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March 26, 2008
Morning Links: 03/26/2008
From the Financial Times a worry we are not out of the woods yet:
"In London, where the Bank of England has faced criticism for not being as proactive as other central banks, the three-month Libor rate was set on Tuesday at 5.995 per cent, its highest of the year. This is nearly 0.9 percentage points above the level investors demand for risk-free money, a spread nearly as high as that which led to central bank interventions in September and December."
"The Fed's latest lending to banks under its Term Auction Facility was also in heavy demand, receiving bids for $88.9bn compared with the $50bn on offer, an excess of demand almost as great as the previous auction two weeks ago, before the collapse of Bear Stearns."
Also from the Financial Times the credit squeeze stirs up trouble in Iceland:
"Fears that Iceland could be the first country to fall victim of the global financial turmoil grew on Tuesday when its central bank abruptly increased interest rates 1.25 percentage points to 15 per cent in an attempt to restore confidence in its struggling currency and stave off a full-blown economic crisis."
Daniel Gross discusses the New Deal institutions which are currently preventing a complete collapse of mortgage lending.
"1. The Federal Home Loan Bank system. Last year, the model of originating and securitizing mortgages began to break down in the wake of the subprime debacle. Mortgage companies that relied on the capital markets (rather than deposits) to raise the money for mortgages suddenly found themselves starved for cash. Many of them turned to the FHLB, which was created in 1932 (so let's give that one to Herbert Hoover) and provides capital to lenders. Indeed, had it not been for the FHLB, it's possible that the nation's largest mortgage lender, Countrywide Financial Corp., might have gone under. Sen. Charles Schumer, D-N.Y., noted last fall that Countrywide borrowed a whopping $51.4 billion from the Atlanta FHLB as its troubles mounted. On Monday, the FHLB pitched in again, relaxing regulations on member banks to allow them to double the number of mortgage-backed securities issued by Fannie Mae and Freddie Mac that they can hold on their books for the next two years. The FHLB noted that this measure could allow member banks to purchase more than $100 billion worth of such securities.2. The Federal Housing Authority. The FHA, which was created in 1934, insures mortgages made by approved lenders to borrowers who are creditworthy but not particularly affluent. As the mortgage market grew like Topsy and subprime lenders peddled credit to underserved markets, the FHA may have seemed outdated. But in the wake of the subprime debacle, the FHA has suddenly become an important part of the effort to stanch the rising tide of foreclosures. Last summer, it created FHASecure, a program that lets certain borrowers switch from adjustable-rate mortgages into fixed-rate mortgages. "From September to December 2007, FHA facilitated more than $38 billion of much-needed mortgage activity in the housing market, more than $15 billion of which was through FHASecure, FHA's refinancing product." As part of the recently passed stimulus package, the FHA is also temporarily jacking up the size of the mortgages it will insure (in high-cost housing areas) from $362,790 to $729,750.
3. The Federal National Mortgage Association (Fannie Mae), which was created in 1938. Fannie Mae purchases so-called conforming mortgages (mortgages under a certain size) made by other lenders and packages them into securities, which it effectively insures. (Here's a historical table of the conforming loan limit, which was $417,000 for a single home last year.) Fannie Mae and its brother government-sponsored enterprise, Freddie Mac, are playing a central role in the federal response to the housing crisis. The stimulus package boosted the size of the loans Fannie and Freddie can buy, from $417,000 to "125 percent of the area median home price in high-cost areas, not to exceed $729,750." And then earlier this month, OFHEO, the body that regulates Fannie and Freddie, said it would lift the cap on the amount of capital they could use to buy mortgage-backed securities and make loans, providing "up to $200 billion of immediate liquidity to the mortgage-backed securities market."
4. The Federal Deposit Insurance Corp. The FDIC, which was founded in 1933 and insures bank deposits, is playing more of a passive role. Many of the financial institutions that have failed or suffered near-death experiences in the current crisis—subprime lenders, jumbo lenders like Thornburg Mortgage and Bear Stearns—essentially fell victim to runs on the bank. Once customers and counterparties came to believe that it wasn't safe to do business with these firms, their days were numbered. But one sector has been largely immune from runs on the bank—banks themselves. Even as banking companies have racked up significant losses on soured loans, and even as some tiny banks have failed, Americans haven't rushed to yank their cash out of their checking and savings accounts. The reason: In the event of a failure, depositors with $100,000 or less at FDIC-insured institutions are made whole."
Brad Delong and Paul Krugman push back on the recent news about the most successful New Deal institution Social Security.
Posted by Price at March 26, 2008 10:30 AM