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NEW YORK (CNNMoney.com) — The economic stimulus plan announced Thursday by Congress and the Bush administration includes provisions that specifically address the mortgage crisis. It aims to make getting a mortgage easier and cheaper in high-cost markets, to facilitate refinancing and to prevent foreclosures.

The package proposes lifting the dollar amount of loans that are eligible for purchase by Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM) and that can be insured by the Federal Housing Administration (FHA). The cap limits for FHA loans, which offer protection to lenders against losses that result from defaults by borrowers, would be raised to $725,000 and would be permanent.

These government sponsored enterprises currently guarantee a secondary market for loans of less than $417,000, which makes lenders more willing to issue them. The stimulus package proposes raising that cap to $625,000 for twelve months in order to make it easier for buyers to get or refinance mortgages - especially in high-cost regions like California.

“It’s about time,” said Richard DeKaser, chief economist for banking giant National City Corp. “The idea has rattled around Congress for a year. Most analysts agree the market for “jumbo” loans [which exceed the cap limits] has been hurt by lender flight.”

The increased cap should give a boost to some of the most sluggish markets in the nation, like Florida, where high home prices typically mean that mortgages exceed the $417,000 loan limits. When credit markets contracted last summer, jumbo loans over that amount became much harder to get and, as a result, home sales in pricey markets took a hit.

“This will have a big, immediate impact, especially in California where sales have been down most significantly,” said Lawrence Yun, chief economist for the National Association of Realtors.

Homeowners with jumbo mortgages also pay higher interest rates because, with no guaranteed secondary market for the loans, lenders take on more risk, and charge borrowers more for doing so.

For instance, the interest rate difference between loans that fall within the cap limit and jumbo loans was more than 1 percent on Thursday — 6.39 percent compared with 5.30 percent, according to Bankrate.com. On a $500,000 mortgage, the difference is about $350 a month.

Pain relief for mortgage fare-ups

“The 1 percent drop is a huge factor,” said Yun. “In California, it could create a mini-boom.”

Before the stimulus package was announced, analysts including Merrill Lynch had come out with dire forecasts for housing markets over the next couple of years.

But, said Mike Larson, a real estate analyst with Weiss Research. “[the raise in loan limits] could remove some of the inventory overhang and alter the buyer psychology a bit. Right now they’re still waiting for prices to fall.”

Yun added, “There’s a lot of pent-up demand in the market. This will boost confidence among these potential buyers, and some of the people on the fence will start buying.”

The National Association of Realtors recently projected that a higher loan limit, which the organization and other industry trade groups have been lobbying for, would boost home sales by nearly 350,000 a year.

It would also reduce the average period of time a home sits on the market by a month and a half, and lift prices by two or three percentage points.

Home price increases could help keep foreclosures in check by increasing a distressed owner’s home equity, making it easier for them to refinance.

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Hartford Financial Services Group Inc. promoted Chris Jones to manager of the St. Louis branch office.

Ruth Binger was elected to the executive committee of law firm Danna McKitrick for a three-year term.

Joshua Wees joined Goffstein, Raskas, Pomerantz, Kraus & Sherman as an associate.

Mercantile Commercial Capital LLC selected Scott Schlote as Missouri correspondent for the northern St. Louis area.
Broadstripe hired Bruce Beard as general counsel.

Angie Kimes joined NSI, a marketing services firm, as executive vice president of business development.

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Central banks on both sides of the border slashed interest rates yesterday in a bid to juice flagging economies and calm gyrating financial markets, but analysts say further domestic rate relief is likely needed to shield Canada from the threat of U.S. recession.

The Bank of Canada lowered its main interest rate a quarter point yesterday to 4 per cent, representing the second reduction in as many months.

The U.S. Federal Reserve made the rare move of slashing rates between scheduled meetings, a step not taken since 2001. And the cut was a bold three-quarters of a point.

Premier Dalton McGuinty tried to bolster Ontarians’ confidence, telling reporters that experts advising his government believe the economy will continue to grow. And he offered a word of advice to consumers: “If you want to be helpful to the economy, then go ahead and buy that fridge, buy that new house, buy that car. That’s good for our economy and that’s good for our jobs.”

Fears of a U.S. recession were responsible for the global plunge in stock markets, including Canada’s, on Monday. But investors cheered the central bank moves yesterday, sending the S&P/TSX composite index soaring 509 points or 4.2 per cent to 12,641, recouping most of Monday’s 605-point drop.

The Dow Jones industrial average, meanwhile, lost 128 points, or about 1 per cent yesterday, a relatively mild decline given that some markets in Asia, for example, plummeted more than 10 per cent over two days this week while the U.S. market remained closed on Monday for a holiday. Markets were posting big gains in early trading today in overseas markets such as Australia.

Economists said more interest rate cuts are likely on both sides of the border.

“Is the 75 basis points on top of what the Fed has already done sufficient to arrest the slide? Probably not,” said Aron Gampel, vice-president and deputy chief economist at Scotia Capital. “I think they’ll end up cutting more and they will probably have to introduce a fiscal stimulus package sooner rather than later.”

While it’s not yet clear whether the U.S. is actually heading into a recession — defined as two consecutive quarters of negative economic growth — fears are mounting that turmoil in mortgage markets is spilling over into the rest of the U.S. economy.

In its statement, the Federal Reserve said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth."

As for Canada, Gampel predicted similar but smaller rate cuts that aim to alleviate the impact of the U.S. economic downturn on such specific sectors of the Canadian economy as manufacturing in Ontario and Quebec, where the high Canadian dollar has already taken its toll.

“We’re in a far different situation in Canada and that’s why, in this case, bigger may not be better,” Gampel said.

“The Fed’s rate cuts are symptomatic of the problem, whereas ours are a reflection on the financial strains that have developed, as well as concerns that the manufacturing problems aren’t going to go away.”

Liberal MP and finance critic John McCallum said the Bank of Canada’s rate cut was in keeping with expectations as fears of an economic slowdown have grown.

“I think people would have been quite amazed if they hadn’t cut. I think it was a question of whether the cut would be a quarter of a percentage point or half,” he said.

“I think they acted on the cautious side but I think it’s definitely good they cut the rate.”

Economists have argued that momentum in the Canadian economy should be enough to offset a slowdown or even a mild recession in the U.S., which is Canada’s largest trading partner.

However, Beata Caranci, director of economic forecasting at TD Bank, predicted the Bank of Canada may “need to take a little bit more insurance out” and cut by another 75 basis points over the next two scheduled meetings.

One potential side effect of yesterday’s cuts is a widening gap between interest rates in Canada and the U.S. That could lend support to the Canadian dollar, which has already been causing pain for manufacturers and exporters. Borrowing costs will also be higher in Canada on a relative basis.

Some say the U.S. central bank is sending out the wrong signals.

In an investor conference call, Brian Miron, co-manager for Canadian fixed-income portfolios at Fidelity Investments, said the Federal Reserve has “not gone over well with investors” because it has been “slow to react, less transparent and now finally has done some panic reaction.”

The Federal Reserve “has kind of kicked us a bit over the edge into believing that recession here in the U.S. is inevitable. That was not the case even two or three weeks ago and certainly not two or three months ago,” he said.

- With files from Robert Benzie, Les Whittington and Star wire services

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U.S. government bond prices rallied on Friday on renewed concerns about banks’ exposure to bad mortgage investments and falling stocks.
Two-year note yields, which respond closely to expectations on moves in official interest rates, dipped briefly to three-year lows in the aftermath of Federal Reserve Chairman Ben Bernanke’s remarks on Thursday signaling willingness to cut interest rates sharply.
Investors sought the safety of government bonds as worries about the global credit crunch were stoked by a New York Times report saying Merrill Lynch could suffer $15 billion in losses from soured mortgage investments, almost twice the company’s original estimate. For details, see ID:nL11761219.
“The Merrill news was obviously negative and that may have got people twitchy this morning,” likely driving demand for the relative safety of Treasuries, said Charlie Smith, chief investment officer of Fort Pitt Capital Group in Greentree, Pennsylvania.
The benchmark 10-year note traded up 14/32 in price for a yield of 3.84 percent US10YT=RR, compared with 3.89 percent late on Thursday. Bond yields and prices move inversely.
Sliding U.S. equity markets helped boost Treasuries, analysts said.
Midmorning in New York, the Dow Jones industrial average .DJI> was down 1.4 percent at 12,670 points.
“Realistically, you look at the equity market today and think that the downside risks are higher than the upside potential,” said Don Kowalchik, a debt strategist at A.G. Edwards & Sons in St. Louis.
“You have a reverse flight. Yesterday people went to stocks: today they are going back to bonds,” he said.
After Bank of America said it agreed to buy mortgage lender Countrywide Financial Corp in an all-stock transaction worth approximately $4 billion, credit rating agency Moody’s said it may cut Bank of America’s ratings.
The Moody’s comment helped to bolster Treasuries further, said Kowalchik.
However, Treasuries pared some of their gains after Washington Mutual shares rose on a report of talks with JPMorgan Chase.
“The Treasury market is really getting whipsawed” as a result of the stream of news from the banking sector, said T.J Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York. Nonetheless, government bonds are likely to retain some of their safe-haven appeal until the extent of banks’ write-downs for risky investments becomes clearer, he said.
The two-year note traded up 5/32 in price for a yield of 2.62 percent, US2YT=RR versus 2.70 percent late Thursday.
Fed Chairman Bernanke said on Thursday the central bank is ready to take “substantive additional action” to support economic growth. His remarks also supported the short end, sending the yield curve — or gap between short-dated and long-dated Treasury yields — to its steepest since 2004.
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