Blue Water Mortgage News

Blue Water Mortgage became an FHA approved lender as of May 15th. We are now able to provide government loans and make home ownership more affordable to a broad range of borrowers.

Keeping you updated on the market!
For the week of October 6th, 2008

Market Recap

What should have been a sure thing last week turned out to be a sure thing this week. We are referring to the $700 billion financial-market rescue package, which the House of Representatives unexpectedly nixed last week on a 229 to 205 vote, sending equity and credit markets into a tailspin. The Senate then stepped in, larded the package with porcine inducements, and then sent it back to the House for another vote. Fortunately, the House gave the amended package a collective thumbs up and sent it to the President for his signature.

The good news is the core of the package remains intact – the Treasury Department will have $700 billion at its disposal to purchase bad mortgage-related securities that are weighing down the balance sheets of the institutions that hold them. The purchases should help improve the flow of credit, which is freezing fast, threatening not only consumers’ ability to make purchases but businesses’ ability to conduct routine operations. And the last thing we need is a new threat to business operations; employers cut the most jobs in five years in September, eliminating 159,000 jobs and sending the unemployment rate up to 6.1%.

Unemployment rates weren't the only thing rising last week. Mortgage rates continued their push higher too, erasing half the improvements realized after the feds put Fannie Mae and Freddie Mac in conservatorship. The higher rates reflect an increasing unwillingness among lenders to lend money, and that's not good.

Thawing the Credit Markets

No one can overstate the need to unfreeze the credit markets. Home prices dropped in 24 of 25 U.S. metropolitan areas in July, led by declines in Las Vegas and the coastal cities of California , as foreclosures depressed prices and accounted for a fifth of all sales. Foreclosed houses tend to sell at a discount of about 20% to owner-maintained houses; these discounts are weighing on prices throughout the country.

Meanwhile, the market for commercial paper, short-term borrowing by businesses, has nearly frozen to a standstill. Even giants like General Electric are suffering. The industrial giant had to sell $3 billion worth of preferred stock to investing legend Warren Buffet and had to place an additional $12 billion of stock in the equity markets to maintain its triple-A bond rating.

To get credit flowing again, banks have to start lending to each other at lower rates. When banks charge each other a higher premium to borrow, the cost trickles down to the consumer. One indicator of how willing banks are to lend to each other is the "TED Spread," which measures the difference between the three-month LIBOR (London Inter-bank rate) and the three-month Treasury rate. The higher the spread, the greater the aversion to risk. Last Tuesday, the spread surged to 3.5%, its highest level in more than 25 years.

The fact is the $700 billion rescue package is the icebreaker for our frozen credit markets. Sure, the prospect of re-floating a few free-wheeling fat cats and funding a few pork-barrel projects appeals to no one, but the prospect of cutting off our nose to spite our face isn't very appealing either. We might not like it, but Congress did the right thing.