March 12 Economic Update

Steve Peterson, Branch Manager
Chase Home Finance
Office: (800) 894-5440 Ext. 214
Cell: (775) 219-7151

An exciting day in the financial markets! Happily, the Fed seems to have substituted putting money into the mortgage-making system for making money cheaper (lowering interest rates)–for the moment. As you can see by looking at the numbers for the day, the markets responded very enthusiastically.
 
One of the things that worries me at this point is that the markets, committed to self-preservation (vs. thinking through ways in which they should and must change to keep from creating again the kind of mess we’re in now) will applaud anything that seems to give them a lease on life…even a very temporary one. We need far more than that.
 
I think, again, that we’re in the midst of a huge revolution in our financial markets. Dubai owns a significant share of Citigroup. Countrywide went to the Bank of America. A huge number of our mortgage companies are history. Will we wake up in a couple of years and wonder where companies like Merrill Lynch went?

Thumbnail Sketch: The Federal Reserve appears to have made a brilliant move yesterday, making credit more plentiful rather than reducing interest rates between scheduled meetings. (The Federal Open Market Committee (FOMC), which meets on March 18, will still most likely cut the fed funds rate by half a percent—50 basis points.)

Now, the very recent moves are a bit difficult for non-economists to understand. Still, the markets get the point, and they responded immediately, gleefully taking interest rates a bit higher and, even more to the liking of the markets, giving a strong boost to stock indices, both of which represented a vote of confidence. We even saw the dollar shoring up a bit of value against foreign currencies.

The Fed’s move, artfully accomplished with the cooperation of foreign central banks, was to set up new programs for financial giants to borrow large amounts of money based on their attractive mortgages. These huge companies, which have been buying up mortgages (and thus providing money for more mortgages to be written) have had a terribly time finding ready, willing and able investors to buy up the mortgage investment products they create from the mortgages they buy. That has created a bottleneck in the system, and lenders have had increasing problems trying to find available financing that can actually fund.

The Fed will now loan against these mortgages—not with overnight loans, but with unprecedented 4-week loans. There is discussion of the Fed actually buying mortgage-backed securities (MBS) as well. (“Of course, the next step would be to add MBS to the Fed’s balance sheet on a more permanent basis. Such action could receive serious consideration at next week’s FOMC meeting.”[David Greenlaw, Morgan Stanley] It also announced an increase in its current lending program to banks. And four other central banks announced they will participate in the program.

Of course, the long-term effects of this move remain to be seen. It appears, at least, as if a shiny new pump has been installed in the bow of a boat that continues to fill with water. We need more. We need, above all, mortgage loan programs that will truly allow people to refinance out of the loans that threaten to make them lose their homes, and we need loans that allow buyers to start buying again.

The OFHEO just released the mortgage ceilings for different areas in the U.S. and they’ll now go into effect. See them at http://www.ofheo.gov/newsroom.aspx?ID=418&q1=1&q2=NoneKEY INDICATORS 

Gold $971.80/ounce [up]Crude Oil (Brent) $104.02/brl [up]U.S. Dollar to…    Euro .6533 [down]    Japanese Yen 103.21 [up]6-mo Treasury Bill Yield 1.63%10-yr Treasury Note Yield 3.60%[6-mo down 6 bps, 10-yr up 8 bps]11^th Dist Cost of Funds: 3.970%30-yr Fixed-rate Mortgage 6.72%15-yr Fixed-rate Mortgage 6.13%1-yr ARM 5.78%[HSH averages rates: 30-yr up 25 bps, 15-yr up 35 bps; 1-yr ARM up 49 bps] 

Mortgage Bankers Association Mortgage Applications Index week ending 2/29  Overall    684.9 (up 3%; down 19.2% the week prior)  Purchase Money Loans     363.1 (up 1.4%; up 0.2% the week prior)  Refinancing Loans    2569.0 (up 4.5%; down 30.4% the week prior) 

Weekly Jobless Claims 3/1    351,000 first computation – 375,000 prior week (with upward revision of 2,000) 

Employment Report Feb    Payrolls declined by 63,000 – unemployment rate down to 4.8% 

Consumer Credit Jan    Up 3.3% - revolving up 7.3% - non-revolving up 1.1%