Market Update

While I'm still trying to figure out how to insert a table or spreadsheet into my post (any help would be welcome and appreciated!), here is a market update courtesy once again of Brian Dragoo:

Wall Street makes money from risk, so what better investment these days than the sub-prime-mortgage business? Morgan Stanley agreed to buy Saxon, Merrill Lynch bought National City Corp.'s First Franklin, and Bear Stearns is buying the mortgage unit of ECC Capital Corp. H&R Block Inc. disclosed it might sell Option One, which last year made about $40 billion in loans. Wall Street firms have built large businesses creating asset-backed securities, including bundles of sub-prime loans, which they sell to investors. Perhaps more important, asset-backed securities are a component in an even more profitable product from Wall Street: collateralized-debt obligations (derivative securities whose value is tied to the underlying asset-backed security.) CDOs are a way to repackage and transfer credit risk. Most asset-backed securities are priced in relation to the London Inter-Bank Offered Rate, or our friend LIBOR. High-quality debt issues are priced to yield LIBOR, and low quality (sub-prime) is priced 1-2 points higher. Profiting on the difference between those rates is what is driving Wall Street investment banks to buy sub-prime lenders.

Mortgage prices did well yesterday, which will be reflected in today’s rate sheets. The Chicago Purchasing Manager’s survey was weak, indicating a weak economy which may lead to lower rates in the future. The yield on the 10-yr went below 4.50% to some levels we haven’t seen since January. The market seems to think the economy is headed south, although the Fed is not convinced, and many investors see more room for rates to improve over the long run. This morning we close out the week with November’s Institute of Supply Management index (expected up slightly) and Construction Spending (expected down).

I realize much of this may seem rather "technie," but it may come as a surprise to some to learn that mortgage interest rates are more closely tied to the activity of the bond market which is influenced by the stock market and not the Prime Rate.