Market Update 10-06-2008

US Stocks are plummeting on concerns over the recent government bailout with the Dow down by more than 500 points. Mortgage Bonds are one of the beneficiaries of this flight to quality as we currently trade back near the levels of two week's ago.

Declining Stocks are currently at a 30 to 1 ratio versus gaining issues on the New York Stock Exchange as the Dow has fallen below 10,000 for the first time in 4 years, despite last week's $700 Billion financial bailout. Regardless of the bailout, we will still see more bank failures to come, such as demonstrated by Wachovia last week. On that front, Wells Fargo has now won an appeal of Citigroup's move to block the merger, and is moving forward with their negotiations. The Wells Fargo offer does not require any assistance from the FDIC, and will not cost the taxpayer anything. The Market is dealing with uncertainty on a global basis with Europe experiencing their worst day for Stocks in history. European Union leaders met over the weekend in Paris to come up with their own bailout plan, but were unable to come up with an agreement. Their uncoordinated response contributed to the sell off of Stocks, and also a significant drop in the Euro's value. This global lack of confidence in financial credit markets is promoting a belief in a world wide economic downturn, and the subsequent movement of investment capital away from risky Stocks, and into the safety of Bonds, as well as a continuing drop in Oil pricing.

Mortgage Bonds began the day considerably better than last week's close, and have held fairly well at that level. While this should lead Mortgage Rates back to the lows we saw right after the bailout of Fannie, & Freddie, we have not seen this as of yet. The reason for this is that despite the "flight to quality" of investors leaving Stocks for Bonds, much of that capital is flowing into Government Bonds due to uncertainty over the market for Mortgage Backed Securities. Remember, when the government took over FNMA, and FHLMC it was with the express purpose of improving that market, but after the indecision involved in the recent financial bailout voting, there is reluctance by investors. Today the Federal Reserve took further steps to ease the strain on banks, and increase confidence by doubling the amount available from its Term Auction Facility from $450 Billion to $900 Billion while also announcing they will pay interest on Bank's required reserve accounts as allowed by the Bailout Bill. All the recent news has led to increased speculation that the Fed will reduce their Funds Rate by 50bp at their meeting on the 29th. Generally, these rate cuts are not good for Mortgage Rates due to their inflationary nature, but if it can be coordinated with a similar cut in Europe, that aspect could be minimized, and we may see some good at the consumer level.

I am recommending to float cautiously for now, but be ready to lock, as we've seen Stocks swing wildly from day to day, and our current gains are closely tied to their losses. It appears we are still in for a lot of volatility ahead, and until we see investor confidence in mortgages again, things can change in a hurry.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington