THE BASIS POINT

Berkshire Invests $5b In Goldman, Mortgage Apps Down, Fed/Treasury Testimony

Ring ring.

“Hello?”

“Hey Warren, this is Ben over at the Fed. You know how you already own 10% of Wells Fargo? Well, I have a little favor to ask…”

Warren Buffett’s Berkshire Hathaway will invest $5 billion in Goldman Sachs, and shares of Goldman rose 6.5% following the announcement yesterday. Berkshire will buy $5 billion of perpetual preferred stock that carries a 10 percent dividend. It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9% stake in Goldman. Shares of Goldman had fallen 50 percent from their level at Halloween. Well, given that Henry Paulson supposedly owns 4.6 million shares of GS already, maybe Paulson, who is in charge of the bailout for the mess that took place during his tenure at GS, placed the call…

Bernanke/Paulson Testimony
Mortgage pricing staged a nice comeback yesterday after Fed Chairman Ben Bernanke’s testimony in front of Congress. He stated that the government should buy the distressed assets at hold-to-maturity value rather than at market determined fire-sale prices, which, as everyone in the mortgage business knows, have driven prices down. Bernanke and Secretary Henry Paulson explained the $700 billion bailout plan in front of the Senate Banking Committee yesterday, and today brings round two on Capitol Hill for Bernanke as he testifies before the Congressional Joint Economic Committee at 10AM EST and then before the House at 2:30PM EST. Paulson will join him in the afternoon session to discuss the proposal.

Market Update
After being +33% the week before, MBA mortgage applications declined -10.6% for the week ending Sept. 19th. Refinancing was -11.2%, while purchases decreased -10%. Today we have Existing Homes Sales for August, expected -1.6%. On Thursday we see August New Home Sales with expectations for a decline of 1.0%. In addition, we have 2-yr (today) and 5-yr (tomorrow) note supply to absorb, which may add pressure to mortgage prices. The biggest news of the week will be the early details of the plan for the purchase of distressed mortgage loans that the government comes up with. 10-yr currently 3.80%, mortgages about unchanged.

Credit Crunch Culprits
Federal investigators have opened preliminary probes into the financial troubles of four companies that are at the center of the current financial turmoil: did fraud helped cause some of the troubles at Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc. and American International Group Inc.?

FHA Ups Guidelines
FHA has just released Mortgagee Letter 08-25 which contains guidelines for using rental income from a current property to be retained by the borrower when purchasing a new residence. Until they can further evaluate the situation they are no longer allowing rental income to be used on a departure property when qualifying the borrower for a new loan unless the borrower meets one of the two exceptions to the rule listed below.

GMAC To Sell Real Estate Division
GMAC is planning on selling their Home Services division to Brookfield Asset Management, a Canadian real estate conglomerate known as Brookfield Residential Property Services. Apparently the name “Pacific Union” will be retained.

Joke of the Day
An old country preacher had a teenage son, and it was getting time the boy should give some thought to choosing a profession. Like many young men his age, the boy didn’t really know what he wanted to do, and he didn’t seem too concerned about it. One day, while the boy was away at school, his father decided to try an experiment. He went into the boy’s room and placed on his study table four objects.

1. A Bible.

2. A silver dollar.

3. A bottle of whiskey.

4. And a Playboy magazine.

“I’ll just hide behind the door,” the old preacher said to himself. “When he comes home from school today, I’ll see which object he picks up. If it’s the Bible, he’s going to be a preacher like me, and what a blessing that would be! If he picks up the dollar, he’s going to be a business man, and that would be okay, too. But if he picks up the bottle, he’s going to be a no-good drunken bum, and Lord, what a shame that would be.

And worst of all if he picks up that magazine he’s going to be a skirt-chasing womanizer.”

The old man waited anxiously, and soon heard his son’s foot-steps as he entered the house whistling and headed for his room. The boy tossed his books on the bed, and as he turned to leave the room he spotted the objects on the table. With curiosity in his eye, he walked over to inspect them.

Finally, he picked up the Bible and placed it under his arm.

He picked up the silver dollar and dropped into his pocket.

He uncorked the bottle and took a big drink, while he admired this month’s centerfold.

“Lord have mercy,” the old preacher disgustedly whispered. “He’s gonna run for Congress”.