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The Bank Bailout's Side Effect: Rising Mortgage Costs & Stocks end back-and-forth session mixed
The Bank Bailout's Side Effect: Rising Mortgage Costs
The government's effort to boost bank lending to end the credit crisis is hurting one of the areas critical to the nation's recovery: mortgage rates. In the past week, the average mortgage rate on a 30-year fixed home loan has jumped more than one half a percentage point to 6.74%, according to Bankrate.com. That might not sound like much, but it is the biggest one-week rise in the normally stable lending rate in 21 years. Some economists say mortgage rates could soon top 7%, a level they have not seen in more than six years.
"Certainly the moves the administration have made so far are not directly attacking the financial issues that affect American homeowners," says John Vogel, a finance professor at Dartmouth's Tuck School of Business. "We need to refinance million of homeowners into affordable mortgages, and if rates go up that makes that job just much harder to do."
Rising mortgage rates could also put downward pressure on housing prices, which have already dropped 20% since their peak in July of 2006, according to the S&P/Case-Shiller Home Price index. The increase in mortgage rates means that the average borrower will pay $1,296 a month in mortgage payment for a $200,000 loan. That's $100 more a month, and $1,200 more a year, than the same loan would have cost them a few weeks ago. For buyers on a budget, that means they can afford less house for the same amount of money. Conversely, sellers would have to drop their prices to attract that same buyer.
What's more, a new "Adverse Market Fee" recently instituted by lenders for borrowers with less than perfect credit (regardless of the market) could raise the cost of a loan another half a percentage point - or an additional $70 a month on that same $200,000 loan - for nearly 20% of Americans. "For individuals looking to buy a home this is going to be just one more obstacle in their way," says Barry Ziggus, who tracks housing issues for the Consumer Federation of America.
The story is worse for people in areas of the country, such as Scottsdale, AZ, or Glen Ellyn in suburban Chicago, where even modest houses can be in the $500,000 range. A $600,000 mortgage will now cost $4,319 a month, or nearly $500 more a month, and $6,000 more a year, than it did six months ago.
Last month, when the government took control of mortgage giants Fannie Mae and Freddie Mac and pledged to inject $200 billion in capital into the home loan guarantors, administration officials said the moves would make it easier and cheaper for people to get home loans. Unfortunately, it hasn't worked that way. Mortgage rates fell sharply after the move, but soon reversed quickly, and are now higher than they were before the Fannie/Freddie rescue plan was launched.
The problem is that other moves the government has made to render bank debt safer has had the unintended consequence of making Fannie and Freddie's bonds less safe by comparison. So Fannie and Freddie's investors have to be compensated for the increased risk. In particular, traders say, the move in the past week by the Federal Deposit Insurance Corp. to temporary offer unlimited deposit insurance for non-interest bearing accounts and guarantee roughly $1.4 trillion in new unsecured bank debt has caused a rush of selling of the bonds of Fannie and Freddie. That's because the FDIC's move makes bank debt more attractive at a time when traders are looking for safety. Sheila Bair, the head of the FDIC, was initially against backing this new bank debt, but eventually went along with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.
Lower prices (and thus higher interest rates) for Fannie and Freddie bonds make it more expensive for the government mortgage guarantors to borrow, and that means that Fannie and Freddie have less money to purchase home loans. Which means a lower supply of capital available for mortgage issuers. The result is higher mortgage rates for the average American. The higher mortgage rates have left some people wondering just what the government can do next. "Just what would you do differently," says John Weicher, a director at the Hudson Institute and a former assistant security at the U.S. Department of Housing and Urban Development. "I'm inclined to believe that the efforts we have made to help homeowners have been successful, they just haven't been enough."
Stocks end back-and-forth session mixed
NEW YORK – Wall Street ended a tumultuous two-week run relatively quietly Friday, finishing another back-and-forth session mixed as investors were cheered by signs of easing in the credit markets and managed to absorb lackluster economic news with equanimity. But while there was less volatility than during recent sessions, analysts warned that the market still faces rough times.
The expiration of options contracts helped tug stocks in different directions. Still, the Dow Jones industrial average traded within a narrower range than it had in much of the past two weeks and ended down 127. The market's big rallies on Monday and Thursday gave all the major indexes gains of well over 3 percent for the week — but that was just a partial recovery from the devastating double-digit drops of the previous week.
"The stock market has finally realized one thing — that the governments around the world have thrown in a lot of money and they're using all the tools that they possibly can" to restore order to the credit markets, said Peter Cardillo, chief market economist at Avalon Partners Inc., a New York brokerage house. "I'm sure we'll still have a strong bear grip to the market but I do believe the market was way oversold. I do believe we've made a bottom."
In recoveries from past market plunges, trading has remained volatile even after the major indexes reached their lows, so it is widely expected that Wall Street will ratchet higher and lower for some time. And, it is not yet clear that the market has actually touched bottom.
Cardillo said economic data are likely to remain bleak but that market has already taken into account much of the economy's problems. Some of this week's heavy selling came in response to disappointing economic reports.
"Everything is ugly. It's going to stay this way for a while," Cardillo said.
The market spent the first half of Friday's session moving between gains and losses after the government said new home construction dropped by more than expected last month to the lowest pace since early 1991. Investors' mood seemed to pick up later in the session as lending rates for bank-to-bank loans edged lower, indicating that some bank fears about not being repaid by borrowers are easing. Demand for safe-haven investments like Treasury bills also decreased. The final hour of trading again proved pivotal as in much of October; stocks fluctuated as investors squared away positions for the week.
Given the magnitude of most of the market's moves in October, the indexes' moderate declines Friday seemed barely noteworthy. And advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 1.74 billion shares.
The loosening of credit markets — which follows a series of moves by governments around the world — appeared to draw most of investors' attention. The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.41 percent from 4.50 percent on Thursday, the fifth consecutive day of declines.
Demand remains high for Treasury bills, regarded as the safest assets around, an indication that there is uncertainty lingering in the markets. The three-month Treasury bill Friday yielded 0.81 percent, up from 0.47 percent on Thursday. That indicates a let-up in demand, though the yield has not surpassed 1 percent in more than a week.
"I think we're beginning to get a slightly better feeling in the credit market," said Cardillo, pointing to the move in Libor.
It was an erratic week on Wall Street, with the Dow soaring 936 points on Monday, slipping moderately Tuesday, sinking 733 points Wednesday, and then rallying 401 Thursday. The volatility is not providing investors with much relief, but it is a welcome change from last week's relentless plunge, during which the Dow logged its worst week ever and Wall Street lost about $2.4 trillion in shareholder wealth.
The Dow fell 127.04, or 1.41 percent, Friday to 8,852.22, after falling 261 points in the early going and rising 302 points — a 563-point range.
Broader stock indicators showed more modest declines. The Standard & Poor's 500 index fell 5.88, or 0.62 percent, to 940.55, while the Nasdaq composite index fell 6.42, or 0.37 percent, to 1,711.29.
For the week, the Dow rose 4.75 percent, the S&P 500 added 4.6 percent, while the Nasdaq rose 3.75 percent. But the gains follow the previous week's huge losses, when the Dow dropped 18.2 percent, the S&P 500 fell 15.3 percent and the Nasdaq lost 15.3 percent.
The dollar was mixed against other major currencies, while gold prices fell.
David Dietze, president at Point View Financial Services Inc. in Summit, N.J., contends that much of the market's whipsaw moves in the past month have come as hedge funds and mutual funds were forced to sell positions because some shareholders were cashing out.
"These hedge funds are getting hit by redemptions, their credit lines are being pulled and they are having to sell furiously," he said. "Selling begets selling, which begets selling, which begets more selling."
While Dietze sees risks for the economy, he questions whether the rapidity of the stock market's retreat signals the pullback was overdone.
"We have a credit crunch which is morphing into a general recession and certainly a lot of the economic data points down but still, to come in this week and see the markets down 20 percent — basically a bear market within a bear market just this month — you wonder if there isn't just this massive overreaction," he said.
A rise in oil prices helped energy companies, some of which had weighed on the market earlier in the week as oil showed steep declines. Light, sweet crude rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange. On Thursday, it sank to a 14-month low on worries about a deep global recession obliterating fuel demand.
Chesapeake Energy Corp. rose $2.12, or 11.6 percent, to $20.47, while XTO Energy Inc. rose $2.08, or 7 percent, to $31.68.
Late Thursday, Google Inc. posted a 26 percent increase in third-quarter profit. Google rose $19.52, or 5.5 percent, to $372.54; early Thursday, the Internet company's stock had fallen to a three-year low.
Economic readings that appeared to trouble the market early in the session seemed to lose their importance as investors looked to improvement in the credit markets.
The Commerce Department reported that housing starts fell more than 6 percent in September to an annual rate of 817,000 units. The figure is lower than the 880,000 units forecast by Wall Street economists surveyed by Thomson/IFR. Building permits also sank.
The report was yet another piece of evidence that the nation is struggling with a weak economy that, if the financial crisis is not solved, could weaken. President Bush on Friday said in a speech that the credit market — where many companies find funding for their operations — will take a while to thaw, but that Americans should be confident that it will.
The Russell 2000 index of smaller companies fell 10.14, or 1.89 percent, to 526.43.
Markets overseas were mostly higher Friday. In Asia, Hong Kong's Hang Seng index dropped 4.44 percent to its lowest level in almost three years, but Japan's Nikkei average rose 2.78 percent after a 11.4 percent loss Thursday. In Europe, Britain's FTSE index rose 5.22 percent, Germany's DAX index rose 3.43 percent, and France's CAC-40 rose 4.68 percent.
___
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
The government's effort to boost bank lending to end the credit crisis is hurting one of the areas critical to the nation's recovery: mortgage rates. In the past week, the average mortgage rate on a 30-year fixed home loan has jumped more than one half a percentage point to 6.74%, according to Bankrate.com. That might not sound like much, but it is the biggest one-week rise in the normally stable lending rate in 21 years. Some economists say mortgage rates could soon top 7%, a level they have not seen in more than six years.
"Certainly the moves the administration have made so far are not directly attacking the financial issues that affect American homeowners," says John Vogel, a finance professor at Dartmouth's Tuck School of Business. "We need to refinance million of homeowners into affordable mortgages, and if rates go up that makes that job just much harder to do."
Rising mortgage rates could also put downward pressure on housing prices, which have already dropped 20% since their peak in July of 2006, according to the S&P/Case-Shiller Home Price index. The increase in mortgage rates means that the average borrower will pay $1,296 a month in mortgage payment for a $200,000 loan. That's $100 more a month, and $1,200 more a year, than the same loan would have cost them a few weeks ago. For buyers on a budget, that means they can afford less house for the same amount of money. Conversely, sellers would have to drop their prices to attract that same buyer.
What's more, a new "Adverse Market Fee" recently instituted by lenders for borrowers with less than perfect credit (regardless of the market) could raise the cost of a loan another half a percentage point - or an additional $70 a month on that same $200,000 loan - for nearly 20% of Americans. "For individuals looking to buy a home this is going to be just one more obstacle in their way," says Barry Ziggus, who tracks housing issues for the Consumer Federation of America.
The story is worse for people in areas of the country, such as Scottsdale, AZ, or Glen Ellyn in suburban Chicago, where even modest houses can be in the $500,000 range. A $600,000 mortgage will now cost $4,319 a month, or nearly $500 more a month, and $6,000 more a year, than it did six months ago.
Last month, when the government took control of mortgage giants Fannie Mae and Freddie Mac and pledged to inject $200 billion in capital into the home loan guarantors, administration officials said the moves would make it easier and cheaper for people to get home loans. Unfortunately, it hasn't worked that way. Mortgage rates fell sharply after the move, but soon reversed quickly, and are now higher than they were before the Fannie/Freddie rescue plan was launched.
The problem is that other moves the government has made to render bank debt safer has had the unintended consequence of making Fannie and Freddie's bonds less safe by comparison. So Fannie and Freddie's investors have to be compensated for the increased risk. In particular, traders say, the move in the past week by the Federal Deposit Insurance Corp. to temporary offer unlimited deposit insurance for non-interest bearing accounts and guarantee roughly $1.4 trillion in new unsecured bank debt has caused a rush of selling of the bonds of Fannie and Freddie. That's because the FDIC's move makes bank debt more attractive at a time when traders are looking for safety. Sheila Bair, the head of the FDIC, was initially against backing this new bank debt, but eventually went along with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.
Lower prices (and thus higher interest rates) for Fannie and Freddie bonds make it more expensive for the government mortgage guarantors to borrow, and that means that Fannie and Freddie have less money to purchase home loans. Which means a lower supply of capital available for mortgage issuers. The result is higher mortgage rates for the average American. The higher mortgage rates have left some people wondering just what the government can do next. "Just what would you do differently," says John Weicher, a director at the Hudson Institute and a former assistant security at the U.S. Department of Housing and Urban Development. "I'm inclined to believe that the efforts we have made to help homeowners have been successful, they just haven't been enough."
Stocks end back-and-forth session mixed
NEW YORK – Wall Street ended a tumultuous two-week run relatively quietly Friday, finishing another back-and-forth session mixed as investors were cheered by signs of easing in the credit markets and managed to absorb lackluster economic news with equanimity. But while there was less volatility than during recent sessions, analysts warned that the market still faces rough times.
The expiration of options contracts helped tug stocks in different directions. Still, the Dow Jones industrial average traded within a narrower range than it had in much of the past two weeks and ended down 127. The market's big rallies on Monday and Thursday gave all the major indexes gains of well over 3 percent for the week — but that was just a partial recovery from the devastating double-digit drops of the previous week.
"The stock market has finally realized one thing — that the governments around the world have thrown in a lot of money and they're using all the tools that they possibly can" to restore order to the credit markets, said Peter Cardillo, chief market economist at Avalon Partners Inc., a New York brokerage house. "I'm sure we'll still have a strong bear grip to the market but I do believe the market was way oversold. I do believe we've made a bottom."
In recoveries from past market plunges, trading has remained volatile even after the major indexes reached their lows, so it is widely expected that Wall Street will ratchet higher and lower for some time. And, it is not yet clear that the market has actually touched bottom.
Cardillo said economic data are likely to remain bleak but that market has already taken into account much of the economy's problems. Some of this week's heavy selling came in response to disappointing economic reports.
"Everything is ugly. It's going to stay this way for a while," Cardillo said.
The market spent the first half of Friday's session moving between gains and losses after the government said new home construction dropped by more than expected last month to the lowest pace since early 1991. Investors' mood seemed to pick up later in the session as lending rates for bank-to-bank loans edged lower, indicating that some bank fears about not being repaid by borrowers are easing. Demand for safe-haven investments like Treasury bills also decreased. The final hour of trading again proved pivotal as in much of October; stocks fluctuated as investors squared away positions for the week.
Given the magnitude of most of the market's moves in October, the indexes' moderate declines Friday seemed barely noteworthy. And advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 1.74 billion shares.
The loosening of credit markets — which follows a series of moves by governments around the world — appeared to draw most of investors' attention. The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.41 percent from 4.50 percent on Thursday, the fifth consecutive day of declines.
Demand remains high for Treasury bills, regarded as the safest assets around, an indication that there is uncertainty lingering in the markets. The three-month Treasury bill Friday yielded 0.81 percent, up from 0.47 percent on Thursday. That indicates a let-up in demand, though the yield has not surpassed 1 percent in more than a week.
"I think we're beginning to get a slightly better feeling in the credit market," said Cardillo, pointing to the move in Libor.
It was an erratic week on Wall Street, with the Dow soaring 936 points on Monday, slipping moderately Tuesday, sinking 733 points Wednesday, and then rallying 401 Thursday. The volatility is not providing investors with much relief, but it is a welcome change from last week's relentless plunge, during which the Dow logged its worst week ever and Wall Street lost about $2.4 trillion in shareholder wealth.
The Dow fell 127.04, or 1.41 percent, Friday to 8,852.22, after falling 261 points in the early going and rising 302 points — a 563-point range.
Broader stock indicators showed more modest declines. The Standard & Poor's 500 index fell 5.88, or 0.62 percent, to 940.55, while the Nasdaq composite index fell 6.42, or 0.37 percent, to 1,711.29.
For the week, the Dow rose 4.75 percent, the S&P 500 added 4.6 percent, while the Nasdaq rose 3.75 percent. But the gains follow the previous week's huge losses, when the Dow dropped 18.2 percent, the S&P 500 fell 15.3 percent and the Nasdaq lost 15.3 percent.
The dollar was mixed against other major currencies, while gold prices fell.
David Dietze, president at Point View Financial Services Inc. in Summit, N.J., contends that much of the market's whipsaw moves in the past month have come as hedge funds and mutual funds were forced to sell positions because some shareholders were cashing out.
"These hedge funds are getting hit by redemptions, their credit lines are being pulled and they are having to sell furiously," he said. "Selling begets selling, which begets selling, which begets more selling."
While Dietze sees risks for the economy, he questions whether the rapidity of the stock market's retreat signals the pullback was overdone.
"We have a credit crunch which is morphing into a general recession and certainly a lot of the economic data points down but still, to come in this week and see the markets down 20 percent — basically a bear market within a bear market just this month — you wonder if there isn't just this massive overreaction," he said.
A rise in oil prices helped energy companies, some of which had weighed on the market earlier in the week as oil showed steep declines. Light, sweet crude rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange. On Thursday, it sank to a 14-month low on worries about a deep global recession obliterating fuel demand.
Chesapeake Energy Corp. rose $2.12, or 11.6 percent, to $20.47, while XTO Energy Inc. rose $2.08, or 7 percent, to $31.68.
Late Thursday, Google Inc. posted a 26 percent increase in third-quarter profit. Google rose $19.52, or 5.5 percent, to $372.54; early Thursday, the Internet company's stock had fallen to a three-year low.
Economic readings that appeared to trouble the market early in the session seemed to lose their importance as investors looked to improvement in the credit markets.
The Commerce Department reported that housing starts fell more than 6 percent in September to an annual rate of 817,000 units. The figure is lower than the 880,000 units forecast by Wall Street economists surveyed by Thomson/IFR. Building permits also sank.
The report was yet another piece of evidence that the nation is struggling with a weak economy that, if the financial crisis is not solved, could weaken. President Bush on Friday said in a speech that the credit market — where many companies find funding for their operations — will take a while to thaw, but that Americans should be confident that it will.
The Russell 2000 index of smaller companies fell 10.14, or 1.89 percent, to 526.43.
Markets overseas were mostly higher Friday. In Asia, Hong Kong's Hang Seng index dropped 4.44 percent to its lowest level in almost three years, but Japan's Nikkei average rose 2.78 percent after a 11.4 percent loss Thursday. In Europe, Britain's FTSE index rose 5.22 percent, Germany's DAX index rose 3.43 percent, and France's CAC-40 rose 4.68 percent.
___
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
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