Obama’s Plan to Subsidize Mortgage Loans Calms Investors

After spending the entire day in negative territory, leading indices on Wall Street surged on Thursday in the final hours of trading following news that the Obama administration is preparing a mortgage loan subsidy program.

At one point, the Dow Jones index was down 2.8 percent yesterday, but it recovered towards the end of trading and finished down just 6 points or 0.09 percent, at 7,932 points. The S&P 500 index rose by 0.17 percent, to 835 points, while the Nasdaq index gained 0.73 percent, reaching 1,541 points. The banking and construction sectors were under significant pressure yesterday until it was announced that President Barack Obama’s administration is preparing a subsidy program for homeowners in greatest need to prevent them from falling behind on payments and facing foreclosure.

This news lifted investor sentiment as the program could be a step forward in efforts to stabilize the real estate market. Along with stimulus measures worth $789 billion and a $2 trillion plan to rescue the banking system, this program, analysts say, could contribute to pulling the U.S. economy out of recession. "This program could positively impact both the mortgage and construction industries. It is a piece of the puzzle that slightly reduces uncertainty in the market," says Richard Sparkes, an analyst at Schaeffer’s Investment Research.

Thanks to this, the KBW banking sector index sharply recovered, finishing yesterday’s trading with a loss of 2.8 percent, having previously been down 6 percent. Among the biggest gainers yesterday was Coca-Cola’s stock, which rose by more than 7 percent after the beverage manufacturer reported solid quarterly business results. Until the news of the mortgage loan subsidy program, the market was in a bad mood due to new data indicating a weakening economy.

Yesterday it was reported that last week the number of people receiving unemployment assistance rose by 11,000, to a record 4.81 million, indicating, analysts say, a worsening situation in the labor market. A somewhat better piece of data is that retail sales in the U.S. unexpectedly rose by 1 percent in January compared to the previous month, marking its first increase in seven months. However, on a year-over-year basis, retail sales recorded a decline of 9.7 percent, and given the rise in unemployment, analysts say further weakening of consumption can be expected. On European exchanges on Thursday, stock prices fell. The London FTSE index lost 0.8 percent, diving to 4,202 points, while the DAX index of the Frankfurt Stock Exchange plummeted 2.70 percent, to 4,407 points. (H)