The reigning credit crunch has disturbed the financial equilibrium of many people around the globe. Aftermath of subprime mortgage crisis was felt the world over and the housing market is yet to recuperate fully. With such a situation prevailing, there are many who successfully manage to tap the equity in their homes. It has been made possible due to reduction in the mortgage rates.

Refinancing activities increased
Statistical data indicates that the fixed rate mortgage for a 30 year loan term dropped by 1.3 points from 6.46% to 5.14% during the period October 2008. The fixed rate mortgage rates for a 15 years loan term has also registered a sharp decline from 6.19% to 4.91%.

Reports also suggest that mortgage refinance escalated by 60% during the 2nd week of December 2008 (according to Mortgage Bankers Association). The increase in mortgage refinance activity could be traced as there were marked changes in the refinance index of Mortgage Bankers Association which keeps a track of all the refinance loan applications.

Mortgage refinance has gone down well with consumers who think they are being able to save a good deal by making lower mortgage payments. The amount that the consumers are saving is being spent mostly for building up an emergency fund or to save it for the rainy day.

Eligibility criteria for mortgage refinance are still stringent
Even though consumers are trying hard to utilize their property by opting for refinancing, not all are qualifying for the same. There are 2 reasons for this. The first reason is that the norms and requirements for qualifying for refinance have been made more stringent. The second reason is that the housing values have declined drastically.

Creditors are usually giving preference to borrowers having 20% equity in their property. However, a borrower can opt for private mortgage insurance in the event he has less than 20% equity in the property.

Refinance is a good option when there are several debts that need to be settled. It is better to opt for refinancing even if the rate available is 1% less than interest rate, the homeowner is currently paying. With the bursting of the housing bubble, lenders have become very cautious and tend to disqualify any loan application that appears to be a risky deal for them.

The Federal Open Market Committee (FOMC) decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action was: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve  Banks of Boston, New York, Cleveland, and San Francisco.

Wells Fargo & Company (NYSE:WFC) and Wachovia Corporation (NYSE:WB) said today they have signed a definitive agreement for the merger of the two companies including all of Wachovia’s banking operations in a whole company transaction requiring no financial assistance from the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

Under the agreement, Wells Fargo will acquire all outstanding shares of common stock of Wachovia in a stock-for-stock transaction. In the transaction, Wells Fargo will acquire all of Wachovia Corporation and all its businesses and obligations, including its preferred equity and indebtedness, and all its banking deposits.

Under terms of the agreement, which has been approved unanimously by the boards of both companies, Wachovia shareholders will receive 0.1991 shares of Wells Fargo common stock in exchange for each share of Wachovia common stock. The transaction, based on Wells Fargo’s closing stock price of $35.16 on October 2, 2008, is valued at $7.00 per Wachovia common share for a total transaction value of approximately $15.1 billion. Wachovia has almost 2.2 billion common shares outstanding. The agreement requires the approval of Wachovia shareholders and customary approvals of regulators.

Speaking before the Senate Banking Committee, SEC Chairman Christopher Cox said commercial banks and broker dealers who sold subprime mortgage backed securities are also being looked at.

“We are investigating whether mortgage lenders properly accounted for the loans in their portfolios, and whether they established appropriate loan loss reserves,” he told the committee.

The Securities and Exchange Commission revealed Tuesday that it has 50 pending subprime related investigations involving residential lenders, investment banking firms, credit rating agencies, and other players involved in the securitization process.

The agency, which is responsible for overseeing bond disclosures on publicly registered securities, said it is investigating whether lenders adequately disclosed the risk profiles of the mortgages they were securitizing.

In late 2006 Lewis S. Ranieri, the co-inventor of the MBS, criticized the SEC in a speech at the National Press Club, saying the agency needs to play a central role in forcing issuers to increase disclosures on bonds collateralized by nontraditional residential loans. At the time, Mr. Ranieri told National Mortgage News that “this isn’t an indictment of the SEC,” but added that “the transparencies are not what they should be.”

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S.  Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.

WASHINGTON, DC – U.S. home prices fell in the second quarter of 2008 according to OFHEO’s seasonally-adjusted purchase-only house price index. The index, which is based on data from home sales, was 1.4 percent lower on a seasonally-adjusted basis in the second quarter than in the first quarter. This decline was less steep than the 1.7 percent decline in the prior quarter. Over the past year, prices fell 4.8 percent between the second quarter of 2007 and the second quarter of 2008. The decline is the largest in the purchase-only index’s 17-year history, but is much smaller than those of other indexes.

OFHEO’s all-transactions House Price Index (HPI) fell 1.4 percent in the latest quarter and was down 1.7 percent over the four-quarter period.

The figures were released today by OFHEO Director James B. Lockhart, as part of the quarterly report analyzing housing price appreciation trends.

“Tighter credit conditions and relatively high inventory levels led to some sharp price declines in the second quarter,” said Lockhart. “However, the majority of Metropolitan Statistical Areas (MSAs) posted positive four-quarter growth.”

The monthly index, which is a purchase-only measure of price changes, was flat between May and June on a seasonally-adjusted basis, but was down 5.0 percent since the April 2007 peak. In June, seasonally-adjusted prices in thePacific Census Division were 17.6 percent off their early 2007 peak, making it the worst performing Division. By contrast, June prices in the West South Central Division reached a new high.

While the national purchase-only house price index fell 4.8 percent between the second quarters of 2007 and 2008, prices of other goods and services increased 5.3 percent. Accordingly, the inflation-adjusted price of homes fell approximately 10.1 percent over the latest year.

“The most overbuilt areas of the country–including California, Nevada, Arizona, and Florida–contrast greatly with most other states, where prices are declining more moderately or even increasing,” said OFHEO Chief Economist Patrick Lawler. “Nationally, the substantial declines in the weakest markets have driven seasonally adjusted prices down to late-2005 levels.”

Read the entire report here

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

The Federal Reserve is currently reviewing regulations that impose limits on how much investment firms can invest in banks, looking to see if they can make it easier for banks to raise capital.

Is this necessary? Rules were put in place to avoid large Industrial Loan Corporations from controlling banks and the availability of credit. Why would a private equity firms be different?

Wall Street may be left a little smaller after the dust from the credit crisis settles. But will its next incarnation be even more profitable?