Strategic Asset Solutions

Dear Theresa,

Firefighting 

Federal Reserve Style

The Federal Reserve has been very creative lately, but when fires are continuously popping up all around you, it does require some quick thinking to stay ahead of the flames.  Last Tuesday the Fed created yet another new facility allowing banks to basically swap their AAA rated mortgage backed securities for AAA rated U.S. Treasuries in an attempt to provide liquidity in the market.  Allowing this type of swap also bars these MBA securities from being marked to market, which could land a crushing blow to the U.S. economy due to over-leveraging of these assets which are now worth a fraction of their former model value.

Yesterday, the Fed made another surprising move, creating a new facility to allow investment banks to borrow directly at the discount window.  Also in a rare Sunday event, the Fed chose to cut the federal funds rate by another quarter percent, although it is still expected to cut the federal funds rate at their regularly scheduled meeting tomorrow, potentially by as much as one full percentage point, reducing the rate to 2%.

And in a move that conjures up images of 1930, the Fed provided $30 billion in funding to JP Morgan to enable the purchase of Bear Stearns, announced Sunday.  The sale of Bear Stearns for a paltry $2 a share was a far cry from the stock's high of $159 last summer or even the $69.75 of last Monday, when rumors of their imminent demise began to circulate. The move by the Fed to assist in financing this transaction also ultimately props up many other Wall Street investment firms who are counterparties of Bear Stearns repurchase agreements, agreements which used securities as collateral for money borrowed. A complete failure of Bear would have resulted in the liquidation of collateral: infecting these other firms with additional losses, firms already hemorrhaging from recent and ongoing write-downs of their own.

Freddie Mac CEO Says Home Prices Still Have a Long Way to Fall 

According to Freddie Mac CEO Richard Syron, housing prices have only dropped a third of the way from peak to trough, further stating that Freddie's expectation is that there will be a total decline of 15%.  However, based on the Case-Shiller national index the extent of the drop thus far has already been 10.2%.  The S&P/Case-Shiller Home Price Index tracks changes in the value of the residential real estate market in 20 metropolitan regions across the country, using data on single family home re-sales.  Perhaps his opinion was based on data from the Office of Federal Housing Enterprise Oversight (OFHEO) purchase-only price index, which reflects a drop of only 2.5%.  This index accounts for prices across all areas of the country but restricts its data pool to loans that fit the parameters of Fannie Mae and Freddie Mac.  Inherently, this would exclude most "subprime" loans and those that were made on high value homes, such as the median priced home in higher cost areas.  Put more plainly, the OFHEO index doesn't account for the types of loans that are resulting in the majority of the foreclosures, indicating the Case-Shiller index is a more accurate representation of the market.  If Mr. Syron is correct about the percentage however, we are looking for further declines of 20% in values to reach the trough. 

California Watch

On February 27^th, Wells Fargo downgraded 34 of California's 58 counties to severely distressed.  This distinction changes the down payment requirement for a new loan in these counties from 20% to 25% and disallows all stated income/stated asset loans.  Other mortgage companies are expected to follow suit.

Creative Solutions 

Local Governments Are In Search Of Them Too

Charlotte, NC officials are working with the Department of Housing and Urban Development in an effort to institute a program to allow those employed in the community infrastructure, such as police officers, fire fighters and teachers, to buy foreclosed houses at 50% of list price.  This move is being made in response to cuts in tax revenue which both prohibits pay increases for these same professionals and leads to the crime and blight that typically crop up in neighborhoods plagued by large numbers of foreclosures. A recently built neighborhood just outside of Charlotte, which was targeted to 1^st time subprime buyers, has been responsible in large part for this creative solution.  Made up of 123 homes, the development has been left a virtual ghost town with 115 already foreclosed or in the process. 

Economic Statistics 

Non-Farm payrolls declined by 63,000 jobs in February 2008, the biggest decline since March 2003.

Home foreclosures in the 4^th quarter of 2007 were the highest recorded by the Mortgage Bankers Association.

Additionally, the mortgage delinquency rate was the highest since 1985, indicating more foreclosures are on the horizon with no slowdown in sight.

SERVICERS BEWARE 

of the Newest Gimmick Geared Against You  

Unfortunately, no matter how bad things get, there is always someone ready to capitalize on it.  The newest form of that is a company called You Walk Away, LLC.  For $995, they are promising to stop creditor calls, ensure that the foreclosure is filed correctly and is valid, fix the borrowers credit to remove the foreclosure and provide them with updates on the total number of days they can continue to live in the house before eviction would take place. 

Edna Juarez and Theresa Burton
Strategic Asset Solutions

In This Issue

The Market

Firefighting

Freddie Mac CEO Says

California Watch

Creative Solutions

Economic Statistics

Servicers Beware

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