Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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Critics of Fannie Mae and Freddie Mac have argued for years that the quasi-governmental secondary market giants competed unfairly in the mortgage market, had grown too large and too dominant, and posed outsized risks to taxpayers. The implosion of the credit markets and near failure of the GSEs, triggering a multi-billion-dollar governmental rescue that is still ongoing, seemed to prove their point.

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Lender concern about strategic defaults has been increasing as more borrowers who can afford to make their payments are making a “business decision” to walk away rather than continuing to make payments on homes that are worth less than their outstanding mortgage. Now, this trend has no taken a new twist as borrowers who are planning to default seek to secure a mortgage on a new home first --a strategy known as “buy and bail.”

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Poor underwriting left lenders and investors with untold millions of dollars in failed loans; now poor documentation is making it difficult for them to foreclose. That problem, long simmering in the background, exploded into view late last month when Ally Financial (a reincarnated GMAC Mortgage, in which the U.S. government now owns a majority share) announced that it was suspending foreclosure sales and temporarily halting the evictions of delinquent borrowers in 23 states, pending a review of the company’s foreclosure procedures.

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Continuing what has become a familiar pattern, June’s economic reports generated mixed signals, some hinting at a strengthening recovery and others threatening a prolonged period of economic blahs.