Information Regarding Recent Federal Reserve Actions

News Release

Release Date: September 29, 2008

For immediate release

The Federal Reserve Board on Monday announced the annual indexing of the reserve requirement exemption amount and of the low reserve tranche for 2009.  These amounts are used in the calculation of reserve requirements of depository institutions.  The Board also announced the annual indexing of the nonexempt deposit cutoff level and the reduced reporting limit that will be used to determine deposit reporting panels effective 2009.

All depository institutions must hold a percentage of certain types of deposits as reserves in the form of vault cash, as a deposit in a Federal Reserve Bank, or as a deposit in a pass-through account at a correspondent institution.  Reserve requirements currently are assessed on the depository institution's net transaction accounts (mostly checking accounts).  Depository institutions must also regularly submit deposit reports of their deposits and other reservable liabilities.

For net transaction accounts in 2009, the first $10.3 million, up from $9.3 million in 2008, will be exempt from reserve requirements.  A 3 percent reserve ratio will be assessed on net transaction accounts over $10.3 million up to and including $44.4 million, up from $43.9 million in 2008.  A 10 percent reserve ratio will be assessed on net transaction accounts in excess of $44.4 million.

These annual adjustments, known as the low reserve tranche adjustment and the reserve requirement exemption amount adjustment, are based on growth in net transaction accounts and total reservable liabilities, respectively, at all depository institutions between June 30, 2007 and June 30, 2008.

For depository institutions that report weekly, the low reserve tranche adjustment and the reserve requirement exemption amount adjustment will apply to the fourteen-day reserve computation period that begins Tuesday, December 2, 2008 and the corresponding fourteen-day reserve maintenance period that begins Thursday, January 1, 2009.

For depository institutions that report quarterly, the low reserve tranche adjustment and the reserve requirement exemption amount adjustment will apply to the seven-day reserve computation period that begins Tuesday, December 16, 2008, and the corresponding seven-day reserve maintenance period that begins Thursday, January 15, 2009.

The Board also announced changes in two other amounts, the nonexempt deposit cutoff level and the reduced reporting limit, that are used to determine the frequency with which depository institutions must submit deposit reports.  The attached Federal Register notice contains a description of the new boundaries for deposit reporting that will be effective in 2009.

The Board's notice is attached.

Attachment (26 KB PDF)

Testimony

Press Release

Release Date: September 24, 2008

For release at 1:00 a.m. EDT

 

Today, the Federal Reserve, the Reserve Bank of Australia, the Danmarks Nationalbank, the Norges Bank, and the Sveriges Riksbank are announcing the establishment of temporary reciprocal currency arrangements (swap lines) to address elevated pressures in U.S. dollar short-term funding markets.  These facilities, like those already in place with other central banks, are designed to improve liquidity conditions in global financial markets.  Central banks continue to work together during this period of market stress and are prepared to take further steps as the need arises.

Federal Reserve Actions
The Federal Open Market Committee has authorized the establishment of new swap facilities with the Reserve Bank of Australia, the Sveriges Riksbank, the Danmarks Nationalbank, and the Norges Bank.  These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $10 billion each by the Reserve Bank of Australia and the Sveriges Riksbank and in amounts of up to $5 billion each by the Danmarks Nationalbank and the Norges Bank.

In sum, these new facilities represent a $30 billion addition to the $247 billion previously authorized temporary reciprocal currency arrangements with other central banks:  European Central Bank ($110 billion), Bank of Japan ($60 billion), Bank of England ($40 billion), Swiss National Bank ($27 billion), and Bank of Canada ($10 billion).

These reciprocal currency arrangements have been authorized through January 30, 2009.

Information on Related Actions Being Taken by Other Central Banks
Information on the actions that will be taken by other central banks is available at the following websites:

Reserve Bank of Australia 
Danmarks Nationalbank (National Bank of Denmark) (54 KB PDF)   
Norges Bank (Bank of Norway) 
Sveriges Riksbank (Bank of Sweden) 

 

 

2008 Monetary Policy Releases

• Midwest Regionally, existing-home sales in the Midwest rose 0.9 percent in August to a pace of 1.14 million but are 12.3 percent below August 2007. The median price in the Midwest was $168,000, down 5.6 percent from a year ago.

• South In the South, existing-home sales increased 0.5 percent to an annual pace of 1.86 million in August, but are 15.1 percent below a year ago. The median price in the South was $176,500, which is 3.4 percent lower than August 2007.

• West Existing-home sales in the West fell 5.3 percent to an annual rate of 1.07 million in August, but are 4.9 percent higher than August 2007. The median price in the West was $251,600, down 23.9 percent from a year ago. “The highest concentration of foreclosures is in the West, which is weighing down the median price because many buyers are taking advantage of deeply discounted prices,” Yun said.

• Northeast In the Northeast, existing-home sales dropped 6.6 percent to an annual pace of 850,000 in August, and are 15.0 percent below a year ago. The median price in the Northeast was $271,000, down 3.8 percent from August 2007.

• 30-year fixed-rate mortgages increased to 6.08 percent from 5.82 percent.
• 15-year fixed-rate mortgages increased to 5.84 percent from 5.54 percent.
• 1-year ARMs increased to 7.01 percent from 6.95.

Financial Bailout Plan Advances

Under pressure from the Bush administration to act swiftly, the plan to revive the U.S. financial system continues to move forward.

Treasury Secretary Henry Paulson Jr. and Federal Reserve Chairman Ben Bernanke pitched the bailout plan during testimony before the Senate banking committee on the morning of Sept. 23. (See NAR Gets Behind Efforts to Restore Market.)

"In order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy," Paulson told the Senate Banking committee this morning.

Bernanke said there was no other option. "Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," Bernanke said.

Some lawmakers from both parties have already expressed concern about the $700 billion price tag and its chances for success.

Meanwhile, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and his staffers have drafted a counter-proposal that works in many of the priorities outlined by Senate Democrats.

Testimony

10 ways to protect your money now

Sit tight; it's no time to fidget

Anatomy of a bank collapse

Press Release

Release Date: September 22, 2008

For immediate release

Based on consultation with the Department of Justice regarding the applications of Goldman Sachs and Morgan Stanley to become bank holding companies, the Federal Reserve Board announced on Monday that the transactions may be consummated immediately without the application of the five-day antitrust waiting period.

Order Approving Formation of Bank Holding Companies -- Goldman Sachs (44 KB PDF)

Order Approving Formation of Bank Holding Companies and Notice to Engage in Certain Nonbanking Activities -- Morgan Stanley (54 KB PDF)

2008 Banking and Consumer Regulatory Policy

Press Release

Release Date: September 19, 2008

For release at 6:00 p.m. EDT

The Federal Reserve Board on Friday approved two interim final rules in connection with its initiative to provide liquidity to markets by extending loans to banking organizations to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds.

The first interim final rule would provide a temporary limited exception from the Board's leverage and risk-based capital rules for bank holding companies and state member banks. The second would provide a temporary limited exception from sections 23A and 23B of the Federal Reserve Act, which establish certain restrictions on and requirements for transactions between a bank and its affiliates.

The interim final rules approved by the Board will facilitate participation by depository institutions and bank holding companies in this special lending program as intermediaries between the Federal Reserve and money market mutual funds. These exceptions expire on January 30, 2009, unless extended by the Board, and are subject to various conditions to promote safety and soundness. 

Federal Register notice - Transactions Between Member Banks and Their Affiliates: Exemption for Certain Purchases of Asset-Backed Commercial Paper by a Member Bank from an Affiliate (31 KB PDF)

Federal Register notice - Risk-Based Capital Guidelines; Leverage Capital Guidelines (43 KB PDF)

2008 Monetary Policy Releases

Release Date: September 16, 2008

For release at 9:00 p.m. EDT

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.  

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. 

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility. 

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries.  These assets include the stock of substantially all of the regulated subsidiaries.  The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers and lending to AIG so it can sell some of its assets in an orderly manner.

And this morning, we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guarantee program for the U.S. money market and mutual fund industry.

Despite these steps, more is needed. We must now take further decisive action to fundamentally and comprehensively address the root cause of our financial system stresses.

The underlying weaknesses in our financial system today is illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy.

When the financial system works as it should, money and capital flow to and from households and business to pay for home loans, school loans and investments to create jobs.

As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and on our economy.

As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put — put too many families into mortgages they could not afford. We are seeing the impact on homeowners and neighborhoods with 5 million homeowners now delinquent or in foreclosure.

What began as a subprime lending problem has spread to other, less risky mortgages and contributed to excess home inventories that have pushed down home prices for responsible homeowners.

A similar scenario is playing out among the lenders who made those mortgages, the securitizers who bought, repackaged and resold them, and the investors who bought them.

These troubled loans are now parked or frozen on the balance sheets of banks and other financial institutions, preventing them from financing productive loans.

The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial conditions of the institutions that own them.

The normal buying and selling of nearly all types of mortgage assets has become challenged. These illiquid assets are clogging up our financial system and undermining the strength of our otherwise sound financial institutions.

As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment and job creation has been disrupted.

To restore confidence in our markets and our financial institutions so they can fuel continued growth and prosperity, we must address the underlying problem.

The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact while including features to protect the taxpayer to the maximum extent possible.

The ultimate taxpayer protection will be the stability this troubled asset relief program provides to our financial system, even as it will involve a significant investment of taxpayer dollars.

I am convinced that this bold approach will cost American families far less than the alternative: a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.

I believe many members of Congress share my conviction. I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans in our system so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.

As we work with Congress to pass this legislation over the next week, other immediate actions will provide relief.

First, to provide critical additional funding to our mortgage markets, the GSEs Fannie Mae and Freddie Mac, will increase their purchases of mortgage-backed securities. These two enterprises must carry out their mission to support the mortgage market.

Second, to increase the availability of capital for new home loans, Treasury will expand the MBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs, it will help facilitate mortgage availability and affordability.

These two steps will provide some initial support to mortgage assets, but they are not enough. Many of the illiquid assets clogging our system today do not meet the regulatory requirements to be eligible for the purchase by the GSEs or by the Treasury program.

I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system. When we get through this difficult period — which we will — our next task must be to improve the financial regulatory structure so that these past excesses do not recur.

This crisis demonstrates in vivid terms that our financial regulatory structure is suboptimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy and more closely links the regulatory structure to the reasons why we regulate.

This is a critical debate for another day. Right now our focus is on restoring the strength of our financial system so that it can again finance economic growth.

The financial security of all Americans, their retirement savings, their home values, their ability to borrow for college, and the opportunities for more and higher-paying jobs depends on our ability to restore our financial institutions to sound footing.

Thank you. Now I'll take several questions.

Question: Mr. Secretary, you said this needs to be — you said this needs to be of significant size. Are we talking hundreds of billions, a trillion dollars?

PAULSON: We're talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem.

Question: What specifically will you be asking Congress for? Have you brought them a proposed legislative package?

PAULSON: We are going to be coming to them with a proposed legislative package and then working with them to flesh out the details through the weekend. And we're going to be asking them to take action on legislation next week.

Question: Mr. Secretary, what is the alternative here? What is the dire picture you painted for members of Congress last night to try and convince them to support this effort? What is the alternative?

PAULSON: This is what we need to do. Because for some time we've been saying that the root cause of the problems in our economy and our financial system is housing, and until we get stability in the housing market we are not going to get stability in our financial markets.

We've worked with Congress on a number of the steps, all of which were important, leading up to this. But this is the way we stabilize the system and get at the root cause.

Thank you all very much. Thanks.

Paulson calls for Congress action by next week

Paulson said he wanted action next week by Congress.

"Time is of the essence," House of Representatives Speaker Nancy Pelosi, a Democrat, said Thursday night after being briefed by Paulson and Bernanke.

Rep. Roy Blunt, the No. 2 Republican leader in the House, suggested the rescue can be handled without a tax increase.

"It doesn't necessarily have to be something that impacts taxpayers in a negative way," said Blunt. "It all depends on how you put that structure together."

Republican presidential candidate John McCain said any action should "be designed to keep people in their homes and safeguard the life savings of all Americans."

Democratic rival Barack Obama said it is critical that leaders in both parties work in concert. "Truly we are all in this together," he said.

The federal government already has pledged more than $600 billion in the past year to bail out, or help bail out, some of the biggest names in American finance.

Paulson Says Fannie, Freddie to purchase more securities
                                                                                                                                                             Paulson said mortgage giants Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market. The government seized control of the mortgage giants this month.

Paulson also said Friday that the Treasury Department will expand a program, announced earlier this month, to buy mortgage-backed securities, which have been badly hurt by the housing and credit crisis.

"As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford," Paulson said.

At a news conference in which he only took three questions, Paulson was asked the approximate dollar size of the government intervention. "We're talking hundreds of billions," he said.

Paulson did not address specifics about the plan to buy back bad debt or whether the government would take a direct stake in troubled banks in exchange for its help.

"These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted," Paulson said.

He said that the administration would present Congress with a proposed legislative package and then work with lawmakers "to flesh out the details through the weekend. And we're going to be asking them to take action on legislation next week."

"This is what we need to do. Because for some time we've been saying that the root cause of the problems in our economy and our financial system is housing, and until we get stability in the housing market we are not going to get stability in our financial markets," he said.

Earlier, Bush authorized Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money market mutual funds. And the Federal Reserve announced it will expand its emergency lending program to help support the $2 trillion in assets of the funds.

Both moves are designed to bolster the huge money market mutual fund industry, which has come under stress in recent days.

The Fed said it is expanding its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. The central bank's move should help the funds meet demands for redemptions.

The Securities and Exchange Commission early Friday imposed a temporary emergency ban on short-selling of financial company stocks. As the financial crisis widened, entreaties had come from all quarters to stem a swarm of short-selling contributing to the collapse of stock values of investment and commercial banks.

Congressional leaders said they expected to get the rescue plan Friday and act on it before Congress recesses for the election.

The government's actions could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has grinded to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings Inc.

Global stock markets roared higher, too.

And European Central Bank, Swiss National Bank and Bank of England offered up more cash Friday. The three banks put a combined $90 billion into money markets in a lockstep move.

The chairman of the Senate Banking Committee, Democratic Sen. Chris Dodd warned on Friday that the United States could be "days away from a complete meltdown of our financial system" and said Congress would work quickly to prevent that.

Later Dodd told reporters that the government's rescue plan will be costly, and demanded more details.

"We're anxious to hear the specifics," he said. "None of us have any idea what the details are. We understand the gravity of the moment."

Secretary Paulson says handling banks’ bad assets very costly, but needed

The Bush administration sketched out an effort on Friday to confront the worst U.S. financial crisis in decades, describing a plan that could cost taxpayers hundreds of billions of dollars to buy up bad mortgages and other toxic debt that has unhinged Wall Street.

President George W. Bush, flanked by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, acknowledged that the program will put a "significant amount of taxpayers' money on the line."

The administration is asking Congress to give it sweeping new powers to execute the plan. Paulson said it "needs to be big enough to make a real difference and get to the heart of the problem."

Paulson gave few details but said he would work through the weekend with leaders of Congress from both parties to flesh out the program, the biggest proposed government intervention in financial markets since the Great Depression of the 1930s. Members of the Senate Banking Committee said they had received no details of the proposal.

The government steps were clearly welcomed by financial markets. As Paulson spoke, the Dow Jones industrials were up over 300 points and at one point had soared by 450 points.

Before the markets opened, the government announced plans to temporarily insure money-market deposits and to block short-selling in financial securities. Short selling is a trading method that bets the stocks will go down.

Speaking to reporters at the Treasury Department, Paulson said that the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary impact while protecting taxpayers as much as possible.

"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said in a prepared statement.

"The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing," Paulson said.

Press Release

Release Date: September 19, 2008

For release at 8:30 a.m. EDT

 

The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.

To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Statement Regarding Planned Purchases of Agency Debt 

2008 Monetary Policy Releases

Press Release

Release Date: September 18, 2008

For release at 3:00 a.m. EDT

 

Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.

Federal Reserve Actions
The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks. 

The FOMC has authorized increases in the existing swap lines with the ECB and the Swiss National Bank. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB, an increase of $55 billion, and up to $27 billion by the Swiss National Bank, an increase of $15 billion. 

In addition, new swap facilities have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada.  

All of these reciprocal currency arrangements have been authorized through January 30, 2009. 

Information on Related Actions Being Taken by Other Central Banks
Information on the actions that will be taken by other central banks is available at the following websites:

Bank of Canada 
Bank of England 
European Central Bank 
Bank of Japan (11 KB PDF)  
Swiss National Bank (58 KB PDF) 

2008 Monetary Policy Releases

• African-Americans and Hispanics are disproportionately affected in comparison with whites. Among mortgage holders 50 and over, African American and Hispanic borrowers both have foreclosure rates of 0.51 percent, compared to a rate of 0.19 percent for Caucasians.

• Older Americans are severely impacted by holding subprime loans. Older holders of subprime first mortgages are 17 times more likely to be in foreclosure than are older holders of prime loans.

• While older Americans are clearly vulnerable to the continuing mortgage crisis, the foreclosure rate at the end of last year for people aged 50 and over was 0.24 percent, compared with a total all-age U.S. average of 0.39 percent.

Barclays Agrees to Buy Some of Lehman Brothers' Assets

Britain's Barclays bank has agreed to buy some of the core assets of stricken US investment bank Lehman Brothers for 1 billion pounds ($1.75 billion), the two banks said.

Barclays had bought Lehman's North American investment banking and trading unit for $250 million, and paid $1.5 billion for its New York headquarters and two data centers following negotiations in New York, the bank said on Wednesday, Sept. 17.

The deal, which follows Barclays' withdrawal last weekend from negotiations on a rescue package for Lehman Brothers, still requires backing from a bankruptcy court.

John Varley, chief executive of Barclays, said the proposed acquisition was part of a policy of "profitable growth on behalf of our shareholders."

Barclays is regarding its move as the "opportunity of a lifetime," one analyst in London said.

"We have the opportunity to continue the growth and development of our US investment banking and capital market franchises with one of the leading financial institutions in the world," Lehman Brothers' chief operating officer Herbert McDade said.

It is understood that Barclays has steered clear of becoming involved with so-called "toxic investments" made by Lehman Brothers in volatile residential and commercial property markets.

The deal could safeguard the jobs of about 10,000 employees in the US, reports said.

But there has been criticism in London that none of the 5,000 Lehman Brothers' employees in Britain will benefit from the Barclays move.

 DPA news agency (kjb)

Some lawmakers say it's a risk that the government shouldn't take on. Creating an agency to buy distressed debt is not the best solution, said House Republican leader John Boehner. "We need this issue to resolve itself, and having more federal involvement or having a new Resolution Trust Corp. is probably not the answer,'' Boehner said.

Source: Bloomberg News

1. McAllen-Edinburg-Mission, Texas
2. San Antonio, Texas
3. New Orleans-Metairie-Kenner, La.
4. Houston-Sugar Land-Baytown, Texas
5. Dallas-Fort Worth-Arlington, Texas
6. Rochester, N.Y.
7. Syracuse, N.Y.
8. Buffalo-Niagara Falls, N.Y.
9. Jackson, Miss.
10. Austin-Round Rock, Texas

Press Release

Release Date: September 16, 2008

For release at 9:00 p.m. EDT

 

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.  

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy. 

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility. 

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries.  These assets include the stock of substantially all of the regulated subsidiaries.  The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

 

2008 Other Announcements

Press Release

Release Date: September 16, 2008

For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.

 

2008 Monetary Policy Releases

Joint Press Release

Press Release

Release Date: September 15, 2008

For immediate release

 

The Federal Reserve Board on Monday requested public comment on an interagency notice of proposed rulemaking (NPR) that would permit a banking organization to reduce the amount of its goodwill deduction from tier 1 capital by any associated deferred tax liability.

Under the proposed rule, the regulatory capital deduction for goodwill would be equal to the maximum capital reduction that could occur as a result of a complete write-off of the goodwill, which is equal to the amount of goodwill reported on the balance sheet under generally accepted accounting principles (GAAP) less any associated deferred tax liability. The proposal is consistent with the treatment of other similar assets.

The NPR will be published in the Federal Register following approval by the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision.  The draft Federal Register notice is attached.  Public comments are due 30 days following publication, which is expected soon.

 

Draft Federal Register notice (327 KB PDF)

Press Release

Release Date: September 14, 2008

For immediate release

 

The Federal Reserve Board on Sunday announced several initiatives to provide additional support to financial markets, including enhancements to its existing liquidity facilities. 

"In close collaboration with the Treasury and the Securities and Exchange Commission, we have been in ongoing discussions with market participants, including through the weekend, to identify potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses," said Federal Reserve Board Chairman Ben S. Bernanke. "The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets."

"We have been and remain in close contact with other U.S. and international regulators, supervisory authorities, and central banks to monitor and share information on conditions in financial markets and firms around the world," Chairman Bernanke said.

The collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF) has been broadened to closely match the types of collateral that can be pledged in the tri-party repo systems of the two major clearing banks. Previously, PDCF collateral had been limited to investment-grade debt securities.

The collateral for the Term Securities Lending Facility (TSLF) also has been expanded; eligible collateral for Schedule 2 auctions will now include all investment-grade debt securities. Previously, only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-backed securities could be pledged.

These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally.

Also, Schedule 2 TSLF auctions will be conducted each week; previously, Schedule 2 auctions had been conducted every two weeks. In addition, the amounts offered under Schedule 2 auctions will be increased to a total of $150 billion, from a total of $125 billion. Amounts offered in Schedule 1 auctions will remain at a total of $50 billion. Thus, the total amount offered in the TSLF program will rise to $200 billion from $175 billion. 

The Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.

 

---

 

Primary Dealer Credit Facility
Term Securities Lending Facility

2008 Monetary Policy Releases

Hot Market: Minneapolis Has Largest Jump in Years

Minneapolis/St. Paul Realtors reported this month that pending sales have jumped in the City of Lakes by more than 28 percent. Across the board, the metropolis inventory of homes is slipping and sales moving up as prices have leveled and buyers come out of the woodwork.

Realtor/Blogger T.J. Larson of Edina Realty says the rebound has come about because of multiple reasons: "Part of this year's increase is due to legitimate increases in demand brought about by attractive prices, still-healthy mortgage rates and a 'last call' flurry of consumers utilizing FHA's seller-funded down payment assistance program before it is discontinued on October 1," he writes on his blog, "The other reason for the year-over-year surge is the Valley Fair-esque downward dive that activity took last year at this time amidst the initial media frenzy surrounding the now-infamous 'credit crunch.'"

The Monthly Indicators report from the Minneapolis Area Association of Realtors states: "To put this in perspective, there has not been a year-over-year increase in pending sales in 30 months and no increase this large in 41 months."

The median sales price for a home is now at $208,000, down about 10 percent year over year. Nevertheless, median prices have been on the rise month after month for all of 2008.

Deliberations resumed Saturday as leading Wall Street executives and top U.S. financial officials tried to find a buyer or financing for the nation's No. 4 investment bank and to stop the crisis of confidence spreading to other U.S. banks, brokerages, insurance companies and thrifts.

An official from the Federal Reserve Bank of New York said participants include Treasury Secretary Henry Paulson, Timothy Geithner, president of the Federal Reserve Bank of New York, and Securities and Exchange Commission Chairman Christopher Cox. The New York Fed official asked not to be named due to the sensitivity of the talks.

Citigroup Inc.'s Vikram Pandit, JPMorgan Chase & Co.'s Jamie Dimon, Morgan Stanley's John Mack, Goldman Sachs Group Inc.'s Lloyd Blankfein, and Merrill Lynch & Co.'s John Thain were among the chief executives at the meeting.

Representatives for Lehman Brothers were not present during the discussions.

They were meeting on the heels of an emergency session convened Friday night by Geithner — the Fed's point person on financial crises.

Federal Reserve Chairman Ben Bernanke is actively engaged in the deliberations but wasn't in attendance.

Geithner convened the meeting Friday evening, and told bankers gathered at the New York Fed's imposing building in downtown Manhattan to come up with a solution or risk being the next to go under, said investment banking officials with direct knowledge of the talks.

They discussed the current financial crisis, and were asked to come back Saturday with solutions that did not involve any financial intervention by the government, the officials said. They spoke on condition of anonymity because the talks were ongoing.

Fed and Treasury officials are aiming for a private-sector rescue for the troubled firm. Options include selling Lehman outright or breaking it up into pieces to be sold to private firms. A sale could be helped along if major financial firms would join forces to inject new money into Lehman.

A spokesman for Lehman declined to comment about the meeting.

Potential buyers could include Bank of America Corp., Britain's Barclay's Plc, Japan's Nomura Securities, France's BNP Paribas and Deutsche Bank AG. All have declined to comment.

Participants in Saturday's meeting were also trying to tackle a broader agenda that includes problems at American International Group Inc. and Washington Mutual Inc., said the investment bank officials, who were briefed on the talks.

AIG, the world's largest insurer, and WaMu, the nation's biggest savings bank, have taken steep losses during the past year from risky investments. Investors, worried they do not have enough cash on their balance sheets to withstand further hits, unloaded their shares on Friday.

AIG's shares dropped about 31 percent on Friday. WaMu's shares shed about 3.5 percent. Shares of investment bank Merrill Lynch & Co. Inc. also lost 12.3 percent.

Lehman Brothers and AIG are the top priorities, said the investment banking officials. WaMu insisted Friday it has adequate capital to fund its operations even as it announced another multibillion dollar write-down on bad mortgage loans.

WaMu has 76 percent of its deposits insured by the Federal Deposit Insurance Corp., an independent agency created by Congress to insure deposits in banks and thrifts up to at least $100,000. AIG has lost more than $18 billion over the last three quarters due to investments tied to subprime mortgages.

Global fears intensified Saturday that Lehman's collapse would stagger markets and undercut confidence in the U.S. financial system.

U.S. regulators face growing pressure from abroad to find a way out ahead of Monday's reopening of Asian markets. Germany's Finance Minister Peer Steinbrueck urged that a resolution be found before then, warning ominously, "the news that is coming out of the U.S. is bad."

Lehman Brothers Holdings Inc. put itself on the block earlier this week. Bad bets on real-estate holdings — which have factored into bank failures and taken out other financial companies — have thrust the 158-year-old firm in peril. Its stock has been hammered and it has been dogged by growing doubts about whether other financial institutions would continue to do business with it.

Richard S. Fuld, Lehman's longtime CEO, had pitched to shareholders Wednesday that the firm would isolate its soured real estate holdings into a separately traded company. He would then raise cash by selling a majority stake in the company's unit that manages money for people and institutions. That division includes asset manager Neuberger Berman.

Government officials want to avoid a Bear Stearns-like bailout; the Fed in March agreed to provide a loan of nearly $29 billion as part of JPMorgan Chase & Co.'s takeover of the firm. Unlike Bear, Lehman can go directly to the Fed to draw emergency loans if it needs a quick source of ready cash. In recent weeks, though, there's been no indication that Lehman has done so.

Bear's sudden meltdown led the Fed to engage in its broadest use of lending powers since the 1930s. Fearful that other firms could be in jeopardy, the Fed temporarily opened its emergency lending program to investment firms, a privilege that for years was granted only to commercial banks, which are subject to tighter regulation.

Those actions — along with the Bush administration's take over of mortgage giants Fannie Mae and Freddie Mac just last week — have spurred concerns that taxpayers could be on the hook for billions of dollars and companies will be encouraged to take on extra risks because they believe the government will come to their aid.

Paulson and Bernanke, however, have said they needed to help Bear Stearns and Fannie Mae and Freddie Mac to avert a financial calamity that would devastate the national economy.

Lehman's Fuld is currently a member of the New York Fed's board of directors.

Associated Press Business Writer Joe Bel Bruno in New York contributed to this report.

Feds bailed out China, not the US

The Fannie-Freddie rescue will work out great for emerging markets abroad, but it's going to kill us here at home. You might find some relief by investing in a handful of recommended foreign stocks.

By Jim Jubak

The U.S. government's takeover of mortgage market makers Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) will lead to a rapid recovery in the real-estate market, a rebound in economic growth and a surge in lending by a newly confident banking sector.

Yep, the takeover and restructuring of the two U.S. mortgage giants is a great thing -- for China and for many other developing economies of the world.

The case for putting more of your portfolio to work outside the United States was very strong even before the Treasury announced its scheme. After the deal, I think it's imperative that investors with a time horizon of more than six months move money into overseas assets.

Not right away, though. We're still in a global bear market for stocks. But sometime within the next six months, I think investors will get an all-clear on overseas markets, especially in developing economies. After spelling out the logic of my worldview, I'll end this column with five stocks to add to the watch list (at bottom left on this page) that I started with my previous column.

Bad for us

How is the deal cobbled together by Treasury Secretary Henry Paulson, the former Goldman Sachs (GS, news, msgs) CEO, bad for U.S. stocks and bonds and for the U.S. economy? Let me count the ways:

Good for them

For China, on the other hand, the results of the takeover are almost uniformly positive:

• The rescue bails out the banks and central banks that had put too much money into mortgage paper backed by Fannie and Freddie. At the end of 2007, Chinese banks held $376 billion in what the financial markets call agency debt.
• Now the commercial banks in China -- and the Chinese government -- don't have to worry about problems at Fannie and Freddie turning into problems on their balance sheets. Chinese banks are free, therefore, to make more risky, ill-considered loans to domestic companies.

• The People's Bank of China can forget about the yuan appreciating too quickly, which would increase the cost of Chinese goods and cut into Chinese exports. Now the Chinese government can manage its exchange rate without worrying that buying more dollars to depress the price of the yuan would increase its exposure to something like a meltdown at Fannie or Freddie.
• The U.S. intervention into its financial markets clears the way for the Chinese to intervene as deeply as they want without any foreign criticism. Who can say the Beijing government shouldn't intervene to prop up Chinese real-estate prices after what the U.S. government just did? Chinese real estate has suffered an even worse fall than U.S. housing prices, with some cities showing a 70% drop from their peaks.
• Pro-growth advocates in China just got another boost. China's advocates of fiscal discipline and the need to fight inflation were probably fighting a losing battle anyway, since politicians everywhere are reluctant to risk the wrath of the unemployed just to cut a percentage point out of inflation. Recent actions and speeches out of Beijing indicate the government is gradually revving up the growth engine again. More-radical pro-growth officials have also advocated new policies that would prop up the prices of stocks and real estate. The huge U.S. intervention to prop up real-estate, bond and stock prices helps make their case.

Follow the new leader

• Where China goes these days, much of the developing world follows. Other Asian economies that were sacrificing some growth to lower inflation are likely to follow China's lead and more actively pursue growth. That includes India, where the Congress Party faces a tough election in 2009. The Fannie Mae and Freddie Mac takeovers free banks and central banks in these countries, too, because they all owned huge positions in agency debt at the end of 2007 -- $63 billion for South Korea and $55 billion for Taiwan, for example.

   

  All this adds to what was a pretty convincing case to begin with for putting more money into overseas assets. Citigroup (C, news, msgs), for example, recently recommended that U.S. investors put 55% of their money in stocks into overseas stocks. That's a big jump from what was already a big allocation of 30% to overseas stocks. The average U.S. 401(k) has just 7% of its stock assets in overseas equities.

  But Citigroup's recommendation does no more than track the percentage of global assets in overseas markets. Non-U.S. stocks now make up about 57% of the Dow Jones Wilshire Global Total Market Index ($DWG). So by moving to a 55% allocation, you're just about matching the current state of global equity markets.

  There's more at stake here than some stock-strategy geek's desire to match a global index. Just as an investor will make more money by buying shares of a fast-growing company, in the long run an investor will make more money by buying into the stock markets of countries with faster-growing economies.

  The mature economies of the developed world aren't simply growing slowly now because of a temporary economic slowdown. They're likely to grow more slowly over the next decade or more than the economies of countries such as China, India, Russia, Brazil, Vietnam and more. A U.S. investor can capture some of that growth by investing in U.S. companies that sell into those economies. But the biggest gains will come from direct participation in those developing stock markets themselves.

In the long run, these overseas markets aren't any riskier than the U.S. stock market. Over the past 10 years, the standard deviation, a measure of volatility, of the U.S. stock market is 15.4. For overseas markets, it's almost the same: 15.5.

But that's an average for all overseas markets over the long term. In the short term, investors know that some overseas markets, especially the stock markets in developing economies, can be a huge risk.

So far, 2008 hasn't exactly been a great year for U.S. stocks. As of Sept. 9, the Standard & Poor's 500 Index ($INX) was down 17% for the year. But that was great performance compared with the 27% decline in iShares MSCI Brazil (EWZ, news, msgs), the 31% loss for iShares Hong Kong (EWH, news, msgs), the 35% loss for iShares MSCI Korea (EWY, news, msgs) and the 39% loss for Market Vector Russia (RSX, news, msgs). Those are all exchange-traded funds that track the Morgan Stanley Capital International indexes for a particular country.

The old rule of thumb that I learned more than a decade ago seems to hold: Developing stock markets are about twice as volatile as the U.S. market.

Volatility cuts two ways, of course. These stock markets fall twice as fast on the downside and rise twice as fast on the upside. Stock markets in developing economies have big rebound potential after falls of 30% or more.

But just because these markets are down 30% or more doesn't mean they can't fall further. The U.S. stock market is still looking for a bottom, and so are the markets in China, Russia, Brazil and the rest of the developing world.

A question of timing

To time your buys in these markets, I'd look to both external and internal signals. The most important external signal would be a bottom in the U.S. market. It will be hard for the world's more volatile stock markets to move up while the U.S. market is still throwing a scare into investors on a regular basis. Internally, I'd look for signs that growth in China's economy has started to accelerate.

One indicator to look at is Chinese auto sales. Preliminary data showed car sales down 10% in August from the same month in 2007. A turnaround in that decline would show the economy is reaccelerating and would ripple out through other major sectors, such as steel, now showing slowing demand. I'd also look at copper prices. Copper demand is a good indicator of construction activity. Copper prices have fallen in early September to match January 2008 lows, and the metal is selling at 20% below its summer high.

But demand from China may be picking up. Copper futures -- contracts for copper to be delivered in three months -- recently moved to a premium in the Shanghai market over futures prices in the London market. That's the first time since January that Shanghai futures have traded at a premium.

What should you buy once you think you've heard the all-clear? I'd break down my potential purchases this way:

• Stocks of domestic Chinese companies that should see the direct effects of any government efforts to stimulate growth. Two that I'm going to add to my watch list (on the left side of this page) are China Medical Technologies (CMED, news, msgs) and SunTech Power (STP, news, msgs).

• Stocks of domestic Brazilian companies in order to reap the benefits of accelerating growth in that country and continued improvement in Brazil's creditworthiness. (Brazil's credit rating going up as the credit rating of the U.S. is under pressure? Who would have thunk it?) Two that I'm going to add to my watch list are Jubak's Picks Petrobras (PBR, news, msgs) and Banco Itaú Holding Financeira (ITU, news, msgs).

• Stocks of suppliers to developing markets. For example, any recovery in the Chinese steel industry will be a huge shot in the arm for Australian iron mining companies such as current Jubak's Pick Fortescue Metals Group (FSUMF, news, msgs).

With this column, I'm adding these five stocks to my watch list. In the case of the two that are already part of Jubak's Picks portfolio -- Petrobras and Fortescue -- I'd maintain current positions and look to add to them when my external and internal indicators turn up. You'll also find updates on the current condition of these two stocks below.

Developments on past columns

"Make money off China's nightmare": When shares of Fortescue were closing in on $12 back in June, I found myself lamenting that I hadn't bought more of the iron mining newcomer when it was cheaper. Now that it is cheap -- $5.15 a share on Sept. 11 -- I've found it hard to pull the trigger and buy more.

That's just another illustration of an investing adage: Stocks are the only thing people want to buy more of when the price goes up and less of when the price goes down. Let's try to get past that, though, with a closer look at why the stock is down and at the fundamentals of its prospects.

Big-picture worries have weighed on the shares. The stock is down because steel production in China is down (on falling auto sales, among other problems). The fear is that less steel production will cut demand for iron ore, which would lead to a fall in iron ore prices.

The shares are also down on the slowdown in the Australian economy as a whole, which has led to a retreat in Australian share prices. The iShares MSCI Australia (EWA, news, msgs) exchange-traded fund fell 18% between July 14 and Sept. 11.

And finally, the shares have been hit by a rising U.S. dollar and a falling Australian dollar. The Australian currency has been hitting new one-year lows almost daily, and each decline takes a bite out of the value of Australian shares when the price is translated into U.S. dollars.

Fortescue faces company-specific fears, too. As a startup, it needs capital to expand, and capital is hard to get these days. The company's existing senior secured debt contains restrictive language that makes raising additional debt very difficult.

These fears are based on reality, but I think they're overblown. For example, while Chinese steel production has tumbled, Chinese demand for iron ore remains strong, and iron ore prices, rather than retreating, look likely to rise an additional 15% to 20% in the coming year. In fact, Fortescue has been able to sell future production to five Chinese steel mills for a $275 million prepayment spread over the next few months (which also helps with the company's capital problem).

The Australian economy is dependent on commodity exports, so if you think China is starting to rev up growth, then Australia's economic problems are likely to be relatively short-lived.

Fortescue also has addressed its capital problem by raising about $120 million in a sale of preference shares to a private investor. That capital didn't come cheap -- the shares, which are senior to existing common shares, carry a 9% dividend -- but the sale does demonstrate that Fortescue can raise the capital it needs to expand.

After looking at the way that all these problems and solutions play out, I'm keeping this stock in Jubak's Picks. I can't tell you where the bottom might be in these shares, any more than I can call the bottom in the stock market as a whole, but at current prices I think I'm certainly much closer to a buy than a sell.

As of Sept. 12, I'm cutting my target price for Fortescue to $9 a share by July 2009 from my prior target of $15 by October 2008. (Full disclosure: I own shares of Fortescue in my personal portfolio.)

"A safe money bet? Think Canada": In mid-July I wrote: "Shares of Thompson Creek Metals (TC, news, msgs) haven't been exactly safe lately, I'll admit. The stock is down 31% as of July 7 from its 2008 high of $24.45 on May 19."

Well, things have just gotten worse since then. As of the close on Sept. 10, the stock was down 49% from its May high.

What's going on? Some of the plunge is due to the general sell-off in all things commodity on fears of a slowdown in the global economy. But some of the damage is company-specific. The company issued 10 million additional shares in May to raise capital. More capital for expanding production is a good thing in the long run, but in the short term the new offer diluted existing shares by about 9% (that is, existing shareholders have a 9% smaller claim on the company's future earnings than they did before the sale of new shares).

The company missed Wall Street earnings projections in both the first and second quarters of 2008. But while I expect that the macroeconomic and financial market big pictures will make it hard for Thompson Creek shares to bounce back quickly, it sure looks to me like the company-specific problems dogging the stock are over.

In the first quarter, the company saw production costs climb as it hit a patch of lower-grade molybdenum ores (lower-grade ores require the same amount of work but yield less metal). In the second quarter, Thompson Creek saw inventory build and sales lag because of maintenance shutdowns at two of its roasters for processing ore. But production volumes at the mine have since picked up, and the company looks like it has worked its way past the lower-grade ores.

Cash costs are now falling, even with higher fuel prices, as the company mines higher-grade ores. Molybdenum prices are holding steady at $33 to $34 a pound, and the company is seeing an increase in customers asking about buying for immediate delivery at prices above $34 a pound, according to Deutsche Bank. The company also recently used some of its cash to buy an option on a molybdenum project in Colorado.

The company continues to project production of 23 million to 24.5 million pounds of molybdenum for 2008 and of 34 million pounds in 2009. Molybdenum prices will likely climb to $35 a pound in 2009 from $33.50 a pound this year, according to RBC Capital Markets.

I don't see any reason to radically change my target price based on anything going on at the company, but I am going to stretch it out because of overall market worries about commodity demand.

As of Sept. 12, I'm keeping my target price at $29 a share but stretching out my schedule to September 2009 from December 2008. (Full disclosure: I own shares of Thompson Creek Metals in my personal portfolio.)

"To mix oil and profits, think small": I still think Petrobras will dodge a political bullet in Brazil, but it's certainly not a sure thing, and escalating political rhetoric between President Luiz Inácio Lula da Silva and opposition parties is justifiably making Petrobras shareholders nervous.

Here's the issue: Da Silva has declared that Brazil needs to own the oil that will someday flow from the big new reserves discovered by Petrobras in the South Atlantic.

You'd think that having the reserves owned by Petrobras would meet that bill, since the government retains majority voting control of the company even though private investors, most of them overseas, hold about 60% of the company's total capital in the form of nonvoting shares. But that's not what the president has in mind.

Da Silva has proposed creating a 100%-state-owned oil company that would claim these new oil reserves. Petrobras would be allowed to participate in developing the oil it discovered only by selling drilling services and the like to the new company.

The president's opponents have accused him of backing the plan as a way to improve his party's chance of winning the 2010 election (he can't run again), and they're fighting the proposal.

What I think will ultimately either kill the plan or result in a major modification that gives Petrobras significant ownership of the oil it has discovered isn't political opposition but financial market reality.

Petrobras estimates that it will take at least $112 billion to develop the new fields, but the estimate is likely to go up when the company releases a new strategic plan later this month. Petrobras can fund much of that investment out of its own revenue, and it can easily raise the rest in international capital markets. A state-owned oil company would have a much harder time finding that capital because it wouldn't be able to tap global financial markets.

One potential compromise would be to set up a national oil company modeled on Norway's Petoro, which would charge higher fees to companies, including Petrobras, for access to the reserves but which would still give these companies ownership of the oil they pump.

All this politicking makes Petrobras a very high risk and a very high volatility stock right now. Make sure the risk in these shares matches the amount of risk that you'd like in your portfolio.

Meet Jim Jubak at The Money Show

MSN Money's Jim Jubak will be among more than 50 investing experts gathered in the nation's capital Nov. 6-8 for the fourth annual Money Show Washington, D.C. Just days after the election, this elite group will present more than 170 free workshops to help you prepare for changes in the political landscape. Admission is free for MSN Money users. To register, call 1-800-970-4355 and mention priority code 009554, or visit the Money Show Washington, D.C., Web site.

Editor's note: Jim Jubak, the Web's most-read investing writer, posts a new Jubak's Journal every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions on helping navigate the treacherous interest-rate environment, see Jubak's portfolio of Dividend Stocks for Income Investors. For picks with a truly long-term perspective, see Jubak's 50 Best Stocks in the World or Future Fantastic 50 Portfolio. E-mail Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares in the following companies mentioned in this column: China Medical Technologies, Fortescue Metals Group, Petrobras and Thompson Creek Metals. He did not own short positions in any company mentioned.

1. Provo-Orem, Utah
2. Raleigh-Cary, N.C.
3. Salt Lake City, Utah
4. Austin-Round Rock, Texas
5. Huntsville, Ala.
6. Wilmington, N.C.
7. McAllen-Edinburg-Mission, Texas
8. Tacoma, Wash.
9. Olympia, Wash.
10. Charleston-North Charleston, S.C.

• Credit history, 30.25 percent
• Not enough collateral, 23.4 percent
• Other, 23.3 percent
• Debt-to-income ratio, 20.7 percent
• Credit application incomplete, 14.2 percent
• Unverifiable information, 8.4 percent
• Insufficient cash, 3.8 percent
• Employment history, 2 percent
• Mortgage insurance denied, 0.2 percent

• Aluminum panels with pre-mounted tracks: $3,500 to $5,000;
• Accordion shutters: $5,000 to $ 7,500
• Roll-ups: $15,000 to $25,000.

Vice Chairman Donald L. Kohn

At the Brookings Panel on Economic Activity, Washington, D.C.

September 11, 2008

Comments on “Financial Regulation in a System Context,” “Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn,” and “The Central Role of House Prices in the Financial Crisis: How Will the Market Clear?”

I appreciate the opportunity to comment on these three papers.¹  They illuminate the sources and effects of the current financial market turmoil, and I learned a considerable amount from reading them and thinking about their implications.  Instead of providing detailed comments on each paper, I'd like to draw out the relationships among them and, in the process, comment a little on the papers and their implications.  To foreshadow:  I will be highlighting the role of leverage--in the household sector and in financial intermediaries--as a critical factor in understanding the buildup of excesses and their unwinding.

At the beginning of the chain of causation is the housing cycle in the United States.  Chip Case points out the difference between this housing cycle and others over past decades and asks why the difference developed.  One culprit he identifies is changes in the financial system that affected the way that mortgage credit is made available to borrowers.  A key element of these changes, and one that accounts for a good part of the subsequent effects of the financial system and the economy, is the rise in leverage in housing finance.  As Case notes, for several years, mortgage indebtedness rose substantially relative to the value of owner-occupied housing.  The willingness of lenders to tolerate--or, in some cases, encourage--huge increases in loan-to-value ratios added to the demand for housing, especially by people who normally might not have had the savings to enter the market, and contributed to the rise in home prices. 

One reason for the loosening of standards was the expectation that house prices would continue to rise--and even more certainly that they could not fall in all regions at the same time, supporting diversification through securitization.  Rising prices would enable lenders to recoup their funds even if the borrower was unable to service the loan, mostly because the borrower would be able to obtain extra cash through refinancing.  Expectations of house price appreciation facilitated and interacted with the increasing complexity of mortgage securities, including multiple securitizations of the same loan, which made it virtually impossible for ultimate lenders to monitor the creditworthiness of borrowers--a task they, in effect, had outsourced to credit rating agencies.  The absence of investor caution and due diligence was especially noticeable for the highest-rated tranches of securitized debt. 

Elevated leverage in housing markets has meant that as prices have fallen, lenders have had to absorb an unusually high proportion of the losses.  As Case points out, foreclosures by lenders have added to the downward pressure on those prices.  Conceptually, such price declines moving down the demand curve for housing services could accelerate and cushion the adjustment in activity necessitated by previous overbuilding.  I am encouraged that Case finds the pace of declines abating in a number of markets.  However, partly owing to the feedback of price declines on lenders, mortgage conditions have tightened some since the late spring readings he is using for his conclusion, and in my view, the jury is still out on whether housing prices are close to finding a bottom. 

 The heavy involvement of financial intermediaries in amplifying the housing boom and the subsequent economic effects of the bust brings me to the Morris and Shin paper, which raises a host of important issues related to the systemic aspects of financial intermediation and the lessons from the recent turmoil.  As they emphasize, one of the important lessons has been the greater-than-expected vulnerability of secured financing when intermediaries are engaged in maturity, credit, and liquidity transformation.  Recall that the turmoil first came onto the balance sheets of the banks through the collapse of the asset-backed commercial paper market last fall before it affected the funding of investment banks through the triparty repurchase agreement market.  The new vulnerability results importantly from the extension of secured short-term financing to increasingly illiquid and riskier long-term assets.  As uncertainty about the liquidity and creditworthiness of those assets--especially related to mortgage-backed securities--was called into question, lenders became more concerned about the possibility that they might end up owning the underlying assets, and they raised haircuts or simply refused to roll over loans. 

Clearly, as Morris and Shin point out, what we have learned about various risks implies the need for intermediaries to build greater liquidity and capital buffers in good times, as well as to improve their abilities to manage their risks.  And those larger buffers would help to offset the moral hazard that may have been created through the expansion of our liquidity facilities.  Getting the micro-prudential piece right--having each institution adequately protected--would go a long way toward making the whole system more robust and resilient. 

But Morris and Shin would go further; they would impose additional requirements on institutions to take account of the externalities for the system created when common shocks impair markets and credit availability by provoking widespread actions to preserve shareholder value.  They would do this through a higher liquidity requirement and through the imposition of a leverage ratio on investment banks, which is already in place for commercial banks. 

I agree with the authors, and with Chairman Bernanke, that we need to consider the level of buffers that is appropriate to ameliorate systemic risk.  That said, a host of difficult judgments are inherent in how we establish such a system, and I'll raise just a few on a very general level.  One set concerns the size of the buffers.  How far into the tail should intermediaries be required to insure themselves?  Shouldn't the Federal Reserve take some of the liquidity tail risk to facilitate intermediation of illiquid credits, as was intended at our founding?  Moreover, the larger the regulatory tax, the more likely it is that activity will migrate to unregulated sectors in an environment of fluid and free capital movements.  How can we gain better assurance of systemic stability when we are unlikely to be able to continuously extend the reach of regulation, and will it be sufficient to deepen the moats around the core institutions?  In this regard, the leverage ratio gives incentives to move some activities away from regulated institutions. 

A second question is, How we can structure these requirements and other aspects of regulation to damp, rather than reinforce, the natural procyclical tendencies of the financial system?  Among the challenges will be encouraging firms and supervisors to comfortably allow buffers to be eroded in bad times.  Interestingly, prompt corrective action under the Federal Deposit Insurance Corporation Improvement Act of 1991 was intended, in part, to induce an element of countercyclical behavior by banks.  It gives banks an incentive to build excess capital--on both a risk-based and leverage ratio basis--in good times to avoid prompt corrective action when circumstances are less favorable.  Now that we are in the latter state of the world, a study of how commercial banks are viewing capital ratios, including the leverage ratio, could inform consideration of the Morris and Shin proposal. 

The Morris and Shin paper also provides a framework for thinking about the Federal Reserve's credit facilities.  On page 9, they note that liquidity makes borrowers feel more robust and lenders less likely to withdraw, raising the odds for a more stable equilibrium for the entire system.  That is exactly what we have been trying to do with our various discount lending facilities.  The assurance of the availability of liquidity to sound institutions against good collateral should counter the greater uncertainty and risk aversion that have impaired normal arbitrage and intermediary functions by making those institutions more willing to extend credit and take positions in the process of making markets.  It should also assure other creditors of those institutions that illiquid markets will not impede the repayment of their loans, and therefore make them more willing to keep lending.  A number of markets remain disrupted and illiquid.  But I believe that they would have been even more illiquid and the risk of disruptive runs even greater without our various facilities; that's certainly what market participants are telling us.

Jan Hatzius is trying to gauge the combined effects on spending of the losses generated by the effects of the decline in housing prices outlined in the Case paper and the impulse for deleveraging in the financial sector inherent in the processes discussed by Morris and Shin.  To restore capital ratios depleted by mortgage losses and to raise those ratios even further in order to reduce leverage to safer levels demanded by counterparties, banks and other lenders need to reduce assets.  They do so by tightening terms and standards across a broad array of credit--and we have seen this behavior reflected in our surveys of bank lending officers and in various spreads and other measures of risk perceptions, risk aversion, and reduced supply of credit at benchmark interest rates.  In the current circumstances, some of the tightening we have seen has been in anticipation of possible adverse events in the economy and in confidence toward the financial sector.  These types of actions not only move up the demand-for-credit curve, but they also bolster profits going forward to cover potential write-offs and to attract new equity capital.  Pressures on profits arise not only from write-offs, but also because some sources of earnings, like securitization of mortgages or leveraged loans, are no longer available. 

In the steady state, lenders will get greater returns for taking risk than they did two years ago, intermediaries will be less leveraged and better capitalized, and the financial system will be more robust and resilient to shocks.  The transition to the new steady state, however, as lenders deleverage and protect themselves against various downside risks, involves some overshooting--making terms and standards tighter than will be necessary over the long run.

This story is completely consistent with the one told in the Hatzius paper, which relies mostly on quantity relationships to gauge the possible effects on gross domestic product (GDP).  My instinct has been to go from the actual and expected indicators of tightening supply, such as the instrumental variables used in the paper, directly to estimates of the effects of that supply shift on GDP.  Measures of flows would fall out of that exercise, but not be its focus.  And I have questions about the stability and reliability of the debt-GDP relationship used in the forecasts at the end of the paper.  But I will admit that we are in uncharted waters here, and the navigators shouldn't discard any potential information about the location of the shoals. 

The message of the paper is that restraint on credit supplies is likely to persist because intermediaries have some way to go to rebuild their balance sheets.  The process of adjustment to a safer, more resilient financial system is going to take a while.  I agree with this observation. 

Footnotes

1.  The views I express are my own and not necessarily those of other members of the Board of Governors.  The three papers discussed and their authors are as follows: (1) "Financial Regulation in a System Context," by Stephen Morris and Hyun Song Shin, professors of economics at Princeton University; (2) "Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn," by Jan Hatzius, chief U.S. economist at Goldman Sachs; and (3) "The Central Role of House Prices in the Financial Crisis: How Will the Market Clear?" by Karl Case, professor of economics at Wellesley College.  Information about the 2008 Fall Conference on the Brookings Papers on Economic Activity is available at the Brookings website .  Return to text

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And the decline in rates doesn't apply to you if you're borrowing more than $730,000.

But for the traditional 30-year fixed-rate mortgages that Fannie Mae and Freddie Mac acquire from lenders, interest rates have fallen to about 6% this week after hovering above 6.5% most of the summer, said data tracker HSH Associates.

As a result, many people with pending loan applications who were waiting to lock in their rates have decided to take the plunge this week.

MORTGAGE RATES PLUNGE IN FREDDIE MAC WEEKLY SURVEY

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.93 percent with an average 0.7 point for the week ending September 11, 2008, down from last week when it averaged 6.35 percent. Last year at this time, the 30-year FRM averaged 6.31 percent.

The 15-year FRM this week averaged 5.54 percent with an average 0.7 point, down from last week when it averaged 5.90 percent. A year ago at this time, the 15-year FRM averaged 5.97 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.87 percent this week, with an average 0.7 point, down from last week when it averaged 5.97 percent. A year ago, the 5-year ARM averaged 6.17 percent.

One-year Treasury-indexed ARMs averaged 5.21 percent this week with an average 0.6 point, up from last week when it averaged 5.15 percent. At this time last year, the 1-year ARM averaged 5.66 percent.

(Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

"Interest rates for 30-year fixed-rate mortgages are down almost 0.6 percentage points over the past 4 weeks, which will help to spur home purchases and loan refinancing in coming weeks," said Frank Nothaft, Freddie Mac vice president and chief economist. "This means that the monthly principal and interest payment on a new $200,000 loan is over $76 lower than a month ago.

"Lower rates have occurred at an opportune time, as the July pending sales data from the National Association of Realtors were off 3.2 percent from June. The Mortgage Bankers Association reported that refinance applications are up 18 percent over the past 3 weeks through September 5th, indicating that refinance activity has already begun to pick up."

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world's capital markets to finance mortgages for families across America. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.

SUMMARY OF SURVEY RESULTS

Freddie Mac defines its regions as follows:

Northeast: NY, NJ, PA, DE, MD, DC, VA, WV, ME, NH, VT, MA, RI, CT
Southeast: NC, SC, TN, KY, GA, AL, FL, PR, VI, MS
North Central: OH, IN, IL, MI, WI, MN, IA, ND, SD
Southwest: TX, LA, NM, OK, AR, MO, KS, CO, NE, WY
West: CA, AZ, NV, OR, WA, UT, ID, MT, HI, AK, GU

Freddie Mac's Primary Mortgage Market Survey (PMMS) is for informational purposes only and Freddie Mac is not responsible for business decisions made based on the reported results of the PMMS. Freddie Mac may change the methodology used to conduct the PMMS survey at any time and without notice.

DEFINITIONS

Commitment Rate is the interest rate a lender would charge to lend mortgage money to a qualified borrower exclusive of the fees and points required by the lender. This commitment rate applies only to conventional financing on conforming mortgages with loan-to-value rates of 80 percent or less.

ARM Index - is the One-year Treasury

Loan to Value Ratio (LTV) is the ratio of the loan amount of a mortgage loan to the lower of the appraisal value or purchase price of the property securing the loan.

Origination Fees and Discount Points are the total charged by the lender at settlement. One point equals one percent of the loan amount.

Margin is a fixed amount added to the underlying index to establish the fully indexed rate for an ARM.

Weighted Averages for the Primary Mortgage Market Survey have been adjusted as of October 18, 2007. The new weights use the dollar volume of conventional mortgage originations within the 1-unit Freddie Mac loan limit as reported under Home Mortgage Disclosure Act (HMDA) for 2006. The weights are listed in the table below.

PRIMARY MORTGAGE MARKET SURVEY RESULTS
September 11, 2008

• Prices are probably as low as they are going to go as the market stabilizes, thanks to the government takeover of Freddie Mac and Fannie Mae.

• Interest rates are likely to decline as Freddie and Fannie get government help.

• The Federal Housing Administration recently boosted its loan limits to $729,750 in expensive areas. It's going to take some of that back come Jan. 1, when the loan limit will shrink to $625,500.

• The tax credit will shave $7,500 off a first-time buyer’s federal tax bill due April 15. Buyers who don't owe tax, will get the money as a refund.

• Midwest: rose 2.8 percent to 81.6 in July but remains 2.4 percent below a year ago.
• South: unchanged, holding at 93.7, but is 13.4 percent below July 2007.
• Northeast: fell 7.5 percent to 73.6 in July and is 13.2 percent below a year ago.
• West: dropped 10.6 percent to 90.3 but is 6.5 percent higher than July 2007.

• Mortgage rates: The 30-year fixed-rate mortgage, which also has been moving up and down, should trend up to 6.6 percent by the end of this year, edging up to 6.7 percent in 2009. NAR’s housing affordability index is likely to remain favorable throughout 2008, averaging 13 percentage points higher than last year.

• Growth in the U.S. gross domestic product: The GDP is forecast to remain positive with a growth rate of 2.0 percent for all of 2008, and 2.0 percent also next year. The unemployment rate is estimated to average 5.8 percent over the coming year.

• Inflation: As measured by the Consumer Price Index, inflation is anticipated at 3.8 percent this year and 1.6 percent in 2009. Inflation-adjusted disposable personal income is projected to grow 1.8 percent in 2008 and 2.1 percent next year.

• Eliminate countertop clutter. A countertop covered with small appliances and utensils looks crowded, not spacious.
• Pack up the too-personal. Don't leave toiletries on the counter. Stash family photos.
• Be prepared for snoops. Prospective buyers pull open drawers, look in closets and peek behind the shower curtain.
• Make sure things work. Dripping faucets, burned-out light bulbs, and squeaking hinges detract from the home's appeal.
• Think "white-glove clean." Mop, dust, vacuum, clean baseboards, wash windows. Make sure the house looks fresh and smells neutral.
• Make sure the front door is clean and the hardware polished. Power-wash walkways.
• Store furniture that makes rooms feel crowded.
• Show every room for the kind of room it is. Maybe you've turned your formal dining room into a home office. Get rid of the desk and computer, and bring back the dining table and chairs.

Treasury Paulson on Fannie Mae and Freddie Mac

Treasury Henry Paulson talks today, Sunday September 7, 2008, concerning mortgage finance companies Fannie Mae and Freddie Mac:

Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency,  FHFA. In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs including the ability of the GSEs to weather a variety of market conditions going forward.

As a result of this work, we have determined that it is necessary to take action. Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Based on what we have learned about these institutions over the last four weeks including what we learned about their capital requirements and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve. We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection. Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.

I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs. I appreciate the productive cooperation we have received from the boards and the management of both GSEs.

I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs.

I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition. I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us.

Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability. To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009.

Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size. Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities.

Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders senior and subordinated and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations.

It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

Police Arrest Couple in CraigsList Rental Scam

A Las Vegas man claiming to be a licensed real estate practitioner and a female assistant have been arrested and jailed for renting out vacant homes belonging to seasonal residents.

Emilio Gonzales and Melissa Cowan advertised properties for rent on CraigsList. They asked potential renters to sign leases and took security deposits totalling several thousand dollars. Rents were collected in cash at various locations the pair specified.

The scam fell apart when the real owners showed up and found people living in their vacation homes. Police arrested Gonzales and Cowan by following a tenant to the agreed upon spot to pay rent. The two are being held on burglary, conspiracy and fraud charges.

Source: KVBC-TV (09/04/2008)

Upgrade Before You Sell

Real estate agents sometimes receive calls from homeowners asking for advice on what they should do to prepare their house to go on the market. They may have settled for living in a "less than optimal" circumstance for years, and are now going to spend money to make it nice for someone else to enjoy.

If you are considering painting, updating the kitchen, landscaping, or making any other improvements that will increase your home's re-sale value, think about making those improvements while you are still there to enjoy them. Create your own dream kitchen, master suite or spa, build an outdoor living room or restore your wood floors now. Improving your property will make your home more enjoyable, help maintain the property values in your neighborhood, and expedite the sale of your home when you are ready for a move.

Selling Before Buying

Timing can sometimes be difficult if you have to sell a home before you can buy another one. Most people need the equity from the sale of their first home for the down payment on the new house. If your present home goes on the market first, you may be concerned that it will sell before you find the one you want to buy. On the other hand, if you find the perfect home before your present home is under contract, the sellers may be reluctant to accept your offer, and you may be too nervous to sign a contract.

It is a good idea to sit down with a good real estate agent for some professional advice before you begin your search. It will probably be necessary to be flexible on the closing date, because it can be easier to find a home that you want to buy than to sell your present home. After finding the house you want, you can ask the lender about arranging a short-term bridge loan that can make the purchase possible before you sell your current residence

Plumbing Preparations

The plumbing is one of your home's most mysterious systems. The pipes are hidden in the wall, and when you have a problem, you have to call in a plumber. Since plumbers' rates are hefty, prospective buyers are often frightened away by evidence of leaky pipes, ceiling stains below shower pans, or antiquated bathroom fixtures.

If you are planning to sell your home, it is a good idea to solve your plumbing issues before you place it on the market. Take care of any cosmetic damage that leaks may have caused after the plumber has finished his work. Plumbing repairs are cost-effective, because most sales agreements call for all systems, including the plumbing, to be in working order. If you have a problem, you will probably have to repair it before the closing anyway, so by doing it ahead of time, you eliminate that issue. Plumbing that is in top condition will make your home appear to be well cared for and will make it more attractive to potential buyers.

Playing It Safe

Conduct a thorough check for any safety hazards when you are getting your house ready to put on the market. You may be accustomed to the worn tread on the stairs, toys in the hallway, or closets that deposit their contents at your feet when the door is opened, but strangers won't be as intuitive as you are. They will be vulnerable to those little "hazards" as they walk through your home, turning on the faucets, opening closet doors, and going up and down the stairs.

The stairs are a good place to begin your safety check. Could someone tall accidentally bang their head on a beam, pipe or the ceiling as they go up or down? Is the carpeting on the stairs securely fastened? An area rug should have a non-slip mat underneath.

Safety is important because someone who is injured in your home could sue you for damages. This doesn't happen often, but if it does, it can be extremely unpleasant. "Better safe than sorry" applies to homes as well--especially when they are for sale and open to visits from potential buyers.

Net Sheet for Sellers

When you consider what price you should accept when selling your home, there are two important factors that will influence your decision. The first factor is the basic sales price. The second, and more important, is the amount you will actually receive from the proceeds at the closing.

Your real estate agent will prepare a seller's "net sheet" showing what your expenses will be. This will aid you in determining who pays what and when. It can help you to focus on the details of the sale.

A seller's expenses will include brokerage fees, real estate settlement fees, title insurance fees and special assessments. In some cases the buyer may ask you to pay some of the loan fees. Local real estate taxes will be pro-rated for you and the buyer, and you may be asked to place funds in escrow for payment of your final water bill. Subtract your mortgage balance any home improvement loans and other liens against the property that will be paid at the closing to come up with your final figures.

Your real estate agent can go over all of these factors with you when you list your home for sale and again as offers come in.

Inspection Repairs

When you sell a house, the buyers will probably have a home inspection before they sign a contract to purchase the home. The inspector may turn up something that needs attention or repair, and after the inspection, the buyers may produce a list of items they want repaired as a condition for moving forward on the sale.

When you get the buyers' list, remember that some of the items may be negotiable. Sales contracts usually require that all the systems be in working condition. Some buyers may make requests that go beyond the normal obligations of the seller. They may ask for a new roof or certain structural repairs that you may not want to make. Your agent can help you to assess the risks of just saying "no" to buyers who are making demands you consider to be unreasonable. You may decide to decline the requests, but the buyers may also decide to back out of the deal as a result.

When you agree to make repairs, hire licensed professionals who will guarantee their work, and give copies of the reports to the buyers. Arrange to have the repairs made as far ahead of time to avoid last-minute complications which could compromise the transaction.

Getting Ready To Sell

Here is a scenario that you may encounter when you sell your home. You make a listing appointment with a real estate agent who shows up with a detailed market analysis and a list of all the advantages of listing with his or her company. The agent then walks through your home with you, making suggestions about how you can present your home at its best.

The real estate agent's recommendations about cosmetic "fix-ups" make some sellers feel a little uncomfortable. They realize how long they have put off all of those "little" projects. If the suggestions about the cat box, spider webs, kitchen and bathroom cleanup, and removal of clutter make you feel a little defensive, remember that none of this is personal! Most sellers need a little coaching to make their homes show well. Providing suggestions for home staging is an important part of an agents job. The better your home looks while it's on the market, the more likely it is to sell quickly, and for top dollar.

Doing What Comes Unnaturally

The most inconvenient aspect of having your house on the market is the constant housekeeping required. Even if you are naturally neat, it requires a lot of hard work to constantly keep your home in top "showing" condition.

Do whatever it takes to make your home shine and to keep it looking beautiful. It may mean getting extra help from the children or hiring short-term professional help. The importance of making a good impression on the real estate agents and buyers who come through your home cannot be overstated. Many interested buyers may call for last-minute appointments to see your home. Buyers may associate a messy home with poor maintenance of the structure, systems and appliances, which can discourage offers or result in a lower offer than the house might otherwise bring.

A Disappointed Seller

Many home sellers are disappointed by the first offer they receive. For example, when your agent calls to say that she has an offer on your home, your adrenaline might start flowing profusely. You get really excited, but your happy bubble bursts when you are presented with the contract. It's just not enough! The buyers asked for your new washing machine, and they also want to postpone the closing for three months. You don't see how it can work!

Before rejecting any offer on your property, you should consider making a counter offer. Rarely does an offer look the way it would if you had written it yourself. Consider the good and bad points of the offer, and work with the agents to find a middle ground that you and buyers can live with. You may have to go back and forth several times, and there will probably be compromises on both sides. Unless you are lucky enough to be selling in a strong sellers' market, the buyers will expect to do some bargaining. With a little patience, you and your agent can create a "win-win" situation for you and the buyers.

Where Are Lenders Getting Credit Scores?

Consumers often mistakenly believe that mortgage lenders use only credit scores from Equifax, Experian, TransUnion, and Fair Isaac's myfico.com to gauge creditworthiness.

However, Consumer Reports recently found that lenders also use NextGen FICO scores, FICO Expansion Scores, and Industry Option FICO scores — which take car loans into consideration — as well as custom formulas.

Given that these credit scores or scoring models are not available to consumers, experts say that consumers should not rely solely on available credit scores to determine their likelihood of getting a loan. They would be wise to make timely bill payments, make more than the minimum payment, hold down credit card balances, and retain old accounts.

Additionally, experts say it might be worth keeping tabls on other credit scores, such as Experian's PLUS scores, which are not yet sold to lenders but could be in the future.

Source: Allentown Morning Call (PA) (09/02/08)

Will Feds new rules stem identity theft?