January 20, 2010
January 20, 2010 by admin
Stocks dropped sharply, setting up a two day roller coaster ride for investors on Wednesday. Following a 100+ point rally in the markets on Tuesday, the DOW reversed course and dropped in excess of 100 points, inter-day trading had the market down nearly 200 points. The volatility in the market is clearly in a state of uncertainty as investors and analysts look for direction in the New Year. Corporate earnings have played a large role in the markets volatility year to date and this week, some of the world largest companies have been reporting earnings, including today’s reports from Bank of America and Wells Fargo, two of the countries largest financial institutions.
Financial companies have been posting better than expected numbers this year, excluding the charges they have incurred in repaying the government TARP funds. The challenge is that collectively banks are echoing concern for future challenges in the market as concerns over unemployment are putting additional strains on their balance sheets. The lack of job growth has been a strong catalyst in the banks guidance for the balance of the 2010, but clearly they all believe that the worst of the economic challenges is in the rear view mirror. The World Bank released a pessimistic report today on the state of the economy, signaling the possibility that the economic recovery has the potential to run out of steam in 2010. The bank was predicting positive global GDP growth, but was airing on the side of caution with its views of growth this year.
Politics also played a role in today’s market activity. The Massachusetts interim Senate election shifted the balance of power in the Senate and provided Republicans with an opportunity to Veto the proposed health care proposals. This news was a boost to the Health Insurance and Pharmaceutical markets and clearly will place additional strain on the President and Democratic party to create a health care proposal that is less reliant on government assistance.
Mortgage rates continue to benefit from uncertainty in January. Yields on the governments ten year Treasury bond have dropped to 3.66 on Wednesday, nearly twenty basis points lower than where they started the year at. Fixed rate home loans are now hovering closer to 5.125% with most national mortgage lenders on thirty year loan terms. The spread between fifteen and thirty year mortgage loans continues to be approximately ½ of a percent different, allowing for consumers who choose a shorter loan term to secure interest rates in the mid four percent range on fifteen year loan terms.
Also today, the FHA loan programs officially got a bit more challenging for consumers. The loans, which are offered and underwritten through HUD will require a larger contribution to the upfront mortgage premium, moving to 2.25% of the total loan (this is typically rolled into the mortgage) and increasing the amount required for a down payment for borrowers who have credit scores below a 580 to ten percent, up from 3.5%. In addition FHA will seek to increase the monthly PMI requirement from its present levels and members of Congress are pushing for the agency to further increase down payment requirements. As we discussed several months ago, dramatic changes to the FHA loan program appear to be misguided. The agencies financial problems appear to be a result of the broader economic challenges and not loose underwriting guidelines. Further restrictions on FHA mortgage loans, will work against stabilizing the housing markets as it reduces the supply of buyers in the marketplace.