednesday, January 21, 2009

Britain Finished?

In a Bloomberg video interview, Jin Rogers (ex-partner Soros) said the U.K. is "finished."

According to Rogers, oil sales from the North Sea were the only thing supporting its economy, and the oil is running out. London, a global financial capital, is also a "disaster" because many of the current economic problems originated there. Bankers and money managers left the U.S. to operate with less regulation in London. Rogers has sold all of his pounds sterling.

And with the pound and U.S. dollar under scrutiny, where are currency traders putting their money? In the countries with the largest trade surpluses – Japan, Norway, and Switzerland. European banking giant BNP Paribas forecasts the yen will appreciate about 14% against the dollar by June. Norway's krone is one of Goldman Sachs' top picks for 2009 (it's one of Jim Rogers top picks too). And Bank of America says the Swiss franc will gain against every major currency.Maybe as speculations, these are good ideas.

A wave of bank failures soon?

The January 9 cover of American Banker said eight out of 12 Federal Home Loan Banks (FHLBs) would have less than the minimum regulatory capital if losses from mortgage-backed securities were deducted.

Dan Ferris makes this argument:

On Friday, the Pittsburgh FHLB said permanent losses could exceed the bank's retained earnings – which has never happened in the FHLBs' 76-year history.

This is a big deal because, like with Fannie and Freddie, FHLB securities are owned by all FHLB member banks. There are currently more than 8,000 members, all of which own shares in their regional FHLB. When the FHLB fails – which is inevitable – thousands of banks holding FHLB securities will take writedowns. That'll bring many banks already weakened by losses in Fannie and Freddie preferred stock closer to insolvency.

Understanding government's role in the financial crisis is a test. If you don't understand the crisis happened not in spite of government "insurance" schemes and regulation, but rather was aided, abetted, and compounded by government interference in mortgage and banking, you fail the test.

The Oil Price Conundrum 2

Food for thought:

  • Why aren’t the big oil exporters all over this trade?Could it be these guys don’t actually have all the spare capacity they’re letting on?
  • Why are the drillers and oil service names so depressed? Stock markets are supposed to discount the future, not the past. Equity valuations are supposed to be forward looking. And yet, at current multiples, most of the high-quality drillers and oil service names are trading as if oil were headed to $20, not back to $60. Yet the December crude contract says otherwise... and the huge spread between near-month and far-month contracts persists. What gives?
  • Could Wall Street still be “broken” in the aftermath of 2008? After the year we just went through, anyone who still believes in perfectly efficient markets should have their head examined.
  • Could December crude contracts be expressing an opinion on the inflationary effects of U.S. debt monetization... or rebound possibilities for emerging markets... or both? It’s widely recognized that the U.S. Fed and Treasury are embarking on a “great experiment” now that has never before been tried – one that could be summed up as, “Print like crazy and see what happens.” Some observers, like Joachim Fels of Morgan Stanley’s Global Economics Team, further believe that emerging markets could outperform in 2009 due to better internals than they get credit for. Could the persistent crude spread be reflecting both views?

Dont rightly know, but its worth watching closely what happens.

Something strange is going on with the price of oil

There is a huge discrepancy between the near-month and far-month futures contracts.

As I write, the going price for near-month West Texas Intermediate crude is $41.42per barrel. The December 2009 contract, on the other hand, is trading at $53.44.

That is a monster spread. We’re talking a difference of more than $12 a barrel between spot crude – the stuff you can buy in the cash market – and crude slated for delivery at the end of this year.
The technical name for this situation is contango. That’s what they call it when a forward-month commodity contract is trading at a higher price than the near month. (You don’t really need to know this right now, but the opposite of contango, when near-term prices are higher than the back months, is backwardation.)
The reason this is strange is because of the massive profit opportunity embedded in the crude market.
Assuming you had the means, you could go out right now and sell millions of dollars worth of December crude contracts at $53 dollars a barrel... buy the equivalent amount in the cash market for $41 a barrel or less... and then just wait until it’s time to deliver the oil (and lock in your $12 profit).
The only hitch in the deal is finding a place to store the stuff. If you were to buy crude now, you would have to take delivery and store it until late November (or whatever month your delivery date rolls in, when you close the trade and take your locked-in profit).
The puzzling question is why the anomaly persists. Why has the spread not come in?
Remember that once the far-month contracts are sold, price risk is removed from the equation. If you’ve entered into a deal to sell 2MM barrels of crude at $53 after buying at $41, you don’t have to worry about where prices go between now and your delivery date. You can just sit and wait.
When a no-brainer opportunity like this comes along, Wall Street normally jumps all over it. Traders exploit the anomaly in size until it disappears.
If markets weren’t so out of whack, you would gradually see the spread between near-month and far-month crude contracts get smaller and smaller as more and more players piled in. The profit in the spread would be reduced to the point where putting on the trade no longer made sense.
Two constraints that keep this from happening now are financing and storage.
First the finance angle: This is a trade that requires a serious cash outlay (or a major line of credit) to pull off. To fill up a supertanker with crude and sit on it for a year, you’re talking $50 million to $100 million as table stakes. The big Wall Street houses have been so bruised and battered, it’s hard for them to come up with that kind of dough – even for slam-dunk opportunities.
The other major constraint to the trade is storage. Such huge volumes of cash market crude are being held off the market now, traders are literally running out of places to put it. (It’s not like you can just pop into the local EZ-storage or stash a million barrels of oil in the shed.)

We’ve got oil coming out of our ears in the short-term... but the price of oil is still head-scratchingly higher – much, much higher – in the longer term.

Inflation ahead?

The Obama bounce?

Well, the Obama bounce didn't come in the first day of his Presidency, as the Dow sold off by 332 points!

We'll have to see what stocks think about the $850 Billion stimulus package that the Obama team is working on...

Here's some detail on the package, that could still grow... It certainly isn't going to shrink!

The stimulus plan covers 5 areas of spending and tax breaks... Health, education, infrastructure, energy, and support for the unemployed and the poor.

All worthy areas... Unfortunately, we (the U.S.) don't have the funds to pay for this... Now... If we weren't already in a huge deficit hole, then a stimulus package to get the economy going might be the answer... But, that's not the case!
This time, we're starting in a deep, dark deficit hole...

I sure hope it works... I just can'tunderstand how adding $2 Trillion to our national debt this year helps...
How did I get to the $2 Trillion? Well... The Congressional Budget Office (CBO) has already told us the deficit in 2009 would be $1.2 Trillion. Holy Cow!

Well, the CBO's budget forecast does NOT include the new stimulus plan of $850 Billion... it also doesn't include: Any new military expenses... And the remaining TARP money that the Obama team just came into... or any other pork spending the political establishment is relentlessly addicted to.

Gold Moves Higher With The Dollar

The first full day of the new regime... I will say this, it makes one proud to be an American when you can watch a peaceful handing over of leadership.

Yesterday, the Bank of Canada (BOC) lowered their official interest rate by 100 BPS or 1%... I told you long ago that the BOC would follow in the Fed's footsteps, and they have... Canada had it all going for them last year, with gold rising, Commodities like Oil, natural gas, and metals all rising, but that curtain came down hard on Canada and their dollar / loonie. It will be some time before the loonie can recover... but... if my scenario of soaring inflation for the U.S. and rising Commodities again comes to fruition, then it won't be that long.

Morgan Stanley issued a report on Gold recently that called for Gold to reach a new record within the next 3 years. They call for the Gold to "average" higher each of the next three years through 2012, with the average this year to be $900, next year $1,000, the following year $1,050, and $1,075 in 2012... Personally, I believe their call to be quite conservative, something that we're going to see a lot of in the next few years, as these research teams, back off the "hyper-calls" for assets, as they walk gently over eggshells.

So how do you take advantage of this prediction (if you believe it to be true)? Try GLD the ETF, or you could look at a junior gold miner: Royal Gold -RGLD (in anuptrend since Mid Oct '08) or the grandaddy of them all Freeport McMoran-FCX( lloks like it is finding support at around $22).

Tuesday, January 20, 2009

Mortgage Workout 4: The real urgency

Its inauguration day. There is hope in the air. Change....

It is time for politicians to be patriotic and not parochial.

They MUST rescue the people of this great nation or the American Dream of home ownership willb be lost forever.

They must do this for the benefit of the country. To do anything other than a clean fix aimed laserlike at the problem of home valuation is to charge the country headlong out of the current recession into a second Great Depression of unimagined magnitude and consequence.

Here is an example of how this would work, without using Bailout money, without cramping the style of politicians who want to free up money for stimulating economic activity and would restore the great hope of prosperity for this great nation and the world:


John Smith Family owns a house with a current mortgage of $700,000. It is their primary residence (they live in it).
Smith household income reported on 2007 Federal tax return was $125,000 gross before any deductions (ie NOT their taxable income).

Current US 30 year Treasury notes have an interest rate of 3.125%.

Principle no 1: 30% of $125,000 means Smith can afford to pay no more than $37,500 per year or $3,125 per month for Principal & Interest on the mortgage.

Smith gets a new mortgage under this program with a 30 year term at 3.625% (3.125+0.5) for a nominal value of approx $600,000.(arrived at through DCF analysis based on what Smith can afford to pay). The Government gets the right to 80% of the difference between $600,000 and the original mortgage amount of $700,000 when the house is sold.

Ten years from now Smith sells the house for $700,000

He has paid about $2,900/month in interest for 10 yrs or $348,000 that has gone back into the US treasury.

He has paid about $27,000 in principal. He owes $573,000 on the new government mortgage, and $100,000 difference between his old and new mortgage originally financed by the US govt.

His gross profit on the sale of his house is $127,000. He owes 80% of this or $101,600, under his mortgage contract so that the Government gets the $573,000 and its $100,000 back and $1,600 more.
Smith has had his property written down to a reasonable value and his mortgage therefore becomes valuable in a resale. Banks can resell it or if they wish sell it to FNMA in the regular course of business. Smith has lived with a new lower payment and still got the tax deduction for interest. He has made a profit on the sale of the home!

Most importantly, Smith is not tempted to hand the keys of the house to the bank because he is upside down in the mortgage. The Bankruptcy/foreclosure process is completely avoided.

There is a very real potential for gain by the government. Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established. The Fed will hire the necessary personnel to administer the program.

The banking system is unclogged and consumer confidence is restored.

Mortgage Workou 3: Benefits to Mortgage Holders under water on the Mortgage

a. Current law-abiding households who are current on their mortgages and are seeing negative real value of their primary residence will be able to remain in their homes at affordable cost with a potential for some upside appreciation in the value of their property and a participation in the realization of that potential together with Govt on sale of their property.
b. Banks and other mortgage owners will have a value, real and ascertainable, assigned to each and every such distressed mortgage AND they will have, therefore a viable asset to sell to mortgage repackagers on Wall Street; this frees up capital to lend out on new mortgages under more appropriate terms (20% downpayment, 30% max housing cost : household income)
c. Government gets a real, visible path to recovery of money appropriated to this program, with interest.
d. Government will be helping citizens who most need help and restoring their confidence in The American Dream.
e. Government will restore confidence in the banking system worldwide by establishing a system of mortgage valuation that establishes a valuation methodology that could easily be cloned by private investors and capitalized on by the Financial Services industry worldwide.
f. Bankers and other lenders will now have a method of assessing the value of collateral offered interbank and lending between institutions, currently effectively at a standstill, can be reinvigorated.
g. No new government burocracy needed. FNMA/FHLMC become effective arms of the Federal Reserve who is charged with housing stability as a third mandate.

The result will be a very viable, self-funding solution to the current housing/banking crisis.

Homeowners will see their property values written down to reasonable values. Mortgages then become easy to value as the underlying properties have a value. Homeowners have an affordable mortgage payment, freeing up discretionary income for spending on other goods and services.

Most importantly, homeowners will not be tempted to walk away from unaffordable payments, or houses worth less than they owe, Foreclosure and bankruptcy is avoided completely.

There is a very real potential for gain by the government. Interest on mortgages comes into the Fed Reserve balance sheet. Potential for profit exists on sale of properties. No new government agencies need to be established.

The banking system is unclogged and consumer confidence is restored. All without requiring additional tax burdens on unborn generations.

Mortgage Workout 2: Funding

FUNDING for this Program:

Congress will authorize Treasury to issue up to$700 billion annually in 30 year Treasury bonds, at prevailing rates, to implement this program.

These funds will be placed in a separate segregated Federal Reserve Board administered fund that cannot be invaded by Congress. These funds will be used to purchase mortgages funded by Freddie Mac/Fannie Mae.

Chairman of Fed to be responsible for disbursement and oversight of the program through FNMA/FHLMC so co-ordination with Monetary policy will be maximized.

Reporting to Congress on program status twice a year.

A Mortgage Workout for the People of the USA 1: The Plan

This is a suggested plan to help every citizen of the USA whose current mortgage obligation exceeds the value of their primary home.

Principle no 1: No household should pay a housing cost (mortgage payment: principal + Interest only) that exceeds 30% of their gross income( before any deductions) as reported on their latest Federal Tax Return.

Principle no 2: The Federal Government will refinance through Fannie Mae and Freddie Mac(buy existing mortgage and reissue a new mortgage to homeowner) existing homeowners who are under water with their mortgage on primary residences.

Principle no 3: New mortgages issued under this program, based on household ability to pay, will contain a provision that allows FNMA/FHLMC to recover on sale of secured property, 80% of the difference between the nominal value of the new mortgage issued and the then sale price of the property, until full amount of original refinanced mortgage is recovered. These agencies will be allowed to charge a 0.5% fee in addition to 30yr treasury rate to cover cost of implementing program.

Principle no 4: FNMA/FHLMC will be allowed to continue to repackage these new mortgages in CMO’s etc for resale through traditional resale channels.