Trader Talk

Stocks Pare Losses On S&P Report And Frank Housing Plan

Stocks have pared some losses on a couple of potentially positive developments. First, Standard and Poor's has issued a report saying the "end of writedowns is now in sight" for big institutions. "The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write downs of subprime ABS [asset-backed securities]," said Standard & Poor's credit analyst Scott Bugie, lead author of the report.

Perhaps more important is S&P's observation that institutions may be valuing these securities too low: "in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses," said Standard & Poor's credit analyst Tanya Azarchs.

Second, details of a housing rescue plan by House Financial Services Committee Chairman Barney Frank are coming out. Rep. Frank is proposing a new mortgage rescue program. The details:

--The program would permit the FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages;

--In exchange for the acceptance of a substantial write down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay;

--The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower;

--This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.

Why lenders would agree to these drastic haircuts—which would essentially decimate their books—is not clear, but the market is looking for anything to end the mortgage crises.

Questions?  Comments?