Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – December 4th, 2007

Watch Mortgage Backed Securities

Rates Be Nimble, Rates Be Quick

So much to report on this week!  New York Fed Vice Chairman Donald Kohn indicated, “In my view, these (financial) uncertainties require flexible and pragmatic policymaking – nimble is the adjective I used a few weeks ago.  In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment.”   Nimble seems to be the operative word, here.  Lowering rates?

Durable Goods Orders for October saw the biggest monthly decline in this index since February of last year.  The National Association of Realtors reported that October existing homes sales fell 1.2%.  Interesting to note; the biggest drop was in multi-family and condominium sales. 

DON’T Watch the 10-Year Treasury!!!

Again…Mortgage Backed Securities were up 16 basis points on Wednesday of last week.  The 10-Year Treasury Note was down 34 basis points. 

Preliminary Gross Domestic Product showed the US economy growing at an expected 4.9%.  This is strongly due to a weaker US Dollar.  Initial Jobless Claims were reported at 352,000.  This is the highest level since February and some see this as our economy’s inability to continue to create more new jobs, than loosing old ones.

Rates Could Get Disappointing

The Fed’s favorite gauge on inflation came in on a year-over-year basis at 1.9%.  Remember, the Fed wants to see inflationary levels between 1 and 2 percent.  Bernanke said that resurgent financial strains have really made future economic growth in our economy quite pessimistic.  If you’re looking for additional interest rate improvements, after the monetary policy decision on December 11^th, you could be quite disappointed.

If you read this article and have been considering refinancing…now is definitely the time.  This Friday November’s nonfarm payroll reported is scheduled for release.  The hype is that less than 80,000 new jobs, coupled with unemployment moving to 4.8%, from 4.7% could create a 50 basis point lowering of the overnight rate on December 11.  If that number is more in line with over 110,000 and unemployment remains at 4.7% than just a 25 basis point move might be in line.  Most of you reading this may think that a 50 basis point drop would be great for interest rates.  

Home Values AND Rates Are Down

Here’s the problem.  Ten-Year Treasury yields are paying 3.88%.  The Consumer Price Index is reading 3.5% in October.  Should inflation readings like the CPI exceed what investors are getting paid to hold Treasuries, investors then throw their funds from bonds and into stocks.  This has occurred from August of 1973 through August of 1953 and from January 1979 to October of 1980.  So, again, I cannot stress enough…now is the time.  Home values and rates are down.  5.625% with an APR of 5.733% is what was being locked in on Monday.  Also, what’s interesting to note…Rate cuts are designed to help economic growth.  This pushes up demand for goods and services, but also the cost of capital.  This is not really a good formula for lower interest rates. 

Rate Freeze on SubPrime Loans

Last, a government sponsored plan to temporarily freeze interest rates on certain adjustable, subprime loans could be right around the corner.  Basically, the low, introductory rate on these loans could be extended for a certain amount of time to help home owners.  It’s still being worked on, but it’s another example of these uncharted waters we’re in around the mortgage industry.  Until next week…

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