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Quote of the Day

"It's a Mess Out There... What are they waiting for?" – Bespoke Investment Group, on the lack of direction from the U.S. government during the subprime crisis, and the urgent need for significant confidence-restoring measures. (Bespoke Investment Group in Seeking Alpha, Jan. 20th)

Subprime Fallout

Bernanke Disappoints Treasury Bulls Detecting Rebound "The cost of borrowing dollars for three months fell below the Fed's benchmark rate last week for the first time since June 2003. The amount of commercial paper backed by assets including mortgages and credit-card receivables expanded for a third week after a five-month contraction, adding to speculation that central bankers are breaking the lending gridlock sparked by the collapse of the U.S. subprime mortgage market." (Bloomberg, Jan. 22nd)

Bon Appetit "Dividend yields [for] big regional banks [are] higher. Wachovia Bank (NASDAQ:WB), at $30.80, yields 8.3%; Wells Fargo (NYSE:WFC), at $25.48, yields 4.7%; and giant Bank of America (NYSE:BAC), at $35.97, yields 7%. The investment community is worried that rising credit losses will depress banks' 2008 profits and potentially prompt dividend cuts, as happened at Washington Mutual (NYSE:WM) andCitigroup (NYSE:C). If the credit situation proves manageable, though, regional banks could have a lot of upside potential in 2008. WaMu, whose shares have fallen 69% this year... rose Friday... amid takeover talk. The rumored potential buyer is JPMorgan Chase (NYSE:JPM)." (Barron's, Jan. 21st)

Closing Costs "[The only mortgages] left for mortgage brokers largely are... [government-backed]“conforming loans,” of less than $417,000... Brokers say it’s not for lack of demand for subprime, jumbo and other loans. Mortgage Bankers Association: Earlier this month, mortgage applications surged to a four-year high on lowered interest rates. But lenders’ appetite for loans has dried up, brokers say, as banks and others see losses from risky mortgages made during the boom." (Orange County Business Journal, Jan. 21st)

The Economics of Second Liens "Default rates on second liens, which one might expect to be astronomical... are in fact not all that high. Home equity loan default rates are at 4.65%, while default rates on home-equity lines of credit are only 2.01%. Economy.com estimates that total losses on $1.1 trillion of these loans might total $58 billion... Recovery values on these loans are negligible, which means that the economy.com estimate implies that eventually about 5.3% of the loans will have to be written off... Washington Mutual (WM) and Citigroup (C) are already unilaterally reducing the credit lines of borrowers whose credit scores have fallen or whose houses have dropped in value." (Felix Salmon in Seeking Alpha, Jan. 17th)

Economic Stimulus Plans: The Good, the Hopeful and the Dubious "Fannie Mae (FNM) and Freddie Mac (FRE) are seen as unfairly competing with private enterprise... We believe that housing progress requires an increase in the conforming loan limit from the current $417,000. This would reflect actual pricing in much of the country. The House has passed such a bill. A temporary increase has been endorsed by both Bernanke and Treasury Secretary Paulson... [But] there is the possibility that election-year posturing could scuttle any plan. Governments are better at using existing tools rather than building new ones... We expect an expanded role for FNM as part of any solution. We... establish[ed] a FNM position at $29." (Jeff Miller in Seeking Alpha, Jan. 20th)

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Source: Housing Market Tracker - Subprime Outlook