I knew that it was going to be a rough day when I said to my boss, “Good morning!” and he replied “Prove it!”
What exactly are “Fed Funds”? It is the rate, monitored by those on the 9th floor of the NY Federal Reserve Bank, that depository institutions (Citi, BofA, Chase, etc.) charge to lend their balances to other depository institutions overnight. Banks and thrifts are required to keep reserves with the Federal Reserve, and if a bank has too much in the way of reserves they can loan this money out. If they have too little (under the reserve requirement) they can borrow, paying the negotiated rate. The weighted average across all the banks’ borrowing is the “effective” Fed Funds rate, versus the “nominal” rate which is the target set by the Fed and currently at 5.25%. When the media refer to the Federal Reserve “changing interest rates,” this nominal rate is what they are discussing: it is generally a range, as the Federal Reserve cannot set an exact value through open market operations.
Interestingly, last night the effective rate went as low as 4.50%, so the Bank of Japan sucked capital out (the opposite of what happened last week) to increase it to 4.875% this morning. Last week the New York Fed, acting on behalf of the entire system, added cash by entering into repurchase agreements with a group of so-called primary dealers. From the dealers the bank buys Treasury securities, federal agency debt and mortgage-backed securities partially or entirely guaranteed by the government, such as those issued by Fannie Mae and Freddie Mac, for a set period — often as short as overnight. The cash paid to the dealers then finds its way into the banking system. Simple, huh? These actions are temporary, but an actual cut to the target rate has a longer lasting impact.
Astoria Federal Savings instituted a minimum credit score of 680 for all products.
Indymac discontinued their Flex-Pay ARM program, non-owner stated income HELOC’s, and for their Alt-A programs, investment properties with stated income, no ratio and NINA documentation will be eliminated. In addition, they adjusted FICO’s and LTV limits for their Alt-A, Jumbo, and “Ultra-Jumbo” programs.
Countrywide led shares of home lenders lower on concern bankers will cut off cash as foreclosures and overdue payments surge nationwide. Countrywide’s stock is down 40% this year. The Cuyahoga County Recorder’s Office (Ohio) has stopped taking checks from CW because of CW’s warning last week of possible financial problems. Countrywide traditionally would pay the county by check for mortgage filings it makes by mail, but the recorder’s office now will accept only money orders or certified checks for payment of those fees!
And not to belabor the point, but Countrywide stated that it and other mortgage companies are facing “unprecedented disruptions” in debt and mortgage finance markets that will likely affect their earnings. They went on to say, “While we believe we have adequate funding liquidity, the situation is rapidly evolving and the impact on the company is unknown.” They moved $1B of nonprime securities from a “for sale” category to a “hold for investment” category and marked them down to $800M, as there is little to no market for these securities at this time. In addition, they decided to hold for investment $700M of prime home equity loans that they marked down to $600M.
Thornburg’s stock lost 27% and Accredited Home Lenders dropped 6%.
July’s Consumer Price Index (CPI) came out +.1%, +.2% ex-food and energy, giving us a measure of inflation at the consumer level of the economy. These were as expected, and the 10-yr yield (4.73%) barely budged. We also had Industrial Production data for July: analysts were expecting to see a 0.3% increase, and that’s where it was.
80,000+ mortgage professionals get this every weekday morning.
By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact