European stock markets and U.S. futures rallied Friday morning on media reports the Bush administration is ready to introduce measures to help stem a growing wave of mortgage defaults, and a scheduled speech by Fed chairman Ben Bernanke. President Bush, who speaks shortly after 11 a.m. ET, will announce the FHA (Federal Housing Administration), which insures mortgages for low to middle-income borrowers, will now be able to insure delinquent loans, allowing borrowers to avoid foreclosure and enabling them to refinance at better rates, a Bush official told Bloomberg anonymously. Delinquent loans are currently ineligible for FHA insurance. Under the new plan they will be eligible -- if borrowers have fallen behind because of a monthly-payment increase, the Washington Post reported. Such increases have led to a rash of defaults as adjustable-rate mortgages issued from 2004 to 2006 roll over. The change will affect borrowers at least 90 days in arrears, allowing them to retain their homes, the Bush official said. Bush will also push proposals to give tax breaks to homeowners who refinance, he said. However, the president still opposes relaxing the mortgage-lending caps on government-sponsored lenders Freddie Mac and Fannie May, who have said they could add market liquidity by buying more of the mortgages shunned by investors. Bush has faced criticism over a lack of action to prevent spreading foreclosures: "The Federal Reserve's interest-rate reductions alone can't fix the problem," economist Peter Meister said, calling Friday's moves a positive for the economy as a whole. Fed Chairman Bernanke is due to speak at 10 a.m. ET at a gathering of central bankers. He is under pressure to give some indication of future interest rate moves, which many anticipate will be dropped in the coming months. "Our economists now expect the Fed to cut rates by 75 basis points before the end of the year," Citigroup said in a note. "Fed fund cuts have generally been positive for global equity markets."
Sources: Bloomberg, Wall Street Journal, Washington Post
Commentary: Will a Bernanke-Bush One-Two Lift the Markets Ahead of the Holiday Weekend? • Why Do Fed Bankers Meet in Ritzy Jackson Hole? • All Eyes Are on Ben Bernanke as Volatility Returns to the Market
Stocks/ETFs to watch: SPY, DIA, AGG, FRE, FNM
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