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Archive for the ‘government backed mortgage’ Category

China and US Try to Make Trade Progress to Save Global Economy …

dgriffith401.wordpress.com12/16/11

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” he was quoted as saying by the official Xinhua news …

How The U.S. Is Quickly Becoming A Third World Country (Part 1 …

seekingalpha.com11/22/11

… 3rd world status. Economic data indicate a harsh reality that obviates mainstream political debate. The evidence suggests that, without fundamental reforms, the U.S. will become a post industrial neo-3rd-world country by 2032. … According to the Economic Policy Institute, the U.S. trade deficit with China alone caused a loss of 2.8 million U.S. jobs since 2001. Falling Real Wages and Household Incomes. Workers earning more dollars are actually poorer in terms of …

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Major financial crises have occurred many times in the United States, and the one in 1929 wasn’t the first, and the present one won’t be the last.

The earliest one on record was in 1792, and there were several crises in the 19th century and also in the 1980′s

In short, recession cycles should be understood to be a normal part of living in a world of inexact balances, one in which there is an attempt to balance supply and demand.

The present world-wide economic crisis, which was caused by the United States wasn’t simply a result of unexpectedly large losses in subprime mortgages or because many of those loans were securitized in complex bonds.

In retrospect, it would seem that the major contributor to the collapse, was what are known as repurchase agreements, which are commonly known as repos.

A repo is a form of short-term borrowing for dealers in government securities. The dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day.

For the party selling the security, and agreeing to repurchase it in the future it is a repo, and for the party on the other end of the transaction, the one who is buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.

Repos are classified as a money-market instrument and they are usually used to raise short-term capital and the Fed uses repos to manage the aggregate reserves of the banking system.

The size of the repo market continually varies so it’s impossible to state its actual size, but it’s generally thought to hover around the $10 trillion mark at any given time.

Banks rely heavily on repro loans, and what caused the collapse of Bear Stearns and Lehman Brothers, was that the repo market panicked because of rising doubts about subprime securities, and loans suddenly became more expensive, or totally unavailable.

So What Can Be Done?

The Obama administration has a plan to protect the country and the world from the next financial crisis, and it can basically be divided into three parts.

1) Stiffer Capital Requirements

Some banks and other financial institutions would be considered too important to fail, because their collapse would pose a threat to the country’s financial stability.

Citigroup, Bank of America, Goldman Sachs and similar institutions would I imagine, be on the government’s most protected species list.

The companies on the list would face stiffer capital requirements in the form of shareholders’ investment, with the idea being that greater capital would provide a larger buffer against losses and a crises.

It might be of interest to note however, that at the time of writing that none of America’s biggest banks are any longer in the top three world-wide.

The top three banks in the world by market capitalization are;

1) Industrial and Commercial Bank of China
2) China Construction Bank
3) Bank of China

Citibank and Bank of America are not even on the list of the top twenty.

Two Canadian banks, Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD) have recently made it to the list.

Australia also has two banks listed, and in addition to the Chinese banks, the importance of emerging markets is confirmed by the presence of Itau Unibanco Banco Multiplo (ITU) and Banco Bradesco (BBD).

The problem with the administration’s protected species plan, is that the very largest financial institutions in America, would effectively become protected and pampered wards of the state and they would most likely squeeze out the smallest ones and lenders would compensate by raising their interest rates or by only lending to the safest borrowers.

2) The Policing Of Unethical Lending Practices

The administration foresees the creation of a Consumer Financial Protection Agency that would police what appear to be unethical lending practices, and ensure that loan documents for mortgages, auto loans and other types of consumer credit are comprehensible.

* The Securities and Exchange Commission would still retain power over the stock markets.

3) Changing The Rules

Financial firms that issue securitized bonds such as bundles of mortgages, auto loans and other credits, would be required to hold 5% of the bonds themselves, the thinking being that this would cause sellers to examine loans more carefully.

In early 2007, when the problems of subprime mortgages and repos first emerged, few if any regulators foresaw the coming meltdown, so the question needs to be asked, “should we trust government regulators instead of bankers, traders and money managers?”.

Due to their past failings, it would seem that we shouldn’t.

The dangers of overregulation should generally not be ignored or minimalized, but especially so in the U.S. whose economy is anchored on risk-taking and expansion.

We don’t yet know exactly what will cause the next financial crisis in the U.S. but its roots are already clearly foreseeable.

By 2019, the U.S. federal debt is expected to be $11 trillion and right now, the Chinese, who are presently supporting the U.S. economy are already preparing a retreat from the dollar.

China has now called for the creation of a new currency to eventually replace the dollar as the world’s standard, and is proposing, if not demanding, a sweeping overhaul of global finance that truly reflects the developing nations’ growing unhappiness with America’s role in the world economy.

If China decides to pull the plug, which is increasingly likely, we will soon understand what caused America’s upcoming financial collapse, but many will say that they didn’t see it coming.

The Obama administration just announced two new programs, that it’s hoped will help homebuyers who are experiencing problems paying their mortgages.

The first program, which should be up and running within a month is intended to help borrowers that have second mortgages stay out of foreclosure, and it will make cash amounts up to $12,000 available to servicers, investors and borrowers who modify loan terms, and a government spokesperson said that as many as a two million participants in the mortgage-modification program may be eligible for the second-lien assistance.

An example of how the plan would work, would be borrower who had a $250,000 interest only, first mortgage and was paying 6% interest. If the housing expenses were equal to 40% of the borrowers income, then the government would pay $2,625 per year, for five years in order to reduce the payments. Moreover, if that same borrower also had a $43,942 second mortgage and was paying 8.6% interest, then the government might, and I say “might”, pay one half of the $2,336 annual cost for five years.

The government’s second plan, is intended to renew interest in the Hope for Homeowners program, which until now has attracted very little enthusiasm from either borrowers or lenders. The program is primarily aimed at borrowers who owe more on their mortgages than their homes are worth, and to make the plan more attractive, the government will now provide a $2,500 incentive fee to loan servicers, and also require them to consider the plan when reworking a mortgage.

Overall reaction to the plans seems favorable, with Laurie Goodman who is an analyst at the Amherst Securities Group LP saying, “The new measures may ease mortgage investors’ concerns that the biggest banks and servicers would be tempted to rework too many loans under the program, in order to bolster their home- equity portfolios. Certainly, it appears that the Treasury has listened to first-lien investors and the announcement goes a very long way toward addressing their objections”.

Treasury Secretary Timothy Geithner said in a statement, “Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system”.

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