Fed Sees Solution In Zero Rates

The Federal Reserve recently vowed to keep interest rates “exceptionally low” for the foreseeable future in an attempt to revive the economy. Since mid 2006, the Fed has brought the Fed Funds Rate down from 5% to virtually zero in an attempt to reduce the debt service burden on over-leveraged borrowers.

Depression Pricing As Empty Hotels Slash Rates

The recent era of easy lending was not confined to residential real estate. Commercial real estate lending is the next big worry for a banking industry already beset by an avalanche of non performing loans. The banking industry has $1.8 trillion dollars of commercial real estate loans and many analysts believe that banks have reserved for only a small fraction of current and future losses. Recent examples of losses on commercial hotel loans in major travel destinations such as Hawaii and Las Vegas indicate the severity of the problem.

The massive number of loan defaults that has put the entire banking industry on the brink of insolvency did not happen by accident. Banks recklessly extended credit, even to low income borrowers who obviously had the least ability to service their debts. What may have seemed like a virtuous circle of increased consumer consumption and higher banking profits has turned into a debt disaster for both borrower and lender - consider the Democratization of Credit:

WSJ -The recession has forced a financial reckoning for Americans across the income spectrum. The pressure is especially acute for the low-income Americans who relied on borrowing for daily expenses or to gain the trappings of middle-class life. Shifting credit practices over several decades had enabled them to live beyond their means by borrowing nearly as readily as the more affluent.

Japan’s Zombie Banking Taken To New Levels Of Lunacy

Japan’s real estate and stock market bubbles burst in the early 1990’s. Since then, twenty years of non-stop Government stimulus programs have failed and left Japan with the highest debt to GDP ratio in the world and two decades of lost economic growth. The costly attempt to have failed banks prop up failed companies has lead to a massive misallocation of capital and resulted in Zombie Firms and Zombie Banks.

The FDIC always takes pride in noting that it is self funding and covers failed bank losses by assessments on FDIC insured member financial institutions.

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 8,195 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.

Bailout Funds Go To Bank Bonuses

Banks that lost billions of dollars on speculative investments and poor loans have routinely been awarding thousands of employees massive bonus payments. Ironically, the only reason many of these banks are still in business and able to pay bonuses is due to the fact that they were bailed out by the taxpayers via the TARP program.

Alan Greenspan, former Federal Reserve Chairman, Wednesday expressed his concern about the level of the US national debt.

Sept. 16 (Bloomberg) – Former Federal Reserve Chairman Alan Greenspan said he’s worried that lawmakers will hamper U.S. central bank efforts to rein in its monetary stimulus, and that inflation might “swamp” the bond market.

K-Ratio Predicts Higher Gold Stock Prices

Based on the recent large rally in the gold stocks, is it time to sell and take profits? The K-Ratio, a time tested method for timing the purchase and sale of gold stocks, is telling us to stay long gold.

Mortgage rates continue their downward trend with the perfect borrower now able to obtain a rate of 4.75% with a two point buy-down on a 30 year fixed rate mortgage. As expected, with mortgage rates now back in the 4% range, mortgage applications have increased. The latest stats from the The Mortgage Bankers Association show large increases in mortgage activity, with refinances accounting for almost 60% of total mortgage applications.

The Market Composite Index, a measure of mortgage loan application volume, increased 17.0 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 15.8 percent compared with the previous week and 64.5 percent compared with the same week one year earlier.

Do Extended Benefits Reduce Job Seekers' Motivation?

Excluding the depression of the 1930’s, we are fast approaching a new official high in unemployment. During the depths of the last worst recession of 1981, unemployment exceeded 10% vs 9.4% today. If we include marginally attached and involuntarily part time workers in the unemployment numbers, the current unemployment rate exceeds 16%.

In a move that can only be described as better late than never, various new Federal laws that restrict certain lending practices become effective on or after October 1, 2009. Other regulations that mandate improved disclosures and early disclosures of loan costs and terms became effective on July 30, 2009. Additional HUD regulations requiring the use of a standardized good faith estimate form and HUD-1 settlement statement will become law effective January 1, 2010.

The intention of the new regulations is to protect the consumer from unfair and abusive lending practices and to ensure that the mortgage borrower is provided the necessary information to fully understand the costs and terms of a loan. In general, the rules are a positive for both borrowers and lenders but are likely to add considerably to the time it takes to close on a mortgage loan.

Congress Takes Bow For Credit Card Act of 2009

The Credit Card Act of 2009 was intended to curb certain practices of the credit card industry that were deemed abusive to consumers. With a great deal of public fanfare, Congress passed legislation that provided the following benefits to credit card holders:

Geithner Goes Over The Edge

Is the stress of running the Treasury and trying to figure out how to borrow almost $2 trillion dollars starting to take a toll on the Treasury Secretary?

Refinances Decline as Rates Stabilize

The latest weekly survey from the Mortgage Bankers Association showed a decrease of 6.3% in mortgage loan applications. Application volume compared to the previous year increased by 16%.