A Sacramento mortgage lender's vision

For the first time since 2004, the DIJA is below 10,000. Bombshells over the weekend included a multi-billion German government bailout of the second largest commercial lender in the country.

CBOT fed funds futures now reflect a 100% chance that the Federal Reserve will cut interest rates on or before it's next scheduled meeting on October 29th.  Treasury bonds are rallying on [perhaps justified] fears the US bailout will not repair the economy; MBS and actual mortgage interest rates are not seeing much of a drop and most likely will not. While there is a corollary between the 10 year Tbill and mortgage rates, it is not cause and effect.  There is a spread between the Tbill and rates; which has been widening for over a year now, and is a direct reflection of the market's opinion of the quality of MBS. 

Another alarming factor is the LIBOR, which closed last week at 4.33 percent, up from 2.82 percent three weeks earlier. Christoph Rieger, a fixed-income strategist at Dresdner in Frankfurt stated: "With no interbank lending taking place, the daily Libor fixings are no more than a flimsy theoretical construct" In other words, since there is virtually no money being lent between backs, the LIBOR does not reflect reality. Based on other factors in credit markets Rieger estimates the true 3 month LIBOR should be about 6.33%. It soon may be.

In other news, President Bush signed into law the $700 Billion Bailout bill this weekend. US Treasury will immediately begin purchasing tainted securities. This may be good for people struggling to get their loan modified...everyone else watched with baited breath. In a related move last week the SEC moved to completely remove rules forcing Investment Banks to calculate or disclose the value of these securities. Sweet.

FHA has grown monstrously; current estimates show that by the end of 2008 it will guarantee one out of every three home loans. Story here