Mortgage Commentary

[Adam in CO]

September 13, 2007

Key Indicators

Gold $722.30/ounce [up]
Crude Oil (Brent) $75.64/barrel[up]
U.S. Dollar to?Euro .7231 [down]
Japanese Yen 114.16 [down]

6-mo Treasury Bill Yield 4.22%
10-yr Treasury Note Yield 4.35%
[6-mo down 29 bps, 10-yrdown 20 bps]

30-yr Fixed-rate Mortgage 6.75%
15-yr Fixed-rate Mortgage 6.41
1-yr ARM 6.30%
[HSH average rates: 30-yr down 23 bp, 15-yr down 24 bps; ARM up 14 bps]

Mortgage Bankers Association Mortgage Applications Index week ending 8/31
Overall 622.9(up 1.3%; down 4% the week prior)
Purchase Money Loans 425.8(up 0.4%; down 4% the week prior)
Refinancing Loans 1770.2(up 2.3%; down 4.2% the week prior)

Weekly Jobless Claims 9/1
318,000 first computation ? 337,000 prior week (with 12,000 upward revision)

Employment Report Aug
New payrolls down 4,000 ? unemployment rate still 4.6%

Productivity second quarter 2007
Revised upward to 2.6% from 1.8% - unit labor costs revised down from 2.1% to 1.4% growth

Monthly Commentary

Thumbnail Sketch: At this point, a consensus has been reached that the Fed will lower the fed funds rate at the September 18 meeting of the Federal Open Market Committee Meeting. Indeed, Mark Zandi, chief economist at Moody's Economy.com, suggests that the possibility of a recession has risen from 15% in the last quarter to 40%.
The argument today, therefore, is over the size of the Fed's rate reduction. This observer feels it will be a standard quarter of a percent. Some suggest it may be a stronger half-percent drop. As Zandi notes, "A 50 basis point cut would probably buoy sentiment more than a conventional 25 bp reduction, as it would send a convincing signal that policymakers will cut rates as needed to avert a downturn. A larger cut would also help alleviate the ongoing stress in global money markets." The distance between American and European short-term securities has widened dangerously.

Zandi further suggests that economic growth will prove lower overall for the next year, with GDP growth hovering at about 2%, unemployment rising to 5%, and core inflation remaining near or below 2%. This means interest rates may come down in a more significant way that most analysts had been predicting over the past several months, taking ARM rates attractively lower. 30- and 15- year fixed rates should also fall as well.

This would take rates-which are already quite attractive-to near-irresistible levels for many potential homebuyers. That's great?but it won't provide a very convincing benefit to today's housing market's problems unless it is accompanied by an increased willingness among investors to funnel the needed funds into more mortgage originations.
"The lack of credit is undermining home sales and precipitating delinquencies and foreclosures," Zandi observes, "as subprime borrowers who took on loans in the midst of the housing boom are unable to refinance before their mortgage payment resets higher. Homeowners with adjustable rate mortgages facing their first payment reset will crest this fall, but remain elevated well into next year. According to the Mortgage Bankers Association, the percentage of homeowners entering foreclosure has never been higher since they began keeping records."

Don't sit up into the night waiting for the next real estate boom to make its appearance, therefore.