Bay Area Weelky Mortgage Report- Bad Bank in the news:

It’s Fed Day.  At 2:15pm ET, the Fed will release their interest rate decision and policy statement.  But before I get into the Fed, there is some big news hitting the wires and giving Stocks a boost this morning.

The Federal Deposit Insurance Corp (FDIC) announced last night that it may set up a ”bad bank” as a vehicle to buy toxic or illiquid assets from banks.  What does a “bad bank” do?  No, it doesn’t talk back to you, give you attitude and treat you with disrespect.  A bad bank essentially purchases illiquid assets, which are difficult to sell or get off the books, but doesn’t necessarily mean those assets will not perform. As I have explained on many occasions, lenders and the entire financial sector is struggling with ”mark-to-market” accounting.  And it is possible that this major problem could be addressed by the new administration over the next few months.  Former FDIC Chair Bill Isaac completely agrees with our position, and has publicly given us “AMENS” on our efforts to get the message out that mark-to-market accounting is the single most destructive force in the financial system.  And just this morning, Steve Forbes chimed in on how mark-to-market accounting must be dealt with, in order to solve the financial crisis.

Back to the bad bank – in the absence of a repair of the mark-to-market system, lenders are forced to “delever” or sell assets in a market where there are few buyers…even though the assets may be performing well.  As you know, many wholesale lenders have withdrawn, because they simply can’t lend due to mark-to market-limitations.  In comes the Fed with the bad bank plan to purchase these assets that no one else will buy, and this may even help some wholesale lenders continue to stay in the game as well.

FDIC Chair Sheila Bair is pushing to run the operation, saying that her agency has the expertise to do so, and could actually help finance the program by issuing Bonds guaranteed by the FDIC.  Some estimates have the government buying up to $1T of bad assets via this program.  This is yet another very creative way for the government to breathe life back into the financial sector.

Stocks are rallying, because this was the original intent of the TARP.  Also giving Stocks a boost is news that the House of Representatives plans to vote later in the day on the President’s $825B stimulus package to revive the US economy.

As mentioned previously, the Fed will deliver their interest rate decision and policy statement at 2:15pm ET.  There is nowhere for the Fed to move rates, but the wording of the statement should gather a lot of interest across the globe as the Fed weighs in on the economy, deflation/inflation and the status of the Mortgage Backed Security purchase program.  The last Fed Meeting on December 16th is when the Fed announced they would start purchasing Bonds in the beginning of January, and sparked the refi-party as Mortgage Bonds exploded for a 103bp gain and have since continued to move in a sideways pattern.  Let’s see what happens today.

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