Mortgage Commentary

[Adam in CO]

Mortgage Market News for the week ending September 21, 2007

Compliments of
Colorado Real Estate Finance Group, Inc.
A Real Estate Speculation and Finance Firm
Lending in all 50 states

PHONE:303-770-2262
FAX: 303-770-2276
admin@corefinancegroup.com
5310 DTC Pkwy, Suite I
Greenwood Village, CO 80111



Events This Week:

Inflation Flat
Employment Improved
Housing Starts Down
Manufacturing Mixed

Events Next Week:
Tues 9/25
Existing Home Sales
Wed 9/26
Durable Orders
Thurs 9/27
GDP
New Home Sales
Fri 9/28
Core PCE
Chicago PMI

Fed Cuts Rates by 50 Points


Tuesday's highly anticipated FOMC meeting was notable for the evenly split opinions among investors about what the Fed was going to do. When the Fed announced a 0.50% cut in the Fed Funds rate, at the high end of the range of expectations, the immediate reaction was that mortgage rates dropped and the stock market rallied. For the next few days, however, as stocks held onto their gains, mortgage rates changed direction and finished slightly higher than the prior week.

The reason for the turnaround in mortgage rates was an increased concern about the risk of future inflation. Despite assurances from Fed Chief Bernanke that the Fed will not try to calm financial markets at the expense of letting inflation worsen, investors began to question the implications of the half-point rate cut on inflation. Following the rate cut, the value of the US currency dropped and commodity prices surged, both of which are typically signs of higher future inflation. Since inflation erodes the value of fixed income investments, mortgage investors reacted predictably by pushing mortgage rates higher.

During speeches on Thursday, Fed Chief Bernanke and Treasury Secretary Paulson outlined some proposals to help ease the credit crunch in the mortgage market. They both discussed raising the conforming loan limits for Fannie Mae and Freddie Mac above the current level of $417,000, but only on a temporary basis. Bernanke also suggested allowing the FHA more room to develop new products to help troubled homeowners refinance out of adjustable-rate loans. In particular, he would grant the FHA the flexibility to collect risk premiums from borrowers who pose higher credit risks.

• Also Notable:
• Bernanke stated that the large half-point rate cut was made to "get out ahead" of problems developing in credit markets which could threaten growth in the broader economy
• The monthly Consumer Price Index core inflation data matched the consensus forecast, rising at a 2.1% annual rate
• Housing Starts for August fell short of expectations, dropping 3% from July
• Oil prices climbed to record levels above $83 per barrel, up from $70 p/b in the middle of August

Average 30 yr fixed rate:
Last week:+0.03%
This week:+0.07%

Stocks (weekly):
Dow:13,857+440
NASDAQ:2,675+77

Week Ahead

The Economic Calendar will be busy next week, with several key measures of economic activity on the schedule. These announcements may carry more weight than usual as mortgage investors are focused on any signs of higher future inflation. The flow of data will begin with Tuesday's release of Existing Home Sales. Durable Orders, an important indicator of economic activity, will come out on Wednesday. Thursday's data will include New Home Sales and the final revisions to Second Quarter Gross Domestic Product (GDP), which is the broadest measure of economic activity. The Fed's preferred inflation indicator, the Core PCE price index, will be released on Friday, along with the Chicago PMI national manufacturing index. Consumer Confidence, Consumer Sentiment, and a 5-yr Treasury auction will round out the schedule.