Mary Steinmeyer’s Blog

The Federal Reserve cut short-term interest rates for the seventh time within seven months on Wednesday, May 1, 2008. The .25% reduction brings the federal funds rate (the rate banks charge each other for overnight loans) down to 2%.

Stocks responded positively in the short run. Shortly after the rate cut was announced, the Dow Jones Industrial Average briefly topped the 13,000 mark for the first time since January.  But it was short lived.  The Dow dropped significantly later in the day over worries about what the Fed would do next. The index closed at 12,820.13, down 11.81 points from Tuesday’s close.

Now the big question is, is Bernanke done?  Will the Fed sit tight or are more adjustments in our future.

TheWall Street Journal had a very disturbing story on Wednesday about the “Fast and Easy” loan program of Countrywide Financial Corporation, many of whose mortgages were bought up by Fannie Mae.

 

Some of the problems are surfacing in a mortgage program called “Fast and Easy,” in which borrowers were asked to provide little or no documentation of their finances, according to people with knowledge of a Federal probe and to former Countrywide employees.  Fast and Easy borrowers aren’t required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn’t even require loan officers to verify employment, according to an October 2006 presentation by Countrywide’s consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.

 

Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as “prime,” meaning low-risk.  A Fannie spokesman agreed that the verification of employment wasn’t required on all loans, but added that Countrywide was expected to verify employment details on a “sampling” of loans. The Countrywide spokesman said his company fulfilled that obligation.

 

In a related article from Bloomberg.com, its interesting to note that Bank of America Corporation. the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corporation’s debt after taking over the mortgage lender, increasing the likelihood of a default.“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors had grown more optimistic the bank would back Countrywide debt, and Standard & Poor’s said this week it may raise Countrywide’s rating to match Bank of America’s.

While most people will look at a recession with fear and uneasiness, it’s important to also realize that this is an opportunity to get some deals and improve your personal finances.