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The Week Ahead in the Capital Markets - January 14, 2008
“I don’t like the mortgage business.” – Ken Lewis, CEO, Bank of America
Lewis offered $4 billion for Countrywide because of its “extraordinary value” at the price. The deal is intended to close in July or August. The mortgage business heaved a sigh of relief as the prospect of a near-term Countrywide bankruptcy evaporated.
The B of A deal removed some uncertainty from the financial markets, but huge Fed rate cuts are still widely expected. Fed funds futures have declined 0.50% in two weeks. Fed policy hinges on financial market risks, and the levels of inflation and growth. Lately it seems that markets are stabilizing, inflation is accelerating, and growth is slowing. In speeches last week Fed Chairman Bernanke and Fed Governor Mishkin telegraphed the Fed’s concerns about financial market risks, and the need to pre-empt any downside risks to growth. Inflation does not appear to be an immediate concern. In short, the odds for a 0.50% rate cut this month jumped to 90%, and odds favor another 0.50% in March. Fed funds futures signal a funds rate of 2.60% by the end of this year.
“As more rate cuts were built in to the yield curve, short-term rates fell 0.10% more than long-term ones, and funding costs fell accordingly. The difference between mortgage and Treasury yields remained steady. The spread has not widened appreciably in three months, and mortgage bankers are enjoying a healthy decline in mortgage rates. Lock volume was strong last week, and refinance activity is picking up.
Servicing prices have moved in to two camps: a high-priced one that believes the record slowdown in prepayment speeds is here to stay, and a relatively low-priced one that believes speeds will accelerate soon. Prices for conforming whole loans, therefore, are as widely scattered as we have seen in some time.
Jumbo fixed rates continue to languish at approximately 0.75% over conforming rates, and rumors swirled last week about a temporary increase in agency lending limits. The Mortgage Bankers Association has changed course and is now backing stand-alone legislation that would allow Fannie Mae and Freddie Mac to purchase jumbo loans up to $625,000 nationwide.”
Not such good news for John Edwards. He came in third. Third. Proving, yes, there are two Americas and neither one is voting for him. – Jay Leno
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