Ben's Big Bet

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Forget AIG. Focus on B-B-B or Bernanke's Big Bet.

The news that matters this week is the remarkable move by the Federal Reserve to purchase an additional $750 billion in mortgage-backed securities and another $300 billion of long-term U.S. Treasury bills.

It is a daring move that signals just how committed Federal Reserve Chairman Ben Bernanke is to kicking the housing market in the pants.

The Fed's commitment to buy massive amounts of mortgage-backed securities (a total of $1.25 trillion to date) is a huge step towards getting credit flowing in the real estate sector by creating a market for mortgage debt.

Make no mistake, the Fed's action will result in more mortgage and commercial real estate loans. Today, tomorrow and possibly for years to come.

The $300 billion purchase of long term U.S. debt – U.S. Treasury Bills -- is having an immediate impact on mortgage rates because most lenders peg their interest rates on the 10-year Treasury note. A little supply and demand primer here: As more buyers bid for Treasury notes, the note's interest rate (cost to the government) drops. The presence of the Fed in the Treasury Markets creates a sellers market and hence lower interest rates.

Mortgage brokers are already telling us they are seeing mortgage rates lower than ever before. Laura Sosa-Rocha of Truth and Lending in Atlanta says she is seeing 30-year fixed rates at 4.75 percent. She had two dozen e-mails waiting for her this morning from clients desperate to lock in rates.

Gary Akright at Dominion Mortgage Corporation in Dallas is being quoted 30-year fixed rates at 4.5 percent and 15-year fixed rates at 4.375 percent. Akright is careful to point out these rates are only available for people with excellent credit (760 FICO score or higher) and with 20 percent down payments. He says he would not be shocked to see these rates go even lower. He believes this is also an unprecedented opportunity for refinancing mortgages. Ninety percent of his business lately has been refi's.

There's still a number of obstacles the Fed moves does not address. For example New York Mortgage Broker Richard Biondi of RJB Financial warns loans financed by Fannie Mae and Freddie Mac are carrying high fees. These "Adverse Market" fees can add $1,000 for every $100,000 in loans for a buyer with a FICO score of 620 and a 20 percent down payment. That's scared away some buyers.

"In some cases, they don't want to do the loan because they don't want to spend the money," says Biondi.

It's important to remember "The Great Recession" started with the housing sector collapsing. So far it's cost 4.4 million jobs and has left 12.5 million searching for work.

Nearly every economist we have spoken to over two years of reporting agrees this will not end unless housing can get off the deck. The Fed's gamble is designed to do just that.

History students 50 years from now will probably have to memorize the details of Ben Bernanke's big bet -- not about AIG's big bonuses.

Guy Campanile is business producer for the CBS Evening News with Katie Couric

[perk235]

jntlw, he doesn't need permission. The Fed was setup to be separate. It uses the ultra rich's money. One day you will understand where real power exists and it's not in Washington and it's not in the hands of the electorate.
Posted by kevsan1 at 2:15 PM : Mar 19, 2009
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It doesn't use the ultra rich's money. IT USES OUR MONEY. It prints money and charges the US Treasury interest for us to use it. Look at the paper money in your wallet--it says "Federal Reserve Note" on the top of it. If the world were right it would say "US Treasury Bill".

The Federal Reserve Act of 1913 gave SEVEN MEN control of our country. The Federal Reserve is a private corporation; it is not Federal nor a Reserve.

[perk235]

I want to know who gave Mr. Bernacke permission to buy these bonds? he cannot do this of his own accord - we need to nationalize the FED and stop this insanity!
Posted by jntlw at 1:43 PM : Mar 19, 2009
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AGREED! HE IS USING OUR TAXPAYERS FUNDS WITH AS MUCH AUTHORITY AS A KING. The Federal Reserve Act of 1913, with modifications in 1915 and 1991gives them the power. We need congress to take this power AWAY!!!!

Here is the language:

The Fed has emergency lending powers in Section 13 of the Federal Reserve Act. Section 13(3) provides for ?Discounts for Individuals, Partnerships, and Corporations.? It reads:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of Section 14,
subdivision (d), of this Act, to discount for any individual,
partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal
reserve bank shall obtain evidence that such individual,
partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe."

[ontheleft]

'kicking the housing market in the pants'

Housing will never recover until employment recovers. You can't pay rent or a mortgage unless you have a job. The outlook for real estate in the next year or two is negative.

Housing in my area has gone down only 10% from its highs. Housing prices have to come down a lot further in order to be in line with reality.

Printing money solves nothing. This country needs real sustainable jobs, not more monopoly money.

[gold_standard]

The correct terminology for this action is "monetizing the debt."

[tx_doughboy]

"Looks like this guy intends to fix this economy!
Posted by rightaboutit at 1:49 PM : Mar 19, 2009 "

That is not entirely true. Yes it's paid in funny money. There are loans that are current and not delinquent, but due to the loss in home value the banks have to write that difference in their books as a loss at this time. The loan is still good, it?s just that the banks now has more loaned out on the property than it is worth. If the property is foreclosed then there would be a loss, but only if there is a foreclosure. So these loans that are not in foreclosure, but dirty up the banks books can be removed resold or held by the government freeing up the backs to loan more and allowing the possibility to profit off loans that look bad now due to low property values, but stay in good standing until the economy recovers.

[kevsan1]

jntlw wrote:

I want to know who gave Mr. Bernacke permission to buy these bonds? he cannot do this of his own accord - we need to nationalize the FED and stop this insanity!

jntlw, he doesn't need permission. The Fed was setup to be separate. It uses the ultra rich's money. One day you will understand where real power exists and it's not in Washington and it's not in the hands of the electorate.

[Chris_Butler]

Posted by grabandgo at 1:45 PM : Mar 19, 2009

Sounds like a plan to me. Send it to: -

President Obama,
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

[grabandgo]

Subject: FW: Patriotic retirement




This was an article from the St. Petersburg Times
Newspaper on Sunday. The Business Section asked readers
for ideas on "How Would You Fix the Economy?"
Dear
Mr.President,

Patriotic retirement:

There's about 40 million people over 50 in the work force
- pay them $1 million apiece severance with stipulations.


1) They leave their jobs. Forty million job openings
-
Unemployment fixed.

2) They buy NEW American cars. Forty million cars ordered
- Auto Industry fixed.

3) They either buy a house/pay off their mortgage -
Housing Crisis fixed.

[jntlw]

I want to know who gave Mr. Bernacke permission to buy these bonds? he cannot do this of his own accord - we need to nationalize the FED and stop this insanity!