The markets continue to gyrate this morning as Countrywide Financial, the nation's largest lender, warned of liquidity issues. Washington Mutual also warned of challenging times ahead for its company. Foreign markets sold off overnight and the Dow and other U.S. Markets are down again this morning.

The Bottom Line of What's Happening

  1. Many sub-prime loans are not being repaid
    1. Over the past few years Wall Street greed for "mortgage backed securities" led to lenders lending to anyone who could fog a mirror
    2. Many of the loans were teaser loans with escalation clauses which have resulted in higher payments for borrowers; payments they cannot afford to make
    3. Many of these loans were low down or zero down loans
    4. National housing values have declined leaving little or no equity in homes and investment properties that these sub-prime borrowers bought, which is prompting many sub-prime borrowers to stop paying on their loans today
  2. Numerous lending institutions are being hurt financially as a result of not getting their mortgage payments from the sub-prime, Alt-A and even some prime borrowers
    1. Huge numbers of foreclosures are popping up on the books of lenders across the country - with each foreclosure averaging a loss of $58,000 to the lender
    2. More and more borrowers are behind in their payments which of course is costing lenders billions of dollars
  3. Hedge Funds and various derivatives that invest in lending institutions and other "money" related instruments are in a quandary as they attempt to figure out how bad their losses could be
    1. This is why we are seeing the wild swings currently in the stock market with triple digit point moves in 12 of the last 15 days
  4. Liquidity has become a major problem
    1. Lenders have tightened lending standards immensely in the last week for several reasons:
      1. Fear borrowers will not repay
      2. Inability to obtain "Wall Street" money to make the loans
      3. This further hurts the housing market, but should only be temporary providing "THE FIX" takes place (see below)
  5. Fear has set into the Markets
    1. Comments by President Bush, Secretary of the Treasury Hank Paulsen and Fed Reserve Chairman Ben Bernanke have done nothing to calm the markets - yet anyway

THE FIX: What Needs to Happen NOW

It does not take a rocket scientist to know that large numbers of foreclosures and borrowers who do not make payments on their loans will hurt, if not cripple, the financial institutions of any country.

There is ONE SIMPLE WAY to provide relief to this predicament. There is ONE SIMPLE WAY to help these borrowers see light at the end of the tunnel. And that is to LOWER INTEREST RATES at the FED LEVEL!

This is Where it Must Start

It starts with the FED backing off of its high interest rate policy that is causing the bleeding. The FED has done nothing at all this year by easing the pain of millions of borrowers. What they are thinking is beyond me.

In the Investor Alert "Predictions for 2007" sent out the first week of November 2006, I forecasted the FED would lower rates 2 times in the 1st half of 2007 and 3 times in the 2nd half of 2007 - each by .25% of a point, resulting in a gradual easing and a Prime Rate of 7.0% by the end of 2007.

The REASON I predicted the FED would lower rates was simple: To stop the rise in foreclosures (also predicted) and to prevent a recession. I am NOT an economist, nor a rocket scientist - but if the FED had in fact been lowering rates this year I believe we would not be in the banking and liquidity mess we are now finding ourselves in.

Too Little Too Late?

The FED refused to lower rates on Tuesday of this week at its 6 week FOMC meeting. What were they thinking? They keep saying "inflation" must be kept in check. What inflation!!!! The fact is this: In the past week GOLD and OIL has been selling off. Why? Because people are more concerned about deflation now than inflation and a slowdown in the economy. Markets speak! The FED refuses to listen! The liquidity is drying up and the FED is asleep at the wheel.

This morning a number of Wall Street analysts are speculating that the FED might hold an emergency meeting to lower rates. Will this happen? It should. This is what is needed for both liquidity issues in the banking system and for us small folk who have been hammered by our HIGH MONTHLY HOUSING PAYMENTS for too long. But will this be a case of too little, too late? Not if the FED cuts the rates by more than .25% as some, such as Donald Trump, are now suggesting.

In an interview this morning Donald Trump pointed out that the rate cut was overdue and is hurting the housing market and will soon cripple the economy if an aggressive stand is not taken now.

In my opinion, I believe the FED should now cut the rate by at least .50% to as much as 1.0% in order to have a positive effect. The longer they wait the worse matters will get. I personally expect them to hold an emergency meeting soon for the purposes of implementing a way overdue RATE CUT!

What Will a Rate Cut Do?

I do expect that a rate cut will be positive. My only hesitation is in what damage has already been done to the banking system as a result of the hedge funds and derivatives. It may take a few weeks to a couple months to see this all shake out.

A rate cut must be done and will be positive for the banking system and housing market! Once we get through these deep waters and good (banking and lending) news begins to surface, I expect positive news on the housing to follow!