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Your Interest Rate Update

November 4, 2008

The more things change, the more they stay the same.

I hope you voted today. Tomorrow, we'll have a new President, and largely a new Congress. I don't envy their position as they work to navigate us through these rough, and mostly uncharted economic waters. Let's hope they get it right. Hopefully, they'll strike a good balance between balancing our budget, creating jobs, righting our economy (although the Fed and Treasury really drive that) and moving us forward into this next phase of American, and global, economic evolution.

If not, well....we get to vote again and make our collective voice heard in a few short years.

In the mean time, it looks like the credit freeze that seized our economy after the collapse of Lehman Brothers about 6 weeks ago, has started to thaw. Money is slowly flowing more freely between banks. The interest rates they charge each other (through the London Interbank Offered Rate/LIBOR, and others) are starting to come down again.

The $700 billion bail out plan is having a direct impact. Yes, there's debate about its implementation and efficacy. But, it has brought a level of confidence back into our financial system as well as providing crucial liquidity. Bernanke should be applauded for getting very creative and marshalling unprecedented cooperation among Central Banks across the globe.

JP Morgan Chase announced last Friday that they're allocating $110 billion to work out loan modifications for borrowers in need. They're also suspending foreclosures for 90 days as they evaluate options and try to reach out to struggling borrowers. They ask that homeowners "Show a willingness to pay. Customers should continue making their payments to reflect their intent to honor their commitments" said a spokesperson.

The FDIC is discussing a $50 billion fund to assist struggling borrowers. Whether these moves - and others on the horizon - will have a lasting, beneficial impact, or simply create a false bottom to the housing price correction remains to be seen. But, on the surface they're an honest attempt.

Twenty percent of US mortgage borrowers owed more than their house was worth in Q3, according to FATCO Corelogic, a Santa Ana, CA division of First American Title Company who provides real estate data. That number will grow further if home values continue their slide.

All that notwithstanding, last week saw the biggest one week rise in the Dow Jones Industrial Average in 30 years, but...October still registered the worst month in 20 years.

Today, the stock market had its largest Election Day rally in 24 years. Additionally, mortgage rates saw a nice reversal lower today, so the see-saw action in the markets continues. Yesterday, 30yr fixed loans were around 6.375% to 6.5%. Now, they're back to about 6%. We have to remember that 6.5% is still a great mortgage rate. And, we might hope that as the credit freeze continues thawing, maybe, just maybe, rates will come down further still.

But, as I've been saying, don't hold your breath. David Hodgkinson Chief Operating Officer of HSBC, Europe's largest lender and a major player in the US mortgage market, signaled yesterday that it won't pass on to consumers or businesses the full effect of rate reductions from the Bank of England. Why? Profitability, bringing their balance sheet back in order and perceived risk premiums they're charging for the "service" of lending.

According to Bloomberg online, economists across the country agree that banks are unlikely to compete for new loans by offering lower rates so long as the economic outlook is dim, and risk of default is perceived as high.

Another reason that rates might not dip too much lower is that the US Treasury, and their counterparts across the globe, will need to issue billions of dollars in bonds to fund the massive injections of liquidity and huge expansions of their balance sheets that's taken place over the last few weeks. This added supply of safe, fixed income investments will need to attract investors. To compete for and earn those dollars, they may have to offer higher yields, which means lower prices and higher rates.

Partially offsetting that, however, is the huge drop in Mortgage Backed Securities, which also compete for those same dollars. Loan applications for residential and commercial mortgages are way down. So is the securitization (bundling, packaging and reselling) of those assets. This could result in keeping the overall supply of bonds and mortgage backed securities at about par, or at least without an excessive increase.

But on the demand side, as you can imagine, the appetite of foreign investors (China, Saudi Arabia, etc.) for our Mortgage Backed Securities and Government Bonds has shrunk drastically. Can you blame them? We sold them a lot of junk. They lost billions. So, in order to gain that business back, rates may need to remain higher than they otherwise would.

Looking on the bright side however, inflation - the only other true dictator of mortgage interest rates beyond the dynamics of supply and demand - has, as Richard Fisher Dallas Federal Reserve Bank President, and inflation Hawk noted ``froze in its tracks'' in recent months as the credit crisis worsened. ``The impetus for rising prices came to a grinding halt as the credit crisis took grip and confidence evaporated,'' Fisher said today to a meeting of the Texas Cattle Feeders Association in Grapevine, Texas. ``As the credit market congealed, inflationary momentum froze in its tracks.''

Indeed, we're seeing that deflationary pressure mount across the economies of the US and around the globe. Some drums are already beating that in a year's time we'll be fearful of devastating deflation when just a couple months ago people were clamoring about inflation running amuck.

We're hearing of continue layoffs and even corporate bankruptcy filings. Commercial vacancy rates are rising, and transactions are falling through the floor. The commercial real estate market is showing strong signs of being the next shoe to drop, but...that's a whole newsletter on its own.

What does all that mean? As we know, a bad economic outlook. With a bad economic outlook come weak corporate earnings. With weak corporate earnings come lower stock prices. If the stock market isn't providing good returns to investors, and the risks are high, where will those dollars flow? That's right. To "secure" stable, fixed income assets delivering solid returns. Enter Government Bonds and Mortgage Backed Securities redux.

But, mark my words, to securitize and bundle mortgages there's going to be a whole lot more transparency than we had over the last 7-8 years. I don't expect lender guidelines will be loosened, as some people hope will happen to allow more borrowers to qualify, because the risk of default must remain low in order to attract investors, unless the rates charged go up significantly accounting for that increased risk.

So...there's always hope for mortgage rates to stay in this 6% range. I think they will. I also expect that from time to time there will be peaks and valleys, where the peaks might be in the 6.5% to 7% range, and the valleys dip back into the 5.5% to 5% range. But, it's definitely not a time to be asleep at the wheel. It's more important than ever to keep in touch with a mortgage professional who has a grasp of these dynamics who will best position you to seize opportunities as they arise.

There are tremendous opportunities out there. As weird and crazy as this economic landscape is, it's also pretty exciting and interesting to watch unfold before us, as long as you're not getting crushed by it. I've definitely heard some tragic stories as I talk with clients and prospects, and my heart goes out to those of you who have to live through them first-hand.

As always, call or email if you or anyone you know has questions about financing residential or commercial real estate. Here are your rates for the week (or at least as of today). Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
40 yr fixed mortgage	n/a	1	#VALUE!	$300,000.00	#VALUE!
30 yr fixed mortgage	6.000%	1	6.240%	$300,000.00	$ 1,799
15 yr fixed mortgage	5.625%	1	5.825%	$300,000.00	$ 2,471
3/1 ARM	5.625%	1	5.815%	$300,000.00	$ 1,727
5/1 ARM	5.750%	1	5.960%	$300,000.00	$ 1,751
5/1 ARM Int Only	5.875%	1	6.135%	$300,000.00	$ 1,469
Jumbo (ask me about the new limit, per your zip code)
40yr fixed mortgage	n/a	1	#VALUE!	$550,000.00	#VALUE!
30 yr fixed mortgage	8.750%	1	9.010%	$550,000.00	$ 4,327
15 yr fixed mortgage	8.500%	1	8.755%	$550,000.00	$ 5,416
3/1 ARM	6.375%	1	6.555%	$550,000.00	$ 3,431
5/1 ARM	7.000%	1	7.220%	$550,000.00	$ 3,659
5/1 ARM Int Only	7.250%	1	7.500%	$550,000.00	$ 3,323
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.