Fed plans new rules to protect future homebuyers (part II)

Bear Stearns was eventually taken over by JPMorgan Chase & Co., with the Fed providing $28.82 billion in financial backing.

Those controversial decisions have drawn criticism from Democrats in Congress and elsewhere that the Fed is bailing out Wall Street and putting billions of taxpayer dollars at risk.

Bernanke, in appearances on Capitol Hill has said he doesn't believe taxpayers will suffer any losses.

In his speech Tuesday, the Fed chief defended those actions anew. If the Fed didn't intervene, he said, problems in financial markets would have snowballed, imperiling the country.

"Allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy," Bernanke said to the mortgage forum, organized by the Federal Deposit Insurance Corp.

The Fed's consideration of giving Wall Street firms more time to tap the Fed's emergency loan program is part of an ongoing effort by the central bank to bring back stability to fragile financial markets and help to bolster shaky confidence on the part of investors.

Policymakers — in the White House, in Congress and other federal agencies — will need to work together to come up with ways to make the U.S. financial system more resilient and stable and to prevent a repeat of the types of problems that brought about the end of Bear Stearns, an 85-year-old institution, Bernanke said.

Although those efforts are already under way, it will fall to the next president and next Congress to settle them.

The Bush administration has proposed revamping the nation's financial regulatory structure. That plan would make the Fed an ubercop in charge of financial market stability. But the Fed would lose daily supervision of big banks. Bernanke said the Fed must maintain this power if it is to be an effective overseer of financial stability.

The Fed, which regulates banks, and the Securities and Exchange Commission, which oversees investment firms, announced an information-sharing agreement on Monday aimed at better detecting potential risks to the financial system.

Over the longer term, though, Congress may need to adopt legislation to bolster supervision of investment banks and other large securities dealers, Bernanke said.

Bernanke recommended that Congress give a regulator in the future the authority to set standards for capital, liquidity holdings and risk management practices for the holding companies of the major investment banks. Currently, the SEC's oversight of these holding companies is based on a voluntary agreement between the SEC and those firms.

"Strong holding company oversight is essential," he said.

Bernanke also said that a growing number of central banks in recent years have been given the statutory authority to oversee systems for processing financial transactions by securities firms as well as overseeing traditional banking transactions. "A strong case can be made for granting the Federal Reserve explicit oversight for systemically important payment and settlement systems," he said.

And, the Fed chief favors looking into an idea — raised by Treasury Secretary Henry Paulson — to create formal procedures to make sure that if an investment firm fails it won't wreak havoc on the broader economy. Such procedures, which allow for a more orderly liquidation, are in place for banks.

The housing, credit and financial crises have bruised the economy. Growth has slowed and employers have cut jobs every month so far this year.

Bernanke said that "it is unrealistic to hope" that financial crises can be entirely eliminated, while maintaining an innovative financial system. "Nonetheless, recent experience has illustrated once again that financial instability can have serious economic costs," he said.

Fed decision to lower the rate...

After Fed decision to lower the rate, I get phone calls from my clients asking me what rate they can get now. Even though mortgage companies most likely will lower rate soon, it does not happen right away, after Fed's decision, and did not happen yet.

The common question is why?

What the Fed did on Tuesday will not directly lower mortgage rates. Mortgage rates are not tied to the Fed rates, they are tied to the Treasury rates.

So the bond market is the influence over mortgage rates. When the bond market goes up – mortgage rates go down and vice versa.

Fed Cuts Interest Rate a Quarter Point

WASHINGTON (AP) - The Federal Reserve cut a key interest rate by one-quarter of a percentage point Tuesday, trying to keep the country out of recession.
The reduction in the federal funds rate to 4.25 percent marked the third rate cut in the past three months. Fed officials signaled that further cuts were possible if a severe downturn in housing and a crisis in mortgage lending get worse.
Commercial banks were expected to quickly match the latest reduction by trimming their prime lending rate, which would reduce this benchmark rate for millions of consumer and business loans to 7.25 percent.
The Fed started cutting rates in September with a bolder-than-expected half-point move and then reduced the funds rate by a quarter-point at its Oct. 31 meeting. The central bank was trying to make sure that a severe slump in housing, spreading mortgage defaults and financial market turbulence which hit with force in August did not derail the economy.
Fed Chairman Ben Bernanke and his colleagues began their final meeting of 2007 behind closed doors Tuesday morning. Wall Street investors traded cautiously as they awaited the announcement.

read more on http://apnews.myway.com//article/20071211/D8TFEGE81.html