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Strategies & Market Trends : Portfolio Construction -- Ignore unavailable to you. Want to Upgrade?

To: Keith Feral who wrote (646)	9/17/2007 6:10:10 PM
From: Keith Feral	Read Replies (1) \| Respond to of 1964

Last FED rant. I think the FED cuts discount rate by 50 basis points and the FED funds rate by 25 bp. That let's the market think they cut rates by 50 bp, even though the FED is doing much less. However, it builds them the credibility they need to gradually respond to housing problems. Most importantly, it enables banks to take loans from the FED at 5.25%, as the FED funds level settles back to 5.00%. I have to disagree with one point that some people keep saying on TV, which suggest that banks are not making loans to people with good credit. The mortgage market is fine for people with good credit. The mortgage rates aren't that much worse than they were 6 months ago with the exception of jumbo rates. Right now, the main problem is the banks are not warehousing loans to secondary companies which do not have the financial strength to put the loans on their balance sheets. By withdrawing financial support for these overleveraged mortgage reits, the companies cannot survive the margin calls and inability to raise liquidity. They are destroying the secondary participants with the help of the hedge funds that won't provide any liquidity to these bucket shop mortgage companies. Once the remaining mortgage reits are bk, the banks will be more than able to sell as much mortgage paper as they want into the market. All the hedge funds will be back buying the limited supply of new mortgages as we wade through the inventory of unsold and foreclosed homes. I wonder how mortgage applications will be revised to handle people with stated incomes from small businesses that have high levels of depreciation. The elimination of the alt a market is going to be a have a negative demand effect for more expensive homes.