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.