Big welcome for Uncle's housing fix: 239 points off the Dow

Wall Street’s way of thanking Congress for the new housing rescue bill: another stock market dive, led by the companies the bill is supposed to help the most.

A heavy sell-off in financial and builder shares pulled the market broadly lower today, a sign investors see little hope for a turnaround soon in the housing bust despite the government’s latest efforts.

"There aren’t any quick fixes," said Joe Battipaglia, market strategist at brokerage Stifel Nicolaus & Co.

The Dow Jones industrials slid 239.61 points, or 2.1%, to 11,131.08. That wiped out another chunk of the rally that had lifted the index 670 points, or 6.1%, in six sessions after it hit a two-year low on July 15.

Another 170 points off the Dow and we’ll be at a new bear-market low.

Broader indexes lost a little less than the Dow today, but it was a dismal session across the board.

Bank, brokerage and builder stocks were down sharply for a third day in a row. Bank of America slid $1.52, or 5.1%, to $28.06, Citigroup fell $1.42, or 7.5%, to $17.43 and Merrill Lynch dropped $3.19, or 11.6%, to a new 10-year closing low of $24.33. After the market closed, Merrill announced a $5.7-billion write-off tied largely to its toxic CDOs, or collateralized debt obligations.

A Standard & Poor’s index of 15 major builder stocks slumped almost 5% for the day.

The housing rescue bill, shepherded by Treasury Secretary Henry M. Paulson Jr. and passed by Congress over the weekend, is supposed to help stem the worst effects of the bust. One provision could help an estimated 400,000 homeowners avoid foreclosure by refinancing into mortgages insured by the Federal Housing Administration.

But lenders that participate in that program will have to share the pain by writing down some of the principal. How many will be willing to do that, as opposed to trying to arrange a loan workout on their own, remains to be seen. After all, many banks can’t well afford more hits to their withered capital.

Another provision in the bill authorizes the Treasury to rescue mortgage-finance giants Fannie Mae and Freddie Mac if they are in danger of running out of capital because of rising loan losses.

Shares of Fannie and Freddie fell for a third straight session, with Fannie off $1.24, or 10.7%, to $10.31 and Freddie down 55 cents, or 6.6%, to $7.72. The stocks’ renewed downturn could be a sign that Wall Street figures the Treasury will inevitably have to bail out the companies -- which presumably would lead to a total loss for shareholders.

Paulson today was pushing yet another solution to the housing crisis: so-called covered bonds. Banks would make home loans, then issue bonds backed by homeowners’ payments. Unlike with traditional mortgage-backed securities, however, the home loans would stay on the issuing bank’s books -- which in theory would give the lender more incentive to underwrite only high-quality borrowers (what a concept!), and give bond investors more confidence about buying the securities.

Covered bonds have been common in Europe, but relatively rare in the U.S.  So we have something to learn from the Old Country, after all?

Photo: Henry M. Paulson Jr. Pablo Martinez Monsivais/Associated Press

Comments

[Steve Wimer]

Irresponsible behavior by banks led to this crisis. They should go broke!

[Trudy%20Self]

All of this talk of the amorphous "they". To quote Walt Kelly and Pogo,"I have seen the enemy and he is us."

[JJ]

Greenspan, you raised interest so fast to cover your ass before you left office, thats why the housing when bust! Instead you could have just left interest alone and let the market correct itself. Look at Hong Kong and Singapore, their interest is low the housing is high but stable and corrects itself when people can't afford it anymore. Greenspan was a fraud!!!

[Dan]

The bailout bill may have a negative affect on the markets. If you consider the exploding debt load now taken on by the taxpayers. Our 500 billion dollar deficit added to 300 billion for backing FHA loans, and now an unlimited and unknown exposure for the Fannie and Freddie backing. All this with a weakening economy and uncertainty over future tax policies. At some point buyers of USA debt may begin to question safety. If that happens interest rates will skyrocket. Higher interest rates are not exactly the medicine the housing market was looking for.

[Andy]

Per my recent article - http://www.savingtoinvest.com/2008/07/why-you-should-be-angry-with-2008.html - , all the bill will achieve is that in the short term it will slow the current housing market crisis and credit crunch, but only delay the inevitable downward spiral. Unfortunately the American and global economy is heading into a recession, not out of one. So the housing bill, like the stimulus checks, will only have a temporary affect. The government again is trying to spend us out of an economic crisis, which is unlikely to work and only add to our national debt and the continued devaluation of the US dollar. Paulson is going to drive us broke. The American economy is not like Goldman Sachs.

[jdj]

I don't understand the appeal of covered bonds. They have to be kept on the bank's balance sheet, so compared to securitization there will be less money available to make loans since the loans aren't sold. And, in order for it to work investors in these bonds have to take a lower interest rate than the banks could borrow the money for. What investor out there is just itching for a low-yielding mortgage bond?