Mortgage Times

[Adam in CO]

Mortgage Market News for the week ending March 14, 2008

Events This Week:
Retail Sales Down
Inflation Lower
Manufacturing Mixed
Sentiment Flat

Events Next Week:

Mon 3/17
Ind. Production
Empire State

Tues 3/18
FOMC Meeting
PPI
Housing Starts

Thurs 3/20
Philly Fed
Leading Indicators

Fed Plan Lifts Mortgage Markets

Tuesday, the Fed's surprise announcement of a new $200 billion lending facility led to a 400 plus point rally in the Dow, the biggest one day percentage gain since March 2003. The effect on mortgage rates was also favorable. The newly available funds will make it more appealing for financial institutions to borrow money from the Fed, which is expected to increase the demand for mortgage backed securities. Mortgage markets should benefit, and the spread between mortgage rates and Treasury yields narrowed significantly, reversing the trend from the prior week.

Later in the week, sentiment turned sour, however. Investors were reminded on Thursday that the problems in credit markets were not yet over. Carlyle Capital, a large hedge fund, defaulted on $16.6 billion of its debt, and the collateral was mostly mortgage backed securities. An even bigger jolt hit the markets on Friday. Bear Stearns, a major Wall Street investment bank, announced that they would receive financing to address liquidity problems. The repercussions of losses at financial institutions continued to be felt, and investors responded to the uncertainty by shifting out of the stock market and into the relative safety of fixed income investments including mortgage backed securities. Mortgage rates fell significantly during the week, reversing a similar sized rise the prior week. That said, not all areas of the mortgage market benefited equally last week. Demand for securities backed by Adjustable Rate Mortgages (ARMs) dropped sharply, and ARMs rates did not share in the declines seen in fixed rate mortgages.

The economic data released last week was favorable for mortgage markets. Notably, the closely watched Consumer Price Index (CPI) inflation data came in much lower than expected. The core rate was still running higher than the Fed would like, but investors were prepared for worse news. In addition, the Retail Sales data fell far short of the consensus forecast. Slower economic growth typically means lower future inflation, and mortgage markets reacted positively to both economic reports.

• Also Notable:
• Continued Jobless Claims rose to the highest level since September 2005
• Treasury Secretary Paulson called for stricter licensing requirements for mortgage brokers
• Gold prices rose to a record high above $1,000 per ounce
• Rep. Barney Frank proposed a $300 billion loan plan to enable the FHA to insure and guarantee refinanced mortgages

Average 30 yr fixed rate:
Last week:+0.50%
This week:-0.36%

Stocks (weekly):
Dow:11,968-32
NASDAQ:2,221-6

Week Ahead

Next week's main event will be the Fed meeting on Tuesday. Investors currently price in a very high chance of a three quarter point cut in the Fed Funds rate, with additional cuts at future meetings. The announcement Tuesday afternoon will almost certainly lead to a strong reaction in financial markets. Next week's major economic data will come out before the meeting. Industrial Production, an important indication of economic activity, will come out on Monday, along with the Empire State regional manufacturing index. The Producer Price Index (PPI) will hit Tuesday morning. Almost without exception, higher inflation leads to higher interest rates, and PPI focuses on the increase in prices of "intermediate" goods used by companies to produce finished products. Housing Starts will also be released on Tuesday. After that, Leading Indicators and the Philly Fed index on Thursday will round out the week.

admin@corefinancegroup.com.

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Going to get interesting. Looks like the late 70's all over again...