Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – November 19th, 2007

Rates Moving Down, But Exceptions Costing More

Stock or Bonds?

So, last week we were waiting for Retail Sales numbers to come in and we expected numbers to be a little higher than we’ve seen lately because WalMart reported some strong earnings.  They came in at expectations, but the Producer Price Index (PPI) rose 0.1% for October.  But the Core PPI came in below expectations, which was good for interest rates.  The Consumer Price Index rose to 2.2% from 2.1%, which is inflationary and generally bad for interest rates, however, what kept rates down was the understanding that this inflationary information would mean that the Fed would NOT raise the overnight rate at their December meeting.  So, money poured out of Stocks and into Bonds on that news. 

CitiGroup Downgraded

This week, Goldman Sachs downgraded Citigroup to a “Sell” from a “Hold”.  Citi may have to write off $4Billion dollars, additionally to what they have forecasted in the past, due to sub-prime related losses. 

Federal Reserve Chairman Ben Bernanke indicated last week that the Fed is changing the manner in which reports, minutes, and other general information will be reported to the general public and markets.  This is really cool because it will enable us to follow, more closely, why the Fed makes certain monetary policies on the information that they’re being provided with.  This “transparency,” “will provide a more-timely insight into the Fed’s outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability.”  What they plan to do is provide information on economic growth, unemployment, and inflation twice as often as they do now, and estimate figures for three years out, as opposed to the two year estimates currently being produced.  This will be helpful to guys like me because it’s just more information that could have a result on the markets.  But, it also means that I could be writing myself right out of an columnist position with the News & Review (editor…don’t read this).

Mortgage Insurance Changes

I thought I’d take some time and go over some major changes regarding mortgage insurance (MI) that will go into effect in January, 2008.  Generally speaking, mortgage insurance is required whenever you put less than 20% down on the purchase of real property, one to four units.  There are ways around this…but for the sake of simplicity…The calculations have been pretty standard for years, but first, HUD came out and said that they were changing the Up front MI factors based on loan to value, credit risk score, and/or source of down payment funds.  Let’s give an example:  Richard N. Diedert buys a home.  Funds are a gift from pops.  His credit score is bummin’ at about 595.  In the past, regardless, his up front MI factor would be 1.5% of the loan amount.  Now, we would have to go to a matrix and look up what that factor would be.  With this scenario the factor would move to 2.0% of the loan amount. 

Fannie Mae & Freddie Mac Pricing Changes

Not to be outdone, Freddie Mac came out with their new model for pricing loans.  For example, let’s say the Richard is now buying an investment property.  He wants to put 20% down.  In the past, he could either pay 1.375% in points (this varies from lender to lender) OR absorb that cost in his interest rate (about 0.5% in rate).  Now, that add on will also be determined by credit risk score.  So, many changes keep popping up in this new environment and we’ll keep you posted.  Gobble, Gobble…Danny