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Fed says economic recovery likely to be more modest in near-term
Fed to keep constant holdings of securities at current level
Fed expects exceptionally low funds rate for extended period
Fed announcement cuts market losses
Fed to buy long-term Treasury debt, keeps target rate unchanged
Tags: Fed says economic recovery likely to be more modest in near-term
There is a Fed rate announcement at 2:15pm ET on Tuesday
10 August 2010. On the previous Fed Day the FOMC
kept the rates in the 0% to 0.25% range.
Fed expected to downgrade US growth outlook
The Federal Reserve’s interest rate-setting panel will meet Tuesday, under pressure to bolster a weak economic recovery that many fear is grinding to a halt.
The 10-member body is expected to downgrade its assessment of the health of the world’s largest economy, as it keeps interest rates at historic lows.
The Fed’s policies have come under the microscope in recent months, as investors asked whether the central bank was overly rosy in its previous assessments, calling its credibility into question.
In June, the Fed said the economic recovery was “proceeding” despite headwinds and would remain “moderate for a time.”
That language — which is eagerly watched by investors — may now be revised to reflect a dramatic slowdown in the pace of the recovery.
“It will be hard to take the Fed seriously if a more forthright acceptance of the array of softer data is not forthcoming,” said Ian Shepherdson of High Frequency Economics.
The scale of the slowdown was laid bare last week, when the Labor Department reported 131,000 jobs were lost in July, far more than expected.
On Monday, researchers at the San Francisco regional Fed ditched the ordinarily couched language of central bankers to warn a double dip recession was possible.
“A recessionary relapse is a significant possibility sometime in the next two years,” researchers Travis Berge and Oscar Jorda wrote, adding that “the policies that are adopted today could play a decisive role in shaping the pace of growth.”
Fed watchers will be looking for any hint of a change in those polices Tuesday, specifically a return to stimulus spending that marked the depths of the recession.
The bank battled the financial crisis by spending more than one trillion dollars, buying up Treasury bonds, mortgage-backed securities and other financial instruments to lubricate markets.
The Federal Reserve may take a tiny step in that direction by reinvesting cash from maturing bonds rather than shrinking its portfolio.
Analysts say that could mean spending anywhere between 100-300 billion dollars over the next year.
“The FOMC faces a tough meeting tomorrow with the market pricing in either a significant change to the statement or, indeed, renewed moves to stimulate the economy, such as re-investing maturing coupons on bond holdings,” said UBS analysts in a note to clients.
But some market-watchers doubt the Fed will take such drastic action without a more explicit threat to the recovery.
“Other than implicitly marking down its near term growth outlook, we expect the tone of the FOMC to not be substantially different than June,” said Joseph LaVorgna, chief US economist at Deutsche Bank.
“We do not expect the Fed to symbolically announce that it plans to reinvest maturing mortgage backed securities back into the market.
LaVorgna indicated even a modest shift in policy such as altering the interest paid on banks’ excess reserves held at the Fed could upset fragile markets.
“We do not expect the Fed to cut the interest on reserves either, as that would wreak havoc.”
Most analysts expect the Fed to ply a middle course, setting out what it will do if things get worse.
“The committee is likely to define what can be done in terms of monetary policy, if the macroeconomic situation were to worsen in the near future,” said Thomas Julien of Natixis.
Tags: Fed expected to downgrade US growth outlook, Fed rate announcement at 2:15pm ET on Tuesday 081010
VIX Index Trading
Overall volume in the index market was light Monday, but the CBOE Volatility Index (.VIX) saw a bit more volume than usual. The volatility index edged up .40 to 22.14 in cautious trading ahead of an interest rate announcement from the Federal Reserve tomorrow afternoon.
In VIX options, the top trades of the day included a combination where an investor apparently bought 13,230 October 30 calls at $3.30 and sold 13,230 October 30 puts at $4.10.
This combo creates a bearish position similar to holding a short position in VIX futures. About 184,000 VIX calls and 111,000 VIX puts traded total, or nearly double the recent average daily volume.
Tags: Federal Reserve announcement, rate change, VIX Index Trading
U.S. Regulators Close Five More Banks
* EverBank
* Bank of Florida
* Granite Community Bank
* City National Bank
* Sun West Bank
The U.S. state and federal regulators have shut down five banks in Florida, California and Nevada, The Wall Street Journal reports. The closure has brought the nationwide total of failed institutions until May 2010 to 78.
EverBank of Jacksonville will buy the banking operations of the three units of Bank of Florida, including a combined $1.32 billion in deposits. The regulators have also seized California-based Granite Community Bank, which will be taken over by Tri Counties Bank. The Los Angeles-based City National Bank will acquire the Sun West Bank, which has $353.9 million in deposits.
What you need to know about credit card reform
The new credit card regulations are finally here. Starting Monday, Feb. 22, 2010, banks will need to abide a spate of new rules on terms and disclosures. The idea behind the landmark law was to prevent banks from using unfair practices that dig borrowers deeper into debt.
The new credit card law is finally here. Starting Monday, banks will need to abide by new regulations on terms and disclosures. The idea behind the landmark law was to prevent banks from using practices that often dug borrowers deeper into debt.
A look at how the credit card law affects key aspects of your account.
INTEREST RATES
THEN: Banks could raise the interest rate on an account at any time, including the rate on an existing balances, even if you weren’t late on payments.
NOW: The rate cannot be raised in the first year after an account is opened unless an introductory rate has come to an end. After that, cardholders must be notified 45 days in advance of any rate change.
For existing balances, rates can’t be raised unless the account is at least 60 days past due. If payments are made on time for six consecutive months, the original rate must be restored.
There’s still no cap on rates.
DISCLOSURES
THEN: The fine print on cardholder agreements was often difficult to understand. Rates, fees and penalties for other services such as cash advances, for example, could be hard to find. The impact of the interest rate on paying down a balance was hard to compute.
NOW: Cardholders will see how many months it will take to pay off a balance if only minimum payments are made. Statements will also indicate how much needs to be paid each month to pay off a balance within three years.
SERVICE FEES
THEN: Banks could charge as much as they wanted. They could assess annual fees, activation fees and other fees. This was mostly a problem for subprime cards marketed to those with poor credit scores. One popular card, for example, the Premier Bankcard, charged $256 in first-year fees for a $250 credit line.
NOW: Service fees, such as activation and annual fees, will be capped at 25 percent of the credit limit during the first year of use. After that, there is no cap.
GRACE PERIODS
THEN: Some card companies sent out statements not long before payments were due, and sometimes shifted payment due dates from month to month, meaning that payments would not always have enough time to arrive and get processed before being deemed late. As a result, some cardholders ended up getting charged interest or late fees even when they thought they were sending in payments on time.
NOW: The law requires that due dates remain consistent. Statements must be sent out 21 days before the payment due date, and finance charges and fees cannot be applied before that period is up. In practice, about half of card issuers have extended grace periods to as long as 25 days.
OVER-THE-LIMIT FEES
THEN: Banks set credit limits, then routinely allowed charges to exceed those limits. When that happened, though, the customer was charged an over-the-limit fee as high as $39. These fees were often triggered by interest charges or late-payment fees that pushed a balance over the credit limit. What’s more, multiple over-the-limit fees could get charged in a single billing cycle if the balance was paid down and another charge pushed the balance back over the limit.
NOW: The cardholder must specifically agree to permit transactions that exceed the credit limit. Only then can over-the-limit fees be charged. But the fees can’t be triggered by other fees or interest charges. Only one over-the-limit fee may be imposed during a billing cycle. No over-the-limit fees may be charged unless the cardholder has specifically agreed to permit transactions exceeding their authorized credit limit. These fees can no longer be triggered by other fees or interest charges imposed by the card issuer, and only one such fee may be imposed during a billing cycle.
In practice, several of the largest card companies have dropped these fees. Some banks are using pop-up boxes on their Web sites or other methods to obtain consumer authorization.
UNIVERSAL DEFAULT
THEN: If you made a late payment on one credit card or loan, or even late payments for obligations like utility bills, that could trigger interest rate hikes on other credit card accounts.
NOW: Card companies cannot raise interest rates on existing credit card balances. Interest rates can’t rise during the first year an account is open, unless the original agreement spelled out a promotional rate for a limited time.
Consumers with older accounts must be informed of any interest rate increase on new charges at least 45 days in advance. They must also be given a chance to opt out of the hike by canceling the account and paying down the balance at the old interest rate. If an interest rate is increased, the card company must review the account once every six months to assess whether the rate should be dropped.
STUDENTS
THEN: Students arriving on college campuses often confronted a gantlet of credit card marketers handing out T-shirts, pizza and other gifts in exchange for filling out card applications. Credit cards were frequently handed out without checking the applicant’s income sources. In 2008, 84 percent of undergraduates had at least one credit card. Average balances topped $3,100.
NOW: Credit cards may no longer be issued to anyone under age 21, unless the applicant has a co-signer, or can show independent means to repay the debt. Colleges must disclose any marketing deals they make with credit card companies. Banks are not allowed to hand out gifts on or near campuses or at college-related events.
Tags: credit card, credit card regulations, What you need to know about credit card reform
The recession is over this could be the time to be cautious
History shows that an economic recovery could be a signal to tread carefully. We look at defensive areas to shelter your savings
The economy grew by 0.1% in the final three months of last year — the first positive change for six consecutive quarters— marking the end of its longest continuous slide in the post-war period.
However, the rise was far less than the 0.4% analysts had expected, leading some to say that the economy could suffer a double dip, with growth falling back again this year. Others expect the figures to be revised up in the near future.
Reflecting the uncertainty, star fund manager Anthony Bolton, president of Fidelity International, has warned we could be in the midst of this bull market’s first serious setback: the FTSE 100 has fallen 3% to 5,189 since the start of the year.
“Markets are worrying less about the recovery and more about what happens after that,” Bolton said at a seminar last week organised by Saunderson House, the wealth manager. “What we are seeing now could be the first major consolidation phase [price falls] for this bull market.”
Meanwhile, research from Morgan Stanley, the investment bank, found that shares declined by an average 23% in the 12 months following a peak in economic indicators — the smallest fall was 12% in 1999 and the largest was 36% in 1987.
It thinks the OECD’s economic indicators for the UK, currently at their highest level since 1987, are likely to peak soon — bad news for share prices.
Graham Secker, analyst at the bank, said: “The FTSE All-Share has risen only once in the 12 months after a peak in economic indicators and that was from October 1999 to October 2000, when markets were in the grip of the tech bubble.”
So for the time being, how you select sectors and shares for investment is crucial.
Mark Barnett, who manages the Invesco Perpetual UK Strategic Income fund, said: “We are already seeing a stock market correction. Following strong rises last year, we are now anticipating quite a setback. It was not a normal recession and, therefore, we will not get normal recovery.”
We look at defensive areas to shelter your savings while you ride out the turbulence.
RISING DIVIDENDS
Most of the big cuts to dividends from UK shares have already taken place, said Ted Scott at F&C, the fund manager, so it ought now to be safe to get back in and start investing for income.
The added benefit here is that some firms will have good scope to increase dividends as the economy gradually recovers, whereas income from gilts and corporate bonds is fixed.
Furthermore, defensive stocks in sectors such as utilities, tobacco, pharmaceuticals, telecoms and support services, which traditionally show strong dividend growth, are still cheap.
“These are the steady growth areas where company shares usually trade at a premium to the rest of the market but they are now at a discount,” said Barnett. “This is a very good opportunity.”
Ben Yearsley at Hargreaves Lansdown, the adviser, said: “In tough times, defensives give you a predictable income as people can’t stop using gas, electricity and water.”
For investors who do not wish to select stocks themselves, an equity income fund can be a good way to tap into these stocks. Most investment funds levy an annual management charge of about 1.5% and an initial charge of about 5%. However, many advisers and fund brokers will refund initial charges to investors.
Yearsley and Martin Bamford at Informed Choice, another adviser, recommend Invesco’s Income and High Income funds, managed by Neil Woodford, which have produced consistent longer term returns.
PHARMACEUTICALS AND HEALTHCARE
These sectors are good examples of defensive areas that were left behind by last year’s rally: the sector is up only 1% in the past 12 months, against nearly 30% for the All-Share. Glaxo Smith Kline, for example, is trading on an all-time low price-to-earnings (p/e) ratio of just under 10. This means its share price is just 10 times earnings. It has a dividend yield of 5.2% and this is expected to grow at 7% or 8% a year. “It is about as cheap as it has ever been,” said Barnett.
Scott added that if the US dollar rallied against the pound this year, as expected, this would translate into higher earnings for companies in the pharmaceuticals arena that make a high proportion of their earnings in America.
For those who prefer to use a pooled fund to invest in shares, Rob Burgeman at Brewin Dolphin, the broker, recommends the Finsbury Worldwide Pharmaceuticals or Biotech Growth trusts. Yearsley likes the Framlington Health fund.
UTILITIES
This is another area where consumers have no choice but to continue spending, but it has not yet benefited from last year’s stock market bounce: it is up only 5.7% over the past 12 months compared with 28.4% for the FTSE All-Share.
“The dividend yields in this sector are, frankly, too good to resist, and these are the companies that have grown dividends the most over the past 10 years,” said Barnett.
United Utilities and National Grid, for example, yield more than 6%, and Scottish & Southern 6.2%. National Grid, in particular, has a strong exposure to huge infrastructure developments in Britain and America, where ageing pipes are being replaced.
Burgeman recommends HSBC’s Infrastructure fund or 3i Infrastructure for investors looking to tap into these sorts of opportunities.
Oil companies also have good dividend yields, said Scott, with BP and Shell yielding about 6%. “These levels are very attractive in this environment, particularly as savers are looking for more income and the more defensive stocks are still quite cheap,” he said.
TECHNOLOGY AND TELECOMS
The tech sector has always outperformed the market in the 12 months after a peak in the economy, with an average gain of 14.7%, according to the research by Morgan Stanley.
As we approach the 10th anniversary of the collapse in technology stocks, some advisers are again recommending the sector.
Yearsley said: “A lot of companies are trying to make themselves more efficient and technology is a good way to do that. If you are a software provider, you also tend to have low overheads.” He recommends the GLG Technology fund.
However, Bamford said some tech firms might continue to struggle in the credit crunch. “If they find it hard to get hold of the cash they need to grow, that could hold them back,” he said. “I would say this sector should be regarded as quite adventurous and risky.”
Telecoms companies, on the other hand, are performing well, with BT and Vodafone yielding 6% to 7%, said Scott.
SELECTIVE ON CONSUMER STOCKS
Retailers are among the worst performers in the 12 months following a peak in the economy, falling by an average 10.8%, according to Morgan Stanley. Construction stocks and insurers also do badly, with falls of 11.8% and 7.4% respectively.
However, Secker at Morgan Stanley would not abandon consumer stocks entirely. “We would caution against getting too bearish on the UK and would not necessarily exclude all stocks sensitive to the economy from a portfolio,” he said.
For investors who may want to increase their holdings in the UK, he would recommend Barratt Developments, the housebuilder; ITV; and JD Wetherspoon and Whitbread, the leisure companies.
FINANCE CHECK
Consumers are being urged to take stock of their household finances amid a sluggish return to growth.
Fix your mortgage
Lenders including Santander, Cheltenham & Gloucester and Yorkshire building society cut fixed and tracker mortgages by up to 0.4 percentage points last week.
The best two-year fix fell to 3.29% after Yorkshire cut rates for those with a 40% deposit. The deal has a £1,195 fee, replacing Principality’s at 3.44% with a fee of £999.
The best five-year deal is unchanged — HSBC at 4.73% with a fee of £999. The best lifetime tracker is also from HSBC at 2.49% with a £999 fee.
Last week’s economic data supported the view that interest rates could remain on hold until the autumn, but even then borrowers with all but the biggest deposits would be better off fixing, according to Aaron Strutt of Trinity Financial Group, a broker.
Find a holiday money window
Following Tuesday’s data, sterling fell against the euro and the dollar but soon rebounded to €1.15. It closed unchanged against the dollar over the week at $1.61.
Sterling has risen steadily against the euro and is back at levels not seen since August 2009. Holidaymakers hoping to pick the right time to convert their pounds to euros should do so ahead of the election, which could hit sterling again.
Pay down your debts
Credit card and loan providers are making their offers more attractive to lure consumers, but be careful of taking on more debt. Business groups say pay freezes are likely for another year, while unemployment is widely expected to rise.
Don’t bank on property
House prices rose 1.2% in January, according to Nationwide, but experts do not expect the rally to continue, with some predicting that values could fall another 10%.
Tags: The recession is over this could be the time to be cautious
January effect
From Wikipedia, the free encyclopedia
The January Effect is a calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases.
Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.
This type of pattern in price behavior on the financial market supports the fact that financial markets are not fully efficient.
The January Effect was first observed in the early 1980s by Donald Keim who, at the time, was a graduate student at the University of Chicago. It is the observed phenomenon that since 1925, small stocks have outperformed the broader market in the month of January, with most of the disparity occurring before the middle of the month.
The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. The January effect does not always materialize; for example, small stocks underperformed large stocks in January 1982, 1987, 1989, 1990, and 2008.
U.S. stocks finished January 2010 on a negative note, with all three major indices posting their worst monthly performance since February 2009.
What follows is a summary of this week’s statistics on the markets.
January 2010 Performance
The Dow finished down -360.72 or -3.46% for the month, its worst monthly percent drop since 2/2009 when it fell -11.7%, and its worst January since 2009
The S&P finished down -41.23 or -3.70% for the month, its worst monthly percent drop since 2/2009 when it fell -10.9%, and its worst January since 2009
The NASDAQ finished down -121.80 or -5.37% for the month, its worst monthly percent drop since 2/2009 when it fell -6.7%, and its worst January since 2009
Since the Peak
The Dow is off by -4,097.20 or -28.93% from the market peak on October 9, 2007 of 14,164.53
The S&P is off -491.28 or -31.39% from the market peak on October 9, 2007 of 1,565.15
The NASDAQ is off -711.77 or -24.89% from its 6-year + high reached on October 31, 2007 of 2,859.12
Since the Bottom
Since the March lows, the NASDAQ is leading the way with a gain of 69.27%, followed by the S&P and Dow +58.73%, and +53.77%, respectively.
Tags: January effect, US Stock market January 2010 performance results
1913 Nickel Sells for $5 Million
1913 Liberty Nickle 5 million dollars
Some may call this unnamed collector crazy for spending a cool one hundred million times the face value of a 1913 nickel. Others envy the ability to drop $5 million on a single purchase that you can’t live in. Whatever your opinion may be, for numismatists, the 1913 Liberty Nickel is one of the most highly sought after and prized coins in United States history.
You have to wonder what the collector is going to do with it. One would assume they’ll want to admire it in their own hands, but they’ll have to be awfully careful with it. Imagine the frustration of accidentally flushing it down the toilet or having it slip through a hole in their pocket. It’s not the kind of thing you can replace you know.
Concerns for its well being aside.
An unnamed California collector has paid $5 million for the Eliasberg specimen 1913 Liberty Head nickel, a record price for the coin and the second highest price ever paid for any rare coin.
“The new owner is a long-time Southern California resident and a dedicated collector of historic United States rare coins,†said Santa Barbara coin and jewelry merchant, Ronald J. Gillio, who negotiated the sale between the collector and the sellers, Legend Numismatics of Lincroft, New Jersey and Washington state business executive, Bruce Morelan.
Legend and Morelan jointly purchased the coin from New Hampshire dealer, Ed Lee, in May 2005 for a then-record price of $4,150,000. It is graded Proof-66 by Professional Coin Grading Service, and is the finest of the five known 1913 Liberty Head nickels.
Gillio said he talked with the collector about the coin for over three months.
“We spoke many times in recent months about the coin’s legendary numismatic status, and he agreed to purchase it for $5 million,” explained Gillio who recently was named Numismatic Acquisition Coordinator for Spectrum Numismatics International and Bowers and Merena Auctions, and continues his role for Collectors Universe as General Chairman of the Long Beach and Santa Clara Coin, Stamp & Collectibles Expos.
The unnamed collector took possession of the coin at an undisclosed Southern California location on Wednesday, April 25.
In 1913 the United States Mint introduced a new design for nickels depicting a Native American Indian on the front and a bison on the back. However, some nickels were struck dated 1913 using the previous year’s design of a symbolic “Miss Liberty.”
Only five 1913 Liberty Head nickels are known today. Two are in permanent museum collections at The Smithsonian in Washington, DC and the American Numismatic Association Money Museum in Colorado Springs, Colorado.
One of the previous owners of this particular 1913 Liberty Head nickel was renowned Baltimore banker, Louis E. Eliasberg Sr., known to collectors for the extensive, one-of-everything collection he assembled before his death in 1976.
“Weâ€re pleased that this coin now is in the collection of another devoted numismatist. We hope he enjoys it as much as we did,” said Laura Sperber, a partner in Legend Numismatics.
The worldâ€s record price for any rare coin is $7.59 million paid for a 1933 U.S. $20 denomination Double Eagle gold coin in July 2002.
Nasdaq sets pace for indexes’ 2009 gains, up 44%; S&P rises 23.5%; Dow, 18.8%
Stockshakers are looking to go LONG FRE and FNM
Options are very cheap and thinly traded.
U.S. Ends Cap on Fannie, Freddie Lifeline for 3 Years
The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.
The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.
The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”
Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion lifeline. Treasury Department officials said they didn’t expect the companies to need assistance beyond what is available under the current caps, barring significant deterioration in the economic outlook.
Today’s announcement “should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis,” the Treasury said in a statement in Washington.
Portfolio Size
The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolios of mortgage assets. Previously, the companies were instructed to reduce their portfolios at a rate of 10 percent a year. Now, they will be required to keep the value of their portfolios below a maximum limit, currently $900 billion, that will go down by 10 percent a year.
This means they will not need to take immediate action to trim their holdings and could allow them to rise. Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies.
“Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary,” the Treasury said.
Fed Program
The change in the portfolio limits may ease investor concern that the companies could be forced to shrink their portfolios at the same time that the Federal Reserve ends its $1.25 trillion mortgage-bond purchase program. That could have exacerbated pressure on mortgage rates caused by the end of the Fed program, Laurie Goodman, an analyst in New York at Amherst Securities Group LP, said this month.
The Treasury said today that it is ending its mortgage- backed security purchase program as of Dec. 31, after about $220 billion in purchases. The government also is eliminating a short-term credit facility for the two companies and the Federal Home Loan Banks that was never used.
Also today, the companies disclosed in regulatory filings that Fannie Mae Chief Executive Officer Michael Williams and Freddie Mac CEO Charles Haldeman Jr. are each eligible for compensation of as much as $6 million this year.
Executive Pay
Pay at the mortgage-finance companies, which were seized by the U.S. in September 2008, added to debate over salaries for executives at companies dependent on government bailouts. Compensation must be sufficiently high to “attract and retain” top talent, their regulator, the Federal Housing Finance Agency, said in a statement.
In addition to the CEO pay, 10 additional executives at the two companies are eligible collectively for $30.1 million in compensation for this year. Overall, pay for top executives of the mortgage-finance companies is down 40 percent from before they were seized, the regulator said.
Brian Faith, a Fannie Mae spokesman, and Michael Cosgrove, a Freddie Mac spokesman, declined to comment on the executive compensation and didn’t immediately return messages on the later Treasury announcement.
The Obama administration is still developing its long-term plan for Fannie Mae and Freddie Mac. In today’s statement, the department said it expected to release a preliminary report on the companies as part of the 2011 budget, due in February.
‘Prudent’ Policy
Recent announcements from the companies and the Federal Housing Administration “demonstrate a commitment to prudent housing finance policy that enables a transition to an environment where the private market is able to provide a larger source of mortgage finance,” the Treasury said.
The Treasury and Federal Housing Finance Agency seized control of the mortgage-finance companies almost 16 months ago amid fears the two were at risk of failing. The government- sponsored enterprises, or GSEs, own or guarantee about $5.5 trillion of the $11.7 trillion in U.S. residential mortgage debt.
Officials set up the Treasury lifelines, which were expanded in May, to keep the companies solvent. If the two firms exhaust that backstop, regulators will be required to place them into receivership.
Treasury officials weren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said in an interview last week.
GSE Losses
Washington-based Fannie Mae has lost $120.5 billion over the past nine quarters and McLean, Virginia-based Freddie Mac has recorded $67.9 billion in cumulative losses over the past nine quarters amid a three-year housing slump.
The companies are an integral part of President Barack Obama’s housing-relief plan and have been pushed by the government to help more homeowners renegotiate their mortgages to stay out of foreclosure.
As part of today’s announcements, made ahead of a Dec. 31 expiration of some of the Treasury’s authority, the department said it would delay setting certain fees connected with the assistance program until the end of next year. The Treasury also made technical changes that affect the definition of mortgage assets and other accounting issues.
Tags: call options, fnm, fre, Freddie Lifeline for 3 Years, long, U.S. Ends Cap on Fannie
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