Market Analysis

Today was a difficult day for Fannie Mae and Freddie Mac mortgage-backed securities (MBS).  Below is market comentary from Larry Baer which was published in the middle of the day.  The market deteriorated further later in the day.  There is almost a 100% probability that the Fed will cut their Funds rate another .5% at the conclusion of their next meeting on Wednesday.  I understand that it is difficult to understand why mortgage rates would increase while the headlines in the newspapers announce rate cuts.  The key thing to remember is that the Fed controls the rates banks charge eachother and also the rates bank who borrower from the Fed for very short periods are required to pay, not 30 year mortgage rates.  What we have to hope for now is that enough damage has been done to 30 year rates (lower MBS prices translate into higher rates) that buyers will be attracted to the MBS which will help to create a short term rally.

Daily Commentary

By Larry Baer, Market Alert

SHORT-TERM TREND (20 days or less) Favors higher note rates and lower investor prices

SUGGESTED PIPELINE STRATEGY: Avoid initiating new "floating" loans in this category unless/until the price of the Fannie Mae 6.0% mortgage-backed security can muster the momentum to close above 101.218.

Since last Thursday I have suggested that it would not be unreasonable to expect the price of the Fannie Mae 6.0% mortgage-backed security to slide into a range between 101.125 on the high side and 100.750 on the low side before pausing to catch its breath. The bottom of this range is being tested today.

Since last week, my cyclical analysis work has indicated the time frame between Friday, October 24^th and Monday, October 27^th as the next likely period in which to expect a short-term change. If a two or three day price bounce does not occur in this time frame -- the next most likely date for a short-term trend change will be the period between Thursday, October 30^th and Monday, November 3^rd."

Experience has taught me that both price and time objectives must be met before the probabilities justify ratcheting up your "floating" loan risk positions. As I see it - this is not a "either/or" proposition.

LONG-TERM TREND (21 days or more) Favors higher note rates and lower investor prices.

SUGGESTED PIPELINE STRATEGY: Avoid initiating new "floating" loan positions in this category unless/until the Fannie Mae 6.0% mortgage-backed security can muster the momentum to close above a price of 101.218.

Commentary: Sales of newly constructed single-family homes rose in September and standing inventory shrank as builders slashed prices to their lowest level in four years in an all-out effort to move properties. The annual sales pace was up 2.7% in September from the August figure. The median sales price of $218,400 was the lowest since the $211,600 level reached in September 2004 while inventories dropped to their lowest level since June of '04. The 7.3% decline in inventory from August was the sharpest month-over-month drop on record. Across the country sales strength varied widely with sales down 21.4% in the Northeast and 5.8% lower in the Mid-west -- while new home sales were up 22.7% in the West and higher by 0.7% in the South. Mortgage investors took a disinterested looked at the numbers since the tremendous amount of standing inventory yet to be worked off and current tight credit conditions suggest the bottom of the market in new home sales won't likely manifest itself until mid-2009 at the earliest.

Credit markets are just treading water this morning as market participants await what is expected to be a 50 basis-point rate cut from the members of the Federal Open Market Committee on Wednesday afternoon. Traders have priced in a 100% chance that Fed Chairman Bernanke and his fellow committee members will slash their benchmark fed fund rate to 1.0% in response to unprecedented turmoil in the financial markets. Normally, such prospects of easier money would lift investor sentiment -- but this time around 50 basis-points may not be enough as worries over the developing global recession temporarily trump otherwise "good" news from the Fed. Like a child throwing a tantrum - the markets don't seem to be satisfied with anything at the moment.

Rest assured there is a moment - somewhere before the end of the first quarter of 2009 in my opinion - that the $10 trillion dollars global central bankers have injected into the world economy will clearly have its intended effect. Improved business conditions and the attendant surge in employment will begin slowly before becoming readily apparent to even the most pessimistic observer. At this point in the cycle (first-quarter 2009) mortgage interest rates will probably be moving higher as the demand for capital to fuel resurrected economic growth accelerates. While the refinance boom that many hope to see may fall short of expectations - the flood of new purchase applications that will wash through the mortgage market as part of the budding economic recovery will likely more than offset the otherwise limited refinance opportunities. Granted, my crystal ball is pretty fuzzy looking that far out, but near-term indications presently support the longer-term view.