Analyzing the Fed's move

Good morning, again. We want your thoughts on the Fed's move yesterday and what it means for mortgages and housing. In that spirit, some starting points -- Fed analysis from near and far:

L.A. Times columnist Tom Petruno writes that the Fed bought some time to restore confidence in financial markets: "However else the decision was dressed up -- Fed supporters say policymakers intervened to protect the economy, while critics say the central bank is simply bailing out major financial companies -- this ultimately was about confidence."

The New York Times' Louis Uchitelle sees a more specific goal -- reviving the suddenly frozen market for jumbo mortgages and other "creditworthy" mortgages: "Fed policy makers and Treasury officials said that in cutting the discount rate, the Fed’s principal goal was to shore up the market for creditworthy mortgages, including those for more expensive homes."

Inman News columnist Lou Barnes doubts that will happen: "The Fed's action this morning has firewalled the mortgage panic from the rest of the banking system ... but will do nothing whatsoever to solve the underlying problems."

Bloomberg's Caroline Baum also returns to the mortgage market, arguing that it is "starting to strangle" much bigger debt markets: "The rate of default isn't extraordinary just yet, but the mortgage market is contracting in leaps and bounds, starting with originations and ending with securitizations. The tentacles of the home-loan market are starting to strangle portions of the debt, equity and even the normally staid money market."

The DealBook blog at NYTimes.com raises the possibility that the crisis at Countrywide Financial forced the Fed to act, and says the rate cut "could prove controversial: : "Some have argued that the Fed should allow the turbulence in the credit markets to play itself out, rather than offering a lifeline to fund managers and mortgage lenders who made risky bets."

Your thoughts? Analysis? Will it help housing? Other Fed commentary you think we should link?
Photo Credit: Reuters

Comments

[EDG]

It is extremely puzzling that all the "sophisticated" analysts and high profile investment "notables" were not able to do a better job at predicting the future effects of subprime mortgages -- now Countrywide gets bailed out. There needs to be a bailout plan for Los Angeles residents so that a person like me with a 6-figure income does not have to consider a market of homes the size of one-bedroom apartments.

[Kaye Thomas]

The truth is the FED didn't really have much choice.. You can't have a run on a major player the size of Countrywide and not have disaster in the making.. Too much was happening in a very short time frame and they couldn't let the credit market panic continue. The FED move was meant to shore up the liquidity of the credit market and will not directly affect home loan rates or the tightening of underwriting rules on those loans.

The Conforming loan market... loans under $417,500 seems fine as Freddie Mac and Fannie Mae are buying/backing these loans. Jumbo loans(over $417,500).. which are the majority of loans in the Los Angeles area.. will continue to see the rules tighten on those seeking home loans. Unless the FED cuts the funds rate at their next meeting don't expect to see rate reductions or an easing of rules on larger loans. This will have an effect on home prices as the pool of able buyers for our market shrinks as rates continue to be at or above 7% for a fixed rate loan.

That said, I don't think tightening underwriting regulations is a bad thing. The market has needed some guidelines for some time. It's just that I'm not sure that strangling the jumbo loan market is the answer. Most of the loans that are in trouble were subprime loans that were under the $417,500 mark. It's not the loan amount that is the problem but the quality of the borrower.

[AnnS]

Petruno is accurate but accords the Fed Reserve too much influence over things not within its control – for example, markets in other countries that have bought the bogus mortgage securities and the ability to effect the outcome of defaulting mortgages with an interest cut.

Uchitelle and Dealbook pretty much are on track.

Baum’s paen to Bernake is far too focused on explaining the Depression as being caused by macro-policies. I’m also trained in the social and economic history of the 30’s.

The macro-policy buffs are far too dismissive of the micro-economics of a society and regard it as unworthy of their attention. Much more fun to rattle on about global markets and liquidity than to sit down and try to figure out what happens to the household budget of the average family when their food costs go up 7%, they now have to pay a $2000 deductible for their healthcare, their costs of transportation go up 33% and all these other daily budgets things change forever upwards without an income increase to match – and what effect that has on their ability to buy consumer goods and repay their mortgage and what happens if they run out of credit.

By the mid-20’s consumers were becoming over-extended with the debts they owed for consumer goods, housing and (for a few) stock market speculation. It was national orgy of buying on credit and done when incomes were not increasing at the same rate as spending and the costs of living where rising faster than income (for example, Blue Cross & Blue Shield came into existence to help consumers deal with medical bills they could not pay out of pocket ecause of rising costs.) Does this begin to sound familiar? When they maxed out their credit and exhausted their savings, they stopped buying which meant sellers stopped selling and manufacturers stopped making which caused more people to stop buying because their jobs were going south. – and around and down it went.

The stock market crash of ’29 did not trigger the Depression. The crash was the end of the downward spiral, not the beginning. It is interesting to note that in the 18-24 months preceding the crash, J.P. Morgan and a handful of others kept injecting money into the market to ‘stabilize’ it, give it ‘breathing room’ and ‘restore confidence.’.

Barnes? I skipped Barnes since all it does is come up with a page asking for a subscription and money.

[Michael]

While admitting to the triple layer leveraging that's gotten the loan market into its' present pickle; pundits have failed to recognize the root of the problem. We need to look beyond the millionaire's prospective. When the Fed removed the cost of food and fuel from the inflation figures it presented to the nation the cucumber hit the barrel. Now after two basic cost incurred by every household have increased by over 200% and the consumer and small business person have been squeezed dry, the Sub-prime loans are defaulting. This is a surprise? When the pundits talk about "liar loans" they need to tell the truth about who the liars are. Any lender fool enough to write a loan where the payment as much as quadruples within two to five years has got to know this is a recipe for foreclosure. The stock market has been more a source of payroll for top management than the source of capitalization that it was met to be for too long. As long as policy makers ignore the fact that all food chains build from the bottom up; no amount of the Fed printing money will bail us out. When the American consumer can afford to shop with the cash in their pockets and not the equity in their homes this mess will turn around.

[Cal]

Peter, instead of the Inman link to Lou Barnes you can use the one from his site at Boulder West. This one doesnt stop working after midnight unlike the Inman one:

http://www.boulderwest.com/news/1810.html

[AnnS]

Michael: Thanks for mentioning the ridiculous reliance upon 'core' inflation numbers when you said "When the Fed removed the cost of food and fuel from the inflation figures it presented to the nation the cucumber hit the barrel. "

Core inflation is of great importance to a business since it reflects the cost of nearly all goods used by a business. Since a business doesn't use food (unless it sells food), food price increases are irrlevant to them.

Such prices are, however, of great importance to Aunt Tilly and Uncle Jake - regardless of whether such prices are 'volatile.'

There are about 113,146,000 households in the US. The top 20% in income go from $92,000 and up; the top 5% go from $167,000 and up; and the top 1.5% go from $250,000 and up; and top 1% go from $350,000 an up.

(Hmm...gives a real good idea of who are the people who can afford homes in LA - it sure isn't anyone in the bottom 80%!)

18.18% of households are in the top 20% of income.

There are a LOT more households in the bottom 80% than in the top 20%, let alone in the top 10%.

For all those households in the lower 80-90%, the costs of food and fuel are huge items in their budegts.

When the economy is 'consumer driven', that means Aunt Tilly and Uncle Jake have to go out and buy things. If their income does not increase as much as ALL their expenses for necessities like shelter, food, transportation increase, they have less money left to spend being good little 'consumers.'

The top 10% won't notice if the grocery bill goes up 7% nor gasoline 33% or the heating bill goes up 10-12%, but AUnt Tilly and Uncle Jake will mst certainly notice if they are in at or below the 80 percentile.

Anyone who touts a 'consumer economy' while ignoring the impact of price increases for necessities (food, fuel) upon all the millions upon millions of Aunt Tillies and Uncle Jakes does so at extreme peril.