Tuesday (February 12) was a big day for a couple of credit markets suffering from the year long credit slump…. … The mortgage industry, the leading catalyst of the credit trouble, was boosted by a Bush administration announcement that it was working with major mortgage lenders to freeze the foreclosure process for thirty days.

Warren Buffet inspired the bond market and equity markets this morning with his personal vow to back the bond insurers who have recently felt the effects of the worsening credit situation.

“Project lifeline” is the new initiative developed by the Bush administration and six leading more lenders to put foreclosures on hold for up to thirty days. A foreclosure is the process of mortgage lender repossessing a home from a mortgagee who has failed to make monthly payments for several months and has been informed of the pending foreclosures.

The intent of the project is to freeze the foreclosure process for thirty days so that lenders can work with home owners delinquent on payments for 90 days or more. The goal is to work out a payment plan that the home owners can manage until they are able to stabilize their finances and repay their loans. The six lenders working with the administration supply about half of all US mortgages.

Unfortunately for borrowers who have already declared bankruptcy, or are within 30 days of foreclosure, the project is a bit late. Other home owners struggling with investment property or vacation homes would also not benefit from the arrangement.

There are no current estimates on how many home owners would benefit from the freeze plan. The plan follows up the sub-prime mortgage assistance offered toward the end of 2007. Some members of Congress suggest more is necessary to help avail consumers of the worsening credit situation. Foreclosures reached record numbers during 2007, and 2008 is expected to be even worse.

Housing and mortgage problems have begun to show carry over effects in other industries as well. The bond and equities markets have been shaky for a few weeks as several leading bond insurers indicated concern over their ability to continue to raise capital and protect investor funds. Warren Buffet inspired both markets today with his personal backing of bond insurers with a commitment to financially support bonds before allowing them to fail.

With all of the government and bank interventions recently, along with Buffet’s support, many Americans are wondering if the financial and mortgage industries can turn themselves around and get back on their feet. All markets are cyclical to a certain extent, so the likelihood of these struggling industries regaining form is high. The important questions for most Americans are: 1) How long will these markets struggle? 2) How long will a potential recession last? 3) How deep will the problems grow before reaching bottom?

The moves have been aggressive and should impact the struggling sectors and economy at some point. Most financial experts believe a recession is inevitable, looking at forecasts and sector trends. The various stimulus and relief efforts over the last several months are more likely to keep a recession brief, than to prevent one. Some democrats and economists are calling on the Bush administration and the Central Bank to do even more to prevent a deepening of the credit crisis and to life a stale economy.

With the pending presidential election, Americans are watching closely to see what develops in the coming months. President Bush and Congress saw their lowest approval ratings this past week, indicating American sentiment over the economy continues to reach new lows. The answers to the important questions mentioned is likely to have a significant impact on the message voters send in November.

Market Recap

US equities started off in the red Monday but finished slightly in the green. The Dow was up 57 points, the NASDAQ and S&P were up 15 and 7, respectively. The biggest news on Wall Street was the formal rejection by Yahoo’s Board of a $44 billion Microsoft takeover bid. The market is wondering what the next step is. Speculation is Microsoft may up the bid or attempt a hostile takeover. Stocks were sparked Tuesday by two huge announcements affecting the US credit situation. President Bush’s administration announced a new program designed to freeze the foreclosure process for 30 days for qualified home owners struggling to keep their homes. Warren Buffet earlier in the day inspired a strong equity surge by saying he would personally help bond insurers stay afloat if necessary. The Dow moved quickly above 200 points on Buffet’s comments before falling off in the last hour to a close of 12,373, up 133. The NASDAQ finished flat while the S&P rose 9 points. The budget deficit has increased. GM had its biggest annual US auto sales drop.

Neil Kokemuller
Tuesday, February 12, 2008
5:33 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University with a specialization in marketing.

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