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by John Poltrock

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Fed to Buy $600B in Securities to Hold Interest Rates Low

by Randy Dockery

Taken from

By: Carrie Bay


The Federal Reserve decided Wednesday to pump another $600 billion into the economy in the hopes of bolstering what it called a “disappointingly slow” recovery.

The capital injection will come in the form of purchases of long-term Treasury securities by the central bank, about $75 billion a month between now and the end of June 2011.

Fed officials said they also plan to continue reinvesting principal payments from existing securities holdings. According to a separate announcement put out by the Federal Reserve Bank of New York – essentially the central bank’s money manager – these reinvestments will amount to another $250 billion to $300 billion in Treasury bond purchases over the same period.

The goal is to buoy economic growth by keeping interest rates low. By throwing more money into the financial system, the Federal Reserve is hoping banks will lend more, allowing consumers to purchase a home or refinance their mortgages and giving businesses the capital they need to grow their operations.

If it plays out correctly, the move is expected to spur spending, foster job creation, and keep deflation in check.

The analysts at the international research firm Capital Economics say they don’t expect lower long-term interest rates to do much to stimulate demand in the wider economy.

Paul Ashworth, a senior U.S. economist with the firm, explained, “Half of all mortgage borrowers don’t qualify to refinance at lower rates because they don’t have enough equity in their homes. Larger businesses are already sitting on stockpiled cash, while small businesses dependent on banks for their credit can’t get loans at any cost.”

Ashworth added, “When the Fed realizes that QE2 [its second round of quantitative easing] isn’t working it will have two choices: Admit this is a lost cause and halt its purchases or increase the size of its purchases. We suspect the Fed would double-down rather than fold.”

This marks the second big bond-buying spree by the central bank since the recession took hold. From November 2008 to March of this year, the Fed bought up $1.7 trillion in mortgage-backed securities (MBS), debt from Fannie Mae and Freddie Mac, and Treasury bonds.

That effort succeeded in pushing mortgage interest rates to extreme lows, but even that hasn’t been enough to boost housing demand. Even after the Fed’s bond buying initiative ended in the spring, mortgage rates continued to drop, hitting lows not seen in more than 60 years.

The Federal Reserve said in its policy statement released Wednesday that information received since its last meeting in September “confirms that the pace of recovery in output and employment continues to be slow.”

Household spending is increasing only gradually, and remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit, the central bank said.

The Fed committee voted to maintain the target range at 0 to 0.25 percent for its benchmark federal funds rate – the rate at which banks lend to one another. As it has reiterated for months on end now, the central bank said it anticipated economic conditions will warrant “exceptionally low levels” for the federal funds rate “for an extended period.”


Randy Dockery

Capital Economics Warns of Another Dip Ahead

by Randy Dockery

Taken from

By: Carrie Bay


The analysts at Capital Economics say that dreaded double-dip is already underway, in both housing activity and residential property prices.

“It is becoming clear that the housing market cannot stand on its own two feet,” said Paul Dales, U.S. economist for the international research firm.

Dales and his team are forecasting home prices in the United States to steadily decline over the next 12 months. The Capital Economics House Price Model suggests that by the end of next year, prices will have fallen back by just over 5 percent, taking them to a new cycle low.

“Prices may not regain their previous peak for a decade,” Dales said.

The agency says in an upside scenario, in which the economy is stronger than its analysts expect, prices may not fall. In a downside scenario, though, prices could drop by another 20 percent.

According to Capital Economics’ latest report on U.S. housing markets, Illinois, Florida, California, and Nevada appear the most vulnerable to further home price declines. Alaska, the District of Columbia, Maine, and West Virginia seem the best placed to weather another downturn.

Mortgage applications for home purchase have remained weak despite the plunge in mortgage rates to a record low. Capital Economics says “even the mortgage bargain of a lifetime has not been enough to bring the market back to life.”

The company’s analysts predict housing demand will remain “unusually weak” for at least the next three years. At the same time, supply is set to stay “unusually high.”

Relative to today’s demand, Capital Economics says there are currently about 1.5 million too many homes up for sale. And a steady flow of foreclosures will mean that excess supply will continue to grow.

According to Capital Economics’ report, the bulk of the 2.5 million households that are already in foreclosure and the 2.4 million that are at least 90 days past due will at some point be put up for sale.

“The economy will not be able to support a decent housing recovery,” the company’s analysts wrote. “Income growth will stay muted, unemployment will stay high, and the threat of deflation will rise.”


Randy Dockery

Fitch Says 7M Homes in the Shadows Will Take 40 Months to Clear

by Randy Dockery

According to the ratings agency, the number of months between the date of the borrower’s last payment and the date of liquidation has steadily increased over the past several years, and is now at more than 18 months on average. Fitch says that is the highest figure on record.

While the volume of newly delinquent mortgages has begun to improve in recent quarters, Fitch says liquidation rates of existing distressed properties have been constrained by weak demand and expanded initiatives to modify loans for troubled borrowers.

On top of that, the agency’s analysts believe the recent discovery of defects in the residential mortgage foreclosure process will further extend liquidation timelines, slowing the resolution of distressed properties in the shadow inventory and preventing home prices from finding a floor.

“While the reduced volume of distressed sales since 2009 has temporarily helped home prices, Fitch believes that the extension in foreclosure and liquidation timelines is simply prolonging the housing correction underway,” the agency said in a report issued Monday.

The total number of troubled loans reached a peak in early 2010 and had begun to show some improvement prior to the most recent foreclosure moratoriums resulting from documentation issues, Fitch said.

According to the ratings agency’s analysis, the latest industry trends indicate that it will take more than three years to sell the properties of loans that are currently seriously delinquent, in foreclosure, or REO. Fitch says for judicial foreclosure states, such as Florida, it is expected to take longer than the national average of 40 months to resolve the distressed loans, while for nonjudicial foreclosure states, like California, the inventory will likely be resolved faster.

The agency points out in its report that the market’s ability to absorb the supply of distressed homes has been affected by limited demand for home purchases.

While interest rates are near historical lows and affordability has improved, fewer potential buyers can qualify for new loans due to the heightened credit standards, Fitch says. Additionally, high unemployment, weak consumer confidence, and uncertainty about the future of home prices have prevented some potential buyers from entering the market.

“Recent concerns about the title-transfer process for foreclosed homes could further weigh on demand,” Fitch noted.

The agency says at this point, it is still unclear how much the foreclosure process will be extended specifically due to document defects. However, even prior to recent developments, Fitch assumed the ultimate resolution of the backlog of distressed properties would result in further home price declines and prevent sustained home price increases for a number of years.

“Fitch is currently assuming approximately a further 10 percent home price decline nationally, with the majority of the adjustment occurring by the end of 2012. However, the timing of the adjustment will be affected by the timing of the distressed inventory resolution,” the agency said in its report.


Randy Dockery

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