Market Reports
A Mortgage Update from Jay Skwierawski for the Week of September 21
Hello Everybody!
What a week! This report is a bit longer than most, but what a week!
Interest rates rose slightly this week, as mortgage bonds had a very wild, volatile week. We had a couple of days where we saw rates change for the better and worse, which is quite unusual. The stock market had its most volatile week in history, only to finish almost unchanged on the week. The week was chock-full of news, both in terms of economic figures and also the health of some major players in the financial system, and the financial system as a whole. Let's look at this past week, day by day:
Over last weekend, financial giant Lehman Bros. announced that they were filing for bankruptcy after 158 years in existence. Although they hoped for a direct government bailout or government assisted bailout by another firm, that never came. Chances are that pieces of Lehman will be sold as it disappears. What did them in? Their exposure to sub-prime mortgages. Another casualty that was narrowly avoided was Merrill Lynch, which was acquired by Bank of America. This was also caused by their exposure in the risky mortgage business. Finally, insurance giant AIG (American International Group) announced that they were in serious trouble and would have to either raise cash or file for bankruptcy. AIG is a $1 trillion international company, operating in 130 countries. They provide insurance in all facets of life, from auto to life to mortgage insurance. If they went under, insurance claims would not be filled and this would be a huge problem.
On Monday, the Empire State Index was reported at -7.4 percent, much lower than the positive reading that was expected. Although the reading reflects the economy in the New York area, it is watched carefully for signs of the nation's economy. Industrial Production came in much lower than expected, as did factory utilization. This shows that we aren't producing as many goods, which doesn't bode well for employment in the future. On Tuesday, the Consumer Price Index (CPI) came in slightly lower than expected, which was good for the inflation-fearing bond market. The CPI was reported at -0.1 percent, its first monthly decline since October, 2006. A flat reading was expected. The so called "core CPI," which excludes volatile food and energy costs came in right where expected at +0.2 percent. On Tuesday afternoon, the Federal Reserve's Open Market Committee (FOMC) announced that they were keeping short term rates steady. This was a good thing for rates. A decrease in the Fed Funds rate, after only one good report on inflation would have spooked the treasury and mortgage bond markets. On Tuesday night, the Fed announced that it was giving AIG an $85 billion lifeline in the form of a two year loan. In return, the government would get a 79 percent stake in AIG. This could actually end up being profitable for the U.S. when some of the assets of AIG are sold. On Wednesday, new housing starts came in at 895,000, below the 950,000 that were expected. Permits for new housing starts also dropped. Although the numbers came in below expectations, the markets have come to accept bad housing market numbers, so the they didn't move too much. Also on Wednesday, the LIBOR (London Interbank Offering Rate) and the Fed Funds Rate both jumped to around 6 percent. These rates are the what banks charge each other for overnight loans between themselves. The AIG scare, IndyMac failure, Lehman bankruptcy and other events have spooked banks into thinking that these "interbank" loans may be riskier than once thought. As a result of this risk, banks are demanding a higher rate of return. Why is this important? Because most adjustable rate mortgages are tied to the LIBOR, and if these rates were to stay elevated, then when ARM's are due to be adjusted, the rates would skyrocket. On Thursday, the Index of Leading Economic Indicators, which predicts the economy up to six months ahead, was reported at -0.5 percent, lower than the -0.2 percent that was expected. This index is not considered 100 percent accurate, but can still be a market mover. The stubborn First Time Unemployment claims number came in higher than expected at 455,000. On Friday, it was reported that there was a run on Money Market accounts, with $180 Million being withdrawn as people preferred to put their money under their mattresses rather than keep it in uninsured money market funds. As a result, the U.S. Treasury announced a plan to insure money market funds, just as bank accounts are insured by the government. The biggest announcement of the week was the Federal Reserve and Treasury announcing that they were working on a plan to purchase bad mortgage investments from banks and other lending firms. This could possibly bring an end to the mortgage mess that has buried firms such as Lehman Bros, Bear Stearns, Fannie Mae and Freddie Mac. The Fed will buy the loans from these firms and sell them on the open market. This is risky for the Fed, but the risk was far greater if the Fed didn't do this, and we continued to the status quo, with banks and investment firms dropping like flies. This was a brilliant move, and should go along way in helping the housing and lending environment. Stocks rallied on the rumor of this happening on Thursday and Friday, and almost made up its huge losses from earlier in the week. It was announced on Saturday that the cost of this could be up to $700 billion. The SEC also announced that they were temporarily stopping the short selling of stocks. The short selling of stocks is selling of a security that the investor does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. Selling short is the opposite of going long. That is short sellers make money if the stock goes down in price. You are basically betting that the stock will go down. This should not be confused with the short sales that are happening in the real estate market. These short sales are not being halted by the government.
What will next week bring? Who knows! These are the economic reports that are expected:
Wednesday - Existing Home Sales are expected to show a decrease to 4.93 million units (Moderate impact on rates)
Thursday - First Time Unemployment Claims (Moderate)
Thursday - New Home Sales are expected to show a slight increase (Moderate)
Thursday - Durable Goods Orders are expected to show a decrease (Moderate)
Friday - Consumer Sentiment should show an increase, especially with all of the steps the government is taking to clean house and get the economy back on track. (Moderate)
Friday - Gross Domestic Product (GDP) final revision should show a slight increase over where originally reported (Moderate)
Friday - GDP Price Deflator, one of the Fed's favorite inflation gauges (Moderate)
It could be another volatile week. Hopefully we will see the stock market settle down and interest rates remain steady, or fall as the safety of investing in mortgage backed securities and mortgage bonds becomes safer.
The above chart shows the price of mortgage bonds over the past 90 days. The most recent trading days are on the right. Keep in mind that the price of bonds move opposite rates. So, red and down are bad, while green and up are good.
We will keep an eye on the markets and keep you updated with any breaking news.
Have a great week!
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
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