Hummer Forums by Elcova - Mortgage Commentary

Mortgage Market News for the week ending August 17, 2007

Compliments of
Colorado Real Estate Finance Group
Real Estate Investment Bankers
PHONE:303-770-2262
adam@corefinancegroup.com
5310 DTC Pkwy, Suite I
Greenwood Village, CO 80111

Events This Week:

Inflation Steady
Retail Sales Up
Housing Down
Manufacturing Mixed

Events Next Week:
Mon 8/20
Leading Indicators
Thurs 8/23
Jobless Claims
5-yr Auction
Fri 8/24
Durable Orders
New Home Sales

Fed Cuts Discount Rate

Despite the release of a wide range of major economic data, the liquidity crunch in credit markets once again dominated the trading in financial markets last week. Demand for mortgage investments other than Fannie Mae, Freddie Mac, and Ginnie Mae securities has dried up in recent weeks, making it very difficult for mortgage companies to sell off their non-conforming loans. In addition, mortgage lenders who rely on short-term loans from banks and Wall Street to fund the mortgage loans they make are finding it increasingly challenging to obtain additional funds, forcing some very fine lenders out of business. Consumers interested in any mortgage products other than conventional conforming loans are finding those loans harder to get and at higher rates.

Against this backdrop, the Fed surprised financial markets Friday morning with the announcement of a 50 basis point cut in the discount rate to 5.75%, while the more commonly watched Fed Funds rate remained unchanged at 5.25%. Under normal circumstances, banks borrow money from each other to maintain the appropriate level of reserves each day, and they pay each other interest equivalent to the Fed Funds rate. When other funding sources are unavailable, banks also have the option of borrowing directly from the Fed at the higher discount rate. Given the unusual financial conditions of the current liquidity crunch, the discount rate cut will lower the cost of borrowing funds from the Fed, meaning that banks will now have a more attractive source of funding. This should alleviate some of the pressure on mortgage lenders as their funding sources will become more liquid.

Somewhat overlooked last week, a wide range of major economic data came out. The closely watched CPI and PPI inflation data was right on target, which will allow the Fed a little breathing room to cut rates if necessary. Meanwhile, the reports on economic growth were mixed. July Retail Sales came in higher than expected, while July Housing Starts unexpectedly fell to the lowest level in more than a decade, and Building Permits, an important indicator of future activity, showed similar declines. Tighter lending standards may delay a rebound in the housing market until 2008.

Also Notable:
The Fed cut the discount rate by 50 basis points to 5.75%, while the Fed Funds rate remained unchanged at 5.25%
The Dow stock index recovered about 500 points from Thursday's low for the week, to finish with just modest losses
The NAHB Housing Market Index fell to the lowest level since January 1991
First Magnus, the sixteenth largest mortgage lender in the US, announced that it would stop funding loans

Average 30 yr fixed rate: Last week:-0.06%This week:+0.02%
Stocks (weekly): Dow:12,990-181NASDAQ:2,484-51

Week Ahead

Next week the focus will remain on developments in credit markets. The economic calendar will be sparse. The only major report will be Friday's release of Durable Orders, an indicator of economic activity. New Home Sales will also come out on Friday. Otherwise, investors will be watching moves by the Fed and other central banks around the world.