Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – March 25th, 2008

OFHEO relaxing Fannie/Freddie Reserve Requirements

The Office of Federal Housing Enterprise Oversight (OFHEO) announced that they, in fact, are rescinding the capital restrictions placed on FannieMae and FreddieMac.  This will put $200 Billion back into the market enabling these firms to buy mortgage bonds.  That news really helped interest rates this past week, even with the lowering of the overnight rate by the Fed. 

Bear Stearns Buyout Moves From $2 to $10 per Share

Another good thing that happened was a report from Morgan Stanley that their earnings showed a nice profit of $1.45 per share.  This was much better than the expected $1.03 per share.  Together with Goldman Sachs and Lehman Brothers showing fantastic earnings reports, this helped settle fears in the banking world and gave evidence to support that the Bear Stearns take-over bid from them not being able to make their margin calls, was actually an isolated incident.  Then, later in the week, stocks surged on the news that the $2 per share buyout of Bear Stearns was being raised to $10 per share. 

After the Fed lowered the overnight rate by .75% here’s what their statement said, “Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to mo9derate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully.” 

Rates Up On Lower Overnight Rate, Then Down On Reserve Lowering

Keep in mind that we’ve been telling you about mortgage bonds not really reacting too favorably after a Fed cut of the overnight rate.  In fact, after this last cut, mortgage bonds moved down (so their yields and interest rates moved up) 120 basis points.  What eased their concerns was later in the week, when OFHEO mentioned their lifting of the capital restrictions on FannieMae and FreddieMac.  So, just when you think rates are going up again, they settle down with yet another historic move by the Federal Open Market Committee.  Truly unprecedented and remarkable actions that this Fed has managed to maneuver into one of the worst financial situations to ever hit the United States! 

We keep mentioning Jobless Claims.  Remember, the last two recessions that the United States was in, the four-week average of Initial Jobless Claims was reported at 362,000.  Well, this past week we hit a slamming 378,000 for the week.  This brought the four-week average to an astonishing 365,250.  We’ll continue to report on this, perhaps weekly. 

A Three Year Level of Resistence Hard To Break Through

It’s a good time to cautiously watch interest rates, and generally, I would say to lock in on any rate below six percent.  We up against a truly tough level of resistance that we haven’t seen in three years, so it would be difficult to climb above this area and have much better rates.  So; up and down, back and forth from 5.5% to 5.875% (APR 5.718% & 6.019%, respectively). 

What was a nice surprise was the housing market numbers.  Existing Home Sales for February were reported at a better than expected rate.  This hurt interest rates a little, but it is a sign that buyers are realizing that it’s an excellent time to get into a home.  Then the Consumer Confidence numbers appeared which helped rates.  This report was at a 35 year low.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – March 4th, 2008

Jobless Claims Continue To Show Signs of Recession

Last Wednesday the Wall Street Journal reported this headline:  Inflation could be a bigger problem than many think!  As Homer Simpson might say, “Doh!”

Last week I mentioned the nice layer of support that the 200-day moving average was giving us.  It has continued to be our best friend in this extremely volatile market. 

I keep commenting on the Initial Jobless Claims numbers for the week.  Remember that the last two recessions that the United States went through, the four-week average of these claims reached 362,000.  This last week we hit 373,000 and brought the average to 360,500.  We’re getting closer folks!

A recession is two Gross Domestic Product quarters in a negative number.  The Fourth Quarter 2007 GDP was 0.6%.  It shows the economy is significantly slowing.  Good ‘ole Ben Bernanke spoke to congress this past week.  His comments caused interest rates to lower a bit.  But the big news of this past week was OFHEO’s (The Office of Federal Housing Oversight Committee) announcement that they rescinded the Capital Requirment Penalties to GSE’s.  What does this mean?  Remember when FreddieMac and FannieMae’s accounting was off approximately $3 Billion each?  OFHEO (the government entity that governs conforming loan limits) penalized these Government Sponsored Entities (FannieMae and FreddieMac) by requiring that they have penalty reserves of 30% more than the usual reserve requirement for each loan funded.  Well, Wednesday, OFHEO removed this penalty reserve requirement, freeing up more money for Fannie/Freddie to purchase loans in the secondary market.  So, this announcement was completely separate from HR 5140 and the economic stimulus package that the president signed into effect on February 13th.  This may also have an effect on removing the limits on Jumbo loans.  We’ll learn more about this in the future, however, this could be huge for high priced areas like California, in general.  I’ll report more on this latter as I learn more. 

FHA Loan Limits Increasing?

So, the announcement of HUD’s new median priced home limits will be announced on March 7th.  Here’s what’s expected.  Conforming loan limits will remain at $417,000.  However, if our median prices stay the same as they are now, $304,000.  Than FHA loan limits should increase by 125% or $380,000.00.  FHA is very flexible, with 3% down, no termite report clearances are required, the seller doesn’t have to pay any of the buyer’s fees anymore (excluding a tax service fee which is about $77.00), the appraisals are just as flexible as FannieMae and FreddieMac appraisals, and with the Nehemiah Funding Program, a participating seller can fund 6% (3% for the down and 3% towards buyer’s closing costs) of the sales price through their non-profit and basically put nothing down in this market.  Believe me, there are a lot of sellers out there that wouldn’t mind crediting 6% just to sell their home right now. 

The Core PCE, by the way, was reduced to 2.2%.  Better than expected, but still outside of the Fed’s desire to have inflation readings between 1% and 2%!  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – November 27th, 2007

50 Basis Point on the Waist

Wow!  Even with the short week there is a lot to report on.  First, I probably gained about 50 basis points on my waist-line this weekend.  Not good for “interest”…period! 

Anyway, housing starts were higher than expected, but interestingly, building permits (which shows future housing activity) were at there lowest levels in fourteen years.  This may indicate that new construction might level off. 

Freddie Needing More Money?

FreddieMac (the nations 2^nd largest purchaser of real estate loans) reported a loss of $2.0 Billion in the 3^rd quarter.  They are also indicating that they’re a little short on a comfortable margin above the required reserve funds and hired Goldman Sachs to help them raise capital.  This will be an interesting story to watch and see how it may affect the markets in the future. 

Last week we saw the Ten-Year Treasury and Mortgage-backed securities moving in opposite directions AGAIN.  It’s the second time in less than a month that this has occurred.  Remember, interest rates follow yields on mortgage backed securities…period.  So make sure you’re working with a mortgage professional that follows this…and understands it…or it could be quite costly, to YOU. 

Overnight Rate Cut?

The minutes were released from the Federal Open Market Committee’s last meeting.  It was interesting to note that the Fed thought that lower inflation may be in the forecast.  So, while in the recent past, it looked as though the Fed was definitely NOT going to lower the overnight rate in December, with this lower inflationary tone, coupled with slower economic growth and job growth…who knows…maybe there WILL be a cut. 

Did You Lock On Monday?

Earlier this week mortgage backed securities were at their best levels in over two years.  Monday was the day to lock!  What happened was very interesting.  Interest rates benefited because stocks took quite a hit.  Remember that when stocks aren’t doing well, money flows out of them and into bonds…benefiting interest rates.  Well, the Dow Jones Industrial Average, the NASDAQ and the S & P 500 were all trading below their 200-day moving averages.  Just like bonds, stocks have trends and averages that they like to hover around.  Once they break through a trend (above or below) markets can move quickly. 

With the lowering of stocks, money flowed into bonds.  Bond prices went up, causing rates to move down.  But once bond values touched on the two year high…it was time to lock…cause it’s VERY hard to break though a tough level of resistance that hasn’t been broken in over two years.  So, locking was prudent. 

Abu Dhabi Invests in Citi

Sure enough, first thing on Tuesday morning, Abu Dhabi Investment Authority and Citigroup announced that Abu Dhabi was putting $7.5 Billion of capital into Citigroup to help them offset their recent losses particularly from the Sub-prime mortgage fiasco.  This sent a message to investors that stocks might be hitting rock bottom.  And, if investment companies are willing to come in a buy, buy, buy, obviously stocks will benefit.  But, at whose expense?  Bonds of course!  So, interest rates moved in the opposite direction as on Monday. 

To make things a little worse, Goldman Sachs reported that the Fed WILL decrease the overnight rate by 150 basis points to help with the credit crisis and have the overnight rate at 3.0% by the middle of 2008.  This is thought of as inflationary, because it lowers the value of the American Dollar, making foreign imports more expensive. Last, the New York Federal Reserve Bank announced that they are putting $8 Billion worth of liquidity into the market.  This should calm investor’s fears of a continued liquidity crisis.  Rates continue to be below 6% for conforming loans.  If you’re a fence sitter…start taking out the splinters and make a move…it is time.  Until next week…

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

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