WeeklyBasis 10/15/07: 2 Week Outlook, Good Jumbo News

Conforming rates are even this week. Jumbo 30yr fixed rates are even and Jumbo ARMs are up by about .125%. In a speech tonight at the New York Economic Club, Fed Chairman Ben Bernanke said that cutting the bank-to-bank Fed Funds Rate by .5% and the Fed-to-bank Discount rate by 1% since August has helped bring liquidity into lending markets. He also said the housing market “is likely to be a significant drag on growth in the current quarter and through early next year.”

TWO WEEK RATE OUTLOOK
Rate markets will trade on Bernanke’s comments tomorrow, then they will trade on inflation data Wednesday when the Consumer Price Index (CPI) figures for September are released. If the economy looks to be weakening, rates trade lower in anticipation of a Fed cut. If the economy looks to be growing too quickly, like if CPI came in higher than expected, rates trade higher in anticipation of a Fed bias toward hiking. Bernanke’s comments about a weakening economy and a flat to slightly higher inflation figure may just cancel each other out.

Either way, I think we’re in a trading range (+/- 0.2%) for the rest of the month, and my bet is that the Fed leaves rates unchanged at their October 31 meeting. There’s no compelling inflationary or recessionary data to push them either way at this point, especially so soon after their aggressive cuts.

GOOD NEWS FOR JUMBOS
The Fed’s also likely to sit still because of this: Positive news for Jumbos broke Sunday when a consortium of global banks led by Citigroup announced they would form a $100 billion fund to absorb bad mortgage and other debt that banks are still trying to unload since August. This new liquidity source won’t stop banks from bleeding on subprime loans that continue to default, but it will increase confidence in good-quality mortgage debt going forward.

Lenders who sell loans would benefit from easier warehouse funds to fund new loans as well as more eager investors to sell to. Even lenders who don’t sell home loans after they close would see easier access to warehouse funds they need for new loans. These increased money flows will amount to better rates. Right now, jumbos are still pricing to risk levels rather than rate market levels.

But it’s not borrower risk, it’s market risk – warehouse banks and debt investors are pricing their loans higher because they’re still traumatized from August/September, and (justifiably) don’t believe warehouse and investor funds are flowing freely just yet. But this new liquidity fund should help calm them down, and help them realize that good borrowers are the key to rebuilding the system. Duh!

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.375% (6.515% APR)
5/1 ARM: 6.25% (6.39% APR)
7/1 ARM: 6.625% (6.775% APR)

Jumbo ($417,001 – $650,000) – NO POINTS
30 Year: 7.25% (7.39% APR)
5/1 ARM: 6.5% (6.64% APR)
7/1 ARM: 6.75% (6.9% APR)