Freddie Mac Says Home Prices Could Drop 20% More, Morgan Stanley Freezes HELOCs

What coffee drinker doesn’t want to open up some market commentary and get a coupon for free coffee? (Gosh, I hope that I don’t get sued on this one!).

Freddie Mac lost $821 million in the 2nd quarter after taking $2.5 billion in provisions for credit losses. Revenue fell to $1.69 billion from $2.34 billion, and the loss was slightly greater than expected. They will cut their common stock dividend, but pay the full preferred dividend. In addition, “the company continues to review and consider other alternatives for managing its capital including issuing equity in amounts that could be substantial, reducing or rebalancing risk, slowing purchases into its credit guarantee portfolio, and limiting the growth or reducing the size of its retained portfolio.” Freddie CEO Richard Syron said that home prices could fall another 20%.

In an example of being late to the party, according to a story in Reuters & Bloomberg, “Morgan Stanley told thousands of clients this week that they will not be allowed to withdraw money on their home-equity credit lines. Most of the clients had properties that have lost value, the agency reported, citing a person who declined to be identified. The second largest U.S. investment bank will review home-equity lines of credit, or HELOCs, monthly from now on, the agency said, citing the person familiar with the matter.”

As expected, the Federal Open Market Committee decided to keep its target for the federal funds rate at 2%. “Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain. Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”

Indiana “dis-approves” 360 mortgage shops? Since July 2007 Indiana laws require mortgage brokerages to employ a principal manager who has passed a competency exam, but they have been slow to comply. So sorry.

Back to the economy and rates. Lately the ISM Non-Manufacturing Index increased to 49.5, higher than forecast, from 48.2 in June. (Non-manufacturing businesses make up almost 90 percent of the economy.) Last week mortgage applications increased from a seven year low last week by 2.8%, with refinancing +4.4% and purchases +1.8%. Demand for ARM’s fell 2.9% to make up 6.9% of the total number of applications. Note that today the Treasury will sell $17 billion of 10-year notes, up from May’s sales, and they will be auctioning off 30-yr bonds tomorrow. Let’s hope for a good 10-year auction, as we’ll need it: currently the yield is up to 4.03% and mortgage prices are worse by up to .5 versus yesterday!

An article in the Wall Street Journal highlights FirstFed Financial Corp., saying that it “is struggling with rising losses”. The bank posted a loss of nearly $70 million in the first quarter, 40% of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast, and the number of foreclosed homes held by the bank doubled in the second quarter from the first quarter! The article goes on to elaborate the problems with payment option ARM’s. First Fed had been doing well with this product, but in 2003 guidelines and terms relaxed and competition increased, and First Fed followed the crowd to maintain market share. (Sound familiar?) “As of the end of June, nonperforming assets climbed to 8.2% of total assets, compared with 0.85% a year earlier.” It is definitely worth a read.

Two bats are hanging upside down from a tree branch.
One bat says, “There’s only thing that I fear when I grow old.”
The second bat says, “What? Loss of hearing? Sore wings?”
The first bat says, “Incontinence.”