Ron Brown FHA & VA Home Loan Specialist

US Stocks are trending up as the Dow is now up over 100 points on what has been a bit of a seesaw day. Mortgage Bonds are experiencing some pressure from the gains in equities, and are down some for the day, but still trading above support levels.

Once again Lehman Brother's struggles are dominating the headlines. Lehman posted their largest single day loss ever yesterday after South Korean officials announced the breakdown of talks with Korean Development Bank was the result of disagreement over price, along with overall market conditions. Today, Lehman posted a 3rd quarter loss of $3.9 Billion as expected. The Investment Bank announced plans to begin liquidating literally Billions of dollars worth of assets, including their asset management arm, Neuberger. While this may be the only way for the company to survive, it also serves to put a spotlight on the continuing struggles of the Financial sector to digest the tremendous weight of bad mortgage loans still on the books. With all this bad news, the Dow has still managed to put up strong numbers, blaming yesterday's decline on too great an emphasis on Financials such as Lehman. Energy stocks are on the rise from an oversold standpoint, and economic bellwether FedEx is increasing 1st quarter earnings projections as fuel costs decline. Oil as always, is in the news with OPEC surprising many by their decision to cut back production by more than 500,000 barrels. This move effectively reverses the recent increase by Saudi Arabia. The decision comes on the heals of the International Energy Agency lowering forecast for demand the remainder of this year, and into 2009.

Mortgage Bonds have experienced a bit of a retracing of their recent gains, which was expected, but the bailout of Fannie/Freddie delayed this reaction. There are no economic data releases today, so Bonds are taking their cue from movement in Stocks. The Lehman situation is also adding some pressure, as there is still some speculation as to just how much of the whole picture we're getting. Mortgage Bonds have been on a sustained positive pattern since Mid August, and are in an "overbought" state. Combined with their current price levels near the highs for the year, there is just not enough information to break through and add to our gains. Tomorrow, and Friday we will see more economic information that could move the markets.

With the overhead pricing resistance, and general lack of economic information I expect Bonds to trade mainly sideways, so I will recommend floating cautiously.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington

US Stocks are down in today's trading as pending home sales showed a decline in July, and financial concerns return as Lehman's talks with Korean Development Bank break down. Mortgage Bonds are still trading to the upside, and the gap between MBS & Treasuries continues to tighten.

After experiencing their largest single day gain in over a month, the Dow has dropped by triple digits. The National Association of Realtors reported that previously owned home sales fell by 3.2% in July from June. They also revised June's increase higher to 5.8% from their previous estimate of 5.3%. All in all the report was mixed, showing some sizable differences between local market's within regions. Lehman Brothers jumped back in the headlines when officials reported that talks had ended with State run Korean Development Bank. The firm's ability to raise new capital at acceptable terms is in question, and while they face substantial write downs from what is known to be on the books, there is genuine concern over what is not being publicly disclosed. On the positive side, Oil pricing is now well below $105 bbl, and gold is below $800 oz despite the Dollar losing some of yesterday's gains.

Mortgage Bonds are holding steady slightly above yesterday's massive gains, but are running into some technical resistance. Price wise, we are at the best levels for Bonds all year, and this "high water" mark is a formidable point of resistance. We are also coming up to the "monthly rollover" for Mortgage Bonds, which will have a positive effect in the end, but typically involves a temporary set back to pricing. The most important aspect to yesterday's gains was a "tightening" of yields between Treasuries, and Mortgage Backed Securities. Investors had been demanding ever increasing returns when buying Bonds from Freddie, and Fannie, which was a large part of the problem in their being under capitalized. The government action from this weekend has had the intended impact of increasing investor's comfort level with holding US mortgage backed debts, thereby decreasing the premium, or spread, between Treasury notes, and Mortgage Bonds by over 50%. Hopefully, this will increase further foreign investment in our Bond Market which will help to pressure interest rates lower.

It is sounding like a broken record, but I am continuing to recommend floating on those transactions that are weeks away from closing, while anything closing in the short term should lock in today's great rates.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington

Everybody seems happy today with both Stocks, and Mortgage Bonds trading well into the Black after this weekend's headline news of the government's bailing out mortgage giants Fannie Mae, and Freddie Mac.

The Dow Jones was up by 340 points in the first hour of trading today after the news broke Sunday that the government would be investing as much as $100 Billion each to save Fannie & Freddie. Over the past year, the two have lost over $14 Billion. The Federal Housing Finance Agency, and Treasury auditors found accounting irregularities, and smaller than expected capital bases, making it necessary to place the two mortgage giants into conservatorship. CEO's Daniel Mudd (FNMA), and Richard Syron (FHLMC) will be replaced (although they will still get $9.3 Million, & $14.1 Million in Severance compensation) as the government takes over with plans to actually increase their mortgage portfolios during the coming year. Investor's worldwide had perceived stock in the two as virtually risk free due to the government's implied backing, but those shareholder's have now seen their stock down graded to junk status. The bailout involves the Treasury purchasing Stock, and also Bonds moving forward. In recent auctions, Foreign appetite for Mortgage Backed Securities offered by the two GSE's was subsiding, and over the last 7 weeks the amount of foreign held debt has diminished by approximately $27 Billion. Fannie & Freddie had been forced to increase yields on their Bonds to make them more attractive at auction, which was eating into profits from their fixed rate return loans. In the end this became a negative spiral, resulting in under capitalization, and what is now effectively a Chapter 11 bankruptcy.

The effect in today's Market, for both Stocks, & Bonds has been very positive (except for stock in FNMA, or FHLMC), as there is a perception of reduced risk for investors. The belief is that this move will prompt banks to begin lending to clients, and each other, more freely. This renewed confidence is translating into more investors across the board, buying both Mortgage Bonds, and Equities. So much so, that the Dollar has actually gained versus many foreign currencies, even in light of the potentially large increase to US government spending, and the possible fueling of inflation. As of now, the Market's seem to have calmed down somewhat, and are on a more sustainable path. Mortgage Bonds are currently positive by a little over 100bp, and appear to be supported well there, which happens to coincide with some of the best levels of this year.

It remains to be seen how well Bonds will react to their new lofty levels, but I am continuing to float on any transactions not closing until the end of the month. Perhaps we will see mortgage rates break below the 6% level once again.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington

US Stocks have regained their footing after an initial drop of more than 100 points by the Dow. Mortgage Bonds are struggling to maintain the momentum of the last three days, but are still well above the support of their 200 day average.

Today's report from the Labor Department pressured stocks lower, even after yesterday's largest drop in over two months. The employment numbers came back much worse than expected with a decline in non-farm payrolls of 84,000 versus expectations of 75,000. This marks the eighth straight month of job losses, pushing the unemployment rate up over 6% for the first time in 5 years, against economist's expectations for a rate of 5.7%. The report also revised the previous two month's losses upwards by an additional 58,000. Total hours worked also dropped, while wages were up more than expected which may begin to fuel inflation. All in all, today's report has confirmed the very weak state of the national economy, and has added to the Bearish pressure on Stocks. In actual Stock news, Financial's are getting hammered once again, with Goldman Sachs downgrading Merrill Lynch to Sell from Neutral on valuation concerns, and an increased likelihood of further write downs.

While Mortgage Bonds found the poor economic news to be friendly, they have been on an increasing path for several days, and seem to have lost a bit of steam. Some of today's lack of enthusiasm for Bonds is coming from perceived inflationary pressure. The US Dollar is down against foreign currencies, and this has actually provided some support for Oil, although that is down for the day also, currently trading below $106 per barrel. Mortgage delinquencies increased during the 2nd quarter of this year to 6.41% which is a 29 year high, and actually the highest rate in the history of the index that began in 1979. While rates for sub prime defaults have actually decreased, prime mortgage delinquencies are up more than 30% from last year, and total foreclosures are almost double the rate of one year ago.

At this time Stocks have turned positive, and Mortgage Bonds are negative which is due in large part to some profit taking on the part of Bond traders. Hopefully, any short term transactions were locked yesterday, and looking forward, prospects for continued improvement of Bonds is good so I will recommend riding out today's downturn, and continuing to float.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Compnay of Washington

US Stocks are significantly in the red today after a surprise spike in jobless claims, and concern over slowing economic growth, both in the US, and Globally. Mortgage Bonds are positive on lower inflation concerns, and increased productivity reports.

The Labor Department released their Initial Jobless Claim report showing an increase in filings of 15,000, the largest jump in 5 weeks. Economists were forecasting a drop in claims of 6,000 to 10,000. Continuing claims also rose, and are now at their highest since November of 2003. The Financial, and Retail Sectors continue to drag on Stocks as new reports have surfaced that both Lehman, and Merrill are facing serious trouble cleaning up their balance sheets, and retailers continue to under perform. The Stock Market got a brief reprieve when the Institute of Supply Management reported Non Manufacturing sectors of our economy actually expanded slightly in August, but it was not enough to create a rally. Oil prices have not had much effect today as they trade slightly lower despite official reports showing a decline in inventory. This is mostly because the decrease was less than expected, reflecting weak demand, and the fact that over 90% of Gulf production is still off line from Hurricane Gustav.

Mortgage Bonds are currently trading just above their 200 day moving average, which is a major line of price resistance. The positive performance by Bonds is coming from the Labor Department's update of 2nd quarter productivity. Productivity, the measure of output per hour of labor, rose at 4.3% versus the initial estimate of 2.2% last month. Economists had forecast an increase to the revised number, but were only expecting a 3.5% reading. The other major component of this report is the Unit Labor Cost, a key measure of actual inflation, which showed a decline of 0.5% versus expectations of a 1.3% increase. Rising productivity, in conjunction with lower Oil prices is considered to be the key to lowering both headline, and core inflation. As long as wage based inflation stays in check (which the tougher job market supports) the current inflation spike may prove temporary, as the Fed policy predicts. At this time, Mortgage Bonds have surged passed their 200 day average, and are actually pushing up against their next line of resistance.

Stocks are showing no sign of fighting off the negative trend, and appear destined to finish substantially lower, so there is good reason to believe Bonds will finish above the powerful 200 day average. I am once again floating on long term (several weeks to close) transactions while encouraging to lock anything still floating that is closing soon. Tomorrow brings the official government jobs report, which is predicted to be bond friendly, but is volatile, and will definitely move the markets one way or the other.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington

615 E Pioneer Ave.
Puyallup, WA 98372
(253) 520-0000