Doing the Charleston!

Upcoming Economic Reports for work week ending 9-12-08

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (July)	Mon. Sept 8, 3:00 pm, et	$5.8 Billion (Increase)	Moderately Important. The expected increase is consistent with reduced consumer spending.
Pending Home Sales Index (July)	Tue. Sept 9, 10:00 am, et	86.8 Index	Important. The index is showing signs of rebounding off multi-year lows.
Wholesale Trade Sales (July)	Tues. Sept 9, 10:00 am, et	1.5% (Increase)	Important. The increase in sales is evidence that the economy continues to avoid a recession.
Mortgage Applications	Wed. Sept 10, 7:00 am, et	None	Important. Application activity continues to increase, though some of the increase is attributable to mortgage shopping.
Import Prices (August)	Thurs. Sept 11, 8:30 am , et	0.9% (Decrease)	Important. Lower import prices will ease inflation concerns.
International Trade (July)	Thurs. Sept 11, 8:30 am , et	$57.9 Billion (Deficit)	Moderately Important. The deficit is shrinking on falling oil prices.
Producer Price Index	Fri. Sept 12, 8:30 am , et	All Goods: 0.3% (Decrease) Core: 0.1% (Increase)	Very Important. Falling producer prices often translate to falling credit prices.
Retail Sales (August)	Fri. Sept 12, 8:30 am , et	No Change	Important. Retail sales suggest consumers remain circumspect on a sustained economic recovery.

The above comment excerpts and information are courtesy of Melissa Breeland of Residential Mortgage of SC

CONV 30 YR FIXED               6.000%                               6.097%

VA/FHA 30 YR FIXED             6.000%                               6.097%

SC STATE HOUSING              6.000% (OPTION III)              6.097%

 Above rates courtesy of Residential Mortgage of SC

I think the following commentary is an easy to understand explanation of what this $700 billion bailout entails. I hope you find it as informative as I did.

$700 Billion for What?

By Lawrence Yun, Chief Economist

A massive $700 billion bill will be fast-tracked through Congress this week to give the U.S. government the authority to buy bad mortgages off the books of Wall Street firms. People are calling it the 'mother of all bailouts' and the 'biggest bailout in the history of mankind.' I am inclined to view it as the biggest sovereign wealth fund investment to date.

Several sovereign wealth funds - essentially a mutual fund run by a government for the government (or its taxpaying citizens) - have been investing in Wall Street firms and mortgage-related debts since late last year. Singapore, South Korea, United Arab Emirates, Saudi Arabia, and China were among the countries putting up a few billion dollars in the hopes of turning a big profit once the housing market recovers. Treasury Hank Paulson, a former CEO of the top U.S. investment bank Goldman Sachs and perhaps missing his old job, has now created a U.S. sovereign wealth fund that outstrips in size all other sovereign funds put together. Some may even view it simplistically as the Treasury Department going "all-in" in this $700 billion Texas Hold 'Em poker bet.

The principal goal of this new Treasury authorization is not to make money but to unclog the financial pipelines. Worries about capital inadequacy, further mortgage debt write-downs, and margin calls have hemorrhaged the movement of capital. The overnight borrowing rate has been skyrocketing, as any firm with excess cash was unwilling to lend that precious dough should it face the fate of Lehman Brothers. The very essence of capitalism - of allocating capital to its most productive use - was collapsing before our very eyes last week. The whole economy and Main Street civilians would have eventually suffered greatly from the mistakes of Wall Street.

The way to unclog the system is to buy certain mortgage backed securities off the books of financial firms. Because of illiquidity many mortgage securities, even those performing reasonably well, are being valued at pennies on the dollar if forced to sell. Let's say, for example, that you as a bank hold 100 mortgages and half of your clients are paying mortgages on time. At worst, these 100 mortgages would get at least 50 cents on the dollar. However, if you need to raise capital because of margin calls in the current panic, you would not get 50 cents but only few pennies on the dollar. These unrealistically low valuations are paralyzing the balance sheets of financial institutions and hindering the liquidity flow.

Treasury intervention will help restore the proper valuation of these illiquid assets. However, Treasury should not reward the mistakes of Wall Street by bailing out at an unreasonably high price and handing out "free money." Buying at a deeply discounted price could potentially lead to huge revenue benefits for Treasury on the behalf of taxpayers once the housing market and mortgage debt valuation recovers, but the financial firms may be unwilling to sell at unreasonably low prices. If this happens, we are back to square one. Subsequently, a delicate balance must be pursued with the goal of helping unclog the financial pipeline, but also protecting taxpayers' money.

Understandably, there will be anger and outcries from the Main Street public of this massive Wall Street 'bailout.' Politicians will feel the heat in this election year. But those same politicians have no choice: if the bill does not pass, the acute financial pain will quickly trickle down to Main Street.

The Main Street disgust of executive pay is also understandable. I will defend the '$700 billion bailout' to help stabilize the housing market and economy, but not the golden parachutes of fallen Wall Street executives. How is it that failed managers are able to get away with a fistful of dollars? The same can be said of Fannie Mae (FNMA) and Freddie Mac (FHLMC) executives. Many past managers of these government sponsored enterprises were paid a gigantic sum for running the very simple business of borrowing cheap and lending high. It was possible for Fannie and Freddie to borrow cheap on the backs of government (i.e. U.S. taxpayer) guarantees. Most of this borrowing cost advantage should have been passed onto consumers and not kept by Fannie/Freddie managers.

Hank Paulson has a tough task. He must permit capital to move around. That is the essence of capitalism. He must at the same time also protect taxpayer money. The return on the taxpayer gamble depends on two things: at what price the Treasury will buy bad mortgage debts off Wall Street books, and the future mortgage default rate. The default rate, in turn, will depend on the housing market recovery. Knowingly or not, the 75 million homeowners and 100 million taxpayers have now become the key stakeholders on the side of housing market recovery. In the end, if all goes better than anticipated, Mr. Paulson may perhaps get his own super hero figure made for returning a healthy rate of investment to taxpayers on this $700 billion gambit.

Copyright National Association of REALTORS®, Reprinted with permission.

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return. This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too. Comparing return rates on two investments illustrates this concept:

• U.S. Government bonds
• Mortgage-backed bonds

The difference in investment return rates is sometimes called a "spread", and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent. 

However, the spread started to grow starting in July 2007, which marked the "official" start of the Credit Crunch. As mortgage delinquencies grew nationwide, so did the market's perceived risk of investing in them.  By the start of this month, the spread had nearly doubled.

But, that all changed Sunday.  When the government announced its takeover of Fannie Mae and Freddie Mac. It put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance, and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term.  With the U.S. government backing the mortgage market, there's no room for the risk premium that helped keep rates high this past year.

It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

Above information courtesy of Melissa Breeland of Residential Mortgage of SC

*** Due to market fluctuations, interest rates are subject to change at any time and without notice. Interest rates are also subject to credit and property approval based on secondary market guidelines. The rates shown are based on average rates for the best qualified customers. Your individual rate may vary.

Above interest rates are from Residential Mortgage of SC and are courtresy of Melissa Breeland