Dealing With Residential Real Estate and Issues That Remain In the Financial Sector

Another fact is that redemptions on mutual funds [hedge and otherwise] continue apace which means money is being drained from the markets sending the DOW down. Apparently the problem of redemptions has become sufficiently “systematic” that the Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds redemptions. They are doing this by opening up yet another and additional backstop program via the discount window. Whether this in response to a panic situation or margin calls

It also appears that the discount window programs will be widened so that the Fed next week will start an unlimited program to purchase commercial paper directly from issuers. What this suggests is that while LIBOR Rates are down, the amount of lending is still severely contracted.

On the residential mortgage front in the US, while there are a large number of concerns, what to do is still up in the air. While Barney Frank has publicly stated that FDIC Chair Sheila Bair should be put in charge of a government-wide effort' to stem foreclosures, how this is supposed to work is unclear. The FDIC in effect running a successor to failed lender IndyMac Financial Corp. has pressed mortgage-servicing companies to modify loans to stem foreclosures in the worst housing slump since the Great Depression. The FDIC is responsible for servicing about 742,000 mortgages at IndyMac.

The Mortgage Bankers Association is meeting in the Moscone Center in San Francisco with the panoply of panel discussions. The Mortgage Bankers Association is asking the Federal Housing Finance Agency [which in effect runs them] to increase the limit for Fannie Mae and Freddie Mac purchases or guarantees of single-family mortgages to $625,500 to bolster the housing market. The current limit is $417,000. Congress approved raising the limit temporarily to $729,500. That increase expires December 31st year and the Federal Housing Finance Agency that oversees Fannie and Freddie would decide on whether to raise the limit permanently. What people have to keep in mind that most of the foreclosures occurring in the US are in Arizona, California, Florida and Nevada. Home-loan originations may drop almost 20% this year to $1.9 trillion, about half the 2003 record.

At the conference, the new chief executives of Fannie Mae and Freddie Mac said that they are trying to do more to stop the home foreclosures but they noted it still might take years for real estate to recover in some areas.
Fannie Mae has stopped roughly 300,000 home loans from going into foreclosure this year. And, in the secondary market both Fannie and Freddie are on track to buy up another $100 billion in mortgage assets. As Jim Lockhart, director of the Federal Housing Finance Agency, noted at the convention here that the government has effectively guaranteed Fannie and Freddie's debt. And, despite efforts by the Treasury and Federal Reserve to encourage lending, home-mortgage rates have trended up in recent weeks after briefly slipping below 6% last month.

That partly reflects unintended consequences of the rescue law. The FDIC guarantees on bank debt for three years means investors who ordinarily buy Fannie or Freddie debt are switching to higher-yielding debt issued by banks and also backed by the government. It was in this context that Lockhart said investors don’t have to worry about Fannie and Freddie's ability to repay their debt, because the Treasury has agreed to provide as much as $100 billion of equity capital to each company, if needed.

However, foreclosure prevention involves renegotiating the entire mortgage – both size of the principal and interest rates – to get monthly payments on to a fixed payment that will result in a reduced mortgage being paid off. Only doing that will prevent more foreclosures that would add to the glut of for-sale homes that has driven down prices. It was very clear that the new heads recognize that renegotiating loans means reducing the amount of principal on the loan.

However, no matter what is done, it’s not viable to expect all delinquent borrowers to be saved from a foreclosure either because they were not in the ballpark or where speculators. And, having said all of that, it takes two to tango. Diana Olick who works for CNBC was at the Moscone Center. She interviewed the head of the FHA who stated that his charges at Fannie and Freddie were not doing enough. However, in at least 45 % of the delinquencies, they're finding an abandoned residence. What that suggests is that the “no deficiency judgment” rule has actually hurt responsible borrowing.

Since the mid 1980's Irwin Nowick has worked for the California State Assembly and State Senate on a plethora of policy issues, most notably firearms legislation. He has been described as "The Assembly's resident genius" by a former Speaker of the Assembly and is seen frequently in the Capitol hallways and offices assisting legislators in drafting and amending pending legislation.