by Gaurav Bhola, MSM, Managing Editor

Tuesday, September 4, 2007

The language emanating from Federal Reserve Chairman Ben Bernanke and President George W. Bush is loud and clear; there will not be any bail out of mortgage lenders, mortgage brokers, and mortgage investors. 

President Bush and Bernanke were blunt in their message that mortgage lenders will not be given any government aid for financial sustenance because they will not learn from their past mistakes and simply repeat them in future. 

Basically, mortgage lenders and mortgage-backed securities investors will have to learn tough lessons, no sops will handed out to extricate them from their deteriorating financial crises. Last Friday, the Fed made it its mission to navigate the economy through the rough waters of the current mortgage and housing market. President Bush held a press conference in the Rose Garden last Friday, outlining his steps to help troubled borrowers. 

Bush intends to have the federal government take action to address the rising foreclosures and the mortgage conundrum. Government help will not be given to overleveraged residential real estate investors or homeowners.  According to Bush, the government aid recipients will be homeowners “…who could get through this difficult time with a little flexibility from their lenders or a little help from their government."

Bush’s and the Fed’s double whammy messages touched upon similar underlying themes; that the government is on top of the crises. They wanted to reassure the American public, Wall Street, and the international audience that the mortgage, foreclosure, and home buying crises will not affect the soundness of the national economy. 

The limited government action will help certain beleaguered homeowners attempting to make their monthly mortgage payments. The Fed will concentrate on implementing policies based on developments in the financial markets that can have a broader impact upon the economy. 

So far, the most publicized actions of the Fed have been to infuse billions into the banking sector and to cut the discount rate it charges to banks for loans, in the hopes of curtailing a growing credit crunch. But these measures have been temporary, band-aiding growing illiquidity concerns. 

Many believe that the Fed may be forced to finally cut interest rates, possibly by a quarter percent to 5.25% by mid-September. As it stands now the Fed has tried everything in its bag of economic tricks to sustain a sound economy except, to cut interest rates; it hasn’t lowered interest rates in 48 months. 

If the Fed cuts the interest rates, then it can be a boon upon the economy. This will help provide mortgage refinance opportunities to millions of Americans with adjustable rate mortgages. Also, the details of President Bush’s plans to provide respite to some homeowners are yet to be fully scrutinized. All in all, any action by the Fed and President Bush are better than any inaction to salvage the economy and certain home loan borrowers who were targets of irresponsible mortgage lenders.