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Strategies & Market Trends : Ask DrBob -- Ignore unavailable to you. Want to Upgrade?

To: shoreco who wrote (99331)	9/26/2008 12:23:55 PM
From: 1der	Read Replies (1) \| Respond to of 100058

Hi Shoreco, I am all for what you are saying but I think the $425,000 is actually $425 without the zeros. I think a better approach is to fund Fannie / Freddie as a RETAIL bank to make loans available directly to the public. Read the following: A better idea for the $700 Billion - People's Bank Since the stated goal of the $700B is to unfreeze the Credit Markets, imho giving it to the banks will do nothing to get them to make loans available again in the near future. It will take 3 to 5 yrs. A Better Idea - The Fed's already own Fannie and Freddie, these are wholesale banks that essentially underwrite, fund and service the loans that are sold to them by the retail banks. It is a SMALL step forward for them to make retail loans directly to the public. The ARM loans that are out there are resetting in two ways, interest rates are higher AND they are starting to FULLY amortize over 25 yrs. This latter adjustment will sink far more people than just sub prime as that adjustment is about a 50% increase from the interest only payment. Example $1 mil loan at 4.5% IO has a payment of $3,750 per month. Keeping the interest rate the same at 4.5% but now amortizing over 25 years to include principal payment increases the payment to $5,558 per month. If the interest rate increase from 4.5% to 6.0%, the payment jumps to $6443. Not many folks going to be able to tolerate those increases without going belly up and creating MORE Foreclosures. Let's say the interest rate goes down to 2%, the payment is $4,239, fully amortized over 25 yrs. The first two scenarios will have a devastating effect on household spending and will further depress the housing market as far more people in the middle class and upper middle class get hit with these increases. The third scenario with rates being lowered would probably be tolerable to a homeowner and would keep the loan performing AND provide for stability in the household to allow some spending. The banks will not do loans with 3%, 25 yr fully amortized terms anytime soon. But the FED could through Fannie and Freddie. Allow ARM holders to convert their loans to somewhere between 3% / 25 yr or a 4% / 30 yr and this economy will be revived very, very quickly. Think about it. My parents bought their houses in 1958 to 1960 and had a 30 yr loan at 4.25% which they paid off. So 4.25% 30 yr loans HAVE existed. The FED making loans would create and foster the competition that the bank's need to get going and making loans that would be close to or match the FED loans. Better than parking $700 billion in the banks balance sheets for next 5 yrs while everything crumbles. Banks can take a writedown on the ARM's that are refinanced by Fannie and Freddie. I bet that write down would be FAR less than the hits they are taking right now.