John Tuggle

This past week the mortgage market continued to tradewithin a very tight range. Refinancing programs are beginning to take shape and investors are beginning to gain more confidence in investing in the MBS market. 3.00% on the 10-year note yield is where we find solid support. This in turn has kept interest rates in the low 5.0% range as well as dipping into the high 4.0% range. In normal markets, mortgage rates set at about 150 basis points above the 10-year note yield. Since the collapse of the credit markets and ensuing asset repricing, mortgage rates have remained about 250 basis points above the 10-year note yield. We are seeing the credit markets heal somewhat as we are down to about a 200 basis point difference. Efforts by our government as well as our friends across the pond have helped keep interest rates low despite our huge financing needs.

We find it rather insulting that some of the CEOs of the too-big-to-fail banks have been boasting about their profitability for the first two months of this year. It is not the profitability that bothers us as much as their thanklessness over who was responsible for their gains. Had the government not stepped in to ensure their success and stability, they would have certainly failed and taken much of the world with them. If things are rosy, then why does the government have to employ a public private facility to take toxic assets off of their balance sheets. Also, why then should there be a change in mark-to-market accounting if they have a grip on the value of those toxic assets and remain well capitalized? The people of this country deserve to be recognized and thanked while we work our butts off to pay for their follies not to mention those of our future generations. We do not bank with the big boys and now you can bet that we will not in the foreseeable future.

We vehemently defend the honest mortgage broker who tried to make a decent living in the mortgage business against those that are seeking to assign blame to anyone but themselves. Are we missing something? Who was it that created the products that infected the universe? Who was it that underwrote the loans and approved borrowers for those insane loans? Obviously, Barney Frank does not understand the mortgage business as he joined the blame game again and attacked the mortgage broker while being courted by banking industry lobbyists. His pals, B of A's Lewis and JP Morgan Chase's Dimon do get it, but want the blame to be deflected away from themselves. How convenient as they sit in their ivory towers while many homeowners are losing their jobs and their homes.

We are sad to see two more mortgage warehouse lenders close their doors in an already scarce industry. Guaranty Bank, Dallas, one of the nation's largest warehouse lenders to non-banks, is reportedly telling customers that it will not renew their lines. PNC, owner of National City has pulled the plug on National City's warehouse lending operation, giving non-banks that borrowed from the unit 12 to 18 months to find new lenders. No word however, whether PNC is pulling out. They were one of the biggest warehouse lenders during the day. As usual, banks seem to always go in the wrong direction. We do not understand with all the tight underwriting and much higher quality loans being generated, why they would not continue their operations and tryto rebuild their client base with those left standing.

The week ahead is not expected to bring us any surprises. Home buying remains deeply depressed so housing starts and building permits will continue to suffer as we expect to see on Tuesday and in the coming months. The Fed will keep interest rates between 0.00% and 0.25% until the financial industry truly stabilizes as we will see on Tuesday when the FOMC releases their policy statement. Two months of bank profits does not a recovery make. Interest rates will likely remain in their tight range with the 10-year note yield ranging from 2.80%-3.00% give or take a few basis points.

The 30 yr $11B auction this afternoon saw very strong demand; the yield came at 3.64% with a strong cover of 2.40 and indirect bidders (foreign investors) took down 46.17% of it. The result shot rates lower across the curve for about an hour before they fell back again to levels prior to the auction. Next scheduled supply binge comes in two weeks with 2 yr and 5 yr notes. Estimates are that Treasury will have to triple the amount it borrows this year.

Two more warehouse lenders closing their doors after the horse left. Guaranty Bank, Dallas, one of the nation's largest warehouse lenders to non-banks, is reportedly telling customers that it will not renew their lines. PNC, owner of National City has pulled the plug on National City's warehouse lending operation, giving non-banks that borrowed from the unit 12 to 18 months to find new lenders.No word however, whether PNC is pulling out, they were one of the biggest warehouse lenders during the day. Banks seem to always go in the wrong direction; warehouse lending now, with all the tight underwriting and much higher quality loans being generated, should be a business to be in----obviously on a selective basis.

Ken Lewis of BofA was talking today; he forecasts that the financial industry will be smaller in the future, that banks will be reigned in, and that much tighter regulations will be imposed. What a truly deep insight

MGIC, the largest MI, said it would defer by 10 years an interest payment on $390 million worth of subordinated debentures, igniting a steep selloff in its stock during the morning. "During this 10-year deferral period interest on the debentures will not be due and payable but will continue to accrue and compound semi-annually to the extent permitted by applicable law at an annual rate of 9%." Fitch immediately put the company on rate watch negative.

The Fed is now considering banning YSPs; according to the official that is in charge, after testing new forms consumers still didn't understand. Washington is running amok! What's to understand from the consumer; shop around, get the best rate at the lowest out of pocket expense. Does the Fed really believe consumers understand the details in the multi-page FNMA mortgage form?

Barney the Frank blames the entire sub prime mess mostly on unscrupulous mortgage brokers. He has a following and its growing. Barney is having difficulty with the realization that while there was fraud and malfeasance by some brokers (who are now selling aluminum siding door to door); the fault of the sub prime and stupid lending came directly from Wall Street and large banks. Most of the loans made and up-streamed to Merrill, Citi, Bear Stearns et al were done on a whole loan basis; all of the three mentioned actually went out and bought mortgage originators in an effort to get more of the junk. Those firms couldn't get enough of the stuff, using their own quality control companies to look at every loan, they pushed those contract firms to pass on about every loan. With S&P, Moody's and Fitch in their pockets issuing AAA ratings, the markets were huge for the junk. Deep pockets with huge lobbying efforts have confused Barney.

Crude oil shot higher and is likely destined to move higher; news that OPEC production is at a five month low drove prices up over $4.00. T. Boone Pickens calling for $75.00 oil by the end of the year.

Another good day for the equity indexes; more short-covering and some value bottom picking. Not over yet though on the down side; the market was extremely oversold. The volume today o the rally wasn't great.

The bellwether 10 yr note spiked up on the strong results on the 30 yr auction this afternoon, it traded below its 20 day MA on the yield chart, but has now fallen back to the average. It has been in a bearish technical pattern since Jan 15th. On the bubble now; the next, and more significant level is at 2.75%. Technically, mortgages are slightly more bullish but only fractionally.

. For five weeks the rate markets (mtgs included) have chopped back and forth with no real direction. With that as a background even with mortgages trading 4/32 better than at 10:00, we suggest locking rate locks. We need proof technically, it hasn't happened yet.

PRICES @ 4:00 PM

Thursday, 3/12/09 4:30pm

Fannie Mae reported a $25.2 billion fourth-quarter loss Thursday evening and said its net worth dipped below zero, prompting the troubled mortgage giant to seek a $15.2 billion capital infusion from the Treasury Department.Washington, D.C.-based Fannie said its net worth - the difference between its assets and liabilities - fell to negative $15.2 billion as of Dec. 31. Its last reported net worth was $9.4 billion on Sept. 30.The fourth-quarter loss amounted to $4.47 a share, compared to a loss of $3.6 billion, or $3.80 a share, in the year-ago period.

For the full year, the company lost $58.7 billion, or $24.04 a share, compared to a $2.1 billion, or $2.63 a share, in 2007.Fannie Mae, which was taken over by federal regulators last fall, attributed the dismal results to continued deterioration of its mortgage-related investments.

"We expect the market condition that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth," the company said it the media statement that accompanied the earnings filing with the Securities and Exchange Commission.The Treasury originally had committed $100 million in capital to help Fannie Mae, but on Feb. 18 the department increased its pledge to $200 million.

Its mortgage counterpart, McLean, Va.-based Freddie Mac, also under federal conservatorship, is expected to announce its fourth-quarter and year-end results shortly. Freddie Mac has already received $14 billion in capital infusion from the government.

No Negotiation of Preforeclosure Sales Commission Servicing Guide,Effective March 1, 2009, closing of preforeclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to a level below what wasnegotiated by the listing agent with the borrower, unless the fee exceeds 6 percent of the salesprice of the property in aggregate. Servicers are reminded that they must continue to obtainany approvals that may be required by interested third parties in connection with preforeclosuresales.

$94B, the amount Treasury auctioned this week. Today's 7 yr note auction went better than was expected, traders fretted about it as it was the first 7 yr note issued since 1993. The large $22B 7-yrs drew 2.748%, with a 2.11 bid-to-cover and a solid indirect bidder take of 38.7%. The cover was fair while the rate was on the high end and prices are falling. Supply of increasingly more supply needed to fund the many attempts to stabilize the economic decline and prop up banks will lead to a 2009 federal deficit of $1.75T admitted by Obama this morning, we are expecting at least $2T of deficit.

Raising taxes on "wealthy" taxpayers is a cornerstone of the Obama budget released this morning; removing incentives for health care insurance companies providing Medicare is another. It should be no secret that the government will run massive deficits for 2009 and 2010, however when it is headlines as it was today markets seem to respond as if it is new news. This is not the time to increase taxes as the voting clearly showed in the stock market today.

No 4.5% mortgages: unless the government turns on Fannie and Freddie and is willing to buy all 30 yr fixed mortgages with decent credit scores and appraisals there is little now that would suggest 4.5% mortgages. Consumers and potential homebuyers are being mis-lead by those that continue to talk about it as a possibility. Never say never in this forecasting business, but with Treasury and the Fed burning money as they are now, and with more to come, the US debt will continue to explode and keep interest rates from declining much. The more probable direction is higher interest rates if there is any even minor indication the economy has bottomed. Right now that isn't happening, so rates won't explode here. What should be considered, mortgage interest rates at the present levels remain some of the lowest in the past 50 years.

It has now been well over one year since the government has been at the center of trying to get banks sanitized and credit markets functioning; throwing massive sums to shore up the likes of Citi and BofA has not met expectations. About the best that can be said is that funds provided to banks may have kept the banking system from completely collapsing. Treasury has been working on plans for six months with nothing to show for it. The financial systems in the US and around the world are seriously damaged, no one should expect a quick turn. Europe's banking crisis is much worse than the US. Eastern Europe is for the most part bankrupt with no bank functioning, the problems there are having additional negative impacts on our banking system. The entire western world is broken financially and is quickly dragging the Asian economies down with them.

Sheila Bair, chair of FDIC said this afternoon there are 252 banks on her list of troubled banks (read teetering on failure); banks lost $26.2B in Q4 2008. Treasury is starting its stress tests on banks; a way to measure how much money they will need to survive the next two years. Arbitrary time frame and just guess work on the needed amounts. How long will it take and will more money open credit markets? I doubt it; why would a bank lend increasingly to consumers when the economy is still in swift decline? More important, why would a consumer that is more astute about the depth of economic slide than Washington or Wall Street even want to borrow more when they are having trouble dealing with present debt? Why would more capital open the short term credit markets and remove the fear of unknown counter-party risks?

Tomorrow, the last trade day of the month, brings the second look at Q4 GDP at 8:30, in the prelim report GDP was -3.8%, now the revision is expected at -5.4%. The Feb Chicago purchasing mgrs index is out at 9:45, the index is expected at 34.0 frm 33.3 in Jan. At 10:00 the U. of Michigan end of month consumer sentiment index is expected at 56.5 frm 56.2 in Jan.

Next week on Friday the Feb employment report; early estimates from economists is another 700K job losses. That will not support a stock market rally.

The bellwether 10 yr note is ending at its key support at 3.00%; more selling tomorrow will decidedly break it and open the run to 3.25%, and would drive mortgage rates higher along with it. Likely choppy and volatile and dependent on how equity markets act over the next few days. No support even with the equity market decline today.

Keep all rate locked loans locked overnight. Technicals are bearish; the 10 however did manage so far to hold at 3.00%, a major technical and psychological level that if not held will push the 10 yr rate to 3.25% and force mortgage rates up along with it.

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PRICES @ 4:00 PM

10 yr note
97.26 -20/32 3.00% +7 BP * Mar 10 yr note contract 121.20 unch

5 yr note
99.01 2.08% +7 BP

2 Yr note
99.18 unch 1.09% +0.5 BP

30 yr bond
96.24 -45/32 3.68% +8 BP * Mar 30 yr bond contract 125.25 -13/32

Libor Rates
1 mo 0.496%; 3 mo 1.261%; 6 mo 1.797%; 1 yr 2.115%

30 yr FNMA 4.5 Apr
99.31 -2/32 (-2/32 frm 10:00)

15 yr FNMA 4.5 Apr
101.15 +2/32 (+3/32 frm 10:00)

30 yr GNMA 4.5 Apr
100.00 unch (-3/32 frm 10:00)

15 yr GNMA 4.5 Apr
102.10 +3/32 (+4/32 frm 10:00)

Dollar/Yen
98.34 +0.89 yen

Dollar/Euro
$1.2743 +$0.0022

Gold Apr
$945.10 -$21.10

Crude Oil Apr
$44.65 +$2.15

Goldman-Sachs Commodity Index
339.04 +11.88

DJIA
7182.08 -88.81

NASDAQ
1391.47 -33.96

S&P 500
752.82 -12.07

Thursday, 2/26/09 4:30pm