Volume 12, Issue 20 For the week of May 26, 2008 A QUICK UPDATE ON HOUSING BAILOUT The bipartisan mortgage bill recently passed by the Senate will allow the Federal Housing Administration (FHA) to insure up to $300 billion new loans for at-risk borrowers. Lenders Lenders must write down (a loss to the lender) the loan principle to 90% of the new appraised value, roughly the amount that FHA would guarantee (pay the lender if the borrower defaults on the new loan). This means, a $200,000 appraisal would qualify for an $180,000 mortgage. The remaining $20,000 would be the borrower’s equity at risk (their incentive to stay in the home). The new FHA-backed mortgage would be a 30-year fixed-rate loan. Lenders' losses could reach 25% when you factor in loan fees and closing costs. Borrowers According to Senate Banking Committee panel Chairman Christopher Dodd, D-Conn the measure could help 500,000 borrowers stay in their homes. The Congressional Budget Office estimates that 500,000 households may enter the system, but the net number who stay with their homes under the program is more likely 325,000. Julia Gordon of the Center for Responsible Lending stated in Congressional testimony, foreclosures outranked loan modifications by three to one among program participants and that the majority of the loss mitigation work being undertaken is unlikely to lead to continued home ownership. Ms. Gordon further says loan modifications have not yet reached the approximately 30 percent of subprime borrowers that are "underwater", owing more than their house is worth. Timing is everything - there are concerns that since the program will not start until October, 2008 it will leave behind the 1.5 million subprime borrowers with adjustable-rate mortgages (AEM) whose loans are scheduled to reset in 2008. That is a large segment of the target group. Foreclosure procedures typically begin after 90 days past due, so homeowners unable to reach a deal with their lenders could lose their homes prior to the program start date. Federal Reserve Federal Reserve Chairman Ben Bernanke says that loan modifications involving reduction of principal have been rare. Bernanke stated "High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy…Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody’s interest." Key Economic Reports Released This Week RELEASE DATE ECONOMIC INDICATORS RELEASED BY CONSENSUS Wt. INFLUENCE ON INTEREST RATES Tue 05/27 10:00 am et Consumer Confidence Index for May '08 Conference Board 61.0 **  If above consensus  If below consensus Tue 05/27 10:00 am et New Home Sales for April '08 Bureau of the Census Dept. of Commerce 522K **  If above consensus  If below consensus Wed 05/28 7:00 am et MBA Mtg Apps Survey for week ending 05/23 Mortgage Bankers Association of America N/A * Undetermined Wed 05/28 8:30 am et Durable Goods Orders for April '08 Bureau of the Census Dept. of Commerce -0.7% **  If above consensus  If below consensus Wed 05/28 1:00 pm et 2-Year Note Dept. of the Treasury N/A ** If strong demand If weak demand Thu 05/29 8:30 am et Jobless Claims for week ending 05/24 Bur. of Labor Statistics Department of Labor 368K *  If above consensus  If below consensus Thu 05/29 8:30 am et Gross Domestic Product 1Q Preliminary Bur. of Econ. Analysis Dept. of Commerce 0.9% ****  If above consensus  If below consensus Thu 05/29 1:00 pm et 5-Year Note Dept. of the Treasury N/A ** If strong demand If weak demand Fri 05/30 8:30 am et Personal Income & Outlays for April '08 Bur. of Econ. Analysis Dept. of Commerce Income 0.2% Outlays 0.2% ***  If above consensus  If below consensus Fri 05/30 10:00 am et Chicago PMI for May '08 Chicago Purchasing Managers Index 49.0% **  If above consensus  If below consensus Fri 05/30 10:00 am et Consumer Sentiment for May ' 08 University of Michigan 59.5 *  If above consensus  If below consensus * Low Importance ** Moderate Importance *** Important **** Very Important