THE BASIS POINT

S&P Down 15% For October, Bank Profits vs Oil Profits, Jumbo/Conforming Spreads Still Wide

The mother asks the son what he wants to be for Halloween. “I want to be real scary. I want to be Freddie”. The mom replies, “Freddie Krueger? From ‘Nightmare on Elm Street’?” “No”, the boy replies, “Freddie Mac, from ‘Nightmare on Main Street’.’”

Mortgage Applications Doing OK, But For How Long?
Although nationwide apps seems to be doing ok (see graph below), many lenders are “staring at an abyss” after the end-of-the-month fundings today. A combination of reasons have many borrowers sitting on the sidelines: mortgage rates have not crept down, they’ve lost their down payment money in the stock market, they believe property values are going to fall further, and “they just want to wait”. Until when? After the election? After the holidays? After the 2nd quarter of 2009? Inquiring agents would like to know, since unless volumes pick up, look for continued mortgage-related job cuts.

Where are mortgage applications currently versus the last few years? Not as bad as you’d think – see this graph from MBAA data. Applications were relatively steady during 2007, but volatility has picked up this year with rates jumping around.

2007 mortgage applications

How are jumbo/conforming spreads doing? Anyone following rate sheets has noticed that there has not been much change recently. Visit this site and see the “view chart” feature near the top/center box which helps illustrate the spreads. The news is not good.

VA Loan Changes
The Veterans Administration (VA) announced several changes including the reinstatement of the VA adjustable rate mortgages (ARMs). Some investors, such as Wells’ wholesale, will accept transactions with the 3/1 and 5/1 VA treasury ARM products.

Bank Profits vs Oil Company Profits
Flagstar reported a 2008 third quarter net loss of $62.1 million, compared to their loss in the third quarter of 2007 of $32.1 million. So far in 2008 Flagstar has a net loss of $56.9 million compared to a net loss of $9.2 million for the same period in 2007. Mark Hammond, CEO, said, “Although we continue to have positive margins in our core operations – net interest margin, gain on loan sales and income from our servicing portfolio, those margins were more than offset by several significant credit and asset disposition charges.”

Compare that to the oil companies who recently reported profits. Exxon Mobil beat its own U.S. record for quarterly profits yesterday, reporting $14.83 billion in net income. Royal Dutch Shell posted $8.45 billion in higher earnings, beating analysts’ estimates, and Conoco Phillips, the third-largest U.S. oil company, said last week that its third-quarter profit was $5.19 billion.

Barclays Raises $11.8b From Sovereign Wealth Fund
Barclays, Britain’s second-biggest bank, will raise $11.8 billion from a group that includes investors in Abu Dhabi and Qatar. By doing this Barclays steers clear of a U.K. government bailout plan that calls for overhauling management boards, capping executive salaries and banning dividend payouts.

S&P Down 15% For October, Mortgages Up, Inflation Could Be Moderate
The stock market is finishing a bad month: for October the S&P 500 is down 15%! Fortunately for us, we’re seeing a bit of an improvement this morning in rates. 30-yr mortgage-backed securities are currently up by .375 to .5 in price, and in unrelated news the 10-yr’s yield is down to 3.85%. Later this morning we’ll see the PCE Deflator, Employment Cost Index, Chicago Purchasing Manager’s survey, and the University of Michigan consumer survey. The ECI tracks employer costs for salaries and benefits, which, when people pay attention to scheduled economic news, is important since rising costs raises wage inflation concerns and may hurt bond prices. It is expected to show an increase in costs of 0.7%. September’s Personal Income and Outlays report, already out, was +.2% and -.2% respectively, and was expected to show an increase of 0.1% in income and decline in outlays of 0.2%.

Daily Humor
The state of Arizona listened to the Wise Old Indian.
When told the reason for daylight saving time the old Indian said, ‘Only a white man would believe that you could cut a foot off the top of a blanket and sew it to the bottom of a blanket and have a longer blanket.” Don’t forget to change your clocks this weekend!