Mortgage Rate News

One of the issues that has been contributing to a lack of liquidity in the financial markets is the fact that banks have been rather reluctant to lend to each other. Without banks lending to each other (and businesses and individuals, for that matter), the flow of capital has been rather slow. Credit has been all but unattainable, and businesses and individuals have been unable to get the funding they need to keep their own operations — and the economy — going.

With the latest bank recapitalization plan, though, United States officials are hoping that changes. In a press conference that ended not too long ago, Treasury Secretary Henry Paulson pointed out that now is not the time for banks and other institutions to hoard cash. MarketWatch reports on some of what Paulson said:

“Our goal is to see a wide array of healthy institutions sell preferred shares to the Treasury, and raise additional private capital, so that they can make more loans to businesses and consumers across the nation. At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

The whole point of the capitalization plan, he explained, is to get the money flowing. The point, he emphasized, is that businesses (and to a lesser extent individuals) need credit in order to keep up their necessary operations. As part of efforts to kickstart the credit market, Paulson said that $250 billion would be used to make preferred stock purchases in certain banks in order to increase capital.

$125 billion of that money is aimed at nine big banks that have already agreed to the terms of using the bailout money. Smaller banks will also be able to take advantage of the program if they wish. Bloomberg reports on some of the conditions of the program:

Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 percent of the senior preferred investment, with a strike price determined by the bank’s share price at the time of issuance.

Personally, as someone who is just looking at it from the standpoint of an ordinary person, this plan seems much better than others proposed. It follows along the lines of plans unveiled in Europe earlier. Instead of focusing on buying assets that are next to worthless, the government will instead have equity in companies that are likely to recover in the long run. This means that the government could actually make money on the deal. I also like that some of the excesses that have been enjoyed by company bigwigs, despite poor decision-making, will be curbed.

Fed chair Ben Bernanke and FDIC head Shiela Bair also spoke at the press conference.

Tags: Henry Paulson, Sheila Bair, home mortgage loan, Ben Bernanke,
bank plan, bank bailout, mortgage loan blog

Last night, the Senate passed its version of the $700 billion bailout package. Bible Money Matters conveniently summarizes the three main changes the Senate added to the bill:

1. FDIC limits raised to $250,000 from $100,000.
2. Business tax breaks extended, and middle-class gets protection from alternative minimum tax.
3. Health insurance companies have to provide coverage for mental health issues.

Obviously, with Main Street in an uproar over the bailout package (and the House left with no choice but to defeat it), the Senate is trying to provide a sop. But, unfortunately, none of these things does anything to address the ways in which Main Street is affected by Wall Street.

Well, I take it back. The bailout package may save some jobs, since some companies may not fail and have to cut back. The other two issues, retirement and mortgage loans, remain untouched.

Really helping Main Street

While the items included in the new version of the bailout package are nice, I suppose, they don’t address underlying issues: unaffordable mortgage loans and diminishing returns in retirement portfolios (unless the package really does boost share values).

• Dave Ramsey thinks that companies that take advantage of government help, they should refinance mortgages that are delinquent at a 6% fixed rate. This would help many of those whose mortgages have reset to higher rates, and make payments affordable by offering a lower rate — and by refinancing the amount owed out over 30 years. This could save many (but not all — some people still won’t be able to afford the mortgage) from foreclosure.
• I would like to see limits to contributions to tax-advantaged retirements accounts lifted. If I could put $10,000 into my Roth IRA each year instead of $4,000, that would be great. It would help my long term future AND is would encourage increased investment.

I would also like to see our leaders begin emphasizing good financial behaviors, rather than telling us how important it is for us to be able to borrow more money that we can then spend on things we don’t really need.

CNN Money offers a PDF of the full text of the Senate bailout package.

Tags: mortgage loans, Senate bailout package, home mortgage loan, Roth IRA,
Dave Ramsey, FDIC, retirement accounts

Washington Mutual failed last night. Luckily, though, even as the FDIC took over the ailing savings and loan, JP Morgan was there to buy it. So FDIC insurance payouts aren’t needed. National Mortgage News reports on the largest bank failure in history:

The S&L is the nation’s fifth largest residential servicer with $600 billion in housing receivables. It is also the nation’s largest S&L with $307 billion in assets. “WaMu’s balance sheet and the payment paid by JPMorgan Chase allowed a transaction in which neither the uninsured depositors nor the insurance fund absorbed any losses,” said FDIC chairwoman Sheila Bair.

Also, it is important to note that WaMu will be largely unaffected. So don’t panic. Your money is safe and your banking will go forward as usual. Cash Money Life offers this about WaMu customers:

This deal combines the operations of two banks and most customers should be completely unaffected by this deal. Friday morning should be the same as any other day and customers should still be able to access funds and maintain their normal banking privileges. Customers should not panic as the only thing really happening is a change on the letterhead on their statements.

The way this has fallen out, though, makes for an interesting commentary on the state of things. In his speech the other night, President Bush said that the markets aren’t “working properly.” Apparently, though, they are.

See, WaMu had plenty of fundamental value. The risk was worth taking for JP Morgan. So JP Morgan bought the company at a good rate. The problem with the government buying the assets that everyone knows are bad is this: Who will buy them later? The President asserts that the government can make money when things return to “normal,” but in a normal market, no one wants to invest in something that they know has poor value.

Indeed, even though I am not huge on “free market” as most peopl think of it, I do think it’s working. After all, the investments that are bringing Wall Street down were over-valued, their status was obscured and they were over-leveraged. In a properly function free market, these types of investments should be going down hard. And they are.

Tags: free market, Washington Mutual, home mortgage loan, WaMu,
JP Morgan, bank failure, mortgage lenders