Notes from the May 21st edition of The Kiplinger Letter

For some time now, I've been subscribing to The Kiplinger Letter, which is a weekly newsletter summarizing trends in politics and economics for managers and other decision-makers.

The May 21st edition was chock full of interesting remarks on housing and economics that I wanted to share here:

• The red ink hemorrhage at Fannie Mae and Freddie Mac is far from finished.

The tally of losses since Uncle Sam took the two over will likely double
before all the bad loans made during the housing bubble years are washed out.

So far, the feds have funneled about $146 billion to the two mortgage giants,
and Obama has pledged to cover the duo’s losses, no matter how deep, through 2012.

There’s little chance Congress will undertake an overhaul this year,
and it probably won’t finish up next, either. Republicans want to tackle the issue now,
while there’s a sense of urgency, so they can wind down Fannie and Freddie’s role
over five years or so.

But Democrats won’t agree. They fear that would deal a blow
to the housing market. The two quasi-governmental agencies, along with the FHA,
the Federal Housing Admin., now make or buy nine out of 10 new mortgages.

Delay has an indirect upside. Odds are Fannie and Freddie will be cut back,
but not eliminated, when lawmakers finally hash out what to do with them.
In the interval…more time for banks to repair their balance sheets and beef up lending
and for a private secondary market to revive. Otherwise, lending would be constrained.

• The slowdown in mortgage foreclosures isn’t necessarily good news.

Though the pace is decelerating, it isn’t because fewer homeowners are falling behind.
Lenders are simply taking longer to pull the trigger…12 months instead of about six.

Banks hope that by holding loans and letting delinquent borrowers stay put for now,
they’ll stave off a tidal wave of foreclosures and help to stabilize housing prices.
Short term, it’s good news for hard-hit areas such as Las Vegas and Miami.
But it will drag out the adjustment process. Now the number of foreclosures
isn’t likely to peak until sometime next year. One in eight mortgages is in distress...

• Europe’s woes spell a break for mortgage seekers, purchasing or refinancing.

For the time being, investors are loading up on U.S. Treasuries, pushing yields down
to about 3.2%. That’s translating into a dip in the 30-year fixed rate for mortgages.

The effects won’t last much longer, though. If Greece, Portugal and Spain
get a better grip on their budgets, following through in the coming weeks on promises
to rein in spending, investors’ worries will shift to the mounting pile of U.S. debt
and resulting inflationary pressures. Look for Treasury yields to bounce back up...

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