Ron Brown FHA & VA Home Loan Specialist

US Stocks are on the rise, with the Dow up over 200 points in the first hour of trading, as hope for congressional approval of a rescue plan overwhelms negative economic data. Mortgage Bonds initially posted gains as a reaction to the poor economic news, but have fallen back a bit as Stocks gain momentum.

Once again it's all eyes on Washington as Stocks spike higher in anticipation of the proposed $700,000,000,000 bailout for Wall Street. The Rally by Stocks flies in the face of today's economic news. Today's economic calendar shows three significant reports, all of which indicate negativity for Stocks. The latest Initial Jobless claims figure of 493,000 is the highest since late 2001, and marks the 9th consecutive week over 425,000 (which typically indicates recession). The jump in claims can be partially explained by the recent hurricanes which are thought to have added 50,000 lost jobs. Continuing claims were reported over 3.5 Million, the highest since 2003. New home sales for August declined by 11.5%, and the median price fell by 5.5%. The month to month drop has pushed the rate of sales to its worst since early 1991. This report is considered to be somewhat volatile, and as such the Durable Goods report is considered more significant. That report came in at minus 4.5% against expectations ranging from -1.5% to -2.0%. Durable goods are big ticket items designed to last at least 3 years, and are considered a bellwether for economic growth. Demand was weak over almost all industrial categories, and seems to confirm weakness in the economy reaching far beyond the housing industry. Despite all this, The Dow is up by over 260 points right now.

Mortgage Bonds began the day looking very positive as a result of this poor economic outlook (remember bad news for the economy tends to lead to lower mortgage rates), but the Stock rally is pulling money out of Bonds. The decline in Durable Goods orders is being blamed on the lack of availability of capital to lend, which the bailout is intended to alleviate. The same goes for the double digit decline in housing sales, and prices, in so far as people are not able to get loans. Last, but not least, the poor employment numbers can be seen as inflation friendly (both Stocks and Bonds hate inflation) since companies should be able to hire workers at a lower cost. This will help to control wage based inflation which the Fed is watching closely. When coupled with the belief that the government bailout will truly unfreeze the credit markets, investors are able to rationalize pumping money into Stocks. In this somewhat upside down logic, Mortgage Bonds are now trading "sideways" as they are merely reacting to the Stock Market and fluctuating within a price range of support, and resistance.

I am recommending to float cautiously for now, since any short term closings should have already been locked. Regardless of the outcome of the bailout, the economy is going to take some time to recover. In the meantime, the economic data should continue to be weak which is a positive for mortgage rates.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington

After missing the opportunity to post my usual Market Update in a timely manner, I turned my thoughts to the terribly chaotic, and uncertain atmosphere of real estate that threw my schedule off to begin with. All eyes are on Washington DC, and the debate over whether to bail out our financial system in the wake of a crisis of their own making. The emotional aspect is evident in just about every individual that voices an opinion, as well as many of those that are actually on camera. As much as I absolutely despise the situation that we currently find ourselves in, I cannot help but remember the old saying - "When you're up to your A** in alligators, it's hard to remember your initial task was to drain the swamp!"

I just finished reading countless commentaries from bloggers regarding the debate over the bailout, and the subsequent debate over having, or not having a presidential debate this Friday. McCain prefers to postpone the debate to devote attention to the problem, while Obama says the Commander in Chief needs to be able to multi task. Valid Points on both sides, but neither actually shows what I'm looking for from the next President. What this country needs right now is someone to show some conviction, and put forth a plan. It is obvious that Treasury Secretary Paulson would love to be what amounts to the most powerful man on the planet by gaining control of $700,000,000,000 to be doled out as he sees fit, and of course he (like the Presidential candidates) does not want to give a lot of details on how he would choose to spend it. The public can not be blamed for their lack of faith given the fact that just a couple of years ago, Hank was running Goldman Sachs, one of the very obvious perpetrators of the scandal we now face.

The problem starts when the public makes the decision that enough is enough, and we're not going to just keep giving silent acquiescence to our representatives spending our tax dollars without recourse, or accountability. As much as I hate to say it, we don't really have a choice this time.

I come to this conclusion for 3 reasons. The public outcry of holding the bankers feet to the fire, and the consequences be damned, comes from a belief that we can whether the storm that will ensue. After all, our country survived the Great Depression, so how can this be any worse? Here's the 3 reasons why.

First, during the Depression Era, the United States was not a debtor nation. That is to say, we did not have any significant foreign debt. I doubt there are many people reading this that are unaware of the fact that our country is barely able to keep up with the accruing interest on our National Debt, let alone make a dent in the principal. The fact that our debt is held by any number of nations that don't really believe in the American way is certainly going to have consequences if we need to renegotiate that debt.

Second, we now have what is admittedly a "service economy" which means we really don't actually produce anything (other than food, which we will need ourselves) that can be construed as a reliable export. We "built" our way out of the depression by constructing what has become our taken for granted infrastructure of highways, water, and power supplies, not to mention skyscrapers, etc. This building of America prior to WWII was made possible because we had true industrial might, and we focused it internally. America is not in a position to focus inward in that way again.

Third, we were energy independent during the depression. America was the world's leading producer of Oil, and Coal, which we used to build the dams that now supply our renewable electricity. If our Dollar collapses because of this financial crisis (and that is what they're really worried about), we not only won't be able to repay our debts, we won't be able to buy the energy necessary to keep the country running.

Because of all this, we are in a position where we really do have to do something, but we need to be sure we do the right thing. I know the tone of this blog is quite negative, but it does not have to be taken that way. If we truly believe in standing up, and taking personal responsibility (which is what frustrates us about those "leaders" in Washington looking to place blame) why can't we demand it of those who represent us. I certainly do not claim to have all the answers, and I know darn good & well that I'm not as smart as a Henry Paulson, or Ben Bernanke, but I'm also not in a mood to trust them to suddenly have my best interest at heart over their Uber Rich friends. On the other hand, I'm not against letting them orchestrate this bailout if they can be held accountable for the true taxpayer risk.

There is a simple way for them to earn my trust. All of these bankers such as Paulson, and Bernanke have been very successful, and as a result they have probably got the most to lose if everything goes bad. It seems to me if they had to put everything they own on the line, they would be much more inclined to be successful. I'm not opposed to paying them handsomely for saving our necks, I just want to know that if us ordinary John Q Taxpayers suffer, so does the guy making the decisions on our behalf.

Today is not so much an update as an explanation.

US Stocks are finishing down for the day with the Dow off by over 150 points after experiencing triple digit gains earlier. Mortgage Bonds have also seesawed up and down throughout the day, and will finish negative though not by much.

There were no economic reports to look to for guidance by Stocks, but I doubt anyone would have paid attention as all eyes are on Capitol Hill watching for progress on the government's latest bailout. Investor's seemed frozen by uncertainty of what would come from Washington as Treasury Secretary Paulson, Fed Chairman Bernanke, and SEC Chief Christopher Cox faced questions on the details of their proposal. According to early press releases the Bush Administration, and congressional Democrats had come to agreement on the basics of a plan that would give Paulson authority to purchase as much as $700,000,000,000.00 (yes I'm going to keep writing it that way as a visual aid!) in bad mortgage debts "without limitation" for a 2 year period.

The theory is that these are bad mortgages because their Mark (value on paper as written) is considerably higher than their Market (what they could actually sell for today) value, and they are clogging up Bank's ability to lend. This is because the bank's are unwilling to write down the value from Mark to Market. As long as the bank holds the debt, the value of the debt (commonly referred to as the Note) does not decrease, and the loss in value only comes into play if it needs to be sold today, as in the case of foreclosure. As long as these debts are held by the bank in good standing, they are considered assets, and banks only need to keep a small percentage of assets (Capital, or Cash) versus investments. The inability to get these "assets" off their books at the value they are being counted as is where the system becomes "clogged." If the Bank is forced to sell them at their true Market value their asset base could fall below government mandated minimums, and they would face being taken over by the FDIC (IE - go out of business). If the Treasury is allowed to purchase those assets for close to their value on paper, bank's won't have to worry about coming up with the difference between the Mark, and Market values in the form of Capital in order to stay in business.

It all boils down to price. These mortgage debts have been "bundled" together (good and bad together), and sold as a "Mortgage Backed Securities" to investors who then service them, and collect the income stream from the interest on the outstanding debt. The problem facing the financial industry now is how to accurately value them. As Chairman Bernanke pointed out, there are no active buyers for these bundles due to fear of how many bad loans are in the bundle, and the result is two different prices: the fire-sale price, and the hold to maturity with all on time payments price the bank prefers. The bailout plan would allow the Treasury to buy these bundles from the banks at closer to the hold to maturity price which would give them the available capital to lend again, and "unfreeze" the credit market. This is what Bernanke meant when he said "Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions."

All of this was being questioned, and explained on Capitol Hill today, and the Markets were watching (remember those "uncertain investors"?). The Dow was swinging up and down by as much as 200 points in an hour, and Mortgage Bonds were acting in a similar fashion. In the end, it looks as though Congress is not excited about being rushed into action, and would prefer to get more details, while investors want to know whether or not the plan will be implemented.

Mortgage Bonds were only slightly negative at the end of the day, so rates should be roughly the same as they were yesterday, which is still pretty good. Until there is some resolution to this situation, the market will continue to be very volatile, and therefore unpredictable. I will continue to recommend locking for near term closings as the risk brought on by this chaotic environment could push rates the wrong way quickly.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington

US Stocks are in a deep decline following last week's rally with the Dow currently down over 300 Points. Mortgage Bonds have traded down from last week, breaking below support levels for the first time in 2 weeks.

Stocks are plummeting following the release of the government's hastily prepared rescue plan for the Financial Sector of the economy. After Stocks jumped higher on the news the government was taking decisive action to deal with the financial meltdown on Wall Street, most of the gains have now been given back. Most of the action for Stocks was in Commodities trading. Apparently, the Market has digested just how many zero's are involved in such a bailout. The price tag of $700,000,000,000.00 (kinda scary when you actually see it written out) has had a rather negative effect on the value of the US Dollar, and caused a tremendous spike in commodities like Gold, and Oil. Oil rose by nearly 20% at one point, experiencing one of its largest gains since it began trading on the NYMEX, and Gold is up more than 5%, now back above $900 oz. for the first time since July. Financial Stock headlines were dominated by the Fed's move to make Goldman Sachs, and Morgan Stanley, the last two private investment banks, into Bank Holding Companies. They will now be subject to the same rules as traditional banks such as Bank of America, and will be required to maintain specific Capital Reserves, and face far greater scrutiny by federal regulators.

Mortgage Bonds began the day well off last week's finish, and below what had been significant pricing support. At several points during the day Bonds fell further, even dropping below critical secondary technical support also, but were able to finish the day right at that level. The negative day for Bonds is one of inflationary reaction following a drop in the US Dollar. The Dollar index fell nearly 2% against almost all major currencies. Last week we saw a flight to quality of capital fleeing the uncertainty of Stocks for the relative safety of Bonds (mostly Treasury's) which caused an increase of spread between Mortgage Bonds, and T-notes as investor's demanded higher returns for anything associated with the mortgage industry. While today saw a decline in value for Mortgage Bonds, there was a larger loss on the part of Treasury's, so Mortgage Backed Securities actually gained favor with investor's as a result. While inflation is bad for all Markets, Bonds tend to get hit harder than Stocks, and when the government commit to spend roughly a $Trillion in a week (if you're wondering, $1,000,000,000,000.00 is what that looks like!) there is undoubtedly going to be inflation.

I am moving towards a locking bias in light of the inflationary potential now faced by the markets. The volatility that is currently in the market means all bets are off, and we are forced to "wait & see" how the world's markets react to this latest action.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington

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