Financial Insight

They both need/needed at least $7 billion in additional capital to stay afloat. Wachovia, the fourth-largest U.S. bank, reported an unexpected loss because of subprime- infected mortgage holdings, cut its dividend, and said it will raise about $7 billion in a share sale to replenish capital. The company's market value has dropped 50% since its $25 billion takeover of Golden West Financial Corp. in 2006 at the peak of the housing market. (Talk about good timing on Golden West’s part!) Wachovia also announced that it will cut 500 investment banking jobs.

I was reading the fine print in my retirement benefits plan the other day, and ran across this:

If you had purchased $1,000.00 of Delta Air Lines stock one year ago you would have $49.00 left. With Enron, you would have had $16.50 left of the original $1,000.00. With WorldCom, you would have had less than $5.00 left. But, if you had purchased $1,000.00 worth of beer, one year ago, drank all of the beer, and then turned in the cans for the aluminum recycling REFUND, you would have had $214.00.Based on the above, the best current investment advice is to drink heavily and recycle. It's called the 401-Keg.

Are people in the US saving enough for their retirement? Or spending it on gas and food? Given the trade deficit number this morning, they are spending their money on goods from overseas (like oil). The Trade Deficit for February swelled to $62.3 billion, somewhat unexpected, although still below last August’s record $67 billion. We also had weekly Jobless Claims, which dropped 53k to 367k. So why is the 10-yr yield down to the mid-3.40’s and 30-yr A-paper mortgage prices slightly improved? Lehman has liquidated three investment funds due to "market disruptions". Lehman's news as well as expectations of further write-downs has renewed fears that the credit crisis is not over, and the economy is still in for more stormy weather.

Does $5 billion buy you the right to shutter Washington Mutual's broker business?

You bet it does. It buys you the right to tell Washington Mutual to eliminate the business channel by May 31st (loans must lock by tomorrow, and most loans must fund by June 13th). WaMu announced yesterday to their employees that they are closing down their wholesale loan division, with yet-to-be-determined cuts in retail. Rumors had swirled about their wholesale business channel for quite some time, but this announcement came as a surprise to many wholesale reps. Supposedly closing wholesale was a stipulation from a private equity firm that was giving them $5 billion (Too risky? The investor didn’t like the servicing performance? It doesn’t fit their business model?). A rumored $5-7 billion capital infusion for WaMu follows other investors injecting capital into banks and brokerages, including Countrywide, Citigroup, Merrill Lynch, Bear Stearns, and UBS. The new capital for WaMu would be provided by a group led by private-equity firm TPG Inc., based in Texas, the Wall Street Journal reported yesterday.

Mortgage prices are roughly unchanged this morning, and aside from the WaMu news there is little news. We will have the release of the minutes of the March 18^th FOMC meeting, along with February’s pending home sales (expected to have decreased -1% following January’s unchanged). Analysts will mostly be focusing on the FOMC minutes for a better sense of what motivated the Fed’s 75 basis point reduction a few weeks ago and what the near-term future might hold for cuts. FNMA’s trading desk reported that for the super-sized conventional jumbos, “the portfolio improved its whole loan pricing to 1.5 points behind conventional conforming for par/premium coupons and 1.875 points behind conventional conforming for discounts.”

If I were considering financing/refinancing a home, I would....
Lock if my closing were taking place within 7 days...
Lock if my closing were taking place between 8 and 20 days...
Float if my closing were taking place between 21 and 60 days...
Float if my closing were taking place over 60 days from now...
This is only my opinion of what I would do if I was financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

 All investors have narrowed their guidelines, and even Fannie Mae will now requires a minimum credit score of 580 on loans purchased for securitization regardless of DU. Many analysts feel that the worst of the credit squeeze is now over. Fortunately, and please check the graph below (thank you Lehman & Bloomberg), credit spreads have tightened in the last three weeks, with many spreads returning to their early February levels, and the tone in the mortgage market has improved as the Fed’s new liquidity initiatives & effectively buying securities backed by mortgages have removed the threat of forced selling from the market.

This week brings us the release of only two relevant economic reports in addition to the minutes from the last FOMC meeting and a Treasury auction. Tomorrow, 11:15PST, the FOMC minutes will be released, which may give us insight into their current thought process and individual Fed member opinions. Aside from that, and the weekly jobless claims Thursday morning, the first piece of monthly data is February’s Goods and Service Trade Balance report Thursday morning. There is a 10 year Treasury Inflation Protected Security (TIPS) sale Thursday. The second and final release of the week is the University of Michigan’s Index of Consumer Sentiment Friday morning. Their consumer sentiment index will give us an indication of consumer confidence, which hints at consumers' willingness to spend, so “good” news would be a decline from March’s 69.5 reading. Ahead of all of that, the 10-yr is back into the mid-3.50’s and mortgage prices are worse by .125.

The Unemployment Rate shot up to 5.1% and Non-farm Payrolls, expected -50k, actually dropped 80k. So the market rallied and rates dropped this morning, right? Well, kind of… the 10-yr is still sitting in the mid-3.50’s, and mortgages are roughly .250 better in price. One would think that with that weak of an unemployment number, along with some revisions to January and February (down a total of 67k versus what was originally reported), rates would have dropped more. March saw the biggest monthly job decline in five years, the Labor Department revised the first two months of the year's job losses to a total of 152,000 from a previous estimate of 85,000, and the unemployment rate is the highest it has been since September 2005. Hourly earnings were +.3%, but job losses were widespread and heaviest in the construction and manufacturing sectors. Independent labor reports indicate that small and mid-sized companies are continuing to hire, and some of the growth in jobs at small business is due to outsourcing from large business which can't get thing done as inexpensively.