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Five Things You Need to Know: Homeowner Bailout Plan; Delinquencies at Record; Super SIV, Now Super Sieve; Auto Bailout Next?; What to Buy?


What you need to know (and what it means)!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Homeowner Bailout Plan

President Bush will today announce a plan to help homeowners avoid home foreclosures by temporarily freezing the low, introductory mortgage-interest rates that are scheduled to reset higher over the next couple of years.

  • Treasury Secretary Henry Paulson and government regulators hammered out the agreement with mortgage lenders that will fix interest rates on certain loans for certain borrowers for five years.
  • Interest rates on 1.5 million mortgages are expected to reset higher next year.
  • The plan applies to loans originated between Jan. 1, 2005, and July 31, 2007, that reset between Jan. 1, 2008, and July 31, 2010, according to the Wall Street Journal.
  • But in order to qualify the borrowers must live in their homes and either demonstrate they do not have the cash or the home equity needed to refinance.
  • For other borrowers the White House wants to speed up the ability for other homeowners to refinance, largely through the Federal Housing Administration and other sources.
  • Meanwhile, although both Treasury Secretary Paulson and White House spokeswoman Dana Perino have repeatedly said the plan does not use taxpayer money for a bailout, we now know the Bush administration wants to allow state and local governments to increase the use of tax-exempt-bond programs to fund refinancings.
  • State housing authorities can now float tax-exempts to help first-time home buyers, but Washington wants to allow states to float bonds to refinance loans or pay closing costs as well.
  • Hmmm, we hate to interrupt the "no taxpayer-bailout" myth with something called reality, but the last time we checked when states use bond programs to finance things they are... using taxpayer money.
  • Eventually, somebody somewhere will be forced to accept financial responsibility for this; sadly, it apparently won't be anyone involved the decision-making that created the crisis.

2. Delinquencies at Record

Meanwhile, as if to underscore the gravity of the crisis, the number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter according to a report from the Mortgage Bankers Association.

  • The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, the Mortgage Bankers Association reported.
  • One in every five adjustable-rate subprime loans had late payments in the quarter, which excludes the one in every 10 already in foreclosure.
  • The most worrisome jump in the quarter was in prime delinquencies.
  • Third quarter prime borrowers who made their payments at least 30-days late rose to 3.12%, a small portion of overall mortgages, but a dramatic increase from 2.73% in the second quarter.
  • The subprime share of late payments rose to 16.31% from 14.82%.
  • Note too that credit tightening is continuing.
  • About 40% of lenders reported increasing their lending standards in October.
  • That's up from 15% in July.

3. Super SIV, Now Super Sieve

What about the other technically-a-non-taxpayer-funded-bailout-that-is-really-a taxpayer-funded-bailout that is supposed to be in the works? The $100 billion "super fund" aimed at helping SIVs may be scaled back due to a low interest from the plan's beneficiaries, according to the Wall Street Journal.

  • The so-called Super SIV (structured investment vehicle) that was originally supposed to be a $100 billion fund may now wind up being about half that size, the Journal says.
  • Citigroup (C), Bank of America (BAC) and J.P. Morgan (JPM) have been working since September to find a way to provide liquidity for off-balance-sheet entities to avoid being forced to dump "high quality" assets at distressed prices, or worse to avoid being forced to bring the assets back onto their balance sheets.

4. Auto Bailout Next?

And just when things were going so well. Delinquencies in the auto-loan market are now rising.

  • According to the Wall Street Journal, citing Lehman Brothers (LEH), about 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent at the end of September, up from 2.9% in August.
  • As well, lenders are tightening terms.
  • The month-over-month jump in delinquencies is the largest in eight years, the Journal reported.
  • About $575 billion in loans for new and used cars are made annually, according to the National Automotive Finance Association.
  • Let's call this bailout, when it is announced, the Super SUV fund!

5. What to Buy?

Yes, the news is grim, but like I pointed out on Nightly Business Report last night we want to buy despair and sell exuberance. The problem is, even though equities indicators are turning positive, what do we buy?

  • It helps to take a look at where we are with respect to past winners.
  • For five full years small cap stocks have trounced large cap stocks.
  • Between 2002 and 2007 the Russell 2000 (RUT) was up 61%, compared to 23% for the S&P 500.
  • That changed this year, something we began writing about to much criticism this time last year, and reiterated throughout the year (See Number Four, Why the Russell 2000 is Worrisome).
  • Year-to-date the Russell 2000 is off 2.8%, compared to the S&P 500's 4.7% gain.
  • The spread has worsened this quarter.
  • The Russell 2000 is off a little more than 7% quarter-to-date, compared to 4% for the S&P 500.
  • Meanwhile, note how Consumer Staples have quietly moved into a leadership role, up 4.5% for the quarter.

    RUT vs. SPX
    The breakdown of the multi-year trendline we pointed out as a possiblity last May has occurred. Leadership has changed.

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No positions in stocks mentioned.

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