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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (45110)	11/2/2008 7:28:08 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 71351

Market Scan Mortgaging Off: The Present Maurna Desmond, 11.01.08, 12:00 PM ET More trouble on the home front. Chairman Ben Bernanke of the Federal Reserve said Friday that America's home loan system, anchored by the terrible twosome of Fannie Mae and Freddie Mac, isn't working and might need to be scrapped. Home loans are now more expensive than they were when the sometimes government agencies were brought back onto the federal books at the end of the summer. Fannie and Freddie started life as government agencies but were morphed into shareholder-owned corporations that helped finance American home mortgages by issue bonds that had an implicit backing from the Treasury. When push came to shove, as it did in September, the federal government took control of the troubled financiers. By providing cheap mortgage financing via the bond market, Fannie and Freddie helped inflate U.S. housing prices, one of the factors that led to the subprime loan crisis. Speaking to a conference in California on Friday, Bernanke said the U.S. home loan market isn’t functioning well. He warned against re-privatizing Freddie Mac (nyse: FRE - news - people ) and Fannie Mae (nyse: FNM - news - people ) after their “time-out period” saying that “considering some alternative forms" for the government-sponsored enterprises or for mortgage securitization generally seemed “worthwhile.” For now, government attempts to bolster the housing market don’t seem to be working. When Freddie and Fannie were nationalized in the second week of September, mortgage rates fell to 5.75% from 6.25% the week before, as regulators said they would. Last week, however, mortgage rates rose to 6.4%. As rates rise, so do monthy mortgage costs, which has the effect of reducing home prices, which already are spiraling lower. Bernanke said that breaking up the government-sponsored enterprises into smaller units before privatizing them (See "Bust Up These Beasts") would be beneficial as it would eliminate the conflict between private shareholders and public policy and likely diminish risks to the overall financial system. It would also be "presumably more innovative and efficient than a government agency" and "operate with less interference from political interests," he said. Trouble is, that the viability of a model “without at least implicit government support is an open question,” Bernanke said. Bernanke suggested government-backed mortgage insurance as an alternative that would limit government exposure while providing investors with the iron-clad guarantee it needs. A more immediate problem is that essentially any mortgage being made in the U.S. has a government guarantee. Having been burned by lending to subprime borrowers -- those unable to obtain Fannie- and Freddie-backed mortgages -- private investors are no longer willing to finance Americans' home purchases. “Right now you cannot issue any nonagency securities of any type and that’s very significant- that market has died, said Guy Cecala, the publisher of Inside Mortgage Finance, a trade magazine. “Now the solution is to have Fannie and Freddie sitting in Uncle Sam’s lap and that isn’t a long-term security.” (See "Fannie and Freddie's 15-Month Fix") In the meantime, Freddie and Fannie are lending money at suddenly higher rates and citing market turbulence doesn’t explain why. “There is no logic for why mortgage rates are so high,” said Cecala. “The only explanation is some sort of investor panic, but that’s why the Federal government took them over in the first place - to calm people down.” The implications are significant: American consumers are slowing their spending, an effect unlikely to end until the housing market recovers. As the engine of much of the world's economic growth, U.S. consumers are bringing recessionary forces to bear around the globe.