Market Commentary for November 2, 2007

The markets made a rebound today just a day after the sharp sell off yesterday. Trading volume was moderate to heavy but definitely lighter than that of yesterday’s session. Crude Oil continued its surge into higher territory today and we saw Gold strike a level not seen since 1980. Jobs data released today, set a much better tone for the markets, with the Bears maintaining a majority of control over the session today. At the close, the Bulls stepped forward with the major indices moving into positive territory for the close of the week.

At the closing bell, here is how the major indices ended the session: the DOW (Dow Jones Industrial Average) posted a gain of 27.23 points on the day to end the session at 13,595.10; the NYSE (New York Stock Exchange) posted a gain of 30.18 points to end the session at 10,052.26; the NASDAQ posted a gain of 15.55 points for a close at 2,810.38; the S&P 500 moved higher by 1.21 points to end at 1,509.65 and the RUSSELL 2000 moved higher by 2.60 points to close at 797.78. The FTSE All-World Index ex-US (top Large/Mid Cap aggregate from over 2,700 stocks from the FTSE Global Equity Index Series (GEIS) which covers 90% of the world’s investable market capitalization) posted a loss of 1.02 points to close at 273.50 and the FTSE RAFI 1000 posted a gain of 2.48 points to close at 6,180.65.

U.S. October overall Workweek changed by 0.0 Hour to 33.8 Hours; U.S. September Unemployment was left Unrevised at 4.7% and U.S. September Payrolls were revised to an increase by 96K from an increase by 110K.

U.S. October Manufacturing Payrolls fell by 21K; U.S. October Service-Producing Payrolls rose by 190K; U.S. October Average Hourly Earnings rose by $0.03 to $17.58; U.S. October Unemployment Rate came in at 4.7% compared to consensus of 4.7% and U.S. October Non-farm Payrolls rose by 166K compared to consensus of an increase by 80K.

U.S. Factory Orders rose by 0.2% in September compared to consensus of a drop by 0.5%; September Factory Orders, Excluding Transportation rose by 1.4%; September Factory Orders, Excluding Defense rose by 1.3%; September Durable Goods were left unrevised at a drop by 1.7% and August Factory Orders were revised to a decrease by 3.5% from a decrease by 3.3%.

Under Secretary for Domestic Finance Robert K. Steel Testimony before the House Committee on Financial Services
Washington - Chairman Frank, Ranking Member Bachus, Members of the Committee, good morning. I very much appreciate the opportunity to appear before you today to present the Treasury Department's perspective on efforts to coordinate and enhance foreclosure prevention. Let me begin by broadly examining the characteristics of foreclosures, in both good times and bad, to provide a better perspective on how to approach this issue, and then provide an update on the various actions we have taken to address the current situation. As you know, we are experiencing a period of adjustment in the credit and mortgage markets. Fortunately, this market stress is occurring against a backdrop of healthy U.S. fundamentals and a strong global economy. Yet, the Administration recognizes the importance of housing to our economy, and as Secretary Paulson has said, the housing decline is the most significant current risk to our economy. In addition to the housing decline having a penalty on economic growth, a significant number of homeowners will experience strain due to resetting mortgage rates and home price depreciation. The issues of foreclosure are complex and nuanced. In truth, thousands of homes end up in foreclosure every year, even when housing markets are strong. Between 2001 and 2005, for example, the U.S. rate of foreclosure starts averaged approximately 1.7 percent; meaning more than 650,000 homeowners began the foreclosure process each year. This baseline rate of foreclosure can result from events such as job loss, credit problems, a change in family circumstances, or other sources of economic instability. These foreclosures, although unfortunate, are largely unavoidable. Over the course of the next 18 months, we expect the foreclosure rate to remain elevated above its historic level. A rising foreclosure rate during a housing downturn is not surprising, but largely because of lax underwriting in recent years, especially in the sub-prime market, a higher than usual number of homeowners will face delinquency during the next year and a half. In total, over 2 million sub-prime mortgages are expected to reset in the next 18 months, but not all will end in foreclosure. Some homeowners will be able to afford their new payments without trouble and many others will qualify for refinanced, fixed-rate mortgages on their own. Others, however, have stretched too far beyond their means, and unfortunately, foreclosure is inevitable; in fact, many loans enter into foreclosure before ever reaching the reset date. A third group of homeowners facing resets fall somewhere in the middle. The challenge is for lenders to identify the homeowners in this middle group, who with a bit of assistance can stay in their homes. On August 31st, President Bush announced an aggressive, comprehensive plan to help as many homeowners as possible stay in their primary residences. The President charged Secretary Jackson and Secretary Paulson to lead this effort and the focus of our hearing today is to discuss one part of this plan. Whenever facing a challenging public policy issue, the first step is full understanding. We are appreciative of the interest Chairman Frank and this Committee have taken in understanding these current challenges. Hearings, such as this one, have contributed to our process of learning. The Department of Housing and Urban Development (HUD) and the Treasury Department have also been working closely with leading servicer’s, mortgage counselors, lenders, and investors to understand the causes of foreclosures and the best ways to help people keep their homes. We are continuing to learn but have reached two early conclusions: First, it is clear to everyone that the earlier we identify struggling borrowers, the more likely it is that servicer’s and lenders will be able to refinance or modify mortgages into something more sustainable for the long term. If we wait until borrowers miss several payments, their credit profiles will be tarnished and they will have far fewer refinancing options.
Second, once identified the method and technique of contacting borrowers are quite important. When contacted by lenders, many borrowers mistakenly believe that the lenders' goal is to repossess their homes through foreclosure. Foreclosure is tough on families and bad for communities, but also very costly for lenders. In almost all cases lenders would rather find a way to help homeowners stay in their homes than foreclose. Yet according to most of the servicer’s and counselors with whom we have spoken, 50 percent of those who lose their homes to foreclosure never contacted their mortgage servicer’s or mortgage counselors for help. Frequently, borrowers are fearful of foreclosure and not aware that their lenders would prefer to work out a solution – such as a lowered interest rate or a payment plan. From our review, it became clear to us that while many market participants are working hard on their own trying to reach and help homeowners, they are not having as much success as they or we would like. In addition, the mortgage market today has developed into a system based on securitization. Securitization has brought many benefits but also leads to greater complexity in finding solutions for homeowners. The breadth of desegregation in the mortgage market presents a practical problem that does not lend itself to easy solutions.

Hope Now Alliance
Many of the servicer’s, lenders, investors and counselors with whom we have met realized that if they coordinated their efforts behind a unified strategy, they would be more effective in reaching and helping homeowners. The Treasury Department and HUD facilitated discussions and encouraged them to work together. On October 10th, they announced the formation of a non-partisan initiative called the Hope Now Alliance. To date, the Hope Now Alliance consists of four counseling organizations, seventeen mortgage servicer’s and lenders (comprising 60 percent of the U.S. market for mortgage servicing), three investor groups (including the American Securitization Forum, which represents over 370 members), and ten trade associations. We applaud these industry leaders for coming together. Since their launch a few weeks ago, the Alliance has been meeting regularly and working hard to develop and implement an aggressive plan to help homeowners. Let me describe the details of their strategy and why we believe such elements are critically important.

Communication
Earlier this week, the Alliance announced a new, national direct mail campaign to contact at-risk borrowers, encouraging them to call for help. Servicer’s have been mailing letters to their at-risk customers but have had limited success. The role of counselors is crucial to helping challenged homeowners, and no where is that more apparent than in communication. We have heard anecdotally that servicer’s achieve only a modest success rate with their letters, because borrowers in trouble do not want to hear from their lenders. In contrast, independent counselors have reported a significantly higher 25 to 30 percent success rate when sending similar letters to borrowers. The Alliance expects this new letter campaign, which will come from the Hope Now Alliance itself, rather than from servicer’s, to increase their effectiveness in reaching at-risk borrowers. This is going to be an on-going campaign that servicer’s will tailor and adjust as they learn from the response. The more attention we can bring to this unified campaign, the more likely it is that borrowers will pay attention to this important information and call for help. The Alliance will begin mailing these letters on November 19th, and will send over 200,000 letters by the end of this month. Let me take a minute to emphasize the importance of these letters and to ask for your help. When you are home in your districts over the weekend or for the holidays, please tell your constituents about this mail campaign. Tell them it is OK to contact Hope Now for assistance. This organization is ready to lend a hand, but we need your help in making their message known.

Process
The Alliance is also working hard to develop strong working relationships between servicer’s and counselors. Some servicer’s already have dedicated teams and contacts for counselors to call. Other servicer’s do not have dedicated resources to work with counselors, and, as a result, counselors can spend hours trying to find the right person to contact. We have learned that some counselors are more effective than others at efficiently working with borrowers to collect the required information and pass that on to servicer’s. Servicer’s and counselors who joined the Alliance have agreed to adopt a standard process model that will strengthen and speed work flow, productivity, and communications between them. Improving the way servicer’s and counselors work together will make them all more effective at helping homeowners once they have been contacted.

Counseling
The Alliance is working to expand the capacity of an existing national counseling network to receive, assess, counsel, refer and connect borrowers to servicer’s. Most borrowers feel more comfortable speaking with independent, not-for-profit counselors than with their lenders. While there are already many conscientious HUD-certified mortgage counselors, their efforts could be enhanced through a uniform message. Similarly, servicer’s want to be able to point their borrowers to quality counselors who have adopted best practices, and this national network will serve that function. They are working to ramp up capacity now, but it will take some time before it is fully operational.

Investors
The American Securitization Forum (ASF), which represents securitization issuers, investors, and other secondary market participants, has joined the Alliance and announced that counseling fees can be reimbursed from securitization transactions in appropriate circumstances. This is extremely important. Historically, counseling was funded by the government and independent foundations. Now the securitization issuers and investor community have recognized the important role counseling plays in avoiding foreclosure and is willing to fund quality counseling. Having ASF as an active member of this Alliance is important because it can help manage the complexity resulting from the securitization model by making sure investors are doing their part.

Metrics
Today, the industry does not have a thorough, standardized set of metrics with which to evaluate servicer’s' loss-mitigation performance or to evaluate counselors' effectiveness. The Alliance is developing standard measures which policymakers, homeowners and investors need in order to monitor performance. These performance measurements could include data, such as the number of loans in default, outcomes for these loans, and success rates for modifications and refinances. Developing these metrics will allow us to identify categories of borrowers who can be helped, determine successful treatments, and measure the rate of successful outcomes.

Technology
The servicer’s have agreed to work toward cross-industry technology solutions to more effectively connect servicer’s and counselors together in order to better serve the homeowner. Some major servicer’s use sophisticated software to analyze borrower situations and determine if work-outs or modifications are appropriate. The Alliance is taking this software and making it web-enabled so other servicer’s and counselors can access it. This should speed the loan modification process: if a counselor can access this software tool, enter the data from the borrower, and pass that along to the servicer in an automated system, then the servicer will have more confidence in the data and the recommended solution and can approve modifications in a more expeditious manner. This element will likely take the most time, but the Alliance is working closely with a major information technology services firm to develop and launch the tool.

Looking forward
The efforts of this private sector alliance alone will not prevent all foreclosures. But it is a good start and a critical first step. As we work with them, we will all learn and improve the means of reaching and helping homeowners to prevent foreclosures. By better identifying those borrowers in need, we hope to see more loan modifications and refinancing. For many families, this will be the only viable solution. Given today's situation, the current process requires a more committed approach. Just as the lenders, servicer’s and counselors have come together to develop metrics and standards that will measure the most effective ways to make counseling accessible to troubled borrowers, we have also encouraged them to come together in a similar way to develop an efficient methodology for offering suitable mortgage solutions such as loan modifications, refinancings, or other flexibility as appropriate. We are optimistic about the effectiveness of our current initiatives. Yet given the size, nature and implications of current challenges for homeowners, we should continue to work to find additional solutions without compromising our shared ambition to not bail out lenders or speculators or those who committed fraud. Other complementary efforts have already been initiated. For example, we applaud the guidance that the federal regulators have given to banks which hold mortgages on their balance sheets to be more flexible in seeking economic solutions in modifying existing mortgages for distressed homeowners. The same is true with respect to the guidance that regulators issued to servicer’s where the record of loan modification has proven to be more difficult and disappointing for many of the reasons identified above in addition to the challenges associated with securitization. We should focus on results and not on prescribing a single approach. Preserving homeownership is the goal, and we must recognize that many different avenues can get us there. Borrowers, too, have responsibility. Mortgage providers must offer clear, transparent and understandable information on the mortgage products they sell. And homebuyers have a responsibility to use that information and understand their mortgages. Buying a home today is a complex process, but that in no way excuses homebuyers from their obligation for due diligence.

Policy Initiatives
The Administration has requested that Congress also do their part by focusing on three initiatives. First, Congress should pass Federal Housing Administration (FHA) modernization to make affordable FHA loans more widely available. Second, to facilitate mortgage workouts, the President has asked Congress to temporarily eliminate taxes on mortgage debt forgiven on a primary residence. And third, Congress should enact comprehensive government sponsored enterprise (GSE) reform. FHA modernization is moving through Congress, and we are hopeful that it will reach the President's desk soon. The tax relief proposal has cleared the House of Representatives and is awaiting further action in the Senate. In large part due to this Committee's hard work, GSE reform has cleared the House of Representatives, and now awaits action in the Senate. Congress should enact these bills as quickly as possible.

Conclusion
Mr. Chairman, in conclusion, let me thank you for holding this hearing. Under the President's leadership, the Administration is working diligently to help mitigate the impact of rising foreclosures on homeowners and the economy. We appreciate having the opportunity to present the Treasury Department's perspectives on these important issues and pledge to keep you apprised of the progress with Hope Now and our other initiatives and programs. Thank you and I look forward to your questions.

Commodities Markets
The trend was mostly higher the board today for the Energy Sector: Light crude moved higher today by $2.44 to close at $95.93 a barrel; Heating Oil closed higher by $0.06 today at $2.57 a gallon; Natural Gas moved lower today by $0.22 to close at $8.42 per million BTU and Unleaded Gas moved higher today by $0.10 to close at $2.44 a gallon.

Metals Market ended the session mostly higher across the board today: Gold moved nicely higher today by $14.80 to close at $808.50 an ounce; Silver moved higher by $0.27 to close at $14.60 per ounce; Platinum moved sharply higher today by $11.90 to close at $1,462.70 an ounce and Copper closed lower by $0.04 today at $3.33 per pound.

On the Livestock and Meat Markets, the trend was mostly higher across the board today: Lean Hogs ended the day higher by $0.18 to close at $52.43; Pork Bellies ended the day higher by $3.00 at $84.70; Live Cattle ended the day higher by $0.63 at $94.73 and Feeder Cattle ended the day lower by $0.38 at $107.93.

Other Commodities: Corn moved sharply higher today by $8.25 to close at $377.00 and Soybeans moved sharply higher today by $10.25 to end the session at $1,016.75.

Bonds were higher across the board again today: 2 year bond moved higher by 5/32 today to close at 99 28/32; 5 year bond moved higher by 9/32 to close at 99 20/32 today; 10 year bond moved higher by 9/32 today to close at 103 13/32 and the 30 year bond closed higher by 10/32 at 106 2/32 for the day.

The e-mini Dow ended the session today at 13,644 with a gain of 36 points on the trading session. The total Dow Exchange Volume for the day came in at 237,351 which are comprised of Electronic, Open Auction and Cash Exchange. Traders should review workshops available at the CBOT (Chicago Board of Trade) Educational in-person seminars schedules available on CBOT (Chicago Board of Trade) website.

The end of day results for the CBOT (Chicago Board of Trade) which is comprised of the total Exchange Volume for Futures and Options (EVFO) including Electronic, Open Auction and Cash Exchange ended the day at 5,434,598; Open Interest for Futures moved higher by 197,027 points to close at 9,921,320; the Open Interest for Options moved higher by 115,523 points to close at 8,639,471 and the Cleared Only closed higher by 221 points at 11,509 for a total Open Interest on the day of 18,572,300 for a total Change on the day with a gain of 312,771 points.

On the NYSE today, advancers came in at 1,519 decliners totaled 1,743; unchanged came in at 95; new highs came in at 103 and new lows came in at 292. Gainers and losers for the day as well as active day trading stocks on the NYSE: PetroChina Company Limited (PTR) moved nicely higher on the session to post a gain of 6.06 points with a high on the day of $257.48, a low of $248.64 with a closing price at $255.06; Goldman Sachs Group Incorporated (GS) continued their southbound trend today with a loss of 10.61 points with a high on the day of $241.80, a low of $223.44 for a final trading price at $229.60; Allegheny Technologies Incorporated (ATI) romped higher to post a gain of 4.00 points with a high on the day of $101.30, a low of $96.59 with a closing price of $100.47; Las Vegas Sands Corporation (LVS) took quite a hit on the session to shed 8.53 points with a high at $117.20, a low at $108.89 for a closing price at $116.77; WellCare Health Plans Incorporated (WCG) posted a rebound today for a gain of 4.50 points with a gain of value of 19.68% with a high on the day of $27.93, a low of $23.01 to end the day at $27.37; Flowserve Corporation (FLS) powered higher on the day with a gain of 12.94 points to tack on 17.16% with a high of $90.00, a low of $80.02 with a closing price at the bell of $88.33;Marshall & Llsley Corporation (MI) tumbled hard on the day with a loss by 22.58% to shed 9.11 points with a final trading price at $31.23 and Ambac Financial Group Incorporated (ABK) took a hit today by 20.87% to lose 6.17 points with a high of $28.30, a low of $21.62 with a closing price at the bell of $23.40.

On the NASDAQ today, advanced totaled 1,465; decliners totaled 1,517; unchanged came in at 121; new highs came in at 60 and new lows came in at 281. Gainers and losers for the day as well as, active day trading stocks on the NASDAQ: GFI Group Incorporated (GFIG) powered higher on the day to tack on 8.35 points with a climb higher by 10.17% with a high on the day of $96.18, a low of $85.06 for a closing price at $90.51; Itron Incorporated (ITRI) took a hard loss on the day by 18.25 points to shed 18.07% with a high on the day of $86.67, a low of $79.40 with a final trading price at $82.79; RadiSys Corporation (RSYS) posted a gain of 3.32 points with a final trading price at $16.91; Cognex Corporation (CGNX) moved higher on the day by 3.89 points to tack on 23.13% with a closing price at the bell of $20.72; Baidu.com Incorporated (BIDU) soared higher on the trading session for a gain of 23.55 points with a high on the day of $409.00, a low of $387.64 with a final trading price at the bell of $409.50; Synaptics Incorporated (SYNA) powered higher on the day for a gain of 9.63 points to tack on 19.09% with a closing price at the bell of $60.07; Wright Medical Group Incorporated (WMGI) tacked on 3.98 points for a gain of 15.61% to end the day at $29.37 and Insight Enterprises Incorporated (NSIT) moved lower by 6.33 points to shed 23.93% on the day for a final trading price of $20.13.

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