October 24th 2008 

By Angel Sherlin, Greater Chattanooga Lending 

While the headlines were focused on the poor performance of the stock market, mortgage rates improved moderately during a volatile week.  Mortgage rates were helped by a couple of factors.  Seeking to reduce risk, investors sold stocks and moved the funds into relatively safer Treasury bonds and government guaranteed mortgage backed securities.  In addition, slower economic growth and lower energy prices reduced expectations for future inflation.  More good news for the housing market came from the September Existing Home Sales report, which rose 5.5% from August to the highest annual rate since August 2007.

Another important development was a decline in Libor rates during the week.  Libor rates are viewed as a primary indicator of credit market conditions.  They are also an important benchmark for setting the rates on many consumer loans, including adjustable-rate mortgages.  Libor rates shot higher during the credit crisis when financial institutions became reluctant to lend money to each other.  The broad series of recent government actions brought Libor rates down closer to more normal levels.

A series of government officials made statements during the week, including Fed Chief Bernanke, former Fed Chief Greenspan, Treasury Secretary Paulson, and FDIC Chairman Bair.  The common theme is that the government is ready to take further actions as needed to support the economy and financial markets.  Broad support was seen for a second fiscal stimulus package.  The decline in the housing market was a key factor in causing the credit crisis, and many proposals are under consideration to help stabilize the housing market and prevent foreclosures.  The bottom line, though, is that it will take some time for economic conditions to improve.