Interest Rate Roundup

Wednesday, August 06, 2008

Fed does nothing ... Market throws a party anyway ... Losses mount at Freddie Mac ... Morgan freezes HELOCs

I had some things to take care of yesterday afternoon, so I missed the hoopla coming immediately after the Fed meeting. The Fed did nothing with rates and said only the following. But apparently that was enough for the stock market to have a raucous good time, adding more than 331 points on the Dow. Go figure ...

"Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

"Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

"Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."

In other news, the losses are really mounting at GSE Freddie Mac. The company lost more than three times what analysts were expecting, while credit losses increased significantly. Here's a bit more from Bloomberg:

"Freddie Mac, the U.S. mortgage-finance company hobbled by record foreclosures, will slash its dividend at least 80 percent after posting a quarterly loss that was three times wider than analysts' estimates.

"The second-quarter net loss of $821 million, or $1.63 a share, compares with the 54-cent a share average estimate of nine analysts in a Bloomberg survey. The common-share dividend will be reduced to 5 cents or less from 25 cents, McLean, Virginia-based Freddie said today in a statement.

"Freddie had credit-related expenses of $2.8 billion, double the first quarter, and wrote down the value of subprime and low- quality mortgage securities by $1 billion as the biggest housing slump since the Great Depression increased delinquencies. Freddie Chief Executive Officer Richard Syron said he still plans to raise capital after U.S. Treasury Secretary Henry Paulson was forced to step in with a rescue plan to restore confidence in Freddie and the larger Fannie Mae.

"This correction is more severe than what we've seen in the recent past,'' said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California. "Both Fannie and Freddie are going to be profoundly insolvent by the time we're done with this.''

"Freddie has plunged 76 percent this year on the New York Stock Exchange on concern the company may not have enough capital to overcome loan delinquencies on the $2.2 trillion of mortgages it owns and guarantees. Syron, 64, agreed to raise $5.5 billion in equity though failed to complete the sale as the stock slumped."

One other thing that caught my eye: Mother Morgan (Stanley, that is) is cutting access to HELOCs for thousands of borrowers whose properties have declined in value. Morgan is just the latest in a long list of lenders that have cut the size of borrower lines, frozen borrower drawing privileges, and otherwise made it tougher for people to use their homes like ATMs. Many banks are also exiting the wholesale lending business entirely to focus on in-house, retail loan originations instead.


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