Foreclosure Freeze and Warren Buffet's Bond Proposition Cause Stocks to Soar

By Jason Simpkins
Associate Editor

U.S. stocks rallied for the second straight day yesterday (Tuesday) – posting their biggest gains so far this month – on news that major U.S. lenders would put a freeze on foreclosures, and major bond insurers were considering a Warren Buffet-sponsored bailout.

After rising more than 200 points in early trading, the Dow Jones Industrial Average gained 133 .4 points, or 1.09%, to close at 12,373 on the news. The broader Standard & Poor's 500 Index climbed 9.74 points, or 0.73 %, to close at 1,348.86. The tech-heavy Nasdaq Composite was the only index to finish in the red – albeit only slightly. The Nasdaq declined 0.02 points to close at 2,320.04.

Of the 12 major sectors, only transportation traded down, declining 0.28%, although technology closed only marginally to the upside.

It was the upbeat news in the financial-services sector that fueled the advances in the Dow and the S&P.

Foreclosure Embargo

Six of the nation's top mortgage lenders have temporarily stopped foreclosure proceedings in a joint effort to halt the torrent of mortgage defaults. Under a new program, called "Project Lifeline," there will be a 30-day moratorium on foreclosures and delinquent borrowers will be given the opportunity to work out new payment options on a case-by-case basis.

"For many families, Project Lifeline will temporarily pause the foreclosure process long enough to find a way out," Alphonso Jackson, Secretary of Housing and Urban Development, said in a prepared statement. "Loan modifications may follow. And, this program is not only available to subprime borrowers but to people with any kind of home mortgage."

There were more than 2.2 million foreclosure filings in 2007, according to RealtyTrac, an online marketer of foreclosure properties. Another 2 million homeowners will be facing higher mortgage rates over the next two years. Economists at the Federal Deposit Insurance Corp. (FDIC) estimate that foreclosures this year will exceed the annual average by more than 1 million.

Lenders that have already agreed to take part in Project Lifeline include Citigroup Inc. (C), Countrywide Financial Corp. (CFC), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Washington Mutual Inc. (WM), and Wells Fargo & Co. (WFC). More may sign up if the program meets with success.

Repossessing homes has become an increasingly unprofitable venture. Excessive refinancing has left many borrowers owing more than their house is worth. And when the house is resold, additional expenses are incurred through general maintenance, accrued property taxes, and realtor commissions.  According to, foreclosures have resulted in an average loss of more than $50,000 per house for the lender.

Buffett Offers to Bail Out Bond Insurers

Markets were also buoyed yesterday by a surprise announcement from Buffett, entrepreneur and chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B). Buffett offered to assume responsibility for $800 billion in municipal bonds guaranteed by MBIA Inc. (MBI), Financial Guaranty Insurance Company, and Ambac Financial Group Inc. (ABK).

"We offered to take over the liabilities for the whole $800 billion of these three companies for a premium that would be equal to, essentially, one-and-a-half times the remaining premium left over the life of the bonds," Buffett said in an interview with CNBC.

The upside for the nation's top three bond insurers would be the opportunity to retain their AAA-ratings. There is a growing concern that the companies won't have enough money to pay claims on the $2.4 trillion in assets they've previously guaranteed.

However, Buffett is only offering to take the most profitable, or safest, portions of the companies' municipal guaranty business. The offer excludes subprime-related securities, and collateralized debt obligations (CDOs). Though Buffett was quick to point out that the CDOs are going to pose a problem for the insurers no matter what.

"What this does, is it means that the municipals, in effect, get taken off the table and they know they're good and you've got $800 billion of those that are good," Buffett said. "It doesn't do anything for the CDOs, but I'm not sure anything is going to do much for the CDOs."

So far, one bond insurer already rejected the proposal, and Buffett has yet to hear back from the other two. But in conjunction with the freeze on foreclosures, the speculation was enough to turn investors bullish.

"It's another potential solution to some of the credit problems," Mark Bronzo of Security Global Investors told Bloomberg. "That's why the markets are responding well."

Not everyone agrees with that assessment.

"I really don't think this does much for anyone but Warren Buffett, as the thought of an insurer 'giving away' its best business and only means of surviving this mess in return for the rest of its 'junk in the trunk' should leave them cold," Kevin Giddis, a fixed-income analyst at Morgan Keegan & Co., told

[For a related article in today's issue of Money Morning that more fully analyzes Warren Buffet's foray into the bond market, please click here.]

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