Dave Woodland - Your Bend, OR Friendly, Knowledgable Mortgage Professional

Fed Week was surrounded with a full-scale shift of funds from Mortgage-Backed Securities (MBS) into the stock market and elsewhere and with it we saw quite a negative move in bonds and rates. But it seemed to find a floor after the announcement with a bounce favorable that continues into today. As I mentioned in my News Flash on the announcement day, this is different from recent Fed rate changes in that the drop in rate didn't have a negative (opposite) effect on mortgage rates that are long-term and all about inflation. Why not? The Fed announcement wording reiterated what we have seen for the past month - Inflation appears to be in check, for now.

I've had a couple of questions about inflation recently. Just two months ago, there was great fear of inflation and now the talk is about a deflationary cycle - seems odd doesn't it? It appears the quick reversal of threatening inflation is all about the economic downturn we are well into. It is appropriate to be calling it a recession with Q3 GDP coming in negative (though not quite as bad as expected), and Q4 well underway in negative territory. The downdraft has caused a real drop in demand for many products. Oil is the most visible with pricing don into the low $60s after hitting a high of $147+/bbl on 7/11/08. Global demand for oil is off fully 20% in the past month from those highs. OPEC has responded with a cutback in production, but I am told this will only stabilize oil prices and not send them back up. Demand for commodities and products across the board shrivel as the global expansion skids to a halt. Central Banks worldwide are dropping rates at the same time the US is, so the normal weakening effect on our currency from our rate drop is almost nil. In fact, Japan's equivalent rate to our Fed Funds rate is now at 0.3%. Expectation is that ours (now at 1.0% and prime at 4.0%) will drop again by the December 16^th FOMC meeting by as much as another ½%.

This week has news on jobs and wages, Tues, Thurs, and Friday. Check out the forecasts below and the video feature on comparing automobile leasing to buying. Tell me what you think of this new feature. Make it a great week, and turn to us for answers and financial services that get deals done! -Dave

You’ll want to look at the MBS (mortgage backed securities) chart below that illustrates the wild ride we are on. The last 5 bars are Monday-Friday of the past week, with green being favorable to MBS and rates and red being unfavorable. Monday is the big green bar followed by another tiny green bar and then 3 red days that brought MBS back down near where they started. The steep slide in the stock market due to recession fears and the bear market is hurting the mortgage secondary market right now.

Normally, as the stock market turns worse, investment dollars flee to quality - bonds and mortgage-backed (MBS) in particular. But as of late, with the severe stock market drops, investors have had to liquidate positions to cover margin calls, cover depositor withdrawals and maintain cash position. This has put real pressure on MBS. That being the case - rates are still pretty darn good in the long view of things.

This week will be eventful. The FOMC (Fed Open Market Committee) meets Tuesday and Wednesday, reporting at 11:15 am our time Weds. The futures market has already baked in a further 0.50% (50 basis points or 50 bps) drop in the Fed Funds rate with rumors of a possible 75 bp drop.

Normally this would cause fear of inflation and drive long term mortgage rates the opposite direction, but I’m not thinking that will be the case this time. There may be a small initial negative impact, but it should turn slightly favorable with a couple of days. All economic indicators for the past 6 weeks have been down so significantly that this global recession is truly paired up with DEflationary indicators.

Mortgage rates would be even lower on this deflation cycle if there were a normal level of investor demand available. So we are watching the supply and demand of mortgage-backed securities. Look for news on Wednesday of a fairly significant Fed action.

Rates are great, Signet has plenty of lenders for conforming, agency jumbo and even jumbo loan options! We are here to make dreams come true and deals go through. Give me a call with questions and let’s make it a great week! - Dave

Last Monday we talked about the Treasury considering investing capital into the larger banks. Sure enough the formal plan was announced Tuesday, and we believe it will have more credit-creating incentives than any of the other moves being contemplated. Make no mistake about it, these efforts are to help a broken financial market. It is going to take some time to get back into full swing, but we are seeing some normalizing of US Treasuries and LIBOR rates already appearing. Mortgage-backed securities (MBS) are still not in full demand and pricing is higher (rates along with it) than the current deflationary environment would indicate. We will be watching for both economic indicators on inflation and impacts on supply and demand of MBS for the time being.

The housing news surprised the pundits last week, coming in at low numbers not seen since the 70s. This would normally do a couple of things to the markets, lessen concern for inflation (good for bonds) and spook money out of the stock market and into bonds (good for bonds.) If you look at the chart below, the last few days of trading were just that, good for bonds. That is continuing on today. I expect that with the current economic trends in favor of bonds, the interest rate driver will largely be demand and money flows. At some point there should be a return of normal demand for MBS that will have an added favorable effect on interest rates. As we stand, rates are still quite reasonable.

This week has limited economic news but there should be much market and political news. We’ll keep a close watch, helping you and your clients seize the moment and get the best available shot at mortgage rates. Let’s talk about who you think we could help. Make it a great week!

By now you’ve heard today's news that the Fed cut the target for Fed Funds rate from 2.0% to 1.5% and in an unprecedented move did so in coordination with the European Central Bank, UK, Switzerland, Sweden, Japan and even China. This coordinated effort was very important to mortgage-backed securities. More about that below. First the reaction in the markets. The Dow was set to open down an additional 500 pts beyond yesterday’s 500 pt drop. The coordinated rate cut seems to have stemmed that tide with stock off “only” about 200 in morning trading and now UP 45 points! Bonds started to the good initially and then fell like a rock or maybe a bouncy ball with a pretty good rebound in the last 30 minutes. Remember that when bond prices move down, interest rates also get worse (higher rates.) See the chart at the bottom of this alert on movement in the MBS market.

This marks the third day in a row that the Fed has made drastic moves as they pull out all the stops to try and slow the freefall into global recession. Monday’s move was to redouble the available credit to the markets now to an incredible $900 billion dollars. Tuesday they took a step not seen since the depression when they announced that they will directly buy commercial paper from very qualified corporations, acting more like a commercial bank rather than just making credit available to the banking system. And now the 50 basis point rate cut. This is the second time this year that the Fed has made a move in rates outside of their normal FOMC meetings and it marks the first drop in 5 months after moving relatively quickly from 5.0% in mid ’07 down to 2.0% in the early part of this year.

The hope among mortgage lenders was that the coordination with other countries might make this rate drop different from the rest. Normally Fed rate drops have two direct effects. 1) It spurs spending with dropping short-term interest rates and 2) it weakens the US Dollar against currencies where you can get higher interest rates. The effect of number 1) on mortgage rates is explained below. The hope this morning was that the 2^nd point on the strength of the US Dollar might prevent a rise in long term rates. When the dollar weakens, we pay more for imported goods. That increases prices and inflation, so lenders with a long term outlook on recovering their money have to get a higher return to cover that inflation cost. Today’s rate change was done simultaneously with at least 6 other Central Banks and was expected to keep the dollar even with those other currencies. And so far this seems to be holding true with the Dollar still in the $1.37 range per Euro (down from last week where it was as high as $1.44 and yesterday $1.36.)

So, why do long term rates actually rise after a Fed Rate cut?

A reduction in the short-term rate is intended to increase spending which jump starts the economy but results in inflation - and 30 year mortgage rates are all about projected inflation numbers. Long term investors want a return on their investment at a premium above inflation. A good measure of inflation fear is the price of Gold and today we are seeing gold rise another $30 or 4%. Looking at the last 30 days’ mortgage bond activity, we are currently a little off the best rates of 3 weeks ago, but better than the still-good rates we were seeing in the last two weeks. The good news is that the Prime Rate and related Home Equity Loans will drop by that same ½% tomorrow!

What whould we expect in the coming weeks?

In the next three weeks you will hear about the high likelihood of a still-further rate cut by the Fed at their FOMC meeting scheduled for 10/28-29. Some are already saying 0.25 to 0.50% by then. You know that this will likely be bad news to mortgage rates. The longer term view is still for a return upward in the target rates, but for now, the Fed is responding more to the turmoil and lack of liquidity in the market than to their normal #1 enemy inflation.

Keep tuned in and keep in touch. Feel free to give me a call, and always remember: exceptional professional service is what you and your client deserves in real estate financing! Make it a great week.

Here is Monday's blog entry, just a little late to the posting:

The Emergency Economic Stabilization Act of 2008 is inked and plans have begun to enable banks to sell assets that today still block their ability to make new loans. There are bigger concerns that embroil the stock market though. Even as the bill was being signed in Washington D.C. on Friday, stocks were taking a beating on fresh concerns for the overall economy after reports of jobless claims and unemployment. And this morning the Wall Street selloff continues, now keying in on the European banking crisis that really came to the forefront over the weekend. Stocks in just over a week are off 1,100 points or roughly 10%. What is that doing to Mortgage Backed Securities (MBS)?

The flow of funds continues to be out of equities and into bonds with MBS enjoying some boost. Corporate and Treasury bonds are receiving the bigger share of this transfer as investors still watch to see what the stability of the mortgage market is. Still MBS are up and mortgage rates are improving with the shift. The Fed continues to be active in supporting the credit market with a pledge of over $900 billion in credit available to reassure banks. And the futures traders are predicting a further Fed cut in the short-term Fed Funds rate of up to 0.50% on or before the next FOMC meeting, right before Halloween (10/28-29).

You’ll see news appearing on the FHA Hope for Homeowners program that became effective on Friday also. This program encourages existing bad loans to be recast into more favorable fixed-rate mortgages. While it is encourages it is 100% up to the lending institution whether they will act. And with values down, it is difficult for those borrowers to try and refinance anywhere but with their current lender. I have seen lenders willing to modify their loans rather than see the property go into foreclosure, so we should see more of this. And Countrywide/BofA struck a deal with many Attorneys General over the weekend that will require them to be more aggressive at entering into modification agreements. With time and luck, some of this should slow down the default notifications that are reaching numbers 3 times where they were last year.

This week there is little in economic news so the mortgage rates will largely be pushed around by movements into and out of the equities markets. Tomorrow we will hear the full minutes of last months FOMC meeting where the Fed decided to keep rates steady and make more Term Auction Facility credit available and Friday will have balance of trade info. Global banking stability and market speculation will drive the impact on mortgage rates this week. We’ll keep our eye on it and let you know what is up.