Bernanke Urges Banks to Forgive Portion of Mortgage Debt
Bernanke Urges Banks to Forgive Portion of Mortgage DebtAssessment: The Fed's remarks predicts further distress in residential real estate and mortgage markets. The Fed's recommendations will negatively impact mortgage backed securities and derivatives markets. Expect credit markets to be tighten and become increasingly illiquid. Long term interest rates will have higher risk premiums. Long term borrowing costs will increase even as the Fed reduces the Fed Funds and/or Discount Rate.[
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Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.
``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech in Orlando, Florida today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''
Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments. By comparison, the central bank's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments.
The Fed chief highlighted the threat posed by home values falling below mortgage balances, something Treasury Secretary Henry Paulson played down yesterday. Bernanke said the ``recent surge'' in delinquencies has been ``closely linked'' to the slide of home equity.
Paulson said in an interview with Bloomberg Television yesterday that ``almost too much'' has been made out of concerns about homeowners whose house prices have dropped below their mortgages. He also said the administration's strategy of encouraging lenders to modify loans is ``the right approach and we are making substantial progress.''
Democrats' Push Democrats in Congress, by contrast, have said relying on lenders to alter loan terms hasn't yielded enough progress and are pushing for a stronger government response. Bernanke warned today that the housing crisis may deepen.
``Delinquencies and foreclosures likely will continue to rise for a while longer,'' Bernanke said in the comments to the Independent Community Bankers of America. A surfeit of homes for sale indicates ``further declines in house prices are likely,'' he said.
Subprime borrowers are about to see their mortgage rates increase more than 1 percentage point, he said. ``Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households.''
In the past, homeowners could refinance, though that option is now ``largely'' gone because sales of bonds backed by subprime mortgages ``have virtually halted,'' Bernanke said. ``This situation calls for a vigorous response.''
Interest Rates Bernanke didn't comment in his speech text on the outlook for the economy or interest rates. Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18, based on futures prices.
``Lenders tell us that they are reluctant to write down principal,'' Bernanke said. ``They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.''
The Fed chairman countered that by reducing the amount of the loan, this ``may increase the expected payoff by reducing the risk of default and foreclosure.''
Bernanke also urged investors in mortgage bonds to accept ``short payoffs'' of loans by allowing borrowers to refinance at a lower principal.
OTS PlanFor investors, a reduction in principal that's ``sufficient to make borrowers eligible for a new loan would remove the downside risk'' of further writedowns or defaults, Bernanke said. Investors may be able to share in future gains in home prices under some plans, he said, citing a proposal by the Office of Thrift Supervision.
Paulson, by contrast, has declined to endorse the OTS plan. John Reich, director of the OTS, last month proposed a program where borrowers would refinance mortgages at current home values. The lender would receive a ``negative equity'' certificate that could be redeemed if the house is sold.
The number of U.S. homeowners entering foreclosure rose 75 percent in 2007, with more than 1 percent in some stage of foreclosure during the year, according to RealtyTrac Inc. of Irvine, California. For the year, more than 2.2 million default notices, auction notices and bank repossessions were reported on about 1.3 million properties.
Yesterday, the Fed and other regulators sent letters to institutions they supervise, encouraging the banks to report on their efforts to modify mortgages at risk of default.
``This will make it easier for regulators, the mortgage industry, lawmakers and homeowners to assess the effectiveness of these efforts,'' Fed Governor Randall Kroszner said in a statement yesterday.
Bernanke spoke in a state that's among the worst affected by the housing collapse. Miami home prices have dropped 17.5 percent in the past year, the most of 20 large U.S. cities, according to the S&P/Case-Shiller index. Foreclosures in Florida jumped at more than double the nationwide pace, rising 158 percent in the past year, according to RealtyTrac.
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Labels: credit derivatives, FED, federal reserve, mortgage backed securities, mortgage derivatives, real estate
Fed pressured to raise rates
Fed pressured to raise ratesEven with inflation at the top of the Federal Reserve's comfort zone, options on Federal Fund futures at the Chicago Board of Trade show a 41% chance the Fed will lift its target rate for overnight loans between banks from the current 5.25% to 5.5%. Options data compiled by Bloomberg show that the chance of a rate cut has fallen from 83% to 29% since the start of May.
Fed Faces Pressure to Raise Rates, Options Show (Update1)
By Daniel Kruger
June 4 (Bloomberg) -- In the options market where the savviest investors take apart conventional wisdom, the Federal Reserve is facing growing pressure to consider raising interest rates as soon as December.
Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase.
While the economy expanded at the slowest pace in more than four years in the first quarter, inflation remains at the top of the Fed's comfort zone, business activity has rebounded, the jobless rate is near the lowest in six years and stock indexes are setting record highs. Just three months ago, options traders speculated the weakest housing market in 16 years would force the central bank to cut interest rates to 4.5 percent by January.
``The economy is in better shape than people give it credit for,'' said Jamie Jackson, who oversees government debt trading at RiverSource Investments in Minneapolis, which manages $100 billion of bonds. ``People exaggerated the pass-through effects of the housing weakness. If the Fed were to do something by year- end it would be a tightening.''
The chance of at least one cut in the overnight lending rate between banks has fallen to 29 percent from 83 percent since the start of May, options prices show.
`Not Satisfied'
Federal Reserve policy makers ``have started to tell us in pretty consistent language they're not satisfied at being at the upper band'' of their inflation target, said Stan Jonas, who trades interest-rate options in New York at Axiom Management Partners LLC. ``One-third of the people think the next move is going to be a tightening.''
Options more accurately reflect changes in monetary policy than futures contracts, the most widely used barometer, because they include the widest array of wagers, according studies by the Federal Reserve Bank of Cleveland in 2005 and the Federal Reserve Bank of St. Louis in 2006.
The Cleveland Fed paper has influenced the study of monetary policy expectations and follows a ``perfectly sound procedure,'' said James Hamilton, an economics professor at the University of California, San Diego.
The CBOT first listed the options in 2003 and began offering contracts in July that allow bets on the Fed's target rate. The so-called binary options pay $1,000 if an investor bets correctly on the Fed's interest-rate decision at regularly scheduled meetings. Investors get nothing if they bet wrong.
Preferred MeasureTreasury yields climbed last week to the highest since August. The yield on the benchmark Treasury note due in May 2017 rose 9 basis points, or 0.09 percentage point, to 4.95 percent. The yield fell 1 basis point today to 4.94 percent.
Treasuries returned 1.1 percent so far this year, compared with a 1.5 percent loss last year, according to indexes compiled by Merrill Lynch & Co.
Personal spending on items excluding food and energy, the Fed's preferred inflation measure, rose 2 percent in April, at the top of the central bank's preferred 1 percent to 2 percent range. It had been above 2 percent the previous 12 months.
Central bankers reiterated their forecast for faster growth and said ``downside risks'' to the economy have ``diminished slightly,'' according to minutes of the May 9 Federal Open Market Committee meeting released last week.
``Economic growth will pick up as we move through the year,'' Federal Reserve Governor Randall Kroszner said at a June 1 conference in Athens. ``The risks to the inflation outlook are primarily to the upside.''
Merrill, Goldman, UBS
UBS AG, among the biggest bond bulls this year, changed its forecast on June 1 for the Fed to begin cutting rates in October from August. UBS, along with Merrill Lynch & Co., Goldman Sachs Group Inc., had been predicting a housing-led recession would result in at least three rate cuts this year. Merrill and Goldman are based in New York and UBS is in Zurich.
New home sales rose 16 percent in April to an annualized rate of 981,000, according a Commerce Department report released May 24. Analysts attributed the increase to developers reducing prices of unsold houses. The average selling price dropped 10 percent, the report said.
Gains in stocks that pushed the Standard & Poor's 500 index to a record 1535.56 on May 30 discouraged the Fed from cutting rates, said David Rosenberg, chief economist for Merrill in New York. Rosenberg predicted at the beginning of January that rates would fall to 4.25 percent this year. He declined to specify when the Fed will cut rates in an interview May 30.
`Bat an Eyelash'
``We came off of virtual stagnation in the first quarter and the Fed didn't bat an eyelash,'' Rosenberg said.
Economists at Barclays Capital Inc., JPMorgan Chase Inc. and Bear Stearns Cos. have been predicting higher rates since the Fed left its target unchanged last August. They forecast at least one increase this year and another by the first quarter of 2008. Barclays is based in London, while JPMorgan and Bear Stearns are in New York.
``We'll see a pick-up in the growth rate of the economy that will make the Fed a little less confident with the rate of inflation,'' said Conrad DeQuadros, an economist at Bear Stearns.
The U.S. economy grew at a 0.6 percent annual rate last quarter, the Commerce Department said May 31. The pace will increase to 2.2 percent this quarter, according to the mean forecast of 65 analysts surveyed May 9 by Bloomberg News. ``If housing can just behave itself and get back some stability there is a risk they could go to 5.5 percent,'' said George Fischer, who manages $17 billion in fixed-income assets at Boston-based Fidelity Investments, the world's largest mutual fund company.
Building the CaseThe economy added 157,000 jobs in May, while the unemployment rate remained at 4.5 percent, the Labor Department reported on June 1. The jobless rate dropped to 4.4 percent in March, the lowest since October and matching a five-year low.
Business activity rose last month, according to the National Association of Purchasing Management-Chicago's business barometer. The measure increased to 61.7 in May, higher than economists forecast, from 52.9 the prior month. Readings greater than 50 signal expansion.
``The case is building more and more'' for Fed rate increases, said Richard Schlanger, who manages $4 billion in fixed income at Pioneer Asset Management in Boston. ``We are definitely seeing more and more people moving away from the Goldman and Merrill argument that the Fed is going to cut multiple times.''
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Full articleFED, US Federal Reserve, interest rates, inflation, economy, economic growth
Labels: economic growth, economy, FED, inflation, interest rates, US Federal Reserve
Is keeping America as center of financial world is good for all?
Is keeping America as center of financial world is good for all?
America's position as the center of the finance world is in peril, according to this author, and expenses associated with regulations such as the Sarbanes-Oxley Act are partly responsible. Joseph B. Fuller, chief executive officer of advisory firm The Monitor Group, wrote in an op-ed piece that America's preeminence in the field is worth defending, and "what we all should realize is that, despite its many shortcomings, the U.S. regime contributed mightily to growing global prosperity."
full articleUS, american regulations, FED, SEC, NYSE, NASD, market leadership, global marketsLabels: american regulations, FED, global markets, market leadership, NASD, NYSE, SEC, US
