A Better Mortgage

What Did You Do With Your Summer Break?

It's a day early for Fun Friday but I couldn't let today go by without mentioning the fact that The Office season premier is on tonight. Here is a web only clip that NBC posted on YouTube to catch viewers up on what the characters did with their summer. I hope you enjoy it!

The Week Ahead in the Capital Markets

We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!

The Week Ahead in the Capital Markets - September 24, 2007

“The dust is still settling after the Fed used ‘an ax instead of a scalpel to cut rates,’ as Barron’s put it.  Mortgages have been volatile.  Tuesday, prices rose 0.50%; Thursday, prices fell 0.75%.  The yield curve steepened.  The 10-year Treasury yield rose 0.16% more than the 2-year yield.  Credit spreads – especially those affecting jumbo core loans – have moved in ever so slightly.  For everything other than cream-puff loans, jumbo core yields remain at very high levels relative to agencies.  Mortgage-to-Treasury spreads narrowed.  Mortgages currently yield 1.65% more than Treasuries, about 0.10% less than pre-Fed levels.  Demand for mortgages is up; banks usually increase their purchases of mortgages when the yield curve is steep.”

The market’s early opinion is that the Fed cut is good for economic growth (stocks soared worldwide) and bad for inflation.  Commodities moved to levels not seen in decades.  The U.S. dollar famously reached parity with Canada’s loonie, and sank to fresh lows against the euro.   Oil and gold soared to new highs.

Bill Gross thinks the Fed will ultimately take rates down to 3.75%, as the housing slump slows the economy.  Whether the Fed cuts rates again, however, will rest on the economy’s performance in the months ahead.  The futures market predicts a 0.25% cut before year end, and another 0.25% cut in early 2008.  Opinions vary.  Bear Stearns believes the Fed will not cut again, and will be forced to raise rates in 2008 as inflation pressures mount. 

The lessons of history are mixed.  Only twice in the last 20 years has the Fed started a rate cutting cycle with a half-point reduction, as noted by Bill Gross. Both times, the economy fell into recession and more rate cuts resulted.  The last two times the Fed acted in response to financial market chaos, however, they cut rates only to reverse course and raise rates shortly thereafter.  Neither the 1987 stock market crash nor the 1998 debt crisis had as much affect on the economy as anticipated, and the Fed eventually raised rates.

A University of Florida student was subdued with a taser after asking John Kerry about the 2004 election.  It was the first time anyone’s been electrified at a John Kerry speech. – (Jay Leno)

The Week Ahead in the Capital Markets

We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!

The Week Ahead in the Capital Markets - September 17, 2007

It will be a “long slog” for Northern Rock if they wish to remain independent, analysts say.  Proving that the real estate mess has gone global, the Bank of England bailed out Northern Rock, England’s fourth-largest mortgage company.  Northern Rock required emergency financing because it relies on the capital markets rather than deposits for 73% of its financing, reports Bloomberg.  Northern Rock’s stock price is down 63% this year, and its “high cost of wholesale financing” is expected to continue for the foreseeable future.  Sound familiar?

Fears of a global slowdown argue for a 0.50% Fed rate cut this week; last week’s modest turnaround in the credit markets argues for 0.25%.  There is some debate over whether the consensus is calling for 25 or 50, but Barron’s reports a 58% probability of a 0.50% cut, versus a 42% probability of a 0.25% cut.  After this Tuesday, the Fed’s next meeting will be on Halloween.

On the eve of the Fed meeting, signs of inflation are rearing their ugly heads:  gold is trading above $700 per ounce, oil is above $80 per barrel, and the dollar is making new lows.  The credit markets are also recovering slightly:  the spread between LIBOR and Treasury yields is moderating, the mortgage-to-Treasury yield spread is stable at 1.75%, and commercial paper rates are falling from extreme highs. 

The change in the amount of commercial paper outstanding is a one of the most important forward-looking measures for the debt markets.  And it is not looking good.  Liquidity is draining out of the system, and the economy will begin to struggle.  Commercial paper outstanding – including asset-backed commercial paper that sometimes is backed by sub-prime loans – fell by 13% last month alone.  As reported in Bill Coppedge’s news items:  During the 2001 downturn, commercial paper peaked in November 2000 and slid through to December 2003.    The volume fell by 22%, but it took three years to do so.

In his big Iraq report, General Petraeus said the troops can start coming home next summer. ... I believe his exact words were, “And then it's Hillary's mess.” – (David Letterman)

The Week Ahead in the Capital Markets

We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!

The Week Ahead in the Capital Markets - September 10, 2007

Negative jobs reports have predicted twelve of the last fourteen recessions.  Nevertheless, stock and bond markets reacted quickly to Friday’s report, and a series of Fed rate cuts seems to be in the bag.  The question amongst traders is not whether the Fed cuts rates on September 18th, but whether they cut by 0.25% or 0.50%.  Rumors even circulated about a mid-day rate cut on Friday.  Implying a cumulative 1.25% of upcoming rate cuts, May fed funds futures closed at nearly 4.00%, down almost 0.50% in two weeks.  Several Fed officials will speak this week, and the market will listen closely.

Treasury yields plummeted.  The spread on TIPS (the market’s best guess on inflation) is hovering just above 2%. And Fed funds are at 5.25%.  “The market is screaming for a rate cut,” said John Mauldin. The ten-year yield fell to a level not seen since January 2006, and the two-year fell all the way back to September 2005 territory.  Breaking their pattern of the past few months – where mortgage yields seemed to be stuck in place – mortgage yields fell in tandem with Treasuries.  The mortgage-to-Treasury yield spread held steady at 1.74%, and notional yields fell.  In other markets, the dollar dropped sharply, and gold rallied to $700 an ounce.

The jobs report hasn’t been negative since 2003.  The weakness was broad based and payrolls for both June and July were revised down, from 92,000 to 68,000 in July and from 126,000 to 69,000 in June. That is an average of less than 46,000 a month for the last three months. The economy needs to create 150,000 jobs a month just to tread water.  Economists from Bear to Goldman to Merrill revised global growth projections lower, and most think the U.S. economy is careening towards recession in 2008.  The extent of the economic downturn is uncertain.  The housing and credit problems will take their toll, but fortunately, corporate balance sheets are strong and stocks are trading at a modest 15 times earnings. 

Mortgage bankers are gloomy from the succession of body blows the industry has taken, but most cheered the news of lower rates.  Refinance activity is sure to pick up, but there are challenges ahead.  Bankers don’t just need lower rates, they need liquidity from investors and warehouse lenders, tighter spreads on jumbo product, and stable home prices.  All of which remain in short supply.  Jumbo core spreads are still shockingly wide, although they seemed to have reached a bottom.  There are a few whole loan buyers in the market, but jumbo securitization is non-existent.

Did you know that when President Bush is in Australia, his approval rating goes down the drain counter-clockwise… --  (Jay Leno)