The early morning newscast today got me wondering if Angelo Mozilo, CEO of Countrywide Financial Corp., has Ben Bernanke’s number on his cellphone? As head of the nation’s largest mortgage lender, maybe Mozilo woke the Federal Reserve Chairman at some ungodly hour this morning from his long hibernation and complained, “Wake up and do something already!!!”
Well, something finally clicked because Bernanke and the members of the Federal Open Market Committee acted this morning, and started cutting rates (although not the rate most economists — and the real estate industry in particular — are waiting for them to cut).
The Fed sliced 50 basis points (one-half a percentage point) off of its discount rate — the rate it charges banks to borrow federal funds — from 6.25 percent down to 5.75 percent. According to this morning’s press reports the Fed has also injected billions of dollars into the nation’s economy in the past week alone to quell both building fears of tightened credit standards nationwide and the turmoil currently disrupting financial markets around the world.
Wall Street reacted immediately to the news this morning, rallying up over 300 points before settling back to around a 180 point advance. The market closed Friday up about 230 points, a welcome relief after the roller coaster ride of the past few weeks due, in large part, to the uncertainty in the mortgage industry.
Still, this comes a day after Countrywide Financial announced it was going to have to dig into it’s $11.5 billion credit line from 40 of the world’s largest banks in order to shore up its existing loan portfolio and keep its doors open and the lights on. Speculations were rampant that the company may even be on the verge of bankruptcy.
In a statement released Thursday, Countrywide President David Sambol justified the move, stating that his firm’s strategy is to “navigate the difficult conditions in today’s market” while the firm continues to shift the majority of its loan origination business to its subsidiary Countrywide Bank, FSB.
Having taken a direct hit to its subprime loan division, the company is now focused on tightened lending guidelines to assure the secondary mortgage market that in the future it will originate only “conforming loans” (those that conform to standard requirements for securitizing set by Fannie Mae and Freddie Mac) and a problem that wiped out a number of hedge funds for mortgage-backed securities on Wall Street very recently.
This all sounds eerily familiar to me. Wasn’t it just about a month or so ago that Mr. Bernanke was telling Congress that the subprime mortgage mess was not going to have a major impact on the nation’s economy? Well, guess again Mr. Bernanke!
This nation’s economy is based on consumer confidence to go out and spend money, using credit cards, taking out car loans and home mortgages. If major firms like Bear Stearns and Countrywide Financial can be directly affected, I’d say the nation’s economy might be in trouble.
In a roundabout way the FOMC’s statement released this morning is leaning more towards admitting that fact. “Although recent data suggest that the economy has continued to expand at a moderate pace…the downside risks to growth have increased appreciably,” the unanimous policy announcement stated.
In fact the “R” word (recession) is starting to be heard more frequently once again. In the meantime, attention will now turn to the next official meeting of the FOMC on Sept. 18 to see if economists — and the real estate industry — get what they’ve been begging for since August 2006, a cut in the Federal Funds Rate, the short-term rate banks charge to lend each other money overnight to maintain the required cash reserves on hand.
Even if the Fed does finally give in, the train has already left the station for homeowners who took out those risky interest-only and other exotic mortgages between 2004 and 2006. Foreclosure is a foregone conclusion for many of those as they go through the system. So the opportunity for real estate investors to pick up some good bargains will continue to exist in many parts of the nation for the foreseeable future, and RealtyTrac is here to help.