San Diego, California Mortgage Market Update

Market Happenings:

Next Cut : The market has been holding better after the initial rate-cut sell-off, while watching stock world crumble. The fact that the Fed has thrown its ammo out into the street, after getting the emergency rate cut rumor out & circulating heavily, leaves traders looking for the next cut while giving rumors added street cred. The funds futures market is pricing in another 50 bp ease next week : after the scheduled FOMC meeting. The implied policy rates fall to near 2% in September. Today's inter meeting 75 bp cut is the largest since November 1994 and with only a week left until the meeting caught the market by surprise. St. Louis Fed president Poole dissented against the move preferring to wait until the meeting rather than move today. The market should weather the Fed speed bump, but there is a lot of "too little, too late" chat out there. The bonds have been swinging back better as players wonder what's next? That these high placed officials are out, in concert, whacking at rates & talking up a sagging economy (out of Treasury, "the economy is resilient" is the new "strong dollar") while many read the rate move as "panic." The rather large stock sell off has come back some with the Fed announcement with the Big Board now down 280 pts. Mortgages responded on a relatively tame tone to the Fed news. FNMA 5.50%’s are up 12 ticks (+12/32) and moved little since the Fed move. Expect lender ratesheet pricing to be better by 30 – 40 bps today.

Industry News:

Fed Cuts Funds Rate 75bps

The Federal Reserve on Tuesday morning cut its key lending rate by 75 basis points to 3.50% in reaction to a rout in global stock markets as well as a "softening" jobs market in the United States and a "deepening" housing contraction. The cut in the target federal funds rate also came on the heels of dismal fourth-quarter earnings reports by Bank of America and Wachovia showing that credit losses and provisioning cut earnings by more than 90% compared with the levels of a year earlier. Collateralized debt obligation writedowns totaled $5.28 billion at BoA. "While strains in the short-term funding markets have eased somewhat, broader financial conditions have continued to deteriorate and credit has tightened further for some businesses and households," the Fed's monetary policy committee said in explaining the sudden rate cut. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in the labor markets." The Fed committee is scheduled to meet Jan. 30, and Fed watchers expected a 50-bps cut based on Fed Chairman Ben S. Bernanke's comments that he will act aggressively to keep the U.S. economy growing. However, fears that the U.S. economy is already in recession swept Asian and European markets on Monday and Tuesday and sent stock prices sharply lower. This prompted the Fed to take quicker and more decisive action before the U.S. stock markets opened.

BoA Deal: CFC Execs Get Grants, Except Mozilo

Four of Countrywide Financial Corp.'s top executives -- except company chairman and chief executive Angelo Mozilo -- are entitled to millions of dollars in retention grants as part of the lender's sale to Bank of America. According to a new filing with the Securities and Exchange Commission, Ranjit Kripalani, Countrywide's managing director of capital markets, is entitled to the most ($2.5 million), followed by president/chief operating officer David Sambol ($1.9 million), chief financial officer Eric Sieracki ($1.5 million), and banking chief Carlos Garcia ($1.45 million). Mr. Mozilo is expected to leave the company once BoA takes over, or even sooner. Mr. Sambol, who currently serves as president, is considered Mr. Mozilo's successor. The board, chaired by Mr. Mozilo, approved the retention grants.

ABA: Rate Cuts, Stimulus Needed as Insurance

Federal Reserve rate cuts and the passage of a stimulus package could provide insurance against a recession, particularly if falling house prices spark a major pullback in consumer spending, according to the American Bankers Association's economic advisory committee. "We may be looking at an unprecedented drop in home prices," said Peter Hooper, chief economist at Deutsche Bank Securities. The consensus of the nine economists on the advisory committee is that there will be a "double-digit decline" in house prices as measured by the Standard & Poor's/Case-Shiller housing price index, and prices will not stop falling until 2009. The consensus says there is a 45% chance of a recession this year. They expect that unemployment will rise to 5.3% and the Federal Reserve will cut the target federal funds rate by 100 basis points to 3.25% by midyear. All nine economists say they expect the performance of mortgage and other consumer loans to deteriorate further over the next six months.

First Horizon's Mortgage Ops Lose $263M

First Horizon National Corp., Memphis, has reported that its mortgage business lost $263 million (pretax) in the fourth quarter, reflecting reductions to its servicing assets and impairment charges. Overall, the bank lost $399 million in the quarter. Like many banks heavily involved in residential finance, First Horizon has been stung by the nation's mortgage crisis and housing downturn. It has moved to cut staff and close production channels. In the fall, First Horizon announced job cuts of 1,500 mortgage workers and the closure of 50 offices.

This Week’s Calendar:

Misc:

-- On Today’s date in 1973, the U.S. Supreme Court, in its Roe v. Wade decision, legalized abortions using a trimester approach.

-- On Today’s date in 1998, Theodore Kaczynski pleaded guilty in Sacramento, Calif., to being the Unabomber in return for a sentence of life in prison without parole.

-- Today Singer Steve Perry is 59. (For comic relief, click here: http://www.youtube.com/watch?v=bQbZRMLKozk)

-- Today Actress Linda Blair is 49

Today's market update brought to you by:

Todd Albrigo

Account Executive

CMG Mortgage, Inc.