Archive for October, 2010
The Federal Reserve is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation—and despite doubts about the wisdom and efficacy of the policy among economists and some of the Fed's own decision makers.
The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.
The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery. But officials want to avoid the "shock and awe" style used during the crisis in favor of an approach that allows them to adjust their policy, and possibly add to their purchases, over time as the recovery unfolds.
Fed Chairman Ben Bernanke's push to restart the bond-buying program—a form of monetary stimulus known as quantitative easing—has been greeted with deep skepticism among some of his colleagues.
It is unusual for large parts of the capital markets to shrink sharply. Yet that is what is happening in the global structured finance markets.
This year alone, forecasters predict there will be at least $400bn less of structured finance swirling around the global financial system than in 2009. This shrinkage will continue for the foreseeable future, according to analysts at JPMorgan. It will include asset-backed securities, which repackage vehicle and credit card loans, commercial mortgage-backed securities, residential mortgage-backed securities and collateralised loan obligations, which turn bank loans into bonds.
There are three main reasons behind the decline:
• the disappearance of special investment funds fuelled by leverage that were huge buyers of structured bonds;
• loss of trust in credit ratings after hundreds of billions of dollars of “safe” triple A bonds proved virtually worthless;
• and the demise of bond insurance that guaranteed debts and boosted ratings to triple A levels.
A broader question is also being asked: do even the biggest and most “sophisticated” investors need to be protected by regulations that would limit the kinds of products banks can sell them?
Speaking to real estate agents, bankers and brokers frustrated with a four-year housing slump, U.S. Sen. Bob Corker, R-Tenn., criticized heavy-handed government regulation and pledged to take a leading role in planning the future of home loan financing.
"Regulators are over-regulating," Corker said Tuesday at a housing panel he convened at the downtown Nashville library. "When times are good they get too loose and happy. Then things happen, there are bank failures and they over-regulate. I think that's what happening in Tennessee."
Brokers at the meeting complained of difficulty getting even good borrowers approved for home loans. One complained: "The medicine has been killing the patient."
Corker, a member of the Senate Banking, Housing and Urban Affairs Committee, said he was open to suggestions on how to reform home loan financing, in particular, mortgage giants Fannie Mae and Freddie Mac.
The Mortgage Bankers Association's Annual Convention and Expo this year is going well. I'm very pleased with the things I'm seeing, all of which are evidence that we're moving in the right direction as an industry, however slowgoing it may feel.
The first thing I noticed this year was that there's a much bigger trade show floor than we've seen in recent years. There are more exhibitors and bigger booths — not the two-story booths that we saw a few years ago, but they're still larger, nonetheless. This is a good indicator that we're finally beginning to recover from the housing crash — people are willing to spend money on exhibiting because they feel it is an investment that will pay off.
We're also seeing interesting people from outside the industry with booths on the floor. Home Depot, FedEx and Google particularly stand out in my mind. Just a few short years ago, we weren't seeing anyone from outside the mortgage industry. It was such a mess that nobody wanted to touch it, so it's a good sign when outsiders can recognize we've turned a corner and want to get back in on the action.
I've been noticing a lot of lenders coming out of information sessions, as well. Not only does this mean that they are willing to spend the money, but it means that they are genuinely interested in learning how to improve our industry. They want to know how to do things better, and are actively engaged in learning the ins and outs of compliance. Somewhere along the way I heard that there are more than 3,000 people in attendance this year, which is a lot of industry players wanting to improve the mortgage space.
Stay tuned. Next week I'll talk about the not-so-great things I'm seeing at the conference.
Rick Grant is veteran journalist covering mortgage technology and the financial industry.
Follow him on Twitter: @NYRickGrant
