Mortgage Times

[Adam in CO]

Mortgage Market News for the week ending November 23, 2007

Events This Week:

Employment Steady
Housing Mixed
Sentiment Up

Events Next Week:

Tues 11/27
Confidence

Wed 11/28
Durable Orders
Existing Home Sales

Thurs 11/29
GDP
New Home Sales

Fri 11/30
Core PCE
Chicago PMI

Holiday Week was Volatile

In typical fashion for Thanksgiving week, mortgage markets bounced around in a wide range, and the movements often were due to light trading volume rather than economic news. The two biggest stories involved the release of the minutes from the October 31 FOMC meeting and the earnings news from mortgage giant Freddie Mac. The FOMC minutes showed that the sentiment of the members was close on whether to cut rates or not, meaning that the Fed may prefer not to cut rates again at the next meeting on December 11. Of course, economic conditions at that time may justify another rate cut. Also notable, the Fed released its first quarterly economic forecast, in line with its new policy. According to the Fed, overall inflation is expected to be higher than core inflation this year and next, while they will be in line in 2009 and 2010.

Tuesday, Freddie Mac announced a steep third quarter earnings loss of over $2 billion, following Fannie Mae's $1.4 billion loss revealed almost two weeks ago, due to mortgage defaults. Since the credit crunch, MBS investors have gravitated toward the relatively safer mortgages guaranteed by these two companies, and their market share has jumped. Fannie Mae and Freddie Mac together guarantee 72% of mortgage securities, up from 41% in 2005. They have been a solid foundation during this extremely difficult period, but there is a potential problem brewing in the short term which could limit their further growth. They are subject to minimum capital requirements imposed by regulators, which are calculated as a percentage of their mortgage holdings. The recent losses have dropped Freddie Mac's capital close to the level required at its current portfolio size, so it may be limited in purchasing new mortgages. Freddie Mac is expected to try to raise more capital soon, and some politicians have proposed measures to ease the requirements, but the situation should be watched in coming weeks.

In the housing sector, the economic news was relatively good. October Housing Starts came in well above the consensus forecast, rising 3%, although Building Permits fell short of expectations. One week ago, the September Pending Home Sales index showed a slight increase from August. In addition, the National Association of Home Builders (NAHB) activity index stayed flat in November. These may be early signs that the downhill slide in the housing market is leveling off. In many cases, mortgage rates have returned to the lowest levels in years, which should be another positive factor for housing.

Also Notable:

• The Dow Jones stock index dropped below its August lows of 12,845
• Fannie Mae and Freddie Mac own or guarantee a combined $4.8 trillion of US mortgage loans, up 12% from one year ago
• Net foreign purchases of US securities returned to the positive column in September, following the first decline in years in August
• Oil prices returned to record levels just below $100 per barrel, after dipping to $90 per barrel last week

Average 30 yr fixed rate:
Last week:-0.07%
This week:+0.01%

Stocks (weekly):
Dow:12,895-209
NASDAQ:2,565-48

Week Ahead

Following the light Thanksgiving week, the Economic Calendar will be full next week. Durable Orders on Wednesday will provide an important read on economic activity. The Existing and New Home Sales reports will be released on Wednesday and Thursday. The first revision to third quarter Gross Domestic Product (GDP) will come out on Thursday as well. GDP is the broadest measure of economic activity. Friday will be another big day with the Fed's preferred inflation indicator, the PCE price index, and the Chicago PMI national manufacturing index. Treasury auctions, Fed speakers, and updates from major financial firms will also bear watching next week.

admin@corefinancegroup.com