Systematic Crisis?

From Bloomberg this morning as stocks tumble:

“This is a systemic financial crisis, there is no end to it,” Nouriel Roubini, professor of economics and international business at New York University, told Bloomberg Television. “It’s a vicious circle between a contracting economy and greater credit and financial losses feeding on the economy.”

President Bush reminds us that the system is “basically sound”:

WASHINGTON (AP) – President Bush urged lawmakers on Tuesday to move quickly in putting into force legislation designed to help prop up mortgage giants Fannie Mae and Freddie Mac while declaring the nation’s financial system to be “basically sound.”

My thoughts?

Well – I don’t think the government should move too quickly on the Fannie and Freddie bailouts. I don’t trust them to get it right this quickly. Too many variables, too many unknowns. Take a deep breath, try to really understand what the best solution is to this problem. The last thing you want to do is panic. At the end of the day it’s investors who are losing money right now – and that’s the game they play, and the government can come in at anytime in the future with a more sensible plan and rescue the market. I just want to caution against hastily put together plans.

Late afternoon update (4:12PM):

Fed Chairman testifies on the Hill (Marketwatch):

Fed uneasy about inflation, growth, Bernanke says

But he also spoke candidly about the weak economy and fragile financial markets. “The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth,” Bernanke said.

Changing the Way Appraisals Are Ordered

 Today the lender orders the appraisal on a loan transaction. Looks like change is on the horizon since this setup is being blamed for inflated home values, fraud and to a degree one of the reasons for the mess we’re in. The issue is also murky because many mortgage companies also own appraisal houses. Also, since the appraiser doesn’t get paid until the loan is closed they are often under pressure to get the “right” answer! They system appears to be in need of a fix according to the Attorney General in New York and today we have an agreement that could have far reaching consequences for how the loan transaction flows.

Fannie Mae (FNM) and Freddie Mac (FRE) reached an agreement with New York Attorney General Andrew Cuomo to only purchase loans that meet new standards designed to ensure independent, reliable appraisals.

Included would be no longer buying mortgages in which the brokers selected appraisers or when lenders used “in-house” staff appraisers or appraisal- management companies they own or control.

Cuomo said the mortgage giants also have agreed to create an independent organization to implement and monitor the new appraisal standards to be funded with $24 million from Fannie and Freddie. Their regulator – the Office of Federal Housing Enterprise Oversight – also has agreed to the creation of the independent institute, to be called the Independent Valuation Protection Institute. The institute will report to the attorney general’s office and Ofheo on a biannual basis.

The moves, which will be effective Jan. 1, come amid wide sentiment that inflated appraisals have been an important contributor to the mortgage crisis.

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