Lenders Cut Mortgage Programs Back

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Mike Larson takes a closer look at how financial institutions that are trying to cut losses. In this issue of Money and Markets, Mr. Larson discusses how financial institutions are cutting back spending by eliminating certain mortgage programs.

Mike Larson takes a closer look at how financial institutions that are trying to cut losses. Mr. Larson discusses how financial institutions are cutting back spending by eliminating certain mortgage programs.

Just recently, Morgan Stanley reportedly began cutting off thousands of its Home Equity Line of Credit customers. It's preventing some borrowers from drawing any more money against their lines and slashing the size of the lines that others have. JPMorgan Chase has made changes to Home Equity Lines of Credit for some 150,000 customers since March, according to Bloomberg. Bank of America, Washington Mutual, and SunTrust are some of the other institutions doing the same.

Wachovia just eliminated its negative amortization "Pick-a-Pay" mortgage, which allowed borrowers to make monthly payments that didn't cover all of the interest due, much less principal. The unpaid interest got added to borrower balances, driving principal up over time rather than down. Several banks have also dramatically cut back on the wholesale lending business, when they fund the loans that originate with a third-party mortgage broker.

According to the Fed's latest survey, 77.7% of banks are tightening standards on subprime mortgage loans, 75.6% are making it tougher to get mid-grade Alt-A and nontraditional mortgages, and 62.3% are tightening standards on prime loans, the most since the Fed started its quarterly survey 18 years ago.

Freddie Mac was supposed to save housing, but it just lost $821 million in the second quarter. That's more than three times what Wall Street analysts were anticipating. It's now sitting on 22,000 foreclosed homes, the highest in the company's 38 year history. And it was forced to set aside $2.5 billion in the second quarter to cover loan losses, more than double what it reserved just three months prior. Those losses are helping shrink Freddie Mac's capital cushion. It fell to $37.1 billion in the quarter, only $2.7 billion above what its regulator requires.

Fannie Mae is responding in a couple of ways to preserve capital. First, it's cutting its stock dividend. Shareholders will now get just $0.05 per share, down from $0.25 per share previously. Second, it's looking to sell new common or preferred shares, more than $5 billion worth.

"In other words, it's probably going to be buying fewer home loans and investing less in the mortgage backed securities market. Without going into all the details, that will mean mortgage rates will go up for new borrowers," Larson states.

To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?What-the-Fed-wants-and-what-the-Fed-is-getting-2064

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 (http://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 http://www.moneyandmarkets.com.

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