Fed Rate Cut

The two big news stories of last week were probably the Fed’s rate cut and a hike in consumer prices. Last Tuesday, the Fed decided to cut the Fed Fund rate by a quarter percent, bringing it down to 4.25 and the discount rate to 4.75%. On Friday, consumer prices reported a .8% increase, beating economist expectations of .6%. Even core inflation, which doesn’t include food and energy prices, rose .3% which is the biggest rise in the last ten months. But there is some good news, too, as the Commerce department reported a 1.2% hike in retail sales in November, beating analysts’ expectations of .6%.

Mortgage Update

Last week the mortgage market got its share of good news. The National Association of Realtors’ index of pending existing home sales rose 0.6% in October. According to the Mortgage Bankers Association, mortgage applications rose during the week ending December 7 by 2.5%, to 811.8. The purchasing index rose 1.7% to 472.0 and refinancing increased 4.3% to 2,879.8. The Fed’s rate cut will give some relief to borrowers with Home Equity Lines of Credit (HELOCs) as the Prime Rate fell in tandem, by 0.25%. Treasury based ARMs holders will also find their new adjusting rates improving in the future; but LIBOR based ARMs borrowers may not be quite as fortunate, as the Fed’s Rate doesn’t have a direct relationship with the LIBOR.

Government Initiatives.

Better late than never. Finally, the Government has started taking some initiatives to bail out the mortgage market from its current crisis. First, President Bush came up with a Rate Freeze Plan; then the Senate approved legislation that will allow the Federal Housing Administration (FHA) to support delinquent borrowers in refinancing their loans which are resetting at higher rates. The Bill also increased the maximum mortgage limit of the FHA to the same as Fannie Mae and Freddie Mac and lowered the down payment fees requirement to 1.5 % from 3% in some conditions. The Federal Reserve also came up with a new weapon called, "Term Auction facility" (TAF). Under TAF, it will auction term funds to depository institutions. This will help mortgage lenders borrow much needed money at lower costs -- especially those who want to originate jumbo mortgages for portfolio, as it will serve to reduce the loan cost. Depository institutions in Europe, Switzerland, Canada and England can also bid on the TAF. The effect of this should, in theory, exert downward pressure on the Libor Index too.. The Federal Reserve will offer $20 billion in its first auction on December 17, 2007.

Stocks Market Update

On the corporate front, major banks were busy with the preparation of "closing the books." UBS announced a $10 billion write-down on credit and mortgage related securities Citigroup planned to move $49 billion of assets from their structured investment vehicles to its balance sheet. Investors were successful in reacting to the mixed data, as major indices like the S&P500 and the NASDAQ ended the week with a slight decline.

Coming Week

Investors will look forward to the quarterly reports of banks, Goldman Sachs, Bears Stern, and Morgan Stanley. In addition, Oracle Corp and Palm Inc are releasing their quarterly reports. Economic indicators will begin with the Housing Index on Monday, third quarter Gross Domestic Product ( GDP ) on Thursday, and the Labor Department's report on personal income and spending in November on Friday.

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