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Seven steps to getting your stimulus check sooner..

March 22nd, 2008 10:07 PM

MARSHALL LOEB'S DAILY MONEY TIP

Seven steps to getting your stimulus check sooner

Last update: 4:00 p.m. EDT March 16, 2008

NEW YORK (MarketWatch) -- The IRS will begin issuing rebate payments in May and will continue to issue them through the end of the year. Although there is little you can do to affect the size of your stimulus check, there are steps you can take to make sure you receive it as soon as possible.

Grant Thornton LLP, a global accounting, tax, and business advisory organization, gives these suggestions on how you can make it easier for the IRS to speed the review of your payment:

First step. File your tax return as soon as you can. The IRS won't calculate and process your rebate until it has the return. So the earlier you send in your return, the sooner the IRS can get to your rebate check. By the same token, avoid extensions because returns filed on extension are likely to have to wait in line behind those that are filed on time.
Next step. Make it easier on your preparer. If you use a tax preparer, make sure he or she receives your complete information as soon as possible, so as not to delay the preparation of your return.
Make sure your return is correct. If you file an erroneous return, you may lose your place in line while the return is corrected and you confirm the corrections. In particular, be careful with items that are central to the computation and processing of the rebate payment, such as your Social Security number.
File electronically. It is easier for the IRS to process an electronic return. The agency has adopted a special procedure to allow individuals who qualify for rebates, but who do not have adjusted gross income (AGI), to report $1 of AGI in order to activate the electronic return process.
Provide direct deposit information. If you use direct deposit for your income tax refund, the IRS will directly deposit the rebate payment into the same account. This can accelerate the receipt of the payment. Make sure that the account is valid, and that it remains open and available to receive the rebate payment.
Do not ask for a split deposit. The IRS can only handle one account per rebate payment. If you ask for the direct deposit of your income tax refund to be split among several accounts, the IRS will not be able to directly deposit your rebate and will have to send you a check.
Let the IRS know where to find you. If you move, make sure you file Form 8852 with the IRS to let them know your new habitat. If they issue your rebate as a paper check for any reason, make sure they know where to send it.

The rebate payment is a special credit that is expected to be paid outside of the normal calculation of income tax. It does not reduce the amount of refund a taxpayer is otherwise eligible for, cannot be counted as a payment of estimated taxes and will not be treated as taxable income in any year.

Marshall Loeb, former editor of Fortune, Money, and the Columbia Journalism Review, writes for MarketWatch.

Posted by William Prieto on March 22nd, 2008 10:07 PMPost a Comment (0)

HUD IN RE NEW GOOD FAITH ESTIMATE & CHANGES IN RESPA

March 31st, 2008 2:49 PM

http://www.MortgageNewsDaily.com

HUD Introduces New Good Faith Estimate and Proposes Other Changes to RESPA

Alphonso Jackson, Secretary of Housing and Urban Development (HUD), Friday released a proposed mortgage reform package designed to help consumers better understand the terms of the loans they are considering and offering guidelines for shopping for different products.

The changes, if enacted after a mandatory period of public comment, will reform the 30-year old Real Estate Settlement Procedures Act (RESPA). Chief among the reforms; for the first time HUD is proposing that mortgage brokers and lenders provide consumers with a standard Good Faith Estimate. Jackson said that by offering consumers clearer, more certain cost estimates the average borrower will save nearly $700.

"A lot of the mortgage problems we see today are directly related to the fact that few people fully understand this (the home buying) process," the Secretary said. "Buying a home can be very intimidating. Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that's been one of the factors driving the current housing downturn. Our proposal fixes that. We owe it to the American homebuyer to give them the information they need to make smart choices."

HUD said that the proposed Good Faith Estimate (GFE) will substantially enhance disclosure of all important aspects of the loan, including:

The interest rate and monthly payment;

Whether the interest rate and principal balance can increase and by how much; and

Whether the loan has a prepayment penalty or balloon payment.

HUD released a draft both of the proposed GFE and of a revised HUD-1, the settlement statement given to all borrowers at the closing on the loan. The GFE is remarkable clear for a government document. It consolidates closing costs into major categories to prevent "junk fees" and displays total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. In addition, HUD's new proposed rule would specify the charges that can and cannot change at settlement. If a fee changes, HUD proposes to limit the amount it can change. Modifications to modify the HUD-1 settlement statement are mainly to assist consumers to compare actual charges on the HUD-1 with prior estimates on the GFE.

One feature of The Good Faith Estimate is not going to make lenders happy. It would require that lender payments to mortgage brokers (often called Yield Spread Premiums) be disclosed. Lenders have already come out strongly against such a change since it was first proposed by consumer activist groups. HUD said it is its belief that these payments are directly dependent on the interest rates that consumers agree to and therefore ought to be disclosed. However, to ensure that HUD's new proposal would not create a consumer bias against brokers, the Department said it did rigorous consumer testing and found the proposed Good Faith Estimate helped consumers to select the lowest cost loan more 90 percent of the time, regardless of whether the loan was originated by a lender or a broker.

Finally, HUD is proposing that settlement agents read a "closing script" to borrowers at the settlement table and that a copy be provided to the borrower. Each proposed script - there is a different one for each loan type - restates in a clear and specific manner every loan term and also provides a graphic showing borrowers which numbers can change from that provided in the GFE and by how much. This script will provide a ready post-closing reference to the loan.

The proposed reforms go beyond the cosmetics of new forms. HUD is also proposing legislative changes to RESPA. HUD currently does not have an enforcement mechanism for some of the most important consumer disclosures and protections and so intends to seek the authority to impose penalties for violations of specific sections of RESPA.

Among the sections for which authority will be sought are those dealing with the provision of a uniform settlement statement, Good Faith Estimate, and settlement costs booklet; loan servicing; prohibition against kickbacks, referral and unearned fees; title insurance; and portions of the section regarding escrow accounts.

HUD will also ask that the Secretaries of and State and other regulators be allowed to seek injunctive and equitable relief for violations of RESPA; require delivery of the HUD-1 to the borrower three days prior to closing; and establish a uniform statute of limitations applicable to governmental and private actions under RESPA.

The proposed GFE, modifications to the HUD-1, and proposed settlement scripts can be reviewed in their entirety at www.hud.gov.

Title: HUD Introduces New Good Faith Estimate and Proposes Other Changes to RESPA

Date: Fri, 14 Mar 2008 11:32:03 EST

Location: http://www.MortgageNewsDaily.com/3142008_RESPA_Changes.asp

Date Printed: 3/17/2008

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Posted by William Prieto on March 31st, 2008 2:49 PMPost a Comment (0)

RESIDENTIAL CONDO MARKET GLUT!!

March 30th, 2008 10:57 PM

Residential Condo Glut to Worsen

By Matt Hudgins

Mar 27, 2008 4:29 PM

Developers and owners of residential condominiums for sale in overbuilt markets would be wise to cut their losses and sell before a wave of construction adds another 100,000 units to the national inventory of this year, experts say.

“People don’t realize that prices are going to be trailing the market down,” says Gene A. Berman, managing director of broker Marcus & Millichap’s Florida offices. “Smart lenders and smart owners are cleaning up the books [to sell] now because they know that in the next six months to a year, it’s not going to get better for them.”

Nationwide, the supply of condos for sale totaled 604,000 units in February, according to the National Association of Realtors (NAR). That number is down 1.8% from the inventory a year ago and well below the peak inventory of 731,000 units measured last July. Due to a slower pace of sales this year, however, February’s inventory equates to a 13-month supply, an all-time high.

Overbuilding is concentrated in specific markets. Chicago, for example, will add 16,000 condos this year; 14,600 are slated for completion in New York and another 13,000 are coming online in Phoenix, according to Josh Scoville, director of strategic research at Property & Portfolio Research. “These are just being added to the glut of empty units in the markets.”

The oversupply will worsen this year with the delivery of new projects that started construction before the credit crunch hit last August, according to Matt Anderson, a partner at Foresight Analytics LLC. Of 120,000 units under construction at the end of 2007, the company expects approximately 100,000 to reach completion this year and another 77,000 to break ground.

The oversupply and its diluting effect on sales have been accompanied by soaring delinquency rates on condo construction loans. Of the $42.3 billion in construction loans outstanding for condos at the end of the fourth quarter last year, a whopping 10.1% were behind on payments by 30 days or more, according to Foresight Analytics, a real estate and economic research firm in Oakland, Calif. That’s up from 2.6% a year earlier and nearly double the delinquency rate of 6% in the third quarter of 2007.

“It’s striking how rapidly the market has deteriorated, but at the same time it’s not surprising given the general residential downturn across the U.S.,” Anderson says. Indeed, the inventory for single-family homes in February exceeded 3.4 million, an unhealthy 9.2 months of supply, NAR reported.

While Anderson expects construction on about 10% of the condos under construction to be halted before completion, most projects are barreling ahead. The large number of units in the pipeline is due in part to the all-or-nothing nature of condo development, which requires completion of an entire project in order to close the sales on even a fraction of units.

Developers midway through a project have few good options. Some are falling back on conversion of completed projects to rental units, but the more substantial building materials and luxury fixtures that go into most condominiums today come with a high cost of construction, making rental income a poor substitute for sales. “It doesn’t recoup all of the money they’ve put in,” Anderson says.

In markets like San Diego, Las Vegas, San Francisco and South Florida that experienced some of the largest residential construction bubbles, new units will find few interested buyers upon completion, according to Berman of Marcus & Millichap. That’s because potential buyers at this point in the cycle are more likely to be investors than residents, and investors will wait to see prices bottom out before they buy rather than risk purchasing an asset that may continue to decline in value.

Vulture funds are already hovering in overbuilt markets like Miami, which has 50,000 to 70,000 condominiums either under construction or completed and empty, according to a Marcus & Millichap estimate.

Since late February, condos in downtown Miami have gone to auction without a minimum bid requirement, a sure sign that some investors believe the time to hold out for a specific price point has passed. Investors who want to snap up some of those deals appearing at auction will need cash resources, Berman says, because sellers aren’t going to allow time for a buyer to line up third-party financing.

Having experienced the price declines and lengthy recovery of commercial real estate in the days of the Resolution Trust Corp., Berman believes investors that continue to hold out for better prices on their condo units are setting themselves up for more painful losses down the road.

“A lot of developers or people who have bought really nice units on spec are holding onto them and renting them out for next to nothing in hopes that the market will come back,” Berman says. “But there’s really no market for seven-figure condos.”

Posted by William Prieto on March 30th, 2008 10:57 PMPost a Comment (0)

HOME PRICE DECLINE STEEPEST IN 21 YEARS!!

March 29th, 2008 10:39 PM

Home Price Decline Steepest in 21 Years

MoneyNews
Tuesday, March 25, 2008

NEW YORK -- The Standard & Poor's/Case-Shiller index shows U.S. home prices fell 11.4 percent in January, its steepest drop since S&P started collecting data in 1987.

The decline reported Tuesday means prices have been growing more slowly or dropping for 19 consecutive months. The index tracks the prices of single-family homes in 10 major metropolitan areas in the U.S.

The broader 20-city composite index is also down, falling 10.7 percent in January from a year ago. That is the first time both indexes dropped by double-digit percentages.

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Capture 10% to 15% Dividend Income Every Month

Posted by William Prieto on March 29th, 2008 10:39 PMPost a Comment (0)

FED TO GET NEW WIDE NEW POWER...

March 28th, 2008 9:19 PM

March 29, 2008

Treasury’s Plan Would Give Fed Wide New Power

By EDMUND L. ANDREWS

WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades.

Democratic lawmakers are all but certain to say the proposal does not go far enough in restricting the kinds of practices that caused the financial crisis. Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets. And some of the proposals could actually reduce regulation.

According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.

While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it carefully avoids a call for tighter regulation.

The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings.

The plan would give the Fed some authority over Wall Street firms, but only when an investment bank’s practices threatened the entire financial system.

And the plan does not recommend tighter rules over the vast and largely unregulated markets for risk sharing and hedging, like credit default swaps, which are supposed to insure lenders against loss but became a speculative instrument themselves and gave many institutions a false sense of security.

Parts of the plan could reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors. The plan would merge the S.E.C. with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like.

The blueprint also suggests several areas where the S.E.C. should take a lighter approach to its oversight. Among them are allowing stock exchanges greater leeway to regulate themselves and streamlining the approval of new products, even allowing automatic approval of securities products that are being traded in foreign markets.

The proposal began last year as an effort by Henry M. Paulson Jr., secretary of the Treasury, to make American financial markets more competitive against overseas markets by modernizing a creaky regulatory system.

His goal was to streamline the different and sometimes clashing rules for commercial banks, savings and loans and nonbank mortgage lenders.

“I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years,” Mr. Paulson will say in a speech on Monday, according to a draft. “I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible.”

Congress would have to approve almost every element of the proposal, and Democratic leaders are already drafting their own bills to impose tougher supervision over Wall Street investment banks, hedge funds and the fast-growing market in derivatives like credit default swaps.

But Mr. Paulson’s proposal for the Fed echoes ideas championed by Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee.

Both see the Fed overseeing risk across the entire financial spectrum, but Mr. Frank is likely to favor a stronger Fed role and to subject investment banks to the same rules that commercial banks now must follow, especially for capital reserves.

The Treasury plan would let Fed officials examine the practices and even the internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system.

That would be a significant expansion of the central bank’s regulatory mission.

When Fed officials agreed this month to rescue Bear Stearns, once the nation’s fifth-largest investment bank, they pointedly noted that the Fed never had the authority to monitor its financial condition or order it to bolster its protections against a collapse.

In two unprecedented moves, the Fed engineered a marriage between JPMorgan Chase and Bear Stearns, lending $29 billion to JPMorgan to prevent a Bear bankruptcy and a chain of defaults that might have felled much of the financial system.

For the first time since the 1930s, the Fed also agreed to let investment banks borrow hundreds of billions of dollars from its discount window, an emergency lending program reserved for commercial banks and other depository institutions.

But Mr. Paulson’s proposal would fall well short of the kind of regulation that Democrats have been proposing. Mr. Frank and other senior Democrats have argued that investment banks and other lightly regulated institutions now compete with commercial banks and should be subject to similar regulation, including examiners who regularly pore over their books and quietly demand changes in their practices.

In a recent interview, Mr. Frank said he realized the need for tighter regulation of Wall Street firms after a meeting with Charles O. Prince III, then chairman of Citigroup.

When Mr. Frank asked why Citigroup had kept billions of dollars in “structured investment vehicles” off the firm’s balance sheet, he recalled, Mr. Prince responded that Citigroup, as a bank holding company, would have been at a disadvantage because investment firms can operate with higher debt and lower capital reserves.

Senator Charles E. Schumer, Democrat of New York, has taken a similar stance.

“Commercial banks continue to be supervised closely, and are subject to a host of rules meant to limit systemic risk,” Mr. Schumer wrote in an op-ed article on Friday in The Wall Street Journal. “But many other financial institutions, including investment banks and hedge funds, are regulated lightly, if at all, even though they act in many ways like banks.”

Mr. Paulson’s proposal is likely to provoke bruising turf battles in Congress among agencies and rival industry groups that benefit from the current regulations.

Administration officials acknowledged on Friday that they did not expect the proposal to become law this year, but said they hoped it would help frame a policy debate that would extend well after the elections in November.

In a nod to the debacle in mortgage lending, the administration proposed a Mortgage Origination Commission to evaluate the effectiveness of state governments in regulating mortgage brokers and protecting consumers.

The bulk of the proposal, however, was developed before soaring mortgage defaults set off a much broader credit crisis, and most of the proposals are geared to streamlining regulation.

This plan would consolidate a large number of regulators into roughly three big new agencies.

Bank supervision, now divided among five federal agencies, would be led by a Prudential Financial Regulator, which could send examiners into any bank or depository institution that is protected by either federal deposit insurance or other federal backstops. It would eliminate the distinction between “banks” and “thrift institutions,” which are already indistinguishable to most consumers, and shut down the Office of Thrift Supervision.

Any effort to merge the Commodity Futures Trading Commission with the S.E.C. is likely to provoke battles.

Yet another proposal would, for the first time, create a national regulator for insurance companies, an industry that state governments now oversee.

Administration officials argue that a national system would eliminate the inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any federal encroachment.

Arthur Levitt, a former S.E.C. chairman who has long pushed for stronger investor protection, said his first impression of the plan was positive. Even though the S.E.C.’s powers might be reduced, Mr. Levitt said, the plan would create a broader agency to regulate business conduct in all financial services.

“It’s a thoughtful document,” he said. “I’m intrigued by the fact that it puts an emphasis on investor protection, and that it establishes an agency specifically for that purpose, which would operate across all markets. I think that’s a very constructive first step.”

Posted by William Prieto on March 28th, 2008 9:19 PMPost a Comment (0)

The Worse President . . . . . . . . . . . . . . .

March 8th, 2008 9:37 PM

PAUL B. FARRELL

U.S. recession: A classic 12-act tragedy

Page-turning plot reads like Shakespeare, driven to dramatic climax

By Paul B. Farrell, MarketWatch

Last update: 1:41 p.m. EST March 4, 2008

This update fixes a typographical error.

ARROYO GRANDE, Calif. (MarketWatch) -- The buck stops here: This is Bush's recession, his legacy.

It could be a chapter in a future edition of Jacob Weisberg's "The Bush Tragedy," with new comparisons to "Henry V" and other great Shakespearean tragedies. In a few sentences, the opening lines could highlight why this is now Bush's recession, and his alone.

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Last week Bush told reporters: "I don't think we're headed to recession." But when one tried to puncture the denial, mentioning that America's energy analysts were predicting $4 gas, our oil-man president stopped him: "Wait, what did you just say? You're predicting $4-a-gallon gasoline?" No, Mr. President, experts are. "That's interesting. I hadn't heard that."

Once again, as in a classic tragedy, crucial facts never quite make it to the king's chambers in time, setting the stage for a fateful turn of events, propelling the plot to its tragic climax.

Indeed, the next 12 acts of this tragedy have already been written. And though many folks are in denial, the consequences are painfully clear. Last week we forecast a global recession. Reader response was overwhelming. Read previous Paul B. Farrell.

One alerted us to a powerful economic report that reads like the plot lines in a Shakespearean tragedy. Twelve acts relentlessly drive the action forward in a dark yet realistic plot reading like a brutal military-style assault on markets and economies worldwide.

In The RGE Monitor, the Roubini Global Economics newsletter published by NYU Prof. Nouriel Roubini, we read of "The Rising Risk of a Systemic Financial Meltdown: Twelve Steps to Financial Disaster," a report that will never make it into any While House briefings.

Why? Roubini's 12-act drama is chilling, apocalyptic, coming at us in 12 relentless waves, tearing down the world's economic and financial system, triggering a severe recession in America that spreads globally, impacting every corner of every economy across the globe and creating havoc in world financial markets, leaving nothing intact.

This is Bush's legacy, an economic disaster no one can stop. And the more they try, the worse it gets.

Over the top? You decide. Then after you read Roubini's dark 12-act plot, we urge you to rethink your investment strategies for the years to come. Why? He warns: "The current recession looks fundamentally more severe than the [last] two for three reasons: we are experiencing the worst housing recession ever in U.S. history; a shopped-out, saving-less and debt-burdened consumer is now in financial trouble and retrenching; and we have a severe systemic financial crisis.

Forget about Washington's happy-talk about avoiding a recession. They got us into this mess and don't know how to get us out.

You must read Roubini's dramatic plot, it's pure Shakespeare. Then add a comment: Tell us what you're doing to protect yourself. Worried you're just a "bit player" in Bush's recession? How this 12-act drama plays out will have an enormous impact on your future:

1. Home prices will fall 20% to 30% from the peak

Roughly $4 trillion to $6 trillion of household wealth will vanish. Large home builders may go bankrupt, triggering further declines in home-builder stocks. Even Fed Chairman Ben Bernanke admitted last week that housing prices could fall into 2009.

2. Prime and near-prime mortgages losses

"This is a generalized mortgage crisis and meltdown, not just a subprime one," warns Roubini. "About 60% of all mortgage origination from 2005 through 2007 had these reckless and toxic features. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy." Add another $300 billion in losses.

3. Consumer debt defaults will increase sharply

Nothing's safe: "There are tens of millions in subprime credit cards and subprime auto loans in the United States." Defaults "will not be limited to subprime borrowers," adding "more to bank and financial-company losses, increasing the credit crunch."

4. The credit insurers rescue package is insufficient

Even $10 billion to $15 billion won't do the trick. Ratings downgrades will "add another $150 billion write-downs on asset-backed securities portfolios," triggering more losses to their muni and money-market portfolios, says Roubini.

5. Commercial real estate loan market will deteriorate

Commercial real estate lending practices "were as reckless as those in residential real estate." Demand for new offices, stores and shopping centers will drop.

6. Some large banks with heavy mortgage exposure will fail

Scary, but some big regional and national banks "may join the 200-plus subprime lenders that have gone bankrupt, adding to an already severe credit crunch."

7. Banks' losses grow as asset values drop further

Banks still have "hundreds of billions of dollars of leveraged loans stuck on their balance sheets at values well below par." Now 90 cents on the dollar, soon bigger discounts.

8. Once the recession gains speed, expect corporate defaults

Corporate default rates average about 3.8% long-term. They were a low 0.6% in 2006-2007, thanks to easy credit, liquidity and low spreads. Junk-bond debt will soon have higher refinancing costs. "Corporate default rates will surge during the 2008 recession and peak well above 10%." In turn, they will trigger major losses in the "credit default swaps (CDS) that provided protection against corporate defaults." Loss estimates range from $20 billion to $250 billion, probably at the higher end.

9. Unregulated 'shadow banking system' facing huge problems

Now more than $500 trillion. These institutions "borrow short and in liquid forms and lend or invest long in more illiquid assets." But unlike banks, they can't tap into a "central bank's lender of last resort support as they are not depositary institutions." Bankruptcies will follow: "Large hedge funds, a few money-market funds, the entire SIV system and, possibly, one or two large and systemically important broker-dealers."

10. As recession spirals out-of-control, stock markets drop again

"Investors have begun to realize that the economic downturn is more severe than anticipated, that the [credit insurers] will not be rescued, that financial losses will mount and that earnings will drop sharply in a recession, not just among financial firms but also non-financial ones." Roubini warns: "Another round of massive equity shorting will take place, leading to a cascading fall in equity markets in the United States and a transmission to global equity markets. U.S. and global equity markets will enter into a persistent bear market, as in a typical U.S. recession the S&P 500 falls about 28%."

11. Credit crunch will dry up liquidity in many financial markets

Roubini says "another round of credit crunch in interbank markets will ensue -- triggered by counterparty risk, lack of trust, liquidity premiums and credit risk. A variety of interbank rates will massively widen again." Central bank injections of liquidity will offer only temporary relief as interbank spreads widen.

12. Massive global recession spreading, spiraling down Vicious circle: "Losses will lead to more margin calls and further reduction of risk taking by a variety of financial institutions that will then be forced to mark to market ... a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit," with further drops in equity prices, more margin calls, an out-of-control spiral down, even a run on some banks. As "the credit losses and the credit crunch spread around the world, U.S. and global financial markets will experience their most severe crisis in the last quarter-century."

Can anyone stop this classic Shakespearean tragedy before the dramatic climax? Probably not, says Roubini. Add your comments: Tell us, are things too far out of control for anyone to fix? What can be done? For America? To protect your family?

Posted by William Prieto on March 8th, 2008 9:37 PMPost a Comment (0)

Interest Rates Rising...

March 7th, 2008 9:37 PM

SAN FRANCISCO (MarketWatch) - Why are interest rates on 30-year fixed-rate mortgages rising even as the Federal Reserve slashes interest rates and yields on Treasury bonds fall?

The answer is that the mortgage market is short of roughly $1 trillion in capital, according to Paul Miller, an analyst at Friedman, Billings, Ramsey. The modern mortgage market works with lots of leverage, or borrowed money. Investors, including hedge funds and mortgage real estate investment trusts, buy mortgage securities, but finance a lot of their purchases with this leverage. FBR's Miller estimates that $11 trillion of outstanding U.S. mortgage debt is supported with roughly $587 billion of equity. That's a leverage ratio of 19 to one.

But last year's subprime meltdown has undermined confidence in the home loans that back these mortgage securities. Now the banks that finance most of these leveraged mortgage investments have started to pull back and impose margin calls, demanding more cash or collateral to back their loans.

This has sparked a de-leveraging cycle in which some highly leveraged mortgage investors have to sell assets to meet margin calls. Forced selling pushes prices lower, sparking more margin calls, which in turn produces more selling and even lower prices.

When debt prices fall, yields rise, and that's what's happening to mortgage securities - even those backed by government sponsored entities including Fannie Mae (FNM

Delayed quote data

FNM) which are considered the safest.

"The immediate impact is that [interest rates on] 30-year fixed-rate mortgages will have to increase relative to Treasuries," FBR's Miller wrote in a note to clients on Friday. "That is why we are experiencing pressure on mortgage rates despite the downward movement on the 10-year bonds."

Rates on 30-year fixed mortgages usually follow the movement of 10-year Treasury bonds, but this relationship has broken down as de-leveraging in the financial system takes hold.

The difference, or spread, between yields on "agency" mortgage securities backed by Fannie and Freddie and those on Treasuries rose to a 23-year high this week, Miller noted.

"It is the leverage game playing havoc with the system," he wrote.

There are two ways to resolve the problem. Either inject $1 trillion of new capital into the mortgage market, or allow prices of mortgage securities to fall (and interest rates on home loans to climb), Miller said.

The mortgage market won't be able to raise $1 trillion, so prices have to fall, he warned.

"There is no quick fix here," the analyst said. "It will take about six to 12 months for the pricing pressure to alleviate on these mortgage assets."

"This will be painful, but it must be allowed to play out in an orderly fashion in order for the mortgage market to achieve equilibrium," Miller concluded.

Alistair Barr is a reporter for MarketWatch in San Francisco.

Posted by William Prieto on March 7th, 2008 9:37 PMPost a Comment (0)