San Diego, California Mortgage Market Update

Market Happenings:

The December consumer sentiment index was revised a point higher to 75.5 : but still shows a small -0.8% decline from November. The one-year inflation expectations were also revised down slightly to 3.4%. The index is already below the lowest level during the 2001 recession as its fallen 22% since the two year high reached in January. High energy prices, the mortgage disaster, tightened credit and a rising unemployment rate provide the fear as this morning's report on spending shows just how resilient the consumer can be. The news on spending is better than expected : The huge 1.1% nominal gain was partially offset by an 0.6% gain in the PCE price index to leave real spending (used for GDP) at a much stronger than expected 0.5%. The rise in nominal spending was the strongest in over two years and leaves an annual growth rate of a large 6.7%. Moreover, October's spending was revised higher to 0.4% -- doubling the initial read. Both provide a welcome boost to Q4 GDP estimates. Income growth was a bit below expectations at 0.4% but leaves a 6.1% yoy gain which will help support spending in the coming months/quarters. The outsized spending with the modest income growth returned the negative sign to the savings rate at -0.5%. Mortgage market appears grumpy on the whole with FNMA 5.5%’s of 9 ticks (-9/32) and 6.0%’s down 5 (-5/32). For those lenders who did not re-price yesterday, expect pricing to be off anywhere from 30 – 40 bps, and about 5 – 20 bps for those that did.

Industry News:

Bear Loses $854M in 4Q, Hikes B&C Hit

Bear Stearns & Co. posted an $854 million loss in the fourth quarter and increased its provision for subprime writedowns to $1.9 billion, a 60% hike from its previous damage estimate. Bear was a major player in the subprime asset-backed securities market, funding nondepository mortgage bankers, buying their loans, and then securitizing them. Bear Stearns currently owns a nonprime shop in Texas called EMC Mortgage. The Wall Street firm made headlines this summer when two subprime-related hedge funds it had started filed for bankruptcy protection. The London-based Barclays Bank -- which had lent $400 million to the funds -- sued Bear on Wednesday, saying the Wall Street firm misled it about the funds' performance.

Bear Sued by Barclays Over B&C Hedge Funds

Barclays Bank of London, which lent $400 million to two subprime hedge funds managed by Bear Stearns & Co., has sued the Wall Street firm, charging that Bear misled it about the performance of the funds. The funds -- High-Grade Structured Credit Strategies Fund, and High-Grade Structured Credit Strategies Enhanced Leverage Fund -- filed for bankruptcy protection in the Cayman Islands this summer. Barclays is owed money by the firms. The funds were managed by two Bear executives: Ralph Cioffi and Matthew Tannin. Mr. Cioffi recently left Bear. At deadline time, Bear Stearns had not commented on the suit. The failure of the funds is the subject of a criminal probe and an investigation by the Securities and Exchange Commission.

NAHB Sees Signs of Market Stabilization

The downturn in home values will likely persist through next year, though signs of stabilization are emerging, according to the chief economist of the National Association of Home Builders. NAHB chief economist David Seiders says home values will likely start to turn upward again early in 2009, with a 10%-15% decline in home prices from the peak of the cycle in 2005 to the trough. On the plus side, lower prices and low mortgage interest rates are reviving housing affordability, Mr. Seiders said during an annual year-end housing forecast call. Mr. Seiders, acknowledging that the housing downturn has been more severe than he predicted, said the meltdown in the housing finance market was the chief reason that home sales and prices have suffered more than expected. Still, he said improved housing affordability and low interest-rates are laying the groundwork for recovery. "Demand has weakened dramatically, but we are looking at tentative signs of stabilization," he said.

Misc:

-- On Today’s date in 1620, Pilgrims aboard the Mayflower went ashore for the first time at present-day Plymouth, Mass. They were greeted by the Golden Girls.

-- On Today’s date in 1937, the first feature-length animated cartoon in Technicolor, Walt Disney's "Snow White and the Seven Dwarfs," had its world premiere in Los Angeles.

-- On Today’s date in 1945, Gen. George S. Patton died in Heidelberg, Germany, of injuries from a car accident.

-- On Today’s date in 1988, 270 people were killed when a terrorist bomb exploded aboard a Pam Am Boeing 747 over Lockerbie, Scotland.

-- Today Talk show host Phil Donahue is 72.

-- Today Actress Jane Fonda is 70.

-- Today Actor Samuel L. Jackson is 59.

-- Today Tennis star (not the former LA Rams QB) Chris Evert is 53.

-- Today Actor-comedian Ray Romano is 50.

-- Today Actor-comedian Andy Dick is 42.

-- Today Actor Kiefer Sutherland is 41.

Today's market update brought to you by:

Todd Albrigo

Account Executive

CMG Mortgage, Inc.