Steve Papapietro's Weekly Mortgage Bulletin: Iron Hank and Super Ben Take Path to Save the World

For the week of Sept 22, 2008-- Vol. 6, Issue 39

Last Week in Review

"The path to success is to take massive, determined action." Anthony Robbins. And success in stabilizing the markets and the economy is exactly what the government is hoping will happen as a result of the massive, determined actions they took late last week in response to unprecedented happenings in the financial markets. 

Treasury Secretary Hank Paulson announced that the US government will guarantee money market funds, after panic led to a "run on the bank" type of environment. A whopping $180 billion was withdrawn from market funds on Thursday alone. And the fear was so great that a premium to put money into Treasury securities was paid, which actually exceeded the rate of return. So effectively, the return was negative! People were actually paying for a place to put their money that would be safe because they had fears of losing principle. The government guarantee helped to ease these fears and stabilize the markets.

The Fed announced plans to create a market place for liquid mortgage debt. This should do a lot of long-term good to help the housing and lending environment. As if that weren't enough, the Securities and Exchange Commission also placed a temporary ban on the short selling of 799 different financially related stocks.

What prompted these dramatic actions? Very dramatic happenings earlier in the week.

After 158 years in existence, Lehman brothers filed for bankruptcy last Monday due to overexposure of high-risk loans in the mortgage arena. Then, the Fed gave insurance giant AIG an $85 billion lifeline to keep it from going into bankruptcy, after initially stating it would not intervene. Then it was announced that Merrill Lynch is being acquired by Bank of America, which will save them from the same fate as Lehman brothers, and now troubled bank Washington Mutual is looking for a buyer as well. 

Also playing a role was the fact that the Fed left its benchmark Fed Funds Rate (the rates banks charge each other for overnight lending) unchanged on Tuesday, not wanting to counter the recent improvements the US economy has made in the way of inflation. While this benefited Bonds and home loan rates earlier in the week, Stocks felt heavy selling pressure on the news... which added to the reasons for the actions taken late last week.

The government's announcements on Friday are great news for the overall health of our financial system, though they did cause Bonds and home loan rates to move away from their best levels of the week. All in all, Bonds and home loan ended the week slightly worse than where they began. Additionally, stocks had their most volatile week in history--but ended the week almost exactly where they started.

The path to smart spending definitely involves taking advantage of great deals! Check out this week's mortgage market view for five fantastic freebies... and a link to 25 more! 

Forecast for the Week

The ride isn't over---the coming week may see more wild movement in the markets as the financial sector responds to all the recent action, along with several reports due in the latter part of the week. We'll get a read on the housing market with Wednesday's Existing Home Sales Report and Thursday's New Home Sales Report. And we will get a read on the economy with Friday's Gross Domestic Product Report (GDP is the broadest measure of economic activity) and Thursday's Durable Goods Report.

What are "durable goods"? Simply put, they are items that are durable (i.e cars, furniture, appliances, games, cameras, business equipment, etc.) and are made to last longer than three years. This report shows a good measure of consumer and business consumption and buying behavior, and depending on the health of the report, could add to the volatility we have seen.

Remember when Bond prices move higher, home loan rates move lower... and vice versa. AS you can see from the chart at the top of the post, Bonds and home loan rates are still much improved from several weeks ago, despite giving up some recent gains. This could be a great time to take a close look at your home loan financing needs, as rates remain at historic lows. As always, I will be watching closely to see how Bonds and home loan rates continue to respond in these volatile times. 

CHART ABOVE: Fannie Mae 5.5% Mortgage Bond 

The Mortgage Market View

Five Fantastic Freebies

These days, many people are looking for new ways to cut costs and save money. Here are five great ideas from the editors of Kiplinger.

Free TV& Movies: Full episodes of more than 300 shows from NBC Universal and Fox stations are available on www.hulu.com. The site also offers over 165 free full-length movies in a variety of genres. In addition, other networks like ABC and CBS are also starting to post full episodes of various shows on their sites. 

Free College Savings: Sign up at www.Upromise.com and you can turn everyday purchases into college savings. You'll earn cash rewards for eligible purchases of groceries, gas, dining out, travel, and online shopping. The money is then automatically transferred to your child's 529 account. In addition, your family and friends can help too, by linking their rewards to your child's account. 

Free Directory Assistance: The next time you need to call 411, dial 1-800-Free-411 instead for free directory assistance for both residential and business listings. While you may have to listen to a short advertisement after voice prompts, you will still save a few dollars.

Free Credit Report: By law, you can receive one free credit report once a year from each of the main credit bureaus. Visit www.annualcreditreport.com to request your report.

Free Recipes: Need some inspiration in the kitchen? Check out www.allrecipes.com and www.Epicurious.com where you can access over 100,00 recipes for all sorts of meals... no matter your level of expertise. You can search by meal, occasion, or ingredient, and there are plenty of user reviews and cooking demonstration videos to help.

For twenty-five more great freebies, CLICK HERE. 

Worried your bank might fail?

Since paraphrasing might leach this important article of its helpfulness, I've decided to post it here in its entirety.  Economy woes have left many of us worrying that our banks might fail--The Mercury News published an article recently by Pete Carey that lays out in simple terms the ways our money is safe-guarded and how it isn't. 

Worried your bank might fail? Here's how you're protected--and how you're not

Pete Carey

The Mercury News

We've all got the jitters these days. Will the bank fail? Is our money safe? What about our investment accounts, and the IRAs we have at our bank or credit union?

The bad news is that not all investments are protected by federal insurance, and there are limits on what is protected. The good news is that quite a lot is covered, and there are strategies for gaining more protection. 

Experts say there's no need to pull your money out of the bank. But here is how your money is insured at various financial institutions, and how you can increase your protection.

BANKS

In the event of a bank failure, the Federal Deposit Insurance Corporation insures deposits, including money market accounts, up to $100,000.  The vast majority of banks, including all state-chartered banks in CA and many foreign-owned banks, are FDIC insured. To make sure your bank is an FDIC member, go to "Bank Find" on the FDIC web site at www.fdic.gov/deposit/index and type in your bank's name and state.

The FDIC also insures certain retirement accounts up to $250,000. These include all IRAs and self-directed defined-contribution accounts, such as 401ks and Keogh plans for the self-employed. This is in addition to the $100,000 per-account protection for bank accounts.

Here are a couple of ways to increase your coverage:

• Co-owners of an account are each insured up to $100,000, so they can have up to $200,000 in a joint account with the full amount protected by the FDIC. Or, they can open three accounts- one joint and two individual accounts--for $400,000 coverage. 
  
• For a living or revocable trust with multiple owners, the FDIC provides up to $100,000 of insurance per qualified beneficiary (parents, siblings, spouse, children and grandchildren). A trust with six owners is insured for $600,000.

Thus, a couple with no children could be insured for up to $1.1 million by having a joint account, two individual accounts, two retirement accounts and two revocable trust accounts naming one another as beneficiaries. 

• Another strategy is to spread your money to many different banks. You and your spouse could have $600,000 in joint accounts at three banks, for example, all of it protected by the FDIC. There is no maximum number of banks where accounts can be held.
  

"Some banks have utilized creative mechanisms for insuring that their depositors can gain even more deposit insurance than that offered by the FDIC," notes William Heraf, commissioner of the California Department of Financial Institutions. He advised checking with your bank to find out if it has done that.

If one of your banks merges with another, the FDIC allows a six-month grace period in which coverage continues as though the money were still at separate banks. 

If your bank fails, the FDIC will find a healthy bank to step in and take over its operations. That usually happens on a Friday, and the bank reopen on Monday with full access to your accounts. Over the weekend, you would still have access by using checks, debit cards and ATM cards.

To learn more about how to structure accounts for maximum coverage, go to www.fdic.gov and click on the "deposit insurance" tab. 

CREDIT UNIONS

Accounts in credit unions are insured by National Credit Union Administration, which operates in essentially the same way as the FDIC.

BROKERAGES

Cash and securities such as stocks and bonds held in a brokerage account are protected by the Securities Investor Protection Corp, or SIPC. That includes 401k plans and investment accounts at banks, as long as they are registered with the Securities and Exchange Commission. 

SIPC, created by Congress in 1970, insures accounts up to $500,000, with a maximum of $100,000 for cash. Of course, you aren't insured against losses incurred by your investments because the stock market is tanking.

You can find out if your brokerage is an SIPC member at www.sipc.org.

Brokerages are required by the SIPC to segregate cash and securities owed to customers, so that in the event of a failure they are safe and can be returned to the customer. If for any reason the failed brokerage didn't segregate the securities, SIPC liquidates the brokerage to pay the customer.

"In this instance, customers are assured they'll get their assets back," said SIPC President Stephan Harbeck. "If there's anything missing, SIPC can use its funds to replace any missing securities," he added. 

In the case of Lehman Brothers, the investment bank that filed for bankruptcy last week, the account segregation "is in good shape" and no customer assets are missing "as far as we know." For technical reasons, however, SIPC may file liquidation proceedings to help facilitate an account transfer to Barclays Bank. Individual accounts are now at a Lehman subsidiary. 

Make sure to check out other great resources at The Mercury News website.