The Economic Backdrop Not As Strong As Advertised

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September 18, 2009 – The Economic Backdrop Not As Strong As Advertised Financial Trial and Error by the FDIC, Housing Starts decline, and cautious comments by Volcker FDIC Sells Toxic Mortgages to a Private Investor The first FDIC announced sale of toxic mortgages involves $1.3 billion in mortgages from Franklin Bank of Houston Texas, which failed last November. My concern with this deal is that a private investor gets to speculate on toxic mortgages on the back of tax payer money. It’s the story of bailing out investors in toxic mortgage structures, who should take the hit when making poor investment decisions. A positive from this asset sale is that it helps establish a market for toxic assets that should return to bank balance sheets when mark-to-market accounting becomes the FASB rule again in 2010. This deal is a 50 / 50 risk-sharing arrangement between the FDIC and Residential Credit Solutions of Fort Worth Texas who will put up $64 million to manage the $1.3 billion mortgages from Franklin Bank. In round numbers the deal prices these toxic loans at 70 cents on the dollar. This price is more than private equity and hedge funds are willing to pay for similar assets, yet below what solvent banks are willing to offer for sale their toxic mortgage loans. Had tax payer money not been put on the line the clearing bid for the Franklin portfolio would be 20 cents on the dollar. How does this help struggling homeowners on Main Street? The FDIC hopes the program will spur the purchases of whole mortgages for both residential and commercial real estate, which is a key to the smooth closure of my estimated 500 to 800 bank failures that will occur through 2011. Statistics on New Home Sales and Housing Starts A third of all new sales in the past few months were done to take advantage of the first time home buyer tax credit of $8,000. This was the cause for the slight up-tick in home builder

confidence. Housing starts and confidence are still quite low by historic standards so the expiration of the $8,000 credit will have the same negative effect on the housing market as ending the cash for clunkers plan for autos. Mortgage rates at just above 5% have helped the housing market, but a 4.25% to 4.5% would help the housing market back to recovery. My “Mortgage Mulligan” rate would be 100 basis points over the 10-year yield, which is just below 3.4%. We need to eliminate Fannie and Freddie as the housing middlemen. The Federal Reserve will stop buying GSE debt and mortgage securities at the end of the year, and this will likely widen spreads and cause mortgage rates to rise. Housing Starts for single-family homes declined in August to an annual rate of 479,000 units, ending a five-month winning streak. Comments by Paul Volcker Paul Volcker has become President Obama’s key financial expert, and he is not that upbeat on the economic growth story. He says that there’s a “long way to go” before the economy returns to pre-recession levels. He indicated that an economic recovery will be a long slog, a matter of years with risks of relapses along the way. Volcker indicated that it is way too soon to resume business as usual. Mr. Volker has read my play book. Send me your comments and questions to [email protected]. For more information on our products and services visit www.ValuEngine.com That’s today’s Four in Four. Have a great day. Richard Suttmeier Chief Market Strategist ValuEngine.com (800) 381-5576 As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the ValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample issues of my research.

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