ANOTHER GOVERNMENT RESCUE PLAN

Wall Street extended a huge rally Friday as investors returned to a buying mode with relief after the U.S. government announced plans to rescue mortgage banks from billions of dollars in bad home loan debt. The Dow Jones industrials rose nearly 360 points, giving them a massive gain of more than 770 points over two days, and Treasurys fell as money flowed into equities.

Treasury Secretary Henry Paulson, spoke about the home financing rescue plan said a bold approach is needed to remove troubled assets from the books of financial firms. He gave few details, but said he would work on it through the weekend with congressional leaders.

A plan to help the banking industry could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Mortgage lending has almost completely come to a stop in the wake of the bankruptcy of IndyMac and Lehman Brothers Holdings Inc. and the bailout of teetering insurer American International Group Inc.

The government took other steps Friday to restore stability to the financial system.

The Federal Reserve said it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed will also buy short-term debt obligations issued by Fannie Mae, Freddie Mac, FHA and the Federal Home Loan Bank.

The Treasury Department decided to use a Depression-era fund to provide guarantees for U.S. money market mutual funds. Money market mutual funds are typically considered safe, but many investors have been fleeing them due to worries about the funds’ exposure to the embattled financial industry.


On Thursday, the Federal Reserve and other major central banks around the world joined forces to inject as much as $180 billion into global money markets in an attempt to keep the mortgage loan and credit crisis from worsening.

But with worries swirling about the financial health of such major companies as thrift bank Washington Mutual Inc. and investment bank Morgan Stanley, the cash infusion was not enough to alleviate the tension on Wall Street.

Mortgage refinance activity has continued to decline even though interest rates remain below 6% for FHA mortgage rates. The bottom line is that lending guideline are still too tight for equity levels that have evaporated with the housing market and foreclosure crisis.

From: From the Nationwide Mortgage Loan Blog 9/19/2008
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