Market Update 09-17-2008

US Stocks are plummeting with the Dow having been off by more than 350 points, and showing no signs of any real rally. Mortgage Bonds are only slightly positive for the day, while the flight to quality focuses on Treasury's.

Once again any economic reports must take a back seat to the Financial Headlines, as the US government announced yet another bailout, just 2 days after refusing to come to the aid of Lehman Bros. After initially stating that any financial support for AIG must come from the private sector, and asking JP Morgan Chase, and Goldman Sachs to come up with the $75 Billion necessary for AIG to stave off bankruptcy, the government stepped in at the 11th hour. Treasury Secretary Henry Paulson reluctantly agreed to give AIG $85 Billion when the two private investment banks were unable to come up with the required amount. Taxpayers now get a 79.9% stake in the company, and AIG has 2 years to repay the loan by selling off some of its $1 Trillion in business assets. Terms of the deal are widely considered to be aimed at the calculated liquidation of AIG, and Paulson's justification was a need to "mitigate broader disruptions." While the extent of AIG's exposure to derivatives susceptible to the mortgage meltdown is unknown, their insurance, and aircraft leasing businesses are well capitalized. The only question is who has the available capital to purchase them. In actual economic news, the reported number of new homes being built has fallen to the lowest level in 17 years. Both Housing starts, and Building Permits were down more than expected. Housing starts fell 6.2%, and building permits fell by 8.9%. Both of these indicators may actually bode well for the economy as this will eventually help lower the inventory of homes on the market.

After a chaotic day of trading yesterday that saw Mortgage Bonds fall to their worst level since the FNMA/FHLMC bailout, Bonds are positive on the day. While Stocks are taking a beating, leading many investor's to move their money to the safety of Bonds, there is still some reluctance to buy Mortgage Backed Securities. While the bailout of AIG has prevented what would have been very significant, and far reaching "disruptions", it has also underscored fears of tighter credit, and slowing growth, regardless of continuing measures to promote liquidity. The Dollar is down in value, and Oil is trading higher despite the consensus that demand is declining. While Bonds typically benefit from Stock Market declines, this large a drop in Stocks may be an example of "too much of a good thing" for Bonds. Despite the negative movement by Mortgage Bonds yesterday, we have a fairly stout floor of support that we have not fallen through. In conjunction with yesterday's tame reading on inflation from the CPI, this bodes well for long term mortgage rates. Lost in all the headlines of this week is the fact that the Federal Government took specific steps to increase investor's appetite for Mortgage Backed Securities.

Given the big picture, I am recommending to float for any transactions that are closing more than a couple weeks away, but for anyone closing in a matter of days that did not lock last week, locking is not a bad option since rates are still the best they've been all summer.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington