Weekly Market Update! by Blue Financial Group

Keeping you updated on the market! For the week of January 28, 2008


MARKET RECAP

There sure was a heck of a lot to talk about for a holiday-shortened week. Without a doubt, the Federal Reserve was the leading topic of conversation, shocking capital markets on Tuesday by cutting the fed funds by a whopping 75 basis points to 3.5% to boost what seemed to be a sinking stock market.

But not everyone cheered. Some pundits are worried that by responding so decisively to stock-market developments, the Fed could be undermining the goal of rate cuts, which is to stabilize the economy, by kowtowing to equity investor interests. The Fed obviously disagreed, believing that it stood a better chance of short-circuiting negative psychology by acting immediately instead of waiting a week.

The other hot topic was the congressional economic stimulus package that would give most tax filers refunds of $600 to $1,200. The package also provides tax incentives for businesses and contains a measure that would help an important segment of the mortgage market by temporarily raising the conforming loan limits for Fannie Mae and Freddie Mac beyond the current $417,000. The new cap, expiring December 31, could be as high as $730,000, depending on a metropolitan area's median housing price.

The Freddie Mac weekly survey showed that mortgage rates continued on their downward trajectory. On that front, the 30-year fixed-rate mortgage averaged 5.48%, the 15-year mortgage averaged 4.95%, while the five-year Treasury-indexed hybrid adjustable-rate mortgage averaged 5.13%. We are now looking at prime rates unseen in nearly three years.



NEW PROPOSITIONS

Not every economist agrees with the economic stimulus package proposed by congress last week, but at least it is supported with accepted economic theory. Another package isn't: President Bush's plan to mitigate the subprime crisis by freezing interest rates on adjustable rate mortgages. It's a short-term salve at best, which could turn into a long-term cancer by making lenders even less willing to extend mortgages to credit-risky (not to mention credit-needy) borrowers.

A better proposition is Fannie Mae and Freddie Mac moving to risk-based pricing, which means that homeowners with weak credit or little equity will pay for the risk associated with underwriting their mortgage. That's a long-term positive (though in the short-term it could dim the benefits of refinancing) because it will help stabilize the housing market by better matching risk and rates and by guiding borrowers to homes they can afford.

Of course, lower mortgage rates will help the housing market as well. And lower rates could be in the cards this week should the Federal Reserve lop another 25 or 50 basis points off the fed funds rate on Wednesday.


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