Market Update 09-26-2008

US Stocks are trending flat to slightly negative on uncertainty over the government bailout, and the predicted failure of WAMU. Mortgage Bonds are following suit as they trade in a very tight range.

The Stock Market is waiting to see what actually comes out of Washington as the news on the bailout continues to ebb and flow. While it seems imminent that there will be some form of bailout, the uncertainty over the form it will take is causing the Markets to pause. A group of economists that includes 3 Nobel Prize winners has urged Congress to not act out of desperation, and allow for a more careful, studied approach as talks on Capitol Hill continue. In the meantime, Stocks are trading sideways with a bit of a negative tilt. Thursday after hours, WAMU was shut down by the Office of Thrift Supervision, and placed in the receivership of the FDIC to facilitate their absorption by JP Morgan Chase. JP Morgan now becomes the largest Depository in the US as they pick up WAMU for $1.9 Billion, after having scooped up Bear Stearns in the beginning of this financial meltdown. While the FDIC refers to this as "simply a combination of two banks," it is unusual in that they normally only take action on Friday after business to help smooth the transition, but were forced to mover quicker for fear of media leaks. In the period since Lehman Brothers filed for bankruptcy, WAMU customer's have withdrawn $16.7 Billion (roughly 9% of the total) worth of deposits out of the bank, forcing the OTS to declare them unable to meet obligations. WAMU had over $300 Billion in loans outstanding, dwarfing the next largest bank failure (1984 Continental Illinois Bank) value of $40 Billion. CEO Alan Fishman quite possibly set a new record for shortest tenure, having only replaced Kerry Killinger 16 days ago.

Mortgage Bonds are struggling to stay even as they have over the past week. Actual Economic news was highlighted by the revision of 2nd quarter GDP lower to 2.8% from the previously reported 3.3%. Economist had expected either no revision, or a slight upward revision so this was a bit of a Bond friendly surprise. The change is being blamed on lowered consumer spending, and a lack of investment spending by business (one of the problems the bailout aims to cure). Regardless of any bailout action to come, economists are now revising their projections for the 2nd half of 2008 to be much worse. As a result of this negative outlook, Fed Futures are factoring a 96% chance of a 0.25% rate cut at the fed's next meeting, and the odds of a 0.50% cut are now better than 50/50. The Federal Reserve is also working with the European Central Bank, Bank of England, and Swiss National Bank to pump $Billions of short term debt into world markets to keep money markets that banks use amongst themselves from freezing up. The availability of these short term loans that fund bank's daily operations are the key to keeping further banks from failing. Basically bank's no longer trust each other's balance sheets so they have raised their rates to each other, halting the necessary flow of capital.

I am continuing to float rates, while we all wait to see what form the bailout plan finally takes. Economically there has been no indication of any positive news to come, which should help maintain rates, and the negative outlook is positive for rates in the future.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington