Gabe's Blog

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.  However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.  Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. 

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were:  Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.
2007 Monetary Policy Releases

NAMB President Elect, Marc Savitt, expressed grave concern about the elimination of the Yield Spread Premium when testifying before the House Financial Services Committee on Mortgage Reform Bill H.R. 3915 on Wednesday.  “Mortgage brokers are the only origination channel that makes full disclosure of their compensation on both the GFE and again at closing,” he said. The bill introduced on Monday would eliminate YSP and all direct and indirect incentives tied to the rate of the loan. In his testimony, Savitt made it clear that a measure to eliminate yield spreads would “destroy small business brokers in this country, and hurt the consumers they serve.”

This is not the last we’ve heard on this issue. We will continue to fight this fight.  I agree with Marc's comments and I believe that mortgage brokers are in some cases disclosing more information on a GFE than a direct lender or mortgage banker, especially in regards to our compensation.

Copies of NAMB’s written testimony can be found here and NAMB President Elect, Marc Savitt’s oral testimony can be found here.

Is the Liquidity Crisis Over?

No, I wouldn’t say the credit crunch and resulting liquidity crisis is totally behind us but the patient is definitely out of intensive care and on the road to recovery. The jumbo A in particular appears to be getting its legs back. Many of the traditional servicing aggregator investors like Wells, Chase, GMAC/RFC, to a lesser extent Citi, and even Countrywide seem to be getting back into the game. B of A has also started to make some noise about having a presence so we are poised to take advantage of that if their execution backs-up their talk. The Wall Street investors appear to be lagging behind a bit as their securitization machines really haven’t gotten cranked-up again and they are definitely gun shy when it comes to credit parameters and collateral overlays. The toughest challenge is to achieve competitive execution without having to “pick a partner” and tie yourself down to a single investor and their specific guidelines and processes. We strongly believe that good quality jumbo A paper has been unfairly punished in this market and will eventually return to some level of normalcy so we haven’t been willing to pick a partner and sacrifice multiple investor liquidity for the sake of a better price today that might not be there tomorrow. It’s been painful but I think the worst is behind us.

Declining Value Markets

This is definitely the hot topic de jour. If it isn’t coming from investors like FNMA or Citi, the MI companies are driving the message home. Models forecasting the probability of default increasing 500% are commonplace and everyone is becoming more risk averse. MI premiums are bound to be on the rise. Is the concern justified? Yes. Is the concern overdone? I think so. From what I can tell this is a classic case of driving in the rear view mirror. I don’t think enough credit is being given to the fact that mortgage programs have been tightened-up or eliminated altogether so today’s book of business isn’t the same nuclear waste that created most the problems. Are their risks we need to manage? There is no question about that but I think the pendulum is starting to swing a little too far to negative side on this one but it’s going to be awhile before this trend starts to reverse itself. There is more pain to come as we try to navigate through the changes ahead.

The Markets in General

The 50 bps Fed easing gave the bond markets a little warm and fuzzy feeling that the FED wasn’t going to just sit idly by and watch the housing market slump and credit crunch drive players like Countrywide out of business or the economy as a whole into a recession. As a result, inflation expectations immediately surfaced with short term rates declining and longer term rates (5-10-30 years) on the rise. Since then, rates across the yield curve have increased as the strength in the employment numbers released this month reminded the markets that the economy doing OK thanks to the weak dollar. Mortgages (at least the FNMA/FHLMC fixed variety) are currently trading about 75 bps in price below the highs we saw exactly a month ago and the spread over Treasuries has also tightened about 15 bps on a relative basis. As long as the dollar remains weak, I don’t think we are on the verge of an extended period of Fed easings just to address the slowdown in the real estate market. The bubble has burst but I think the Fed is very reluctant to send a message that they are in panic mode as long as the overall economy is alive and kicking.

Where Do We Go From Here?

The talk from most investors in all about agency and non-agency ARMs as everyone is trying to figure out a way to make a living without any real viable ALT A business to be had and the space for the historically low margin conforming fixed getting a little crowded these days. The steeper yield curve has certainly helped ARMs become more competitive and depository institutions (like us) that don’t have to rely on LIBOR based funding have an even bigger advantage in today’s market but barring another unforeseen crisis, I’m not holding my breath waiting for the Fed to continue to lower rates going forward. I wouldn’t be a bit surprised if we become a bit range bound for the near future. If that is the case, ARMs could continue to have their day in the sun until the cloud of inflation builds on the horizon and outweighs the risk of further economic slowdown.