Saint Croix Falls, WI

Over the years, MMG has continued to help the mortgage community discover and understand the disconnect between the 10-year Note and Mortgage Bonds. In recent times that disconnect has been very clear to anyone in our world - but in the past 24 hours, the disconnect has been dramatic. Since yesterday the 10-year Note has risen by 285bp, while Mortgage Bonds have risen 12bp!!! Do you think the media knows this? NO. Use this to inform your relationship partners and clients of what really drives fixed rate mortgages.

So what happened? Yesterday the Fed Minutes from the October Fed Meeting were released. The Minutes expressed concern over the health of the economy and their future targets for employment and growth were lowered. But the big news was the "D" word. The Fed, after years of being concerned with inflation, now say they are concerned about deflation. This news shocked the financial markets, pushing Stocks sharply lower while directing enormous money flow into ultra-safe Treasury Notes.

Deflation is when prices drop, mainly due to decreases in money supply and credit. And we are sure seeing problems with available credit right now. And with the economy slowing down, we are hearing some people say we are in for a deflationary recession. In a deflationary environment, investors flee into fixed instruments like Bonds because the fixed payment received would actually buy them more goods and services over time.

For those of you in the business a few years, you may recall back in the Spring of 2003, when Alan Greenspan uttered the "D" word. Mortgage Bonds rallied 400bp in a couple weeks, setting off an unprecedented refi-boom. Things are quite different right now, but stay tuned, should more investors wake up to the value of Mortgage Bonds, we could again see a significant improvement in prices. Get your clients informed and ready - all refi-runs have a limited timeframe. And this time will certainly be more challenging as there are fewer programs with stricter guidelines, but the biggest hurdle will be appraised values. Now would be an excellent time to run some filters on your database and see who would best be able to benefit from the window of opportunity when it hits.

Initial Jobless Claims continue to worsen as 542,000 filed this past week, far more than the 503,000 that was expected and the highest in 16 years. The four-week average of initial claims climbed by 15,750 to 506,500, the highest since January 1983. While the numbers are ugly, comparing them to previous markers is a bit unfair because there are more people today.

At 10am ET, the Philly Fed Index will be reported and while this may influence pricing in a typical market, we don't expect it to reverse the course of Mortgage Bonds.

Prices have barely peaked above the 200-day Moving Average. We will continue to float, but be mindful that things can change quickly. And a reminder about 2003, when Alan Greenspan came back and later said there is no threat of deflation - the refi-boom quickly ended and rates shot up dramatically higher. Stay tuned - we are living history.

Thanks,
Greg Adelman

Midwest Home Center LLC.
715-483-0012
612-735-4414 cell
612-395-5444 fax

www.midwesthomecenter.com

Mortgage backed securities were off about 40 bps this morning, but are only off 9 bps currently. I would continue to float and see if they continue to improve throughout the day.

Risks favor: Floating into Jobs Report
Current Price of FNMA 6% Bond: $101.31, -34bp
Mortgage Bonds are down sharply this morning after they have enjoyed a nice three-day 160bp rally higher. Prices are now resting just near important support at the 200-day Moving Average with the highly anticipated Jobs Report set for release tomorrow - read on for our Jobs Report Strategy.

Initial Jobless Claims were 481,000, slightly worse than the 476,000 expected. The continuing claims jumped to 3.84 million, the worst in 25 years.

A preliminary reading on 3rd Quarter Productivity, a measure of employee output per hour, rose at a 1.1% annual rate, slightly above expectations. Labor costs climbed at a 3.6% annual rate, also more than the anticipated 2.8%. The higher labor costs are inflationary and not bond friendly, causing some of the selling pressure we are seeing today.

Some huge global news - The Bank of England surprisingly cut their benchmark interest rate by 1.5% to a rate of 3%, bringing it to the lowest level since 1955. And if that weren't enough, the European Central Bank (ECB) also lowered interest rates by .50% to a 3.25% rate. In recent updates we have been discussing how it was likely that Europe would need to continue cutting rates and how that would have a positive effect on the US Dollar and thus Oil prices - at the moment Oil is down over $3.00, leaving Oil under $62 per barrel. It looks like more cuts in Europe are likely.

Jobs Report Strategy

We always have to consider both fundamental and technical factors. Fundamentally, tomorrow's Jobs Report is set up to be a stinker. However, the markets are already prepared for a lousy report, with estimates of 200,000 jobs lost during October. The recent ADP Report as well as the latest Initial Jobless Claims numbers indicate that the Job market is doing poorly. So while we will certainly see a bad number, it might actually be better than expectations which wouldn't help Bond prices. But we see more downward revisions and a potentially significant uptick in the unemployment rate, which will both work towards improved pricing.

On the technical side, both the 200-day and 50-day Moving Averages are near the same level, creating a strong dual layer of support. This floor has already been tested this morning and prices currently sit right at this important threshold. Although the Bond is down this morning we would like to be patient, float and look for an improvement tomorrow morning. We feel both fundamental and technical factors point towards floating into tomorrow's Jobs report and a continuation of the recent uptrend

Thanks,
Greg Adelman

Midwest Home Center LLC.
715-483-0012
612-735-4414 cell
612-395-5444 fax

www.midwesthomecenter.com

Risks favor: Floating, with a finger on lock trigger
Current Price of FNMA 6% Bond: $100.12, +19bp
Mortgage Bonds are trading a bit higher, but already far off the best levels of the day.
In a speech this morning, Richmond Fed President Jeffrey "The Dissenter" Lacker, said the US economy was definitely in a recession, but he believed it would be fairly moderate in size. "We are in a contraction. Up until the summer it was a fairly mild recession,". Mr. Lacker, is not a voting Fed member, but he will be back in the voting rotation in 2009.

The ISM Index for October was reported at 38.9, which was much worse than expectations of 42. And even after the poor economic news, Mortgage Bonds failed to improve.

Technically, Bond prices indicate indecision among Traders. The last five trading days show a sideways trading pattern, hovering near support. We will float for now, but be ready to lock in this jittery environment.

Here is a link to the economic calendar for this week. http://www.bloomberg.com/markets/ecalendar/index.html
BY THE NUMBER$
We hope you enjoy this edition of "BY THE NUMBERS" below - use these as talking points with your clients and referral partners this week

1. A TIE? - There are 538 electoral votes at stake in tomorrow's election. It will take 270 electoral votes to win the Presidency. There has been a tie in the Electoral College voting only one time in the nation's history. In 1800, both Thomas Jefferson and Aaron Burr each received 73 electoral votes (source: PresidentElect.org).

2. SENATE TO THE WHITE HOUSE - Only 2 Presidents in the history of our country have ever gone directly from the Senate to the White House. They were Warren Harding (President # 29) and John Kennedy (President # 35). Both John McCain and Barack Obama are US Senators and one of them will become US President # 44 (source: WhiteHouse.gov).

Thanks,
Greg Adelman

Midwest Home Center LLC.
715-483-0012
612-735-4414 cell
612-395-5444 fax

www.midwesthomecenter.com

3. MAJORITY VOTE - The 2004 presidential election broke a streak of 3 consecutive elections where no candidate won 50% of the popular vote. President George Bush won the last election with 50.7% of the national vote. Bill Clinton won the 1992 election with 43.0% of the vote and then won reelection in 1996 with 49.2% of the vote. President Bush won the 2000 election with 47.9% of the popular vote. Before 1992, the last President to win the White House with less than 50% of the vote was Richard Nixon in 1968 (source: PresidentElect.org).

4. SOUTHERN DEMOCRATS - The last Democrat to win the White House that wasn't from the South was John Kennedy (1960). Since 1964, the 3 Democrats that have won the White House have been from the South. The 3 are Lyndon Johnson (Texas), Jimmy Carter (Georgia) and Bill Clinton (Arkansas) (source: WhiteHouse.gov).

5. WE'RE OPTIMISTIC - A majority of Americans have a positive opinion of both presidential candidates, as indicated by the favorability rating of both Barack Obama (61%) and John McCain (57%) from a survey released on Friday 10/24/08 (source: Gallup, USA Today).

6. THE BUCKEYE INDICATOR - The candidate that has carried the state of Ohio has won the White House for the last 11 presidential elections. The last time that the winner of Ohio did not win the White House was Richard Nixon in 1960. Nixon beat John Kennedy in Ohio but Kennedy won the White House (source: PresidentElect.org).

7. 60-VOTE SENATE - If either political party was to achieve 60 votes in the 100-member Senate that party would be able to stop a filibuster by the minority party, or end floor debate and bring any proposed legislation to a vote. The last time when either party had a filibuster-proof majority in the Senate resulted from the 1976 elections when the Democrats achieved a 61-vote majority (source: Senate).

8. SONS IN THE MILITARY - John McCain, Sarah Palin and Joe Biden each have a son that is currently serving in the military. Jimmy McCain is in the Marines, Track Palin is in the Army and Beau Biden is a military attorney with the Delaware National Guard. The last US president to have a child serve in the military during his term in office was Dwight Eisenhower, our 34th president (source: Wall Street Journal).

9. SHORT LIST - 1,000 days before tomorrow's presidential election (i.e., 2/08/06), the most widely read newspaper in the USA had a story documenting the 20 most likely Republican and Democratic candidates for the White House in 2008. John McCain and Joe Biden were on that list but Barack Obama wasn't (source: USA Today).

10. REPUBLICAN VP - In a 7/26/08 Wall Street Journal article, the potential selection of Sarah Palin to be John McCain's VP was described as a possibility if he wanted to "go outside the box." The selection of Governor Palin was announced on 8/29/08 in Dayton, OH (source: Wall Street Journal).

11. WHERE IT BEGAN - Barack Obama announced his run for the White House in Springfield, IL on 2/10/07, almost exactly 146 years after Abe Lincoln did the same thing in the same city. John McCain announced his candidacy on 2/28/07 on the David Letterman Show (source: BTN Research).

12. ON THE JOB EARLY - Secret Service protection for presidential candidates is not required by law until 120 days before the November election date, or as of 7/08/08 for the 2008 election. The Homeland Security Department can authorize earlier coverage and did so on 5/03/07 for Barack Obama. John McCain accepted the government's protection on 4/27/08 (source: Houston Chronicle).

13. YALIES - Every president since 1988 has earned a degree from Yale (source: PresidentElect.org).

14. WIDE OPEN RACE - The 2008 presidential race is the first time since 1952 that no current president or vice president is running for the White House (source: PresidentElect.org).

15. PERSONAL STATS - Democrat Barack Obama stands 6 feet, 1 ½ inches, more than a ½ foot taller than Republican John McCain's 5 feet, 7 inch height. Both gentlemen are left-handed (source: Wall Street Journal).

Here is a new update for agents and customers:

-- Fannie Mae (NYSE: FNM - News) today announced that it will reinstate a requirement for homeownership counseling and education for first-time homebuyers obtaining a MyCommunityMortgage® loan or a loan that relies on nontraditional credit to qualify. Effective January 1, 2009, the requirement is geared toward helping borrowers better assess their options and responsibilities both before and after they purchase a home.

In otherwards, agents, customers, originators all have to pay for the sins of others. Sorry!

Thanks,
Greg Adelman

Midwest Home Center LLC.
715-483-0012
612-735-4414 cell
612-395-5444 fax

www.midwesthomecenter.com

To all:

I know it's scary out there, but just a note to wish all a Happy and safe Halloween!

The markets are very volatile out there but with this uncertanty there is opportunity. I have found that in times like this that it only makes us stronger for the next challange that may arrive.

Thanks,
Greg Adelman

Midwest Home Center LLC.
715-483-0012
612-735-4414 cell
612-395-5444 fax

www.midwesthomecenter.com