Thanks to reader Frank for sending this brief FAQ about the Federal Housing Administration’s Modernization bill and the Federal Stimulus Bill that was just passed.  With all of the confusion around the changes proposed to FHA loan limits as well as the new conforming loan limits that will be in effect as a result of the stimulus package.

 FAQ Regarding FHA Modernization

Q- Where are the new loan limits going to, and when?

A- Right now, the county loan limits are at 95% of the median home value within each individual county. The stimulus bill which President Bush passed, will raise these limits to 125% of the average median home value. A simple calculation would be to take the limit and multiply it by 1.315 (or raise it by 31.5%). We think the new loan limits will be accepted within a few weeks, and we will advise you immediately when we can close these new loan sizes.

Q- What’s the difference between the FHA Modernization act and the Stimulus Bill?

A- The FHA Modernization act is a bill that will modernize the current FHA guidelines including loan limits, tiered MIP, and may enhance current guidelines. This is currently in legislation, yet there is no time frame as to when this will go into effect. The stimulus package is an economic package which included the loan limits increasing for FHA until December 2008, however, the modernization act should put this in place for either a longer period of time, or with no termination date.

If you’ve got information or communications that help sort through the confusion send them our way and we’ll get them up to help spread the knowledge.

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In a confidential proposal to the government Bank of America warned that nearly $800 billion in mortgages (of all types, not just subprime) are at “moderate to high risk” of defaulting due to detoriating housing conditions over the next 5 years.  The Bank of America proposal calls for the creation of the Federal Homeowner Preservation Corporation to lead homeowners and banks out of the housing bust.

If anyone thought that the bail out was in full swing; a move like this would kick it truly in to full bail out mode.  The proposal, and several others, are getting a lot of attention by the Bush administration and Congress as home prices, late payments and defaults continue to pile up at an alarming rate.

From the New York Times article covering the increasing prospects of a federal housing market bail out:

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s. The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

As we have said many times on this blog that a bail out is unacceptable and does nothing to prevent a repeat of the excesses and gluttony of the banks and Wall Street from occurring again.  It’s called moral hazard and we’ll pay for it in the future as people and businesses continue to bet on the government coming to the rescue any time irrational and risky bets are lost.

The plan also uses federal tax money to bail out those that made the most money during the run-up at the expense of those that didn’t benefit at all.  Using money of people who didn’t participate in the run up is inexcusable.  Imagine trying to explain to someone who kept renting instead of taking a stated-income, teaser-rate loan because they believed that they should save, put 20% down and be able to afford their loan that they suddenly are responsible for their neighbor’s greed and irresponsibility?  Insanity defined.

More from the NY Times:

Supporters contend that a government rescue could be the fastest and cleanest way to force banks and investors to book their losses from bad mortgages — a painful but essential first step toward stabilizing the housing market.

The government would buy the mortgages at their true current value, perhaps through an auction, at what would probably be a big discount from the original loan amount. The mortgage lenders, or the investors who bought mortgage-backed securities, would be free of the bad loans but would still have to book their losses.

If the government took control of the bad mortgages, supporters of a rescue contend, it could restructure the loans on terms that borrowers could meet, keep most of them from losing their homes and avoid an even more catastrophic plunge in housing prices.

Will a federal housing market and mortgage bail out work?

The answer seems to be “no.” We are clearly facing a recession, home prices continue to fall, mortgages continue to default and inflation is creeping back in to the picture in the face of the patch work of federal and state programs being thrown at the problem.   And guess what?  It’s a good thing!  The NY Times article concludes:

Right or wrong, the arguments for rescuing homeowners are likely to be blurred with arguments for rescuing home prices. At that point, industry executives are likely to argue that what is good for Bank of America is good for the rest of America.

The rescue isn’t always in the direction you think.

Home prices do need rescuing!  And guess which way is the rescue?  Down!  To affordable levels where demand can be created and sustained by folks with real income buying real houses.  Rescuing is not keep artificially inflated prices at a premium where people have to spend every last dime of imaginary income to find a place to live.

Let the rescue happen.  Let prices come down to where they are supported by demand driven by common-sense underwriting guidelines and we’ll see a return to growth and prosperity in the economy that is healthy and sustainable.

What do you think?

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Filed under: Forecasts, Industry, Citigroup Inc. (C), Bank of America (BAC), Wachovia Corp (WB), Economic data, MBIA Inc (MBI)

A look at NYSE short interest as of February 15 shows that short sellers are still willing to make very large bets that bank stocks will go lower.

Shares sold short in Wachovia (NYSE: WB) rose 16.3 million between January 31 and February 15. For Citigroup (NYSE: C) shares short rose 10.9 million to 92.8 million. At Bank of America (NYSE: BAC) the number was up 6.3 million to 68.8 million.

Even with bank stocks trading near multi-year lows, a number of investors are anticipating more bad news as banks file their 10Ks for 2007 and announce their 2008 first quarter results. The short sellers have a fairly good chance of making a killing.

Big banks still have several things going against them. As the mortgage market gets worse, they may have more subprime write-downs. A drop in the credit rating at a bond insurer like MBIA (NYSE: MBI) could force the banks to write-down securities that rely on AAA ratings for some of their value. Perhaps the most important liability banks have not faced is the declining value of financial instruments based on auto loans and credit card balances.

The world is likely to get much worse for big banks and short-sellers are likely to make money on that.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Books

Market gurus like Jim Cramer preach the benefits of broad diversification, something I think is good for investors too: if your goal is to produce returns approximately equal to the market averages. In other words, if you believe in diversification, buy an index fund. If you don’t want to simply buy and hold index funds, broad diversification is unlikely to make sense for you.

I recently found a good summary of why combining diversification with stock-picking is a bad idea from an unlikely source: Michael Konik’s The Smart Money, a book about an elite sports bettor who gambles hundreds of thousands a day on football — and wins. Here, he explains why the elite gamblers don’t bet on more than a few games each week:

I’m sober enough about the difficulty of betting sports to realize that gambling on seven pro games in one weekend is the sign of a sucker. The linemakers just don’t make that many mistakes on NFL football, where all the information is widely known to everyone in the universe.

It would be impossible to sum up the problem with diversification in the stock market any better. Generating greater returns without taking greater risk requires the investor to spot instances of market inefficiency — the stock market equivalent of the linemakers making a mistake. And even the best investors in the world can’t find enough market inefficiency to earn exceptional returns while owning a lot of stocks.

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Filed under: Deals, China, Middle East, Citigroup Inc. (C), Merrill Lynch (MER), Politics

News that the European Commission is planning to adopt proposals next week that will ask sovereign wealth funds to accept a code of conduct to govern their investment activities, raises the question if the U.S. government should take a look at the impact these funds may have on U.S. security.

Peter Mandelson, the European trade commissioner, said the code will outline standards of governance and transparency for such funds.

“The emphasis in their investments should be on commercial motivations, not national or strategic considerations. I think such a code is possible to draw up and would get acceptance from the wealth funds,” the report quoted Mandelson as saying.

German companies, for example, are worried that China will steal their intellectual property or that Russian President Vladimir Putin wants to use such investments “as a political instrument,” according to European Member of Parliament Wolf Klinz.

Continue reading Are sovereign wealth funds a threat to national security?

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Filed under: Consumer experience, Competitive strategy, Coca-Cola (KO), PepsiCo (PEP)

Coca-Cola Co. (NYSE: KO) really needs to get things going in the North American territory. If you take a look at Coke’s latest earnings report, you’ll see that unit case volume moved up 1% for the fourth quarter, and down 1% for the entire fiscal year. That’s well below the 6% growth in volume experienced overall. It’s no wonder that the Associated Press highlighted the problem in North America in a recent article on comments made by Coke’s COO Muhtar Kent (he will be the new CEO starting July 1) at a conference in Boca Raton, Florida.

Kent mentioned Coke Zero and the VitaminWater brand — which Coke gained after acquiring Glaceau last year — as being two key beverages to leverage to drive growth. They will probably help. I recently tried some of that VitaminWater stuff the other day — not bad, although I suppose its appeal goes beyond the taste factor, as it basically relies on the consumer feeling healthier after drinking it (at least in terms of perception).

Continue reading Coca-Cola needs a bubbly domestic market

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Filed under: Press releases, NASDAQ

Blank-check IPOs have been on the rise recently. There are companies that conduct initial public offerings for the sole purpose of raising capital to acquire other companies. American Apparel (AMEX: APP) recently went public in this manner.

Historically, Nasdaq listing standards have barred these companies from the exchange, which has been a big boon to the otherwise-struggling AMEX. Now the Nasdaq is proposing a new rule to the SEC that would allow SPACs to list on its exchange.

In the press release announcing the plan, Nasdaq Senior Vice President Bob McCooey said that “Acquisition vehicles are an increasingly common capital-raising device. We believe that listing them on Nasdaq, subject to these important investor protections, will benefit investors and issuers alike.”

Maybe this is the right move, but it’s interesting that Nasdaq was willing to stand by its principled objection to these entities until the amount of money they raise (and fees/trading volume they can generate) grew too big to ignore.

But I still think investors should be very skeptical of investing in these situations. How exactly do you research an investment in a company when you don’t yet know what the business model is?

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Filed under: Good news, Products and services, Genentech Inc (DNA), Presidential elections

That the FDA has granted accelerated approval to Genentech (NYSE: DNA) for Avastin for the treatment of patients with breast cancer is not just big news for the company, but great news for women around the world in their fight against the dreaded cancer.

“There is no cure for metastatic breast cancer, so it is important to control the disease as early and for as long as possible,” said Kathy Miller, M.D., Associate Professor of Medical Oncology, Indiana University School of Medicine and lead investigator on the E2100 trial. “Now with Avastin plus Paclitaxel, we can increase the time a woman’s cancer is kept under control, and offer a biologic option to women who previously were limited to chemotherapies alone.”

“As an oncologist who has treated women with metastatic breast cancer, I know how important the first course of therapy can be,” said Susan Desmond-Hellmann, M.D., M.P.H., president, Product Development, Genentech. “New treatments are needed, and this approval provides women who have not yet received chemotherapy for their metastatic breast cancer a new option to consider with their physician and families.”

Continue reading FDA approval great for Genentech and Women

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Filed under: Economic data, Federal Reserve, Recession

While big banks were trying to dig themselves out of the subprime mortgage mess, they neglected to notice that muni-bond insurers had made the same bad bets that they had. According to Reuters, the failure of banks to address the insurance crisis early on could cost them. The total write-downs at the banks “may jump by almost 50 percent, according to brokerage Oppenheimer & Co. in New York. That is because the tottering bond insurance companies some banks used to guarantee their mortgage bets are facing their own troubles and may not deliver on policy claims.” Write-downs by big banks already total $150 billion.

That is not only bad for the banks, it is bad for their customers. Even with the Fed cutting rates, banks may not pass those lower rates on to clients. As a matter of fact, they may cut back their lending substantially because they cannot afford the risk of extending credit, even to corporations.

The assumption until recently is that, even with bad financial news, the Fed could give banks enough liquidity to provide capital to industry. That could fuel growth across a wide variety of businesses and keep the economy out of recession.

But, the banks aren’t lending money.

Douglas A. McIntyre is an editor at 247wallst.com.

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Filed under: Television, News Corp’B’ (NWS), Politics, Presidential elections

In this midst of a tirade about Michelle Obama’s comments that “for the first time in my adult lifetime I am really proud of my country,” the ever-so-enlightened Bill O’Reilly had this to say:

“I don’t want to go on a lynching party against Michelle Obama unless there’s evidence, hard facts, that say this is how the woman really feels. If that’s how she really feels — that America is a bad country or a flawed nation, whatever — then that’s legit. We’ll track it down.”

I’ve pretty much given up on being shocked by anything O’Reilly says anymore, but I am shocked that he hasn’t been fired — or at least suspended — over this blatantly offensive and inexcusable remark.

Don Imus was fired for something that was, in my opinion, far less offensive — and he’s an early morning radio shock jock!

It’s interesting that News Corp.’s (NYSE: NWS) Fox News apparently has lower standards for its anchors than talk radio.

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