Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – August 14th, 2007

More Sub-Prime Concerns

As mentioned in last week’s article, investors are weary of purchasing loans that nobody wants.  This is causing the sub-prime market, and other portfolio (or riskier) types of loans to not have buyers.  Therefore, their interest rates have been unstable, difficult to place, with potentially significantly higher than normal interest rates.  It’s causing a lot of confusion in the marketplace and world-wide arena as well.  Stock markets, globally, are sharply lower over concerns regarding banking and investment fund exposure to US sub-prime mortgages. 

Fund Freezing Frenzy?

The French Bank BNP – France’s largest bank and the second largest bank in Europe, didn’t allow their investors to withdraw funds tied to US Sub-prime loans.  They wanted to let the situation settle, before everyone withdrew, and there were no funds left.  Just imagine if you couldn’t pull funds from one of your accounts.  To calm fears, Central Banks are responding by making liquidity available, to help calm investor fears and prevent massive withdrawals from accounts and holding around the globe.  As of Monday, August 13^th, the European Central Bank (ECB) had provided $278.9 Billion  of liquidity into their marketplace.  Unprecedented!  Some are even suggesting that the Federal Reserve might cut interest rates before their scheduled meeting in September.  If not before, than a cut by the September 18^th meeting seems inevitable.  Senators are getting involved, asking that there be a temporary raise in the conforming loan amounts (remember last week we mentioned that conforming loan limits are currently $417,000).  Hilary Clinton even chimed in and suggested that ALL pre-payment penalties be waived, by law.  I told you last week, we’re in un-charted waters! 

Will China Unload Their US Bonds?

To make things a little more uncertain, the US and China are in somewhat of a game of chicken.  The US has threatened to put trade sanctions on China.  And hence, China is threatening to unload $1.3 Trillion of US Bond Holdings (if you’ve read my previous articles you would understand that China holds more US Bonds than any other foreign entity).  I heard a statement on NPR this week.  Ted Koppel stated that the US and China are tied at the ankles.  Like an old potato sack style race.  If one makes the wrong move, it will definitely cause the other to stumble.  China probably won’t unload these shares, as it would hurt the value of their remaining shares…so let’s hope and watch what happens. 

Higher Unemployment Rearing Its Head?

Initial Jobless claims edged up another 7,000 to 316,000.  This is the second movement upwardly, and the highest move since June 30.  This could set a trend for higher unemployment, which would help interest rates.  Retail Sales for July were up 0.3% which was greater than expected.  This positive news helped stocks.  On Tuesday, the Producer Price Index (PPI) came in at 0.6%, much higher than the 0.1% that was expected.  Energy prices jumped 2.5% for the month, which probably helped the higher PPI.  The Core Rate of Inflation only jumped 0.1%.  Some ugly reports from WalMart and Home Depot may help lower the stock market and help interest rates.  These lower earning reports suggest concern over the possibility of the US slumping into a recession by early next year. 

With the Consumer Price Index, Core Consumer Price Index, Jobless Claims, Philadelphia Fed Index, Housing Starts, New Home Sales, and other data all coming out later this week, man I tell ya, your guess is as good as mine…Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – July 17th, 2007

Watching the Subprime Loan Situation?

Well, last week I had indicated that Good ‘ole Ben Bernanke would be speaking out and that I would report about his comments, and how the market reacted, this week.  Well, when Ben spoke, mortgage backed securities…didn’t even react…they were too busy watching the stock market…how’s that for anti-climactic? 

Something that we should be watching is this whole subprime loan situation.  I’m sure you’ve been reading about it lately.  Well, some bond rating services from Standard & Poor’s and Moody’s are considering, or may actually be in the process of, lowering the credit ratings of Mortgaged-Backed Securities.  When a large amount of A-Paper Loans are pooled together and offered for sale, they generally are accompanied by some subprime loans as well.  So the entire pool could potentially be contaminated and this could bring the pricing for Mortgage Bonds to a more risky level.  This could hurt interest rates, in the future. 

We’ve really been having a difficult time breaking through the 25-day moving average.  If fact, we continue to bounce off of that level of resistance, and the trend line keeps moving lower…so rates keep moving a little higher, as that trend line lowers (remember, when Mortgage Backed Securities move lower, their yield moves higher, causing interest rates to move higher). 

Wal-Mart Staying Strong

Last week, WalMart reported a much stronger than expected 2.4% increase in their sales for June of 2007.  In the pits, on Wall Street, there is a common saying, “As goes WalMart…so goes Retail.”  So rates moved up on speculation that Retail Sales will be strong (based on WalMart’s reports).  Again, speculation moving our markets…I keep talking about this…but a funny thing happened…Retail Sales plunged -0,9% in June.  This was the lowest level reported since August of 2005.  Over and above that, previous numbers for April and May were revised lower.  This was a big surprise for the markets and we enjoyed a little breathing room.  Interestingly, the University of Michigan’s Preliminary Consumer Sentiment Index for July was reported at 92.4.  Much higher than the 85.5 that was expected.  What this means is that consumers weren’t spending too much money in June, but they felt as though their financial outlook for the future looked promising.  Go figure…now that’s optimism, hey?  

Some great news regarding foreign investment in our bonds!!! 

$126 Billion was invested in US Securities, when we only expected $72 Billion of foreign assistance.  Remember that we have been watching this VERY closely, as foreign investment has really helped keep our long term rates lower.  So this was very good news to see. 

The Producer Price Index (PPI) for June, was reported at -0.2%, lower than expectations, but the Core PPI rose 0.3%.  This was not good for interest rates, but the bigger news will have to wait until next week issue, as print time is hounding me.  Also, I’ll have to wait to comment on Ben Bernanke’s semi-annual monetary policy report to the House of Representatives Financial Services Committee.  Then he speaks to the Senate Banking Committee.  It will be interesting to see how the financial markets will react to the question and answer event.  Let’s hope that Bernanke can keep his comments on inflation at a level that the markets can cope with.  I’d hate to have another anti-climactic article…Until next week

Chico, CA Interest Rates Market Report – Economic Influences – May 29th, 2007

The Fannie Mae Foundation is the largest purchaser of real estate loans  in the  United States. 

If you meet their guidelines, than you qualify for the lowest interested rates and more flexible products than other loans because lending institutions can sell these loans to the foundation, freeing up more money for them to lend to more home owners and buyers.  The foundation has recently pledged $20 Billion toward loosening these guidelines to assist homeowners in refinancing that currently may be in a tight financial hardship in an effort to help prevent foreclosure and bankruptcy. 

As you may have been reading in the media, many homebuyers in the past few years, purchased mortgages that could not be sold to Fannie Mae and therefore, were put into sub-prime loans that enabled them to buy for reasons like bad credit, high monthly expenses compared to monthly income (debt ratios), extremely flexible underwriting requirements, almost no documentation to support claims on an application, and high loans values compared to the purchase price.  These types of loans are generally fixed for a very short period of time, and then start adjusting with a high profit margin to the bank over an index that can make payments difficult for a client. Generally refinancing or selling to get out of that financial hardship are the homeowner’s only options.   If they are unable to refinance or the home doesn’t’ sell, their sub-prime loan will adjust to higher interest rates with their payments adjusting dramatically, as a result. 

While values in our area have remained relatively stable, values throughout the nation have steadily declined, causing many homeowners to not have the equity to refinance out of these high interest loans.  Banks generally want to finance a percentage of the value of the home.  Some of these loan balances have surpassed the value of the home itself and many people unfortunately have been forced into such a financial hardship, that they have had to either walk away from their home, causing a foreclosure, or simply file for bankruptcy protection on their other personal financial responsibilities. 

What’s Fannie Mae doing to help with this situation? 

The $20 Billion has been set aside to aide the refinance of borrowers in this undesirable situation.  By encouraging full documentation; Fannie Mae has determined that allowing higher debt ratios, not requiring an appraisal on the subject property, allowing minimal amounts of liquid assets (cash) in saving institutions, and increasing the term or time in which a borrower has to pay the loan off (40 year terms), will help homeowners stay in their homes and help alleviate the financial hardship.  This will save lending institutions, homeowners, tax payers, and consumers billions of more dollars on foreclosures and bankruptcies alone.  Fannie Mae will be choosing four lending institutions to handle these requests.  Access Real Estate Lending, of course, has access to these options now! 

For those of you not in the sub-prime market, the stock market is still doing quite well.  Not helping matters was Tuesday’s Consumer Confidence Report coming in hotter than expect at 108.  We just can’t get through this negative downtrend that we’ve been experiencing.  This Friday, we have two big reports coming out; the Jobs Report and the Core Personal Consumption Expenditure (PCE) Index.  These two reports would have to really be tame to turn this current market around.  But, how quickly the market can change…Until next week…