mortgage market comment august 20,2007

Mortgage and Lending with First Interstate Financial Corp


To say last week was turbulent is to understate the obvious. Neither the debt nor equity markets have witnessed such volatility since September 2001. To wit: the Dow Jones Industrial Average dropped over 700 points early in the week before rallying late in the week to reclaim over half its losses.

Meanwhile, short-term Treasury issues soared. In fact, a run on three-month Treasury bills sent yields lower by as much as 72 basis points, producing the biggest yield decline since October 1987. Further up the duration scale, two-year Treasury-note yields fell to lows unseen in nearly two years.

The well-documented cause for last week's wild swings was the subprime mortgage market and financial concerns over Countrywide Financial, the national's largest mortgage lender. Tightening access to short-term financing forced Countrywide to tap an entire $11.5 billion bank line, prompting one Merrill Lynch analyst to reduce Countrywide's stock to a "sell" (though he'd issued a "buy" recommendation only two days earlier) and to raise the specter of bankruptcy.

In response to what was fast becoming a panicked market, the Federal Reserve reduced the discount rate - the rate at which the Fed makes direct loans to banks - by 0.5% to 5.75%. (Lowering the discount rate encourages the supply of short-term financing instruments like commercial paper, which are a key financing tool in the mortgage market.) Moreover, the Fed said it's prepared to take additional action in order to mitigate further damage.

The preoccupation with Countrywide et al. made the week's scheduled slate of meaningful economic releases seem almost meaningless, but they weren't. On that front, the consumer-price index rose 0.1% in July from June, while core producer prices - less food and energy prices - rose a less-than-expected 0.1%. Both reports helped ease inflation concerns (making the Fed's discount-rate cut more plausible).

The prime mortgage market's response was relatively muted to the nonstop action. The 30-year fixed-rate mortgage added five basis points to average 6.62%, the 15-year fixed-rate mortgage added four basis points to average 6.30%, while the five-year Treasury-indexed hybrid adjustable-rate mortgage added two basis points to average 6.35%, according to Freddie Mac's weekly survey. Average points paid were 0.5.

Date and Time

State Street Investor Confidence Index

Tues. Aug. 21,
10:00 am, et


Moderately Important. The index will likely reflect growing investor aversion to risk.

MBA Mortgage Applications

Wed. Aug. 22,
7:00 am, et


Important. Recent upheavals in the mortgage industry are raising application activity.

Durable Goods Orders

Fri. Aug. 24,
8:30 am, et


Important. Factories continue to increase output, albeit at a slowing pace.

New Home Sales

Fri. Aug. 24,
10:00 am, et

(Annual Rate)

Important. New home sales are expected to post their lowest annual rate of the year, suggesting a turnaround isn't imminent.


Capital markets should be more subdued this week. More market pundits will realize that Countrywide's predicament is far from fatal. The company has $185 billion in credit lines available, and even if the situation worsens enough to cut off these flow of funds, it has an ace in the hole: its banking relationship with the Federal Reserve.

Meanwhile, lesser mortgage lenders will be helped by the added liquidity. Most firms lack Countrywide's resources and access to credit, so the Fed's actions are actually more impacting on these firms than on Countrywide.

The key now is for more investors to regain their confidence to purchase mortgage-backed securities. When that happens, mortgage credit will become more plentiful, making it easier to both sell and finance homes.

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Comments (2)

Jeffrey Tumbarello
South West Florida Real Estate Investment Association - Fort Myers, FL
i dont think the worst is over
Aug 19, 2007 01:31 PM
John Barry Seattle Washington Home Loans
Home Loans - Kirkland, WA
I think there is plenty of business for Realtors and Lenders willing to go the extra mile. People will have to buy and sell...We are just going to see less of the exotic loans that people could use AND there will be less ability to refinance in some cases. Is that good? No...but it's  great time for loan officers to REALLY review credit, help borrowers clean up issues so they CAN but in the future. thanks for the update George...good post
Aug 19, 2007 01:55 PM