THE BASIS POINT

WeeklyBasis 9/29/08: Rates May Drop Further On Credit Market Chaos

Fixed and ARM rates are down about .375% in the three weeks since my last report. Since then Fannie/Freddie were taken over by Treasury; AIG was bailed out by the Fed; WAMU was taken over by JP Morgan Chase; Wachovia was taken over by Citigroup; Lehman Brothers went bankrupt; Merrill Lynch was acquired by Bank of America; Morgan Stanley and Goldman Sachs converted from investment banks to commercial banks; the Treasury proposed a $700b bailout of the financial system; and I had a baby boy named Zane, a very bright spot amidst the credit market chaos.

Bond markets tend to benefit in market turmoil because they’re a fixed income investment that is safer than many alternatives. Mortgage rates are tied to mortgage bonds, and when bond prices rise in a rally, bond yields (or rates) drop.

I was going cover high points of the $700b bailout plan, but I will wait because the existing plan is irrelevant now since the House rejected the plan today in a 228-205 vote. The Dow lost 778 points, the largest one-day point drop in history, and as I’m writing, the Hang Seng is down 801pts and the Nikkei is down 556 on the news.

It’s likely that the Fed may cut rates by .5% to try to stem further carnage, but they also announced $630b in additional short-term liquidity this morning, which in hindsight, was a preemptive move in case the bailout plan didn’t pass. So the liquidity measures will likely be the better solution than cutting rates.

Either way, rates could get better this week. True Jumbos above $729k don’t necessarily move with the market right now, but rather move according to lenders’ willingness to take on those larger loans. But we will definitely see movement on true Conforming and Super Conforming tiers.

Not that it matters right now, but it’s an extremely busy week for economic news too. Personal Consumption Expenditures, the Fed’s favorite inflation measure, came out today and showed short-term moderation of inflation as oil prices have dropped from $145 early summer to $96 today. Tomorrow we have the latest S&P Case Shiller home price data, and Wednesday and Friday we have ADP jobs report and official Bureau of Labor Statistics non-farm jobs report respectively.

We can expect rather dismal September jobs reports continuing the 605k jobs lost through August, and Case Shiller existing home prices are probably going to remain on trend—their last report on August 26 showed home prices for June down 15.9% across 20 cities.

These are all critical data points but credit market concerns will overshadow these data points this week, and if anything these data points will exacerbate the situation. Again, the only good news in all this bad news is that investors flock to bonds and rates benefit. Fasten your seatbelts, it’s more of the same from here.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.125% (6.23% APR)
15 Year: 5.75% (6.87% APR)
5/1 ARM: 6.25% (6.21% APR)

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 6.375% (6.49%)

Jumbo ($729,751 – $1,500,000) – NO POINTS
30 Year: 7.0% (7.025% APR)
7/1 ARM: 6.375% (6.49% APR)
5/1 ARM: 6.25 % (6.37% APR)