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Mortgage Help Anyone?
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: December 10th, 2007 at 10:14 am EST
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This week the government outlined their plan to have mortgage firms voluntarily freeze interest rates for those who may find it hard to make monthly payments if their mortgage interest rates where raised. The onus falls on the mortgage firms to identify who those people are. There is no indication that federal money will be used to offset any losses those firms may incur. I believe there is a toll-free number for people to call if they need help. I see a few potential problems with this plan.
The first problem is the cost involved in identifying and dealing with the people who truly need this help. Then comes the loss of revenue from these loans going forward. Finally it is up to the mortgage firms to do all this voluntarily. You do see where I am going with this. Which mortgage firm is going to willingly lose money? Many mortgages have been packaged and sold to other financial firms. The new owners of those loans might not be willing to go though all of this. The flip side is the cost of foreclosure to these firms. Nobody wants to be handed the keys to a house, let alone a million houses. I can see bean counters busy doing the math to see if freezing rates is cost effective or is it better to sell the portfolio to someone else at a big discount. It will be interesting to see how this all plays out in the coming months. For now the perception is that something is being done to address this problem.
I mentioned in my earlier newsletter the key to avoiding an economic slump was solid and steady employment. The recent numbers point to a healthy job market. Unemployment remains low. I do not know if it is holiday related part time jobs or full time jobs. Bottom line: as long as people have a paying job, they will spend. The GDP depends heavily on consumer spending. I suspect the economy will pull out of this slowly but surely. The recent credit and sub-prime problems will and has hurt several financial institutions. They will lick their wounds and move on. Will we see another financial crisis again in the next decade? It is human nature to be greedy, and if past history is any indication then we will surely see another crises in the future.
Next week will kick of earnings in the financial sector. Expectations are low since most have had to write off big losses. I suspect we may see a few surprises in the form of better than expected earnings. The financial’s have been beaten down and might see some fresh money coming in. Lets not forget the FOMC meeting next week. The current expectation remains for a quarter point drop in the Fed funds rate.
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