Van Meerten's picks

Bernake has been quoted on Larry Kudlow's show tonight as being in favor of this "bailout that isn't a bail out" of Freddie & Fannie and why not? He and His "Gang of 12" caused it and it gets them off the hook.

There was a very interesting article in the Charlotte Observer by Dr. MIke Walden this Sunday. He is the William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agriculture and Resource Economics at the NC State University. Google the article, it's worth your time.

He claims that following 9/11 the Fed kept lowering and lowering the interest rate. Again I don't have an original thought in my head but I'm starting to connect this with some other dots. Lower interest rates eventually mean lower mortgage rates right?

So now we have lower and lower mortgage rates and No Doc loans that are either Adjustable Rate or in some cases interest only and in the worst case the "pick your poison" negative amortization loans. People who really can't afford houses are buying them for nothing down and just barely making the payments. These mortgages are packaged and repackaged and a lot of investors don't realize how poorly underwritten these loans are.

Now Uncle Ben is not a stupid man and neither is the "Gang of 12". Not only are they smart but they have a whole army of analyst to give them data. They knew or should have known that if they began raising interest rates that pretty soon the ARMs would reset higher and even worse the people who were paying interest only or the negative amortization loans would be forced into foreclosure.

As Dr. Walden puts it: "Beginning in 2005, the Fed began to systematically and continuously raise interest rates and reduce credit availability." He explains that buyers who were already strapped got squeezed from rising payments and lower home values.

Is there anyone reading this journal that believes that Uncle Ben and the "Gang of 12" didn't know what the effect of every 25bp increase in the Fed Funds rate would do to the foreclosure rate of the ARMs, interest only and negative Amort mortgages???

How do we fix it? Maybe from here on out the only loan that should be guaranteed is a properly underwritten 15 or 30 year fixed mortgage with at least a 10% down payment.

At this writing only 5 of the 11 Leading Economic Indicators are positive. Real economic recovery can't start till a few more turn around.

I hope that today's rally isn't unwarranted exuberance but only time will tell.



I would enjoy hearing your comments at VanmeertenFund@aol.com

Comments: View Comments |  Wednesday September 10, 2008