Dec. 12, 2007: Mortgages: you’ll need to be wearing a neck brace for this market

Dec. 12, 2007: Mortgages: you’ll need to be wearing a neck brace for this market Rob Chrisman

The other day my son Robbie bought a bobble-head doll for $5, named him Mohammed, and the sold him for $10. He asked me if he’d made a prophet.

Our local WAMU wholesale rep sent out an “interesting” memo, saying, “To our valued customers. It is not viewed as the jumbo market for loan transactions to see any rate improvement in the near future. It is my recommendation that if you are working on such that you lock those loans and close them. There is NO secondary market at this time for these loans and they most definitely will see further rate increases and product parameter changes in the coming months than any relief.” (Excuse the grammar – I copied it exactly.) I don’t know if this is one rep’s opinion, or if he is reciting company policy. Or if this is only for WAMU jumbo (their pricing is fairly unaggressive already) for for all jumbo product. Other investors’ rates are not great, but there is still an active market for it.

As most know by now, the FOMC cut the Federal funds rate by 25 basis points, to 4.25%, and simultaneously lowered the discount rate by 25 basis points, to 4.75%, as it kept intact the 50 basis point penalty rate for borrowing at the discount window. This was less than the market was expecting, and stocks headed south and interest rates dropped (the 10-yr, I believe, dropped below 4%). Where are we this morning? The 10-yr is back up to 4.16%, 30-yr A-paper mortgages are worse by at least .250 in price, and stocks appear to be heading higher!  The FOMC noted that “information suggests that economic growth is slowing,” confirming the expected weakness noted in the 31 October statement. They also continue to explicitly cite financial market “strains.” But analysts felt that it was not enough, given the current state of the housing and credit markets, and they reacted accordingly, but this was countered by reports in the press that the Fed will introduce new methods to improve liquidity. The only news out today was the Trade Balance, which widened somewhat unexpectantly, and also showed that import prices have increased.

On the “good news” front, this morning’s MBA mortgage applications index showed that mortgage applications rose 2.5% last week, the highest level since July 2005! Is the recent rise in applications at most originators enough to stop the housing slump? Perhaps not, but it is a move in the right direction – a good percentage of the activity is likely to reflect borrowers needs to refinance out of resetting adjustable rate mortgages.

Fed officials will continue to consider ways of using various tools to increase liquidity and combat banks’ unwillingness to lend even to each other. There could be currency swaps, another cut in the discount rate, longer-term loans to money-market dealers, easier collateral rules for loans from the Fed, and other complex steps. No one really knows what will work, as the markets haven’t seen this before. No doubt economists will spend years digging through data trying to analyze what worked, what should have been done and why we did it. The two major problems that we are facing (the housing sector and the credit crisis) will take time to solve. The housing sector problems are being reduced to over-speculation and too much cheap cash, and housing inventories must be significantly reduced and prices stabilized before the bottom is reached. The credit crisis is larger and can hurt the economy as a whole. It is attributed to mis-pricing risk, over-leveraging, and misunderstanding sophisticated financial instruments. Hopefully lower rates will help!