Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Outlook Is 'Excellent' - 23rd July 19
Why The Coming Silver Rally Might Be The Greatest - 23rd July 19
We Are in for Decades of Ultra-Loose Monetary Policy - 23rd July 19
Gold & Gold GDX Stocks Ripping. What’s Next? - 23rd July 19
Stock Market Breadth Warning Signs for the Stock Market’s Rally? - 23rd July 19
U.S. Recession Watch: The Six-Cycle Forecast - 23rd July 19
US Dollar Index tightly wound between: US Bond Yields down on safety flows - 23rd July 19
Stocks Bull or Bear? The Market’s Message - 23rd July 19
This Dividend Aristocrat Is Leading the 5G Revolution - 22nd July 19
What the World Doesn’t Need Now is Lower Interest Rates - 22nd July 19
My Biggest 'Fear' For Silver - 22nd July 19
Reasons to Buy Pre-Owned Luxury Car from a Certified Dealer - 22nd July 19
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Fed Failing to Get Credit Flowing

Interest-Rates / Credit Crisis 2008 Aug 11, 2008 - 07:47 AM GMT

By: Money_and_Markets

Interest-Rates

Mike Larson writes: Best Financial Markets Analysis ArticleIt's no secret what the Federal Reserve — as well as Congress and the Bush administration — want. They want banks to open their wallets. They want lenders to keep the credit flowing. They want firms of all stripes to take the Fed's cheap money and DO something with it — make business loans, make mortgages, make car loans, you name it.

But the lenders aren't playing ball!


Instead of charging lower rates for loans, they're charging higher ones.

Instead of making loans easier to get, they're tightening standards.

And instead of expanding into new lending areas, they're getting the heck out of several business lines.

In short, the Fed has driven interest rates through the floor and it's handing the financial industry billions and billions of dollars worth of bailouts and rescue programs. But credit is getting tighter anyway.

That's why I find it hard to believe the recent rally will stick. Let me show you some specific examples of how the Fed's best laid plans are utterly backfiring ...

Many Borrowers Are Caught in HELOC Hell

Do you know what a HELOC is? That's industry jargon for "Home Equity Line of Credit." It's a revolving loan you take out against your home — for $10,000, $50,000, even $100,000 or more.

It's getting harder for homeowners to use their homes like ATM machines!
It's getting harder for homeowners to use their homes like ATM machines!

You don't have to take all (or even some) of the money out at closing. Instead, you write checks or swipe a Visa or MasterCard whenever you want to tap into a portion of the line. Then you pay the principal back — with interest — over time (say, 10 years).

Lots of homeowners have used HELOCs to fuel spending binges in the past few years. Others just have them in place for emergencies. They're willing to pay nominal origination and annual maintenance fees on the off chance they might need to tap into their HELOCs if they get laid off, if they need money to cover medical expenses, and so on.

But here's the thing: Many banks no longer want to be exposed to that kind of contingent liability. They know more Americans are falling on hard times, driving up the chance borrowers will actually tap into their emergency HELOCs. Considering those borrowers are already stressed, that's not what banks want to see happen.

Meanwhile, the underlying properties securing HELOCs are losing value month in and month out. A few years ago, banks had no qualms about layering a $100,000 HELOC on top of a $400,000 mortgage for a house worth $600,000. After all, if the borrower got in trouble and ended up in foreclosure, there was plenty of equity to cover both lenders.

But now, that $600,000 house might go for $500,000 — or less. If you're the HELOC lender, and your borrower has drawn down the entire $100,000 (on top of his $400,000 first mortgage), chances are you'd get much less than you're owed if the house went into foreclosure, once you factor expenses into the equation.

So what's happening? Lenders are slashing their HELOC exposure across the board!

This week, Morgan Stanley reportedly began cutting off "thousands" of its HELOC customers. It's preventing some borrowers from drawing any more money against their lines, and slashing the size of the lines that others have.

JPMorgan Chase has made changes to HELOCs for some 150,000 customers since March, according to Bloomberg.

Bank of America, Washington Mutual, and SunTrust are some of the other institutions doing the same thing.

And it's not just HELOCs that banks are running scared from.

Borrowers Seeking First Mortgages Are Finding Fewer Options, Too ...

Wachovia just eliminated its negative amortization "Pick-a-Pay" mortgage, which allowed borrowers to make monthly payments that didn't cover all of the interest due, much less principal. The unpaid interest got added to borrower balances, driving principal UP over time rather than down.

Several banks have also dramatically cut back on — or completely exited — the wholesale lending business. That's when they fund the loans that originate with a third-party mortgage broker.

Still others are making it much tougher for borrowers to get "jumbo" mortgages and/or charging higher rates for them.

And subprime loans? Forget about it! They're harder than ever to find.

All told, according to the Fed's latest survey, 77.7% of banks are tightening standards on subprime mortgage loans ... 75.6% are making it tougher to get mid-grade Alt-A and "nontraditional" mortgages ... and 62.3% are tightening standards on prime loans, the most since the Fed started its quarterly survey 18 years ago.

Freddie Mac was supposed to save housing, but it just lost $821 million in the second quarter!
Freddie Mac was supposed to save housing, but it just lost $821 million in the second quarter!

Speaking of the prime, or "conventional," mortgage market, Fannie Mae and Freddie Mac were supposed to be its savior. Congress has been urging the two Government Sponsored Enterprises to buy and back billions and billions of dollars more worth of home loans.

Despite the slump in housing and the obvious impact it will have on credit losses, the GSE's federal regulator actually REDUCED its excess capital requirement for Fannie and Freddie earlier this year. The goal: Free up more money for investing in the mortgage market.

And as I told you last week , the Treasury Department recently pulled out ALL the stops. It asked for — and was granted — the power to buy equity in the GSEs and extend them both unlimited lines of credit direct from Uncle Sam (and ultimately, taxpayers like you and me!).

But here's the thing: Freddie Mac just reported an $821-million quarterly loss, more than THREE TIMES what Wall Street analysts were looking for. It's now sitting on 22,000 foreclosed homes, the highest in the company's 38-year history. And it was forced to set aside $2.5 billion in the second quarter to cover loan losses, more than double what it reserved just three months prior.

Those losses are helping shrink Freddie's capital cushion. It fell to $37.1 billion in the quarter, only $2.7 billion above what its regulator requires.

Fannie is responding in a couple of ways to preserve capital:

First, it's cutting its stock dividend. Shareholders will now get just $0.05 per share, down from $0.25 per share previously.

Second, it's looking to sell new common or preferred shares — more than $5 billion worth.

Third, — and this is most important — Freddie will likely SLOW the growth of its portfolio of retained mortgages and its mortgage guarantee business. In other words, it's probably going to be buying fewer home loans and investing less in the mortgage-backed securities market.

Without going into all the details, that will mean mortgage rates will go up for new borrowers.

Heck, it's already happening. The difference between yields on Freddie Mac's actively traded, 30-year mortgage-backed securities and yields on 10-year Treasury Notes has ballooned to about 215 basis points. That's far above the 136 average of this decade and just shy of the record high of 242 set during the credit market panic in March.

Result: Rates on 30-year fixed-rate mortgages are now averaging 6.52%, according to Freddie Mac. That's way, way up from the recent low of 5.48% in late January and closing in on a six-year high.

And It's Not Just Mortgages, Either. Lenders Are Tightening Just About Everywhere!

I could go on and on with examples OUTSIDE of the mortgage business, too. Take car lending. About 20% of auto sales are financed by leases. But Chrysler just said it would exit the leasing business, and General Motors and Ford are also pulling back.

HSBC Finance, a company with a $12.5 billion portfolio of auto loans, said it stopped accepting new business in late July.

Other auto lenders like AmeriCredit have dramatically shrunk their operations. The company originated just $780 million in loans in the June quarter, compared with $2.51 billion a year earlier.

Credit card companies are tightening standards as well. More than 32% of the card lenders surveyed by the Fed said they are making it tougher for borrowers to get credit. That's the highest percentage of lenders tightening standards in that part of the business since 1997.

Bottom line: The Fed is leading the credit market horse to water. But it can't make that horse drink. The more banks make loans harder — and more expensive — to get, the more the economy suffers.

Keep that in mind when you see vicious bear market rallies (especially in the financials) like the one earlier this week. My bet is they won't stick.

Until next time,

Mike

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules