Ron Brown FHA & VA Home Loan Specialist

US Stocksare experiencing another roller coaster day as the Dow has been both up, and down by over triple digits, and is currently up over 300 points. Mortgage Bonds have also been up and down all day, but stayed within their recent range of resistance and support.

Once again Market headlines rule the day, and force economic reports to the back of the bus. In a week that has seen two investment banks go away, and one of the world's largest companies be bailed out by the US government, is it really a surprise to see the world's Central Banks work in a concerted effort to inject nearly $200 Billion into the Financial Markets? In response to a recent spike in the rate banks charge each other for funds, and prevent banks from hoarding cash, the Central Banks of the US, Europe, Switzerland, Japan, England, & Canada have moved to provide $180 Billion into short term money markets. Similar moves were implemented by China's Central bank, as well as Hong Kong, Australia, and India. Money Market funds have long been considered the safest of all investment vehicles, but the recent failure to perform by the oldest such fund - Reserve Primary - due to losses incurred by Lehman's failure, brought such uncertainty to the market that banks were freezing up. The move effectively provides unlimited liquidity to the markets, and goes to show the Central Banks will do whatever is necessary to prevent further erosion of the credit situation.

Mortgage Bonds have followed the lead of Stocks as they have been up and down in a nearly 100bp range. While they have fallen below levels of support for brief periods, they have bounced back each time, and are currently right in the middle of that support, and resistance pricing range. My recent posts have remarked how much there has been a "Flight to Quality" of capital flowing out of Stocks, and into Bonds (specifically government Bonds). There has been so much of this that the yield from Treasury Notes has literally gone to zero, and in the cases of some short term paper, even negative. This irrational fear is the equivalent of stashing your cash under your mattress. Early this week the return on a 3 month Treasury bill was 0.0304%, which meant that if you bought $1 Million worth, you would make $76 upon maturity! Remember, this is despite the explicit direction provided by the Treasury bailout of Fannie & Freddie, to increase the desirability of Mortgage Backed Securities, not T-bills! Today's injection of capital has eased the situation somewhat, and we are beginning to see yields rise for Treasury's, which tightens the spread between them, and Mortgage Bonds, which in turn is positive for interest rates.

I am again recommending to float as I expect next week to show further improvement, and hoping that anyone who is closing within days has already locked. Keep in mind though, rates are still at, or near, their best levels of the year.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington

US Stocks are plummeting with the Dow having been off by more than 350 points, and showing no signs of any real rally. Mortgage Bonds are only slightly positive for the day, while the flight to quality focuses on Treasury's.

Once again any economic reports must take a back seat to the Financial Headlines, as the US government announced yet another bailout, just 2 days after refusing to come to the aid of Lehman Bros. After initially stating that any financial support for AIG must come from the private sector, and asking JP Morgan Chase, and Goldman Sachs to come up with the $75 Billion necessary for AIG to stave off bankruptcy, the government stepped in at the 11th hour. Treasury Secretary Henry Paulson reluctantly agreed to give AIG $85 Billion when the two private investment banks were unable to come up with the required amount. Taxpayers now get a 79.9% stake in the company, and AIG has 2 years to repay the loan by selling off some of its $1 Trillion in business assets. Terms of the deal are widely considered to be aimed at the calculated liquidation of AIG, and Paulson's justification was a need to "mitigate broader disruptions." While the extent of AIG's exposure to derivatives susceptible to the mortgage meltdown is unknown, their insurance, and aircraft leasing businesses are well capitalized. The only question is who has the available capital to purchase them. In actual economic news, the reported number of new homes being built has fallen to the lowest level in 17 years. Both Housing starts, and Building Permits were down more than expected. Housing starts fell 6.2%, and building permits fell by 8.9%. Both of these indicators may actually bode well for the economy as this will eventually help lower the inventory of homes on the market.

After a chaotic day of trading yesterday that saw Mortgage Bonds fall to their worst level since the FNMA/FHLMC bailout, Bonds are positive on the day. While Stocks are taking a beating, leading many investor's to move their money to the safety of Bonds, there is still some reluctance to buy Mortgage Backed Securities. While the bailout of AIG has prevented what would have been very significant, and far reaching "disruptions", it has also underscored fears of tighter credit, and slowing growth, regardless of continuing measures to promote liquidity. The Dollar is down in value, and Oil is trading higher despite the consensus that demand is declining. While Bonds typically benefit from Stock Market declines, this large a drop in Stocks may be an example of "too much of a good thing" for Bonds. Despite the negative movement by Mortgage Bonds yesterday, we have a fairly stout floor of support that we have not fallen through. In conjunction with yesterday's tame reading on inflation from the CPI, this bodes well for long term mortgage rates. Lost in all the headlines of this week is the fact that the Federal Government took specific steps to increase investor's appetite for Mortgage Backed Securities.

Given the big picture, I am recommending to float for any transactions that are closing more than a couple weeks away, but for anyone closing in a matter of days that did not lock last week, locking is not a bad option since rates are still the best they've been all summer.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington

Another roller coaster day for Stocks as they are rallying to end the day on a positive note. Mortgage Bonds have struggled throughout the day against overhead resistance, and have moved towards support levels.

After yesterday's selloff, Stocks have been looking for a reason to rally. The day does have some important economic news in the form of the CPI, but all eyes are focused on AIG, and the Fed today. AIG is a global company that does business in more than 130 countries, with assets worth well over $1 Trillion. After trading near $60 early this year they've seen their value drop to as low as $1.25 today, and are facing a need to come up with $75 Billion in capital basically by the end of the day. The Fed is asking for the private sector to take care of this by urging the remaining two private investment banks; Goldman, and Morgan Stanley to come up with the money. The Futures Market had priced in a 100% chance of a Fed rate cut as of this morning, following a nearly 0% expectation last week. When the Fed decided to hold rates steady Stocks fell initially, but have since rebounded on reports of a possible government loan to stabilize AIG. The sheer size of the balance sheet involved in the AIG situation makes any other news, including a Fed rate cut, seem insignificant. That other news was actually pretty good, as the CPI came in meeting expectations, and actually showing lower inflation for the first time in nearly two years.

Mortgage Bonds were in a bit of a Catch 22 all day. The sudden belief that the Fed was going to cut rates led most investors to price that scenario into today's mortgage rate's by accounting for potential inflationary repercussions, thereby negating the good news from the CPI. The benchmark FNMA 5.5% 30 30 year Bond started the day positive, but trading erratically. The CPI was Bond friendly, and Oil was down, but the uncertainty over the Financial Sector, a possible Fed rate cut, and the fate of AIG kept investors on the sidelines. The flight to quality is more apt to take the form of Treasury purchases in light of the negative atmosphere surrounding mortgages, and has resulted in yields for 10 year T-notes falling below 3.5%, which is not likely to be sustainable. Despite the government's bailout of FNMA/FHLMC, foreign investor's have still not come back to the Market, and are holding out for higher compensation spreads between Treasury's, and Mortgage Backed Securities.

All in all, today was almost a no win situation for Bonds, and they have traded in a fairly wide range, but I expect they will finish within the same range they have been over the last week. I am continuing to recommend floating cautiously, while we see what happens with AIG.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington

US Stocks have been down since the opening bell, with the Dow off by nearly 300 points the majority of the day, as Financial Sector headlines far outweigh any other information in the Market. Mortgage Bonds are benefitting from investor's "flight to Quality", and are challenging recently established pricing resistance.

And then there were Two. With Lehman Brothers declaring Chapter 11 Bankruptcy, Merrill Lynch being rescued by Bank of America, and Bear Stearns suffering their infamous collapse earlier this year, the big 5 investment banks are now down to Morgan Stanley, and Goldman Sachs. Going into the weekend, it was hoped that Lehman Brothers would have announced a merger/acquisition with either Barclay's, or Bank of America by the time Asian Markets opened. Instead, while B of A, and Barclay's were balking at the amount of bad debts they would have to digest on their own once the Fed stated they would not step in; CEO John Thain of Merrill Lynch proactively contacted B of A to consummate a previously discussed Merger. Merrill could see that if Lehman went down, and their bad debts were liquidated, they were likely to experience their own "run on the bank" that they would not be able to answer. Projections were for their stock to be as low as $10 to start the day, down from a $17 close Friday, and that would definitely have caused investor's to flee. This is somewhat ironic, as only 2 month's ago it was Merrill Lynch that established a new low of $0.22 on the Dollar for their bad mortgage related securities, which forced the other investment banks to write down assets to this new level. The World's largest insurer, AIG is now facing a similar dilemma as they have asked the Fed for a $40 Billion Dollar bridge loan, and state they need a total of $50 Billion to forestall a ratings downgrade. Any kind of ratings slip would likely be the end of the company within 48 to 72 hours, as much of their asset base will be called due, and they do not have sufficient capital to answer.

The result of all this turmoil by financial giants has been a surge of capital out of Stocks and into Bonds. However, Mortgage Bonds are not the sole beneficiary, as investor's run to safety. The lowest risk comes from Bonds, but there are Government Treasury Bonds, Mortgage Bonds, and Corporate Bonds to choose from, with the least risk, or highest quality being Treasury's. After the weekend's news, there is little appetite for Corporate Bonds, but even with the government bailout of Freddie, and Fannie, Mortgage Bonds are not as secure as Treasury's. With a great deal of fear over just how toxic the mortgage debts of the large investment bank's really are, there is still an atmosphere of reluctance. Investor's are still seeking a large spread (higher return) between the yield of Treasury notes, and those of Mortgage Bonds, so while we see improvement from Friday, it is not on the scale of change in T-Note's. The end result is that we are seeing Mortgage Bonds unable to break through to that next level of pricing that would bring a substantial drop in interest rates. Every time we see investment's (IE - Bonds in our case) turned back by a technical level of resistance, it becomes that much harder to break through in the future. If Bonds are unable to break through, and finish above current resistance given today's events, it becomes increasingly unlikely that they will. More potential bad news for Bonds may come from tomorrow's Fed meeting. With lower concern over inflation (Oil now trading in the $96 Dollar range), future's are giving a good chance that there may actually be a rate cut, or at least language that one may be forthcoming, which would not be good for Bonds.

Given the amount of turmoil in the Market, I am recommending to lock rates today. While the economic data is still Bond friendly; the chaos, and volatility of the day, in conjunction with an inability to break above resistance, tells me risk outweighs reward at this time.

Make it a great day!

Ron Brown

VA & FHA Loan Specialist

First Mortgage Company of Washington

US Stocks are trading slightly to the downside as concerns over the Financial Sector once again dominate the headlines, and Retail Sales fail to meet expectations. Mortgage Bonds have been the recipient of friendly economic reports overall, but are still flat, unable to break above pricing resistance.

It is all about Lehman Brothers on Wall Street. The Investment Bank has officially put themselves up for sale, and are negotiating with as many as 4 different suitors. Bank of America is rumored to be the most likely purchaser, and the Treasury Department, and Federal Reserve are helping to facilitate the transaction. While a deal is expected to be finalized before the opening of Asian Markets this Monday, Moody's has warned they will downgrade the stock to one grade above Junk status if it is not completed soon. In the background of this is the WAMU news. They have seen their stock fall 30% this week prior to last nights release of a financial update, and statement that they remain well capitalized. Today's economic news featured an August Retail Sales report that came in at -0.3% versus expectations of +0.3%, and indicates continuing weakness in the labor market is affecting consumers. In contrast to that theory, the University of Michigan Consumer Sentiment Index was a huge surprise, as it came in at 74.1, well above expectations of 64.0, with a highlight of a positive mood towards future inflation.

Mortgage Bonds are trading to the downside, but still in a tight range between technical support, and resistance. While we have failed to break above the year's high point for bond pricing since the initial jump in response to the Fannie/Freddie bailout, we have not dipped below the support line established that day either. Today's release of the Producer Price Index showed wholesale pricing fell for the first time this year as a direct result of lower energy costs. The drop was nearly double economist's predictions, and leaves the core number right where expected at 0.2%. This is positive news for the inflation front, and adds weight to the Fed's rationale for patience as we still have not seen wage based inflation. Despite the positive news on inflation, the Dollar has lost some of its recent gains against other currencies. Some of this is merely a short term correction from the recent run up in value, and some is from concerns sparked by the Lehman issue. However, the long term outlook for both the Dollar, and Mortgage Bonds remains positive, and a solution to the ongoing situation with Lehman may be the catalyst we need to break above our current pricing resistance.

While Bonds continue to trade in response to Stocks as a result of mixed economic news, they remain range bound between support and resistance. I will follow the old adage to "never lock on a Friday" and recommend floating over the weekend, but if you need to due to timing, rates are still at, or very near, the best of the year.

Make it a great day!

Ron Brown

FHA & VA Loan Specialist

First Mortgage Company of Washington