Bankruptcy & Foreclosures

I like to use my blog space to point out the affects of the subprime mortgage mess on individuals. While we’re all feeling the weight of the situation in our daily lives, Bear Stearns could very well have been hit the hardest by the collapse. On Friday the word was that Bear Stearns would be receiving an emergency loan from JPMorgan Chase backed by the Federal Reserve.

As of today word has been announced that a deal is being formulated in which JP Morgan Chase may purchase Bear Stearns for $2.2 billion. While this Wall Street firm buy out may not have much of an affect on you personally, this news only further strengthens fears that we are in trouble collectively.

What does affect each and every one of us is the news that investors are suddenly turning away from mortgage-backed securities issued by government-sponsored enterprise (Fannie Mae and Freddie Mac). In the opinion of many, it is these government backed loan programs credited in preventing the real estate market from completely crashing.

So what does this mean to the individual consumer? It could very well make it harder for people, even those with favorable credit history, to get a mortgage. Those individuals who could still get a home loan face higher rates, stricter terms, and additional conditions. As the prices of mortgage-backed securities fall, yields rise correspondingly, which means higher mortgage rates.

The concept of rising defaults and delinquencies freezing up the subprime market is nothing new and that’s because up until recently, borrowers with good credit could still get conventional loans thanks to the fact that investors continued to buy securities backed by Fannie Mae and Freddie Mac. After all these were still viewed as relatively safe investments due to the governmental backing.

Recently things have changed. Investors aren’t quite so quick to buy up these securities once Fannie Mae and Freddie Mac reported a combined $6 billion in losses for the fourth quarter. Unfortunately, all the Fed can do at this point is to continue to slash interest rates. Many argue that this tactic isn’t helping matters (after all, the lowest rate in the world means nothing if an individual cannot get a loan). Hopefully news in the early portion of the week will be more positive.

They say admission is the first step to recovery. In the case of our economy of late, the first of many steps!

President Bush acknowledged today that the country is facing a pretty deep bowl of challenges both within the housing and financial markets. Always the optimist, the Prez did stress his confidence that the economy would recover.

The reasons we’re in a major slowdown center on U.S. consumers, who drive the economy. Throughout the past half-decade, we’ve been the most maniacal spending machines the world has ever witnessed. So what happened that slowed our spending? Americans consumers now face a weaker dollar, soaring prices for gasoline, which in turn means rising prices for food. Food and gas are obviously essentials for most consumers which continues to drive the spiral downward.

Although last month’s foreclosure filing data showed a very disturbing rise to a record 60%, somehow unemployment numbers are remaining low. The President went on to remind consumers that the $170 billion stimulus package should help spur growth once checks start appearing in mailboxes all across the nation.

A bit of good news comes in the form of the fact that inflation hasn’t yet soared to levels predicted earlier. In fact prices did not move at the end of February. However, even without jumping up last month, overall prices are still 4% above where they were 12 months earlier (but still down from the 4.3% rise seen in January).

The relief in inflation may only be temporary however. Average gasoline prices fell 2% in the month of February which acted to drag down overall inflation. Unfortunately, March has already witnessed gas prices 3% higher than the highest level of February. We won’t know until March concludes, but it is shaping up to appear that inflation may have only taken a one-month break. So much of our economic status depends upon the trade of oil and lately these figures continue to surpass long-standing records.

As I’m writing this post, news is developing of the stock market taking but another tumble after news that Bear Stearns requires emergency funding due to a liquidity crisis. Naturally fears that the credit crunch continue spreading. As the stock market falls, bond prices surge as investors seek the comparative safety of government insured debt.

We like to believe the government knows best especially when it comes to bailing out a troubled economy. Unfortunately this may not be entirely accurate and sometimes even their best efforts fail. Tuesday witnessed the first signs of economic recovery in direct response to the Federal Reserve’s announcement that it plans to drop a cool $200 billion into the financial market to help ease the strain from the current credit crisis.

So how does the Fed pumping 200 billion into the market place help you and I? The program is part of a global effort aiming to assist struggling banks and mortgage lenders. The Fed isn’t acting alone either. With assistance from the European Central Bank, the Bank of Canada and the Swiss National Bank, the Fed agreed to offer up an interesting trade. The government will loan investment banks money in exchange for debt (don’t you wish we had this option?), which includes securities that have faltered on account of slumping mortgage backing.

What this does in simple English is it creates a market for assets that investors have been too scared to purchase. It is that lock-up in the demand that has sent asset values plunging and caused massive losses for some of the world’s biggest financial institutes.

This is significant as it represents the first time in recent history that the Fed has attempted to resolve the current slump without resorting to rate cuts. This latest solution offers a direct lifeline to investment banks, which previously couldn’t borrow in past Fed liquidity plans.
So how was the response to this announcement? The Dow Jones industrial average shot up over 416 points, representing the biggest one-day point gain since July of 2002. I would say the point was well taken. Unfortunately today, things aren’t quite as optimistic on account of a record-setting streak of oil prices (which have surpassed $110 a barrel). If oil prices continue to rise, inflation pressure would also likely rise in unison which would limit the Federal Reserve’s ability to reduce interest rates/ boost lending efforts.

They’re close, but the cost of crude oil has to be settled before long-term stability is feasible.