U.S. Rep. Barney Frank, D-Massachusetts and Chairman of the House Financial Services Committee, Thursday introduced legislation to enable the Federal Housing Administration to insure and guarantee mortgages that have been written down banks and other mortgage holders, Rep. Frank announced in a statement.

Rep. Frank's proposal would permit the FHA to provide up to $300 billion in loan guarantees which could potentially result in the refinance of 1-2 million at-risk mortgages, preventing foreclosures, "protecting neighborhoods and help stabilize the housing market."

With home foreclosures expected to increase in 2008 as the second wave of variable interest rate mortgages reset, an influential member of Congress is expected to introduce legislation that would enable the Federal Housing Administration to buy at-risk loans, enabling them to be refinanced and preventing homeowners from being foreclosed upon, The Financial Times reported Wednesday.

U.S. Congressman Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, is floating a $15 billion initiative that would authorize the FHA to buy as many as 1 million at-risk mortgages, The FT reported. Some loans, such as those for investment properties and vacation homes, would not be eligible for the program.

The overlooked FHA

Overlooked during the "Roaring 1990s" economic expansion and this decade's housing boom, the Federal Housing Administration is a Depression-era agency that insures loans made to borrowers with poor credit.

Bond insurer MBIA (NYSE: MBI) said hedge fund founder William Ackman's proposal for a restructuring of U.S. bond insurers is no more credible or viable than his flawed open-source model, The Wall Street Journal reported [subscription required].

"Like Mr. Ackman's open-source model, his statements in the media and the barrage of letters he has sent to regulators and the rating agencies -- which contain half truths, innuendo and faulty analysis -- this proposal is simply a continuation of Mr. Ackman's campaign to profit from his short positions and credit default swaps in the bond insurance industry," MBIA said. MBIA added that it is continuing to work with New York State Superintendent of Insurance Eric Dinallo and his advisers to evaluate options for maintaining the highest rating for its policyholders.

Furthermore, MBIA, the nation's largest bond insurer, said it agrees with a spokesman for the New York Insurance Department who said Ackman's proposal would split the company and likely lead to a substantial downgrade for the structured side.

Amid calls for disclosure of more information on bidding for auction-rate bonds after dealers stopped buying the securities, two economists told BloggingStocks Friday that the problem of a lack of investor demand speaks directly to the need to re-capitalize bond insurers MBIA and Ambac.

"The problem is not merely a lack of demand for bonds. The problem is that institutional investors are shunning these investments because they are concerned about a lack of available insurance for this debt and related credit market uncertainty, which underscores the need to address the liquidity concerns of MBIA and Ambac," economist David H. Wang said Friday.

MBIA, Ambac: two linchpins

The bond insurers, Wang said, are two linchpins of the bond market [municipal, corporate], and, by extension, of the financial markets.

Shares of MBIA (NYSE: MBI) and Ambac (NYSE: ABK) have lost more than 70% of their value in the past six months, as investors have fled them amid concern that the two do not have sufficient capital to fund insurance policies for mortgage-backed and collateralized debt obligations held by banks and institutions. MBIA and Ambac executives have rejected the accusations, arguing that they have sufficient capital to fund claims and can modify/improve their business models, long-term, aided by re-capitalization. MBIA fell 80 cents to $11.82 and Ambac fell 45 cents to $10.08 in Friday afternoon trading.

The $150 billion fiscal stimulus package that's winding its way through the U.S. Congress will not represent a panacea for the U.S.'s economic ills, an economist argued, but it will represent modest good news for one segment -- the beleaguered housing sector.

The fiscal stimulus bill currently under discussion in the U.S. Senate calls for raising Fannie Mae and Freddie Mac's conforming loan limit to $729,750 through 2008 from the current $417,000.

Conforming loans are conventional, fixed-rate mortgages for good credit borrowers that banks make that are eligible for purchase by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). When Freddie and Fannie purchase these loans from banks, it "frees-up" money that the banks can use to grant mortgages to future borrowers, thus expanding the pool of funds available for mortgages.

Economist Steve Affinito told BloggingStocks Thursday that while it's important to underscore that the higher conforming loan ceiling will not eliminate the U.S. housing sector's recession, it is "a critical, essential step in the right direction," in his interpretation.

Clem Chambers, CEO of stocks/ investment web site ADVFN, argues in an article in Forbes.com that the best thing that could happen to the markets right now would be a quick stock market crash.

Chambers writes: "In many ways, the best thing that could happen now would be a quick crash. A lot of professionals are praying for a so called 'puke' because that would set a bottom for a recovery and signal that the worst is over. A short, sharp shock would be good for everyone. Recovery is better than sickening."

Chambers also notes that the market may very well be in the process of crashing right now, but until there's a period of relative calm or a massive drop, it's too soon to tell. Chambers added that if a crash does happen, it will occur in the next few weeks, and if it doesn't he sees a bear market for an extended period of time (It should also be noted that Chambers' other scenarios for the period ahead, 2008-2010, are a protracted period of volatility or a small/short bear market).

As traders and investors digested the impact of the market's latest sell-off on both assets and investor psychology, Tuesday's jolt is likely to speed the passage of a U.S. fiscal stimulus package to boost the ailing U.S. economy, economists and analysts said Tuesday.

President Bush and U.S. Congressional leaders from both parties are expected to discuss this afternoon that fiscal plan, which should aide place $140-160 billion into the econmy, Bloomberg News reported Tuesday.

Fiscal stimulus: sooner the better

Independent currency trader Andrew Resnick, said if Tuesday's market jolt prompts President Bush and lawmakers to agree on a package of tax cuts/rebates and spending increases, then the market's latest gyrations "will turn out to be a blessing in disguise."

Given the U.S. market's 400-point sell-off in its initial minutes of trading, "a Dow close down just 300-points would look like a moral victory" according to one economist.

"All things considered, from a market standpoint, a 300-point down day is a relatively small consequence," economist David H. Wang told BloggingStocks Tuesday.

Amid the sell-off, the U.S. Federal Reserve, in an emergency monetary policy action, cut key interest rates Tuesday morning - - cutting both the Fed Funds rate and the discount rate by 75 basis points. The Fed cut the Fed Funds rate to 3.50% and the discount rate to 4.00%.

Larger matter: mortgage insurers

Of utmost importance, in Wang's interpretation, is the health and fate of mortgage insurers, primarily MBIA (NYSE: MBI), and Ambac (NYSE: ABK), but also PMI Group (NYSE: PMI), and MGIC (NYSE: MTG).

Wang said the mortgage insurers "form a critical foundation in mortgage insurance, and as a result, in the mortgage process."

"A failure by MBIA or Ambac would mean several banks would not receive insurance payments for mortgages that go into default, substantially reducing the asset values of those banks," Wang said. "That would prompt another market sell off, possibly resulting in a failure by one or more banks."

China and the United States on Wednesday agreed that the relationship between the world's two largest economies is becoming increasingly interdependent but again differed on the pace of Chinese currency reform, as trade talks between the two nations continued in Beijing, The Associated Press reported.

Separately, U.S. officials pronounced as a success a side process Tuesday during which the two sides signed several agreements, including one on food safety, calling for U.S. health inspectors to play a greater role in inspections in China itself, the International Herald Tribune reported.

The proposed Super SIV may end up being considerably smaller than the original outline, as banks and other SIV-owning institutions either write-down or find other ways to dispose of problematic SIV assets, The New York Times reported Monday.

Conceptualized following a request from the U.S. Treasury, the Super SIV is designed to facilitate the orderly sale of high-risk packaged mortgage loans and assets held by SIVs, but not to rescue those SIVs.

As presently configured, beginning in January/February 2008 the Super SIV will lead a coordinated, gradual purchase-and-resale of these assets, which, officials say, will avoid a "mad rush to the door" of SIV asset sales. The latter would further depress prices, and create another round of credit market turmoil, with negative consequences for the U.S. economy. The Super SIV will raise money from financial institutions to fund itself.

The U.S. Federal Reserve is likely to continue to cut benchmark short-term interest rates by another quarter-point Tuesday, but in the view of some economists and analysts, it would not be totally unreasonable for the Fed to implement a half-point cut.

Economist David H. Wang told BloggingStocks that recent Fed data "seems to be indicating a clear risk of a recession, which is the argument for a 50-basis point [half-point] cut."

Wang noted that while the futures market is pricing in two more 25 basis-point cuts at the Fed's January and March 2008 meetings, and also pricing in 100% odds of a 25 basis-point cut and 28% odds of a 50-basis point cut Tuesday, recent negative economic news/data points may weigh on the Fed on Tuesday, and perhaps carry the day, producing a half-point cut.

The number of mortgage delinquencies rose to a 20-year high in Q3 as borrowers increasingly found it difficult to make payments within the 30-day grace period, the Mortgage Bankers Association announced Thursday.

The percent of home loans with payments more than 30 days late rose to seasonally-adjusted 5.59%, the MBA announced -- the highest level since 1986. The group's survey began in 1972.

Telling stat

The delinquency statistic suggests that the housing correction "is far from over," according to economist Steve Affinito.

"It's not even the beginning of the end," Affinito told BloggingStocks on Thursday. "Generally during a housing slump, what you see first is a rise in unsold homes, and then a rise in delinquencies, mostly from homeowners who did not sell or could not refinance."

True, no one on the trading floor of the New York Stock Exchange Friday yelled, "It's a return to the 'Roaring 90s,' " but given the way the U.S. economy and the stock market have gone in 2007, it's a start.

The Dow Jones Industrial Average closed Friday up 59.98 points to 13,371.71 - - hardly the stuff of a headline, but it was a technically-significant day.

The Dow's accomplishment? On Friday the Dow closed above the critical 200-day moving average at 13,250.10 - - the toughest moving average to break - - for the third consecutive day. Technical analysts argue that three consecutive closes above the 200-day moving average is a bullish sign. [For background on the Dow and the 200-day moving average, click on this bloggingstocks link: "Fed be nimble, Fed be quick."]

Hence, the Dow has cleared a major technical hurdle. The 'three closes above 200' does not guarantee that the rally will continue, but it is a step in the right direction.

It looks like the Super SIV roadshow is about ready to start, with the Bank of America apparently taking the lead.

Left unanswered -- at least for the immediate future -- are compelling questions related to the fund's transparency, effectiveness, and cost.

The Bank of America (NYSE: BAC) announced Monday that it will lead efforts by Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) to convince smaller competitors to help finance an $80 billion bailout of the short-term debt market, Bloomberg News reported Monday, citing two sources with knowledge of the matter.

With the three largest U.S. banks reaching agreement on a new $80 billion fund aimed at reviving the market for short-term debt, criticism appears to be mounting that the new fund itself may be flawed or may create more problems than it solves.

Citigroup (NYSE: C), the Bank of America (NYSE: BAC). and JPMorgan Chase (NYSE: JPM), the three largest U.S. banks, have reached an agreement on the structure of an $80 billion fund to help revive the market for short-term debt, a person familiar with the talks said, Bloomberg News reported.

The banks want to establish the fund, called the "Super SIV" or master liquidity enhancement conduit ("M-LEC"), as a way to obtain short-term credit to finance high risk / high-yield investments in subprime mortgage loans. The fund would buy some of the $320 billion in assets held in structured investment vehicles, or SIVs. SIVs typically borrowed money to invest in longer-term investments, like subprime mortgages.