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Fixed Rate Mortgages 
The 30 year and 15 year fixed rate mortgage is the most common type of mortgage program in the Las Vegas and Henderson areas and the one I highly recommend to my clients in our current market. Rates are near historic lows and are expected to go up this October 2008.  The fixed rate mortgage is a loan program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.
Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “bi-weekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)
Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to principal . A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

FHA

FHA offers several program options such as Fixed Rate Mortgages offering 10, 15, 20 year fixed (temporary buydowns not allowed) or 25 and 30 year fixed rate mortages which do allow for a 2-1 temporary  buydown. Eligible borrowers include U.S. citizens and permanent resident aliens  (non-permanent resident aliens may qualify) and non-occupant co-borrowers. The properties you may obtain an FHA mortgage loan for include 1-4 unit  properties, PUDs, Modular and Manufactured Homes (double-wides only) A very nice feature with the FHA Mortgage Loan is that the seller may contribute up to 6% of the loan amount towards borrowers closing costs. The 3% down payment required per FHA guidelines may come from borrower’s own funds, it may be a gift from a blood relative or it may come from a DPA organization as previously mentioned.  Rates are excellent right now but are expected to rise this October 2008.

Adjustable Rate Mortgages (ARM)
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.
However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
In today’s market I would only recommend this mortgage loan program to a client who is absolutely positive they will live in the home for less than the fixed rate period wether it be 2 years or 5 years.

Introductory Rate ARM’s
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment.
Index - The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.
Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
Interim Caps - All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six-months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization”. These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.

Standard ARMS and the Differences
A few options are available to fit your individual needs and your risk tolerance with the various market instruments.
ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.
The interest rate and monthly payment can change based on adjustments to the index rate.
6-Month Certificate of Deposit (CD) ARM
Has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.
1-Year Treasury Spot ARM
Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.
6-Month Treasury Average ARM
Has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.
12-Month Treasury Average ARM
Has a maximum interest rate adjustment of 2% every 12 months. The treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

Introductory Rate ARM’s
Most adjustable rate loans (ARMs) have a low introductory rate or start rate, some times as much as 5.0% below the current market rate of a fixed loan. This start rate is usually good from 1 month to as long as 10 years. As a rule the lower the start rate the shorter the time before the loan makes its first adjustment.
Index - The index of an ARM is the financial instrument that the loan is “tied” to, or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security,

LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.
Margin - The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
Interim Caps - All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six-months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Payment Caps - Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization”. These loans generally cap your annual payment increases to 7.5% of the previous payment.
Lifetime Caps - Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.

Reverse Mortgages
A reverse mortgage is a special type of loan made to older homeowners (typically 62 +)  to enable them to convert the equity in their home to cash to finance living expenses, home improvements, in-home health care, or other needs.
With a reverse mortgage, the payment stream is “reversed.” That is, payments are made by the lender to the borrower, rather than monthly repayments by the borrower to the lender, as occurs with a regular home purchase mortgage.
A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home — or “age in place” — and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.
The first, most widely available reverse mortgage in the United States was the federally-insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.
A reverse mortgage is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.
In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.
Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump-sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn’t change.
Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.
The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower’s age and current interest rates, and the home’s property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.
Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage.
Unlike a home purchase mortgage or home equity loan, a reverse mortgage doesn’t require monthly repayments by the borrower to the lender. A reverse mortgage isn’t repayable until the borrower no longer occupies the home as his or her principal residence.
This can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home.
The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can’t exceed the value of the home.
The loan may be repaid by the borrower or by the borrower’s family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower’s estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower’s estate. In general, the repayment obligation of the borrower or borrower’s estate can’t exceed the value of the property.
In general, a borrower can’t be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.
 

London InterBank Offered Rate (LIBOR)
LIBOR is the rate on dollar-denominated deposits, also know as Eurodollars, traded between banks in London. The index is quoted for one month, three months, six months as well as one-year periods.
LIBOR is the base interest rate paid on deposits between banks in the Eurodollar market. A Eurodollar is a dollar deposited in a bank in a country where the currency is not the dollar. The Eurodollar market has been around for over 40 years and is a major component of the International financial market. London is the center of the Euromarket in terms of volume.
The LIBOR rate quoted in the Wall Street Journal is an average of rate quotes from five major banks. Bank of America, Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank.
The most common quote for mortgages is the 6-month quote. LIBOR’s cost of money is a widely monitored international interest rate indicator. LIBOR is currently being used by both Fannie Mae and Freddie Mac as an index on the loans they purchase.
LIBOR is quoted daily in the Wall Street Journal’s Money Rates and compares most closely to the 1-Year Treasury Security index.

Balloon Mortgages
Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30 year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.
At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30 year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

Interest Rate Buydowns
The most common buydown is the 2-1 buydown. In the past, for a buyer to secure a 2-1 buydown they would pay 3 points above current market points in order to pay a below market interest rate during the first two years of the loan. At the end of the two years they would then pay the old market rate for the remaining term.
As an example, if the current market rate for a conforming fixed rate loan is 8.5% at a cost of 1.5 points, the buydown gives the borrower a first year rate of 6.50%, a second year rate of 7.50% and a third through 30th year rate of 8.50% and the cost would be 4.5 points. Buydown costs were usually paid for by a transferring company because of the high points associated with them.
In today’s market, mortgage companies have designed variations of the old buydowns rather than charge higher points to the buyer in the beginning they increase the note rate to cover their yields in the later years.
As an example, if the current rate for a conforming fixed rate loan is 8.50% at a cost of 1.5 points, the buydown would give the buyer a first year rate of 7.25%, a second year rate of 8.25% and a third through 30th year rate of 9.25% , or a three-quarter point higher note rate than the current market and the cost would remain at 1.5 points.
Another common buydown is the 3-2-1 buydown which works much in the same ways as the 2-1 buydown, with the exception of the starting interest rate being 3% below the note rate. Another variation is the flex-fixed buydown programs that increase at six month interval rather than annual intervals.
As an example, for a flex-fixed jumbo buydown at a cost of 1.5 points, the first six months rate would be 7.50%, the second six months the rate would be 8.00%, the next six months rate would be 8.50%, the next six months rate would be 9.00%, the next six months the rate would be 9.50% and at the 37th month the rate would reach the note rate of 9.875% and would remain there for the remainder of the term. A comparable jumbo 30 year fixed at 1.5 points would be 8.875%.

Cost of Funds Index (COFI)
The 11th District Cost of Funds is more prevalent in the West and the 1-Year Treasury Security is more prevalent in the East. Buyers prefer the slowly moving 11th District Cost of Funds and investors prefer the 1-Year Treasury Security.
The monthly weighted average Eleventh District has been published by the Federal Home Loan Bank of San Francisco since August 1981. Currently more than one half of the savings institutions loans made in California are tied to the 11th District Cost of Funds (COF) index.
The Federal Home Loan Bank’s 11th District is comprised of saving institutions in Arizona, California and Nevada.
Few people who use and follow the 11th District Cost of Funds understand exactly how it is calculated, what it represents, how it moves and what factors affect it.
The predecessor to the 11th District Cost of Funds index was the District semiannual weighted average cost of funds published for a six month period ending in June and December. The San Francisco Bank was the first Federal Home Loan Bank to publish a monthly cost of funds index.
The funds used as a basis for the calculation of the 11th District Cost of Funds index are the liabilities at the District savings institutions: money on deposit at the institutions, money borrowed from a Federal Home Loan Bank (known as advances) and all other money borrowed. The interest paid on these types of funds is the cost of these funds.
The ratio of the dollar amount paid in interest during the month to the average dollar amount of the funds for that month constitutes the weighted average cost of funds ratio for that month.
The average cost of funds is said to be weighted because the three kinds of funds and their costs are added together before a ratio is computed rather than calculating averages individually for the three sources and using a simple average of the three ratios. This gives the greatest weight to the interest paid on deposits, and explains the delayed reaction of the index to rising fixed-rate mortgages.

Graduated Payment Mortgage (GPM)
The GPM is another alternative to the conventional adjustable rate mortgage, and is making a comeback as borrowers and mortgage companies seek alternatives to assist in qualifying for home financing
Unlike an ARM, GPMs have a fixed note rate and payment schedule. With a GPM the payments are usually fixed for one year at a time. Each year for five years the payments graduate at 7.5% - 12.5% of the previous years payment.
GPMs are available in 30 year and 15 year amortization, and for both conforming and jumbo loans. With the graduated payments and a fixed note rate, GPMs have scheduled negative amortization of approximately 10% - 12% of the loan amount depending on the note rate. The higher the note rate the larger degree of negative amortization. This compares to the possible negative amortization of a monthly adjusting ARM of 10% of the loan amount. Both loans give the consumer the ability to pay the additional principal and avoid the negative amortization. In contrast, the GPM has a fixed payment schedule so the additional principal payments reduce the term of the loan. The ARMs additional payments avoid the negative amortization and the payments decrease while the term of the loan remains constant.
The scheduled negative amortization on a GPM differs depending on the amortization schedule, the note rate and the payment increases of the loan. GPM loans with 7.5% annual payment increases offer the lowest qualifying rate but the largest amount of negative amortization.
On a loan of $150,000, with a 30 year amortization and a note rate of 10.50% with 12.5% annual payment increases, the negative amortization continues for 60 months. The qualifying rate is 5.75% and the negative amortization is 11.34% (approximately $17,010).
The note rate of a GPM is traditionally .5% to .75% higher than the note rate of a straight fixed rate mortgage. The higher note rate and scheduled negative amortization of the GPM makes the cost of the mortgage more expensive to the borrower in the long run. In addition, the borrowers monthly payment can increase by as much as 50% by the final payment adjustment.
The lower qualifying rate of the GPM can help borrowers maximize their purchasing power, and can be useful in a market with rapid appreciation. In markets where appreciation is moderate, and a borrower needs to move during the scheduled negative amortization period they could create an unpleasant situation.

Choosing A Mortgage Program
There isn’t a single or simple answer to this question. The right type of mortgage for you depends on many different factors:
Your current financial picture.
How you expect your finances to change.
How long you intend to keep your house.
How comfortable you are with your mortgage payment changing.
For example, a 15-year fixed-rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage — but your payments could get higher when the interest rate changes.
The best way to find the “right” answer is to call me or e-mail me directly so we may discuss your finances, your plans and financial prospects so I may help you determine the loan that will best suit your current and future needs. 

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FHA Mortgages

With FHA attempting to assist with the housing crisis some homeowners are facing I have been receiving numerous questions from clients in regards to FHA loans, how they work and what the new guidelines and loan limit increases mean to them personally. I will attempt to shed some light on the subject and hopefully make your life a bit easier…

From HUD:

Nearly a quarter of a million more families could be eligible this year to purchase or refinance their homes using affordable, FHA-insured mortgages, thanks to the economic growth package signed into law by President Bush last month. The Economic Stimulus Act of 2008 will allow HUD’s Federal Housing Administration (FHA) to temporarily increase its loan limits and insure larger mortgages at a more affordable price in high cost areas of the country.

“The stimulus is providing immediate relief to homeowners,” said HUD Secretary Alphonso Jackson at a Greater Las Vegas Association of Realtors keynote speech. “It raises the Federal Housing Administration’s loan limits, enabling more families to qualify for a safe, affordable FHA mortgage. This is important. Families in high-cost states have been priced out of FHA-backed loans. This has created a vacuum, filled by exotic subprime loans. Families with home loans up to $729,750 will now qualify for an FHA loan, depending on where they live.”

Beginning today, HUD will offer temporary FHA loan limits that will range from $271,050 to $729,750. Overall, the change in loan limits will help provide economic stability to America’s communities and give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative. The maximum amount of $729,750 will only be applicable to extremely high-cost metropolitan areas such as: New York, Los Angeles, San Francisco and Washington, D.C. HUD also calculated new limits for loans to be purchased by Government-Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac.

“Many families all over the U.S. will benefit from this access to credit, and increasing these loan limits will inject much-needed liquidity into the housing market,” said FHA Commissioner/Assistant Secretary for Housing Brian Montgomery. “Even moderate-cost areas like those in the South and Southwest such as Dallas, Houston, Augusta and Tallahassee will be helped, with most loan limits there rising to $271,050.”

There are 75 areas in the U.S., out of a total of approximately 3200, that will be eligible for the highest loan limit of $729,750. Previously, FHA’s loan limits in these very high-cost areas were capped at $362,790.

The Economic Stimulus Act of 2008 permits FHA to insure loans on amounts up to 125 percent of the area median house price, when that amount is between the national minimum ($271,050) and maximum ($729,750). The new minimum and maximum loan limits are based on 65 percent and 175 percent of the conforming loan limits for Government-Sponsored Enterprises in 2008, which is $417,000. The FHA used a combination of existing government data sets and available commercial information to determine the median sales price for each area, and released the data approximately two weeks after the President signed the stimulus bill. The change in loan limits are applicable to all FHA-insured mortgage loans endorsed after HUD publishes the increased loan limits today, and it lasts until December 31, 2008.

By increasing loan limits nationwide, FHA will provide much needed liquidity and stability to housing markets across the country. Already, as conventional sources of mortgage credit have been contracting, FHA has been filling the void. From September to December 2007, FHA facilitated more than $38 billion of much-needed mortgage activity in the housing market, more than $15 billion of which was through FHASecure, FHA’s refinancing product. By focusing on 30-year fixed rate mortgages, FHA helps homeowners avoid and escape the risks associated exotic subprime mortgage products, which have resulted in rising default and foreclosure rates.

In January 2009, FHA’s maximum loan limit will return to $362,790, unless the U.S. Congress approves bipartisan legislation to permanently increase loan limits as part of the FHA Modernization bill, which is still awaiting final approval on Capitol Hill.

“In January 2009 the loan limits will return to their previous setting,” Jackson said. “We need a more permanent solution. So our next step must be to modernize the 74-year-old FHA. Two years ago, before the downturn, we introduced an FHA modernization bill to Congress. Our plan offers flexible down payment requirements and higher loan limits. It would also enable the FHA to fairly price premiums, taking risk into account so the market makes rational decisions. We don’t want anyone caught by surprise again. FHA modernization could help a quarter of a million families this year alone. It passed the House and Senate in overwhelmingly bipartisan fashion. But a final bill has yet to reach the President. Congress must act-now!”

Jackson noted that the Administration could not wait for Congress to act. “Last August, the President and I introduced FHASecure. It helps responsible families who, having paid their bills on-time under the original interest rate, find themselves falling behind under the reset rate. For the first time, these delinquent families would be able to qualify for an FHA loan. ‘Underwater’ borrowers and those in the process of foreclosure may also qualify.” Since August, FHA has helped 110,000 homeowners who were current or past due on their loans refinance with an additional 200,000 expected by year’s end.

Jackson also discussed the Administration’s efforts with the Hope Now Alliance, and industry-led effort that has been reaching out to borrowers in trouble. Hope Now members have contacted over a half million homeowners. Their hotline now receives more than 4,500 calls a day. Industry has modified 1 million loans since the second half of last year, keeping homeowners in their homes.

“We can create the conditions for recovery,” Jackson said. “We can make the boom-bust cycle shorter and shallower. We can replace gimmicks and shortcuts with transparency and honesty. And we can take the necessary steps to prevent foreclosure. That’s right, foreclosure is not inevitable, it’s preventable. And we have the tools to prevent it.”

Discussing recent efforts in Congress to bail out lenders, which the Administration opposes, Jackson said” Americans are a fair people. They want to help. But they understand that the answer to an economic challenge must ultimately come from the people who drive the economy. They want the tools of recovery in their own hands. And they do not want to kill the spirit of opportunity that made this country great.”

FHA loan limits are based on the county in which the property is located. However, for properties located in metropolitan or micropolitan statistical areas, the limit is set at that of the county with the highest limit within the metropolitan or micropolitan area.

Hopefully this will help answer your FHA concerns; if not, as always, you can contact me direct at 702.526.3133 or mgarnes@garnesmortgage.com if you have more personalized questions and I will be more than happy to assist you.  And in case you were wondering the FHA loan limit for Clark county Nevada has risen to $400,000

See below for the daily market commentary:

Monday: 03/17/08 10:30 AM EDT: Treasuries are up on news of action by the Federal Reserve yesterday and the release of largely bond-friendly economic new this morning. Stocks opened lower but losses have been contained and the indices have been heading back toward unchanged.

The initial guidance for the markets was word that the Federal Reserve, through its Federal Open Market Committee (FOMC) decided yesterday to lower the discount rate (the rate charged to banks for loans directly from the Fed) by 0.25% from 3.50% to 3.25%. It is now just 0.25% above the Fed’s target for the fed funds rate, the rate banks charge each other for overnight loans necessary for the maintenance of daily reserve requirements.

In addition, the FOMC created a temporary (though extendable), short-term lending channel to primary securities dealers in order to shore up the credit market. The action came shortly after an announcement that JPMorgan Chase was buying Bear Stearns. The Fed move came just two days before the committee’s regularly scheduled policy meeting. (FED ANNOUNCEMENT)

Foreign stock markets plummeted on the news since it sparked a new round of fears that the credit market is crumbling. But U.S. stock traders have not been as skittish so far today, though the financial sector has been hit hard. The Fed action was dramatic but it also shows that the central bank will do whatever is required to prevent a meltdown in the financial markets.

Another support for stocks this morning is a major retreat in oil futures. In recent trade, the price of a barrel of light, sweet crude for April delivery was down by $3.63 to $106.58.

The economic news of the day was basically bearish, which keeps downward pressure on interest rates. The New York branch of the Federal Reserve reported that its index of the region’s manufacturing activity came in at -22.23 this month following a reading of -11.7 in February. Any reading below 0.0 indicates a general contraction of activity relative to the preceding month. Not only was the latest index much worse than the -5.5 that forecasters were calling for, but it was the weakest reading in the history of the data series going back to July of 2001.

More bearish news came when the Federal Reserve reported that industrial production — a gauge of output from the nation’s factories, mines, and utilities — fell last month by 0.5%. This was a larger contraction than the 0.1% that analysts had predicted. Output grew by just 0.1% in January.

While a portion of February’s decline was due to a 3.7% drop in the production index for the volatile utilities category, today’s report indicated that the large category of manufacturing saw a decline of 0.2% following a flat reading (0.0%) in January.

A plus for both stocks and bonds was a sharp drop in capacity utilization, the ratio of output to potential output. It came in at 80.9%, the lowest reading since November of 2005. Significantly, the ratio fell to 79.3% in the manufacturing sector, the lowest reading since October of 2005. The low figures mean there is more slack in the production process and a reduced threat of bottlenecks that drive up prices.

In other news, the Commerce Department said that the current account posted a deficit of $172.9 billion in the fourth quarter of last year. The current account balance is the difference between dollars leaving and entering the country and includes investment income and unilateral transfers (foreign aid and government pensions sent abroad) so the report is more comprehensive than the monthly reports on international trade of goods and services.

The fourth quarter gap was much narrower than the $185.0 billion that had been projected by forecasters. In addition, the initially reported third quarter deficit of $178.5 billion was revised down to $177.4 billion, though the figures for the first and second quarter were revised to show larger deficits.

The economic calendar for the remainder of the week is relatively light but there are only three trading days after today since the markets will be closed on Friday.

Tomorrow, the Producer Price Index (PPI), a gauge of inflation at the wholesale level, will be released. Though a key inflation indicator, its influence will be diminished by the fact that the more significant Consumer Price Index has already been released.

In the last report, the Labor Department said the PPI rose in January by 1.0% following a 0.3% decline in December. In November, the index surged by 2.6% but this was due primarily to an 11.4% jump in energy prices — the largest in almost eighteen years. Energy prices fell by 3.0% in December and rebounded by 1.5% in January. The index for food prices slipped by 0.2% in November but rose in December by 1.4% and in January by 1.7%.

The core index (ex-food and energy) was up by 0.4% in January, the biggest jump in eleven months. Moreover, on a year-over-year basis, the PPI was up by 7.4%, the largest rise since October of 1981. The core index was up by 2.3% Y/Y following 2.0% increases in November and December.

A tamer report is expected for February. The estimate for the PPI is an increase of 0.3%. The core index is predicted to have risen by 0.2%

The report on housing starts for last month also comes out tomorrow morning. In the last report, the Commerce Department said the seasonally adjusted, annualized rate of new home starts edged up in January by 0.8% to 1.012 million. Though an improvement, it followed a two-month decline of 21.2% which left December’s 1.004 million the lowest since May of 1991. January’s reading was the second lowest since then.

A sign of further weakness was a 3.0% drop in the rate of building permit issuance to 1.048 million (seasonally adjusted, annualized). Though this was subsequently revised up to 1.061 million, it was still an eighth consecutive decline and the lowest level since March of 1993.

The starts pace is expected to have declined in February by 1.7% to 995,000. This would be the lowest rate since March of 1991. The rate of permit issuance is expected to have declined by 3.9% to 1.020 million, which would be the lowest since November of 1991.

But tomorrow’s news will be eclipsed by the results of the FOMC policy meeting. The meeting statement will be released at approximately 2:15 PM Eastern Time.

The Fed has already reduced the fed funds rate by 2.25% since last September and reduced the discount rate by 3.00% since last August. In addition, in December, the Fed instituted a Term Auction Facility (TAF), another means by which banks could obtain needed reserves. And, of course, it recently established a Term Securities Lending Facility (TSLF) and a Primary Dealer Credit Facility (PDCF), in order to provide funds to investment institutions.

However, economic data continues to paint a bleak picture. Mortgage foreclosure activity is at record high levels and nonfarm payrolls are shrinking. Statistics on both the manufacturing and services sectors have indicated recent contractions of activity. And financial institutions continue to disclose larger than predicted losses.

For these reasons, Fed watchers are anticipating another round of cuts tomorrow. The main question is how deep will the cuts be. Besides the extent of the expected cuts, traders will also look closely at the policy statement for any hints of what the Fed might do at the next meeting at the end of April.

There are no major releases on Wednesday so the markets will continue to react to the results of the Fed meeting. A couple of minor reports may offer guidance. The Mortgage Banker’s Association of America will release its application index data for last week but the news is likely to get less attention than the weekly oil inventories report.

On Thursday, the jobless claims report will direct attention to the employment situation once again. In last Thursday’s report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits were unchanged in the previous week at 353,000.

The reading was more bullish than expected since it followed a decline of 21,000 the week before — which had led forecasters to predict a partial rebound in the latest figure. The four-week moving average, which smoothes out some of the short-term volatility, fell by just 1,250 to 358,500.

Despite the lack of movement in the latest initial claims numbers, levels remain elevated. For the year to date, the average weekly reading has been 345,500. For all of 2007 it was 322,135.

The report said that the level of continuing claims rose by 7,000 to 2.835 million in the week ending March 1 (continuing claims must be at least a week old). This was the highest reading since September of 2005. The four-week average rose by 24,500 to 2,812,750, the highest reading since October of 2005. The average weekly reading for the year to date is 2,766,000. For all of 2007 it was 2,551,231.

Once again, a moderate increase is anticipated in last week’s initial claims figure.

Later on Thursday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for last month. In January, the index fell by 0.1%. This was a fourth consecutive contraction, suggesting that the economy is or will soon be contracting rather than growing. Another contraction of about 0.3% is expected for last month’s index.

The last major economic release of the week also comes out on Thursday morning. This is the regional index on manufacturing from the Philadelphia branch of the Federal Reserve. The index came in at -24.0 in February following a -20.9 reading in January and a -1.6 reading in December.

Like the New York index, any reading below 0.0 indicates a contraction of activity. The latest declines mark the first three-month contraction since early 2003 and February’s reading was the lowest since February of 2001. Another contraction reading of about -19.0 is predicted for this month’s index.

Tags: Uncategorized by Matt Garnes
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