Market Update 09-19-2008

US Stocks have extended yesterday's momentous end of the day rally with the Dow steadily up by over 350 points today. Mortgage Bonds have been up and down, and have now fallen below technical pricing support for the first time since the government bailout of FNMA/FHLMC.

This has truly been a historic week of government actions. In the last 24 hours, we've seen the US Treasury, and Federal Reserve working with, and through Congress, initiate some very bold moves. In response to what amounted to a public outcry of fear about the security of supposedly safe asset investments, Treasury Secretary Henry Paulson announced the government would be guaranteeing low risk money market funds. After seeing a run on T-Note's to the point yields actually went negative (indicating people were willing to pay money, for a guarantee they would not lose more), and the withdrawal of close to $200 Billion from the world's money market funds, the US Treasury announced a temporary guarantee of those funds that pay a fee to participate. The Securities & Exchange Commission enacted a ban on the short selling of 799 Financial Stocks yesterday that runs until October 2, and is renewable after that in 30 day increments. They took the action to "protect the integrity and quality of the securities market and strengthen investor confidence." The third government action taken to calm the global markets was the Fed's commitment to come up with a plan to move what have come to be viewed as toxic assets off the balance sheets of some major US firms. These illiquid assets (mostly bad mortgages) are clogging up the flow of credit, both between banks, and to the public. The presumed plan is to create an agency similar to the Resolution Trust Corporation set up in the 1980's to deal with the Savings & Loan crisis, where the new entity would purchase those bad assets, and hold them before eventually selling them back into the market at auction. All of these actions together have had the desired effect of boosting investor confidence, as shown by Stock gains today.

Mortgage Bonds have taken a bit of a beating as the result of the rush of capital into Stocks. The moves described above contributed to Bonds opening below yesterday's finish. However, the government actions aimed at improving public confidence were not limited to Stocks. This morning Secretary Paulson came out with steps to improve the mortgage market as well. Along with announcing the intention to create an entity to deal with illiquid mortgage assets, the Treasury has authorized Fannie Mae, and Freddie Mac to resume buying mortgage debt, and they have expanded the amounts available to the Mortgage Backed Security purchase program. The first move will "provide critical additional funding to our mortgage market," and the second will "increase the availability of capital for new home loans" which will help with "mortgage availability and affordability." While the obvious results of all these moves is showing up in the form of a Bull Market for Stocks, the latter two are helping to keep Bonds at or near their current levels, and more importantly, narrowing the spread between Treasury's and Mortgage Bonds. The narrowing of these spreads should bring foreign investors back to the mortgage market, and help to further reduce rates moving forward.

I believe the incredible rally by Stocks will be more temporary in nature than the support established for Bonds because eventually the banks will still have to deal with the deficiencies o their balance sheets, and this should result in moves towards the quality of the Bond Market. That is why I continue to recommend floating for those transactions that are weeks out from closing, and any shorter term transactions should have already locked. For those in between, we still have very good rates, and it is always better to have locked when you could have floated, than to have floated when you should have locked.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington