Interest Rate Roundup

Wednesday, September 12, 2007

Random bits for today

I'm not seeing any major news on the housing and mortgage fronts today. But there are lots of little things worth mentioning. In no particular order ...

* The International Organization of Securities Commissions (IOSCO) is a group of securities regulators from around the world. It has summoned the major ratings agencies for a pow-wow over the ratings process for structured finance products, according to the Financial Times. Needless to say, the ratings agencies are at the center of the mortgage credit storm. Critics accuse them of giving overly optimistic projections about the future performance of hard-to-value bonds backed by high-risk mortgages.

* Treasury Secretary Henry Paulson -- formerly of the "well-contained housing problem" camp --hosted his own Washington get-together with the leaders of top mortgage lending firms. Paulson told lenders that "we need an expansion of mortgage financing products," according to Bloomberg.

Me? I think we need lower home prices so potential buyers don't need "expanded" mortgages (read: higher-risk ones) to afford a darn house. Stretching the bounds of prudent lending got us into this mess. Reverting back to a world where average home buyers earning median incomes can buy traditional homes using plain-vanilla mortgages will help create a healthier housing market over the longer term.

* According to, an executive speaking on a Capital One Financial conference call just said borrowers are choosing to give up their houses and home loans rather than give up on their credit cards. Welcome to Bizarro World!

* A random thought: I'm wondering if or when actual principal balance reductions will start being implemented as a loan modification tool. If you bought a house for $400,000 and it's now worth $300,000, your lender might cut your rate to 6% from 8% to lower your monthly payment. But are you really going to be incentivized to keep making those payments? I doubt it. You'll just resort to "jingle mail" because you're so far in the hole.

Maybe the real answer for some lenders in bubble markets (where 20% to 30% price declines from peak levels are already occurring or will likely occur over time) is to identify borrowers who want to stay in their homes and who were not speculators. Then figure out if they'd be willing to stay in their homes (and mortgages) if the amount they owed were slashed to the current market prices of their homes. An "out there" idea? Maybe. But perhaps it's worth considering.

* Crude oil is surging by $1.31 right now. At $79.53, futures prices are at an all-time high. One catalyst: An Energy Department report showing a massive 7.01 million barrel drop in crude oil inventories. Another: The sinking U.S. dollar. You see, commodities like oil are priced in dollars. As the dollar falls, it boosts the dollar cost of oil. Or stated another way, oil producers have to charge the U.S. more because the dollars they're getting paid for that oil are losing value.

The Fed has pretended the slumping dollar and surging oil prices don't matter for -- what -- five years now? But I wonder just how much longer they can afford to keep that charade up with the $80 level only a whisker away. Don't forget that the dollar index is falling out of bed, too. It was recently down 32 more basis points to 79.39 (78.19 is the all-time record low).

It's tough to say whether this market action will factor into the Fed's decision about whether ... or how much ... to cut rates on September 18. But I doubt Gentle Ben is very happy about $80 crude ... $710 gold ... the highest wheat prices in the history of mankind (more than $9 a bushel today) ... the highest soybean prices since 2004, etc., etc.


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