Rates for most mortgage and car loans continued their modest decline last week, and much praise was heaped on the new help offered by the U.S. Treasury Department and the Federal Reserve. But the wounded banking sector is mending slowly, and both banks and consumers seem wary. The Fed generously announced that it will purchase up to $100 billion of GSE debt from primary dealers via competitive auction starting this week, and it will purchase up to $500 billion of mortgage-backed securities held by Fannie Mae, Freddie Mac and Ginnie Mae through asset managers before the end of this year. But wait, there’s more: the Fed is creating a $200-billion Term Asset–Backed Securities Loan Facility—TALF—to issue and sell securitized auto loans, backed by $20 billion in credit protection from Treasury.

“This is great news for home buyers and sellers and we applaud the Fed for taking this historic step,” stated National Association of Realtors president Charles McMillan. NAR chief economist Lawrence Yun expects a significant decline in long-term interest rates. Each 1-percent decline in interest rates on 30-year fixed mortgages would spur homes sales by 500,000 units, says Yun. “That should help to draw inventory down and stabilize prices.”

Home builders want more, however. They are asking for explicit, long-term guarantees for debt and securities held by Fannie and Freddie. The guarantees under the Housing and Economic Recovery Act of 2008 expire in December 31, 2009. In a letter to Treasury Secretary Henry M. Paulson and James Lockhart, director of the Federal Housing Finance Agency, National Association of Home Builders president and CEO Jerry Howard complained that market uncertainty about the Fannie and Freddie debt has led to high mortgage rates, while GSE debt is considered less secure than senior, unsecured debt covered by the recently introduced Federal Deposit Insurance Corp. guarantee program. “This misperception has resulted in wider long-term senior debt spreads for the GSEs,” Howard wrote.

Struggling auto dealers are delighted with the TALF, meanwhile. “The economic health and well-being of our nation depend on a robust automotive industry,” said National Automobile Dealers association chairman Annette Sykora in a letter to Henry Paulson and Fed chairman Ben Bernanke in early November, noting that car sales account for 20 percent of U.S. retail spending. TALF will help stabilize auto demand, NADA believes. But Sykora last week pointed to the need for “greater liquidity in the market for wholesale automotive inventory loans.” She asked officials to “confirm that TALF eligibility requirements reach floorplan securitizations.”

Consumers may still be cautious, but the Conference Board’s Consumer Confidence Index showed a modest upturn in November, rising to 44.9 from it’s record low of 38.8 in October. The Expectations Index rebounded to 46.7 form 35.7, while the Present Situation Index slid to 42.2 from 43.5. The big change? Inflation expectations “subsided considerably as a result of falling gas prices,” according to Lyn Franco, director of the Conference Board Research Center. Despite the improvement in two of the indices, “consumers remain extremely pessimistic and the possibility that economic growth will improve in the first half of 2009 remains highly unlikely,” Franco adds.

Even if consumers grow more optimistic, they may not be able to rely as much on their credit cards as they once did, says Oppenheimer & Co. analyst Meredith Whitney in a recent note. Banks continue to pull back credit lines as they focus on risk management and regulatory pressures, and “we expect available consumer liquidity in the form of credit card lines to decline by 45 percent” in the next year and a half, Whitney wrote. That could exceed more than $2 trillion in credit. Federal Reserve credit cards, anyone?

Finally, the National Bureau of Economic Research—the official definer of recessions—said yesterday that the U.S. economy slid into a recession in December 2007. The Dow Jones Industrial Average couldn’t sustain its five-day rally, tanking 7.7 percent or 679.95 points to 8,149.09.

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