Market Drop

Congress Debates Rescue Plan What a day it has been, again! On a historic day, the House unexpectedly failed to pass the $700 billion rescue plan, and investors embarked on a flight to safety. Money flowed out of the stock market in tidal wave fashion with the Dow losing over 750 points! The lack of a systemic action to help credit markets leaves a lot of questions. Until a solution is agreed upon, financial institutions will be even more reluctant to make loans. At the same time, confidence in the ability of lawmakers to fix the problem is dropping. Needless to say, investors will be waiting and watching closely to see if lawmakers come up with an alternative rescue plan in the days ahead. In the meantime today, as money flowed out of the stock market, a good bit of it flowed into the bond market, which helped drive mortgage rates lower. Oil prices also fell $11 to $96 per barrel. If we can get some gas into Atlanta, then maybe we'll see gas prices take a significant drop. And almost as a footnote with everything else going on today, Wachovia finally went under and was bought by Citigroup. Just two and a half years ago, Wachovia was an extremely healthy bank, that is until they got wrapped up in the sub-prime business through their $25 Billion acquisition of Golden West Financial. Talk about the kiss of death. And the Wachovia bank failure comes just two business days after the largest US bank failure ever as Washington Mutual collapsed, was seized by the FDIC, and then sold to JP Morgan Chase to prevent the FDIC from depleting its insurance fund. Citigroup and JP Morgan Chase now join Bank of America as the three largest banks in America. To Bail Out or Not to Bail Out? So, what’s the $700 Billion Bailout all about anyway? Make no mistake about it, the credit markets are dragging down the economy, and the basic problem is clear. Many financial institutions hold large quantities of complex mortgage securities which have declined in value. The precise value of these securities is difficult to determine, since there are few buyers and the market is not functioning efficiently. Amid the uncertainty, it's very difficult and costly to raise additional capital, so financial institutions are conserving their remaining capital. These institutions are very reluctant to make new loans of any kind. If businesses have no capital to grow and consumers have trouble purchasing homes and cars, the economy suffers and jobs are lost.

Fed Chief Bernanke and Treasury Secretary Paulson spent two long days last week presenting a $700 billion rescue plan to Congress. Much of the testimony noted that the rescue plan would be an acquisition of assets. Mortgages and mortgage backed securities will be purchased at a significant discount to the face amount of the underlying mortgages. Many of the mortgages will be performing, while some will not, and they will have houses as collateral. Ultimately, the orderly liquidation of the acquired assets could recover most, if not all, of the purchase price. The plan would provide much needed capital to institutions, which is expected to be used to make more loans. Hopefully, Congress can work out the details and pass something soon so we can begin moving in the right direction! In other news last week:
Bernanke called this the most significant financial crisis in the postwar period
Continuing Jobless Claims rose to the highest level since 2001

August Existing Home Sales fell a little from July, while inventories declined FHA Limits 'Buy and Bail' PurchasesFHA announced last week that home buyers who want to rent out their current home and use the rental income to offset their mortgage payment to enable them to qualify for a new home are going to be able to do so only if they have 25% equity in their current home or if they provide proof of a job relocation. Unless one of these conditions is met, buyers are going to be forced to sell their current home first or qualify for both mortgages at the same time. FHA hopes this new rule, which was implemented effective Sept 19, will prevent buyers from purchasing a less expensive home and then walking away from their current mortgage. This has become a major trend in certain parts of the country. Whatever the reason, there is no doubt that this is going to push even more people out of the home purchase market.

Update from James Williamson-

Relief Program Boosts Confidence
This has been quite the historic week in the financial markets. One major investment bank declared bankruptcy, another sold itself, and the world's largest insurance company needed a government bailout. Central banks around the world had to inject hundreds of billions of dollars into the banking system to calm the markets.
The government's primary response to the market turmoil was a broad relief program. The program includes major elements intended to stabilize credit markets and restore confidence. Directly affecting the mortgage market, a government entity will be established to acquire underperforming mortgage assets, manage the assets, and sell them in an orderly fashion. This will remove troubled assets from financial institutions and replace them with fresh capital, which will then be available for future lending opportunities. In addition, the Treasury doubled the amount of mortgage securities that it will buy in the open market for its own holdings. Fannie Mae and Freddie Mac will be allowed to increase their mortgage portfolios, as well. One result of these actions should be increased liquidity for future investment in mortgage assets.
A Fed meeting is usually the most significant event in a week, but last week it took a back seat to the other news. While many investors expected a rate cut on Tuesday to relieve credit markets, the Fed held the fed funds rate unchanged at 2.0% in a unanimous vote. According to its statement, the Fed expects inflation to moderate later this year, but they are concerned about the upside risks. The Fed also noted slower economic growth, partly due to tight credit, weakness in the housing market, and a slowdown in exports.
In other news last week:
Some good news as the August Consumer Price Index (CPI) showed a small decline from July
The government also announced that it will provide guarantees for the $2 trillion in assets in money market mutual funds
And, oil prices fell as low as $90 per barrel, down 40% from the high, before ending at $100 per barrel. Unfortunately, the prices are rising this week.
Update on Down Payment Assistance
Last week the House Financial Services Committee adopted H.R. 6694, which is designed to reauthorize and reform down payment assistance programs that the Housing Bill banned in July. A last-ditch effort to head off the Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill that would mend rather than end the practice of down payment assistance. HR 6694 would allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans. Borrowers with scores between 620-680 will be subject to risk-based pricing and higher insurance premium fees. We should find out this week if Congress and the President will also approve of this legislation. Rate Update With all of the volatility in the financial markets last week, mortgage rates remain very low but are as much as .5% higher than last Monday. Needless to say, expect more volatility in the days ahead.

Freddie and Fannie Taken Over

Government takes control of Fannie, Freddie
Move is intended to prevent major financial turmoil


BREAKING NEWS
MSNBC News Services
updated 54 minutes ago

WASHINGTON - The U.S. government announced on Sunday that it was taking control of troubled mortgage finance giants Fannie Mae and Freddie Mac, effectively wiping out shareholders' interest in the publicly traded companies.
The regulator of the two companies, the Federal Housing Finance Agency (FHFA) will manage the two companies on a temporary basis.
The takeover is the second rescue bid engineered by the U.S. Treasury Department in little more than six weeks. It came as confidence in the firms' ability to keep operating amid a deepening housing crisis continued to erode.
Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart, regulator for the so-called GSEs or government-sponsored enterprises, called a Sunday-morning news conference to spell out the latest rescue effort.
Officials said the executives of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.
Paulson said the actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said.
Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.
The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."
The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.
The announcement followed an intense round of meetings on Friday and Saturday with directors and top leaders of the GSEs, who are expected to be dismissed after having come under stiff criticism for their high pay and management shortcomings.
The two mortgage companies are a vital cog in the United States housing industry because they own or guarantee almost half the nation's $12 trillion in outstanding home mortgage debt. The housing sector would have difficulty recovering from its deepest slump since the Great Depression unless Fannie or Freddie are stabilized and able to continue their role in buying mortgage loans and packaging them into securities sold around the world.

Thanks to Real Estate ABC.com for the following information:

Existing Home Sales - August ReportLast Updated: 8/29/2008
Home Sales Report Summary
Sales of existing homes in the USA went down by 2.04% last month, to 4.86 million homes. That's well below last May (2007), by -15.48%.
Sales Pace by Region - Month to Month and Year to Year
For month-to-month comparisons, sales were down everywhere except in the West, which was up by .98%. The sales pace for resale homes was down by -3.14% in the South, -3.45% in the Midwest, and -6.50% in the Northeast.
That is month-to-month. Year-to-year presents a different picture. Nationwide, we have already talked about the sales pace (it was down -15.48%). In the South, sales were slower by -18.14%, -17.65% in the Midwest, -15.84% in the Northeast, and only down -6.36% in the West.
July sales pace figures released at the very end of August.
This measure tracks units - condominiums, co-ops, and single family home. What "sales pace" means is that the National Association of Realtors calculates how many homes were sold, makes adjustments for seasonal factors like weather, school, vacations, then calculates how many homes would sell in a year at that given pace. When we use raw data, we try to state that clearly.
Price Appreciation
Nationally, the median average sales price fell compared to last year, down by -6.07%, with the new median average sales price of a home was $215,000. The Midwest showed an actual increase of value, by 2.82%, followed by declines in all other regions: South by -2.37%, Northeast by -12.63% and the West by -17.22%.
Median Average
The median average is the "midpoint" sales price. Half the homes sold above that price and half below.
Inventory Rises
It would take 11.1 months to sell all the existing homes currently available on the market at the current sales pace, and there are more homes on the market than last month. There are 4.490 million homes listed for sale. We're selling less than five million a year.
We measure inventory in two ways. "How many homes are available for sale?" and "How many months would it take to sell the total number of homes available for sale right now, at the current sales pace?" When the sales pace declines, inventory measured in months will increase, even if the same number of homes is for sale.
Next Report
All figures in this report are for June 2008 closings. July 2008 data released at the very end of August.
Month-to-Month Appreciation Graphs, regional and nationwide - click here.