Brought to you by David Jones - Extraco Mortgage - Durant, OK.

MARKET RECAP

Come January we will have a new president (congratulations, Mr. Obama). Unfortunately, the equity market's welcome for the new commander-in-chief was less than hospitable: The Dow Jones Industrial Average tanked nearly a thousand points. Nothing personal, of course; it's just a reflection of the way the economy is these days.

And it's the way things are in the credit markets as well. Continuing a pattern seen since the housing bubble burst, large majorities of banks reported tighter lending standards on prime mortgage loans, as well as nontraditional mortgage loans and subprime mortgages, according to a recent survey by the Federal Reserve.

Hopefully, that pattern will reverse course before year's end. The Treasury Department has already purchased roughly $50 billion worth of bank stock under the $700 billion Troubled Asset Relief Program (TARP), with a goal of purchasing $250 billion in total. The purchases will strengthen banks' capital position, which should allow them to lend more freely – at least that's the theory. The proof will be when lenders become more accepting of applications from the self-employed and those who earn a living on commissions.

Unfortunately, the outlook continues to deteriorate for those who earn a living through wages and salaries. More Americans than anticipated filed first-time claims for unemployment benefits last week and total jobless rolls climbed to the highest level in 25 years, indicating further deterioration of a labor market that has lost roughly a million jobs this year. Meanwhile, hours worked fell at a 2.7% pace, the most in six years.

People who are working and getting mortgages are increasingly turning toward the government, whose share of mortgage originations more than doubled numbers seen last year to 11.8% in the first half of 2008, the Mortgage Bankers Association reported. One can only hope that steps taken in recent weeks will be enough to prop up and return liquidity to the mortgage market, particularly in the private sector. A true turnaround in lending will only occur when borrowers can avail themselves of private lending sources as well.
 

Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
Mortgage Applications

Wed. Nov 12,
7:00 am, et
None
Important. Rising rates and a moribund economic backdrop slice activity to an eight-year low.
International Trade
(September)
Wed. Nov 13,
8:30 am, et
$57.9 Billion (Deficit)
Moderately Important. The trade deficit should continue to contract on falling oil prices and a slowing economy.
Import Prices
(October)
Fri. Nov 14,
8:30 am, et
3%
(Decrease)
Important. A rising dollar is making imported goods less expensive, which will help keep inflation at bay.
Retail Sales
(October)
Fri. Nov 14,
8:30 am, et

0.8% (Decrease)
Important. Consumers account for two-thirds of gross domestic product. A contract in retail sales portends continued economic sluggishness.
Consumer Sentiment Index
(November)
Fri. Nov 14,
10:00 am, et
55.5 Index
Moderately Important. This fickle index is expected to post its lowest reading of the year, but it has little predictive power on the direction of the economy.

Too Much Regulation?

A recent Los Angeles Times/Bloomberg survey found that most Americans believe the lack of government regulation was partly responsible for the current financial and housing crisis. At least 70% of respondents in each of a wide range of demographic categories blame the absence of regulation for the nation's economic ills. The need for stronger regulation of financial markets was cited most as the top issue for the presidential candidates.

But is lack of regulation really the problem? After all, it's not like banks and financial institutions operate in a laissez faire economy. Indeed, most financial institutions fall under the purview of the Federal Reserve, the Treasury Department, the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Office of Federal Housing Enterprise Oversight, or the Federal Home Loan Bank Board. And let's not forget that each state is home to its particular financial regulators as well.

The fact is that heavily regulated banks have inflicted much of the damage, and with the blessing of Congress, which leaned on banks (through the Community Reinvestment Act) to be more aggressive in making home ownership available to people who historically had not qualified for mortgages. In turn, Freddie Mac and Fannie Mae were leaned on to buy these mortgages from the lenders.

It's important to remember that no group – public or private – has superior soothsaying skills over any other group. It's also important to remember that every rule or edict has a consequence, unintended or not. Congress wanted something, and it got it – only it got much more than it expected.