The subprime markets continue to plague the markets as investors and homeowners are starting to feel the pinch. Not only are the investors in trouble, but also several mortgage companies and banks are starting to feel uncomfortable as well.
Federal Reserve Chairman Ben Bernanke, President Bush and his Treasury Secretary Henry Paulson were probably to confident to say “The fundamentals of our economy are strong,” and that the economy is “thriving.”
Many believed that the early to mid-week gains in the larger markets proved that we might be poised for a turnaround. We have to remember that we are in witnessing a very volatile market right now. Just 15 days ago, we witnessed the Dow cross over the 14,000 mark for the first time in history. Today, the market is close to breaking back below 13,000. We’ll have to see what happens as the day wears on in this volatile market.
The losses and misconceptions surrounding the possibly devastation around the subprime and housing markets is more real than ever. Mortgage companies are going bankrupt right and left. American Home Mortgage last Friday filed for bankruptcy on Monday, and on Wednesday Luminent Mortgage Capital was hit hard by margin calls.
Wells Fargo and Wachovia seem to be tightening its credit stances as well. Both have decided to cut risky loans and raise rates on mortgages even to some of their more worthy and responsible loan applicants. The two banks have decided to stop selling Alt-A, loans between prime and subprime, mortgages all together, saying that there is “no market” for these type of loans.
Not only have these banks stopped issuing these types of loans, but demand for mortgage-back securites have come to a halt, and CDO’s are looking worse than before.
Paulson said in a CNBC interview, “Borrowers weren’t quite as disciplined as they should be, and lenders clearly weren’t as disciplined as they should be. We’ve seen some excesses. We’ve seen it in the subprime area, and that will be with us for a while.”
Housing prices are looking to fall this year, which will be the first annual decline since the Great Depression, according to the National Association of Realtors, based in Chicago. Current housing indicators show that both existing and new home sales are down, and in two weeks we will be able to see if the stumble continues.
Bernanke told congress on July 18, “rising delinquencies and foreclosures are creating personal, economic and social distress for many homeonwners and communities—problems that will likely get worse before they get any better.”
Today in trading, Countrywide Financial Corp and Washington Mutual Inc. feel today after the U.S. mortgage providers said demand has dried up and finding sources of new money may become more difficult.
Pointing to more things that are getting worse before they get better, the Federal Reserve added $35 billion in temporary funds to the banking system through the purchase of securities. Furthermore, the U.S. Treasures price rose as the two year note yields touched the lowest levels in 18 months.
We are not alone in this catastrophe as the European Central Bank (ECB) today loaned $83.6 billion to pump funds into the banking system for a second day, after which it added almost $130 billion yesterday.
Even though banks might be in need of some funding, for the most part the financial sheets of banks look pretty solid. Even with the banks’ shares tumbling over the past few weeks, the Economist magazine shows that analysts are still forecasting higher profits for the year ahead, and that if the solidity of bank finances is to be tested, the markets have chosen a good time to do so.
This could be what the American economy might need though. GDP figures are in line with the growth the federal reserve likes to see, and although spending is looking like its heading towards a potential slowdown, this could help retain some of the risks of higher interest rates. Although this would have an inverse effect on growth, causing it to slip, and as we have seen, the jobless claims have risen, and the market for housing will continue to fall even into the 2008 by as much as 18 percent, it seems only logical that the Fed might have to reduce its rate in the coming meetings.