The Fed: Making Plans

Mike Larson examines the Federal Reserve's different plans of action that have been developed since the start of the recession. In this issue of Money and Markets, Mr. Larson takes a closer look at each of the plans and the terms that exist within them.

Jupiter, Fla. (PRWEB) March 16, 2008 -- Mike Larson examines the Federal Reserve's different plans of action that have been developed since the start of the recession. Mr. Larson takes a closer look at each of the plans and the terms that exist within them.

The Federal Reserve's reaction to the mortgage crisis started with a discount rate cut of 50 basis points in August of 2007. That was followed by another 50-point cut in September, a 25-point cut in October, another 25 in December, a whopper 75-point cut on January 22 and then another 50 points eight days later. During that same time period, the federal funds rate was slashed from 5.25% to the current 3%. And by all indications, another 50-point or 75-point cut could be seen at the Fed's March 18 gathering. The Fed is slashing rates and throwing hundreds of billions of dollars at the credit crisis.

But that's not all. In December 2007, the Fed unveiled an unconventional "Term Auction Facility" (TAF) for the first time. The supposedly temporary plan allows for the periodic auction of funds to depository institutions in exchange for a wide variety of collateral. The Fed is willing to accept everything at the TAF, from U.S. Treasuries to foreign government debt to commercial mortgage-backed securities, residential mortgages, and even consumer loans. These auctions started at $20 billion each. That jumped to $30 billion a pop in January. Then most recently, the Fed boosted the auction sizes to $50 billion. And the Fed wasn't finished. It also said it would conduct several repurchase transactions totaling roughly $100 billion. Repurchase operations are those where the Fed swaps cash for assets. It's doing them on a 28-day basis, too, rather than the customary overnight term.

To top it all off, the Fed has come up with yet another plan, the TSLF, or "Term Securities Lending Facility." The TSLF will allow major Wall Street firms and banks that trade directly with the Fed to conduct up to $200 billion in fresh transactions. They'll be permitted to swap their less-liquid, somewhat impaired mortgage-backed securities and Fannie Mae and Freddie Mac debt for highly liquid, rock-solid U.S. Treasuries. The assumption is that this will help ease pressure on balance sheets and help reduce mortgage rates. Moreover, it's not just the Fed that has shifted into action. The legislative and executive branches are moving into major rescue mode, too. The "FHASecure" plan was one of the first major offers unveiled in August. The idea was to make it so borrowers with high-risk private mortgages could refinance into government-insured FHA loans. Soon thereafter, the "Paulson plan" was put into action to freeze adjustments on certain subprime adjustable rate mortgages.

The government has put together an alliance of top mortgage lenders and servicers that would try to come up with ways to help stressed borrowers. Then it was time for Project Lifeline, a plan to postpone foreclosures for 30 days for certain borrowers. During that time, their servicers would be obliged to hammer out loan modification or workout plans. The economic stimulus package that is getting refund checks mailed out to most U.S. citizens also includes some mortgage-related provisions. They allow Fannie Mae, Freddie Mac, and FHA to buy or insure larger loans as well.

Over in Congress, House Financial Services Committee Chairman Barney Frank is introducing anti-foreclosure legislation. States would get $10 billion to buy foreclosed homes. Mortgage servicers would also be encouraged to write down the value of outstanding loans. Then, the borrowers would be refinanced into government-insured FHA mortgages.

"Finally, policymakers are unveiling a list of reforms designed to prevent future crises in the mortgage industry. Nationwide licensing of mortgage brokers will be implemented. Credit ratings firms will be required to update their ratings scales to distinguish between structured products and traditional bonds. And other proposals will affect how loans are bundled and packaged into bonds for sale to investment firms," Larson states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspx?Credit-Crunch-Continues-Despite-Fed-and-Washington-Bailouts-1542

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

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