The next Fed meeting takes place on January 29th & 30th. The odds of a 25 basis point ease stand near 100%, and a 50 basis point cut in overnight rates well above 50%.

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Does it matter for 30-yr mortgage pricing? Perhaps not, at least not right away. Last month, after they cut overnight rates by .25%, RPM’s 30-yr fixed was 6.25% at 1.4 points rebate. Where is it now? Last week it was actually higher at 6.375% at a 1.4 points rebate, but has since dropped to 5.875% at 1.1 a rebate.

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The Federal Reserve’s rate adjustments are usually a reaction to the market, rather than setting the tone for the market, and the Fed will adjust rates according to economic conditions which already exist.

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While some home buyers and refinancers may benefit, home prices may be headed for more declines in the most overheated markets, no matter what the Fed does. The areas that are being hit the hardest are some of those that appreciated the most, something akin to baseball batting averages and streaks. (Batting streaks often follow, or are followed by, below-average hitting, so that by the end of the season the batter usually hits their typical average. As with most things in the financial world, home prices eventually had to regress to a historical rate of return.)

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Why does the Fed need to ease so much further? Many analysts feel that the drop in housing starts and home prices is likely to continue as the downturn in the homeownership rate keeps housing demand depressed for an extended period. This could lead to lower GDP growth and possibly further deterioration in mortgage credit quality. Housing spills over into the real economy, not just the financial markets, and there are now signs of weakness in business investment, employment, and other lagging sectors of the economy such as state and local spending. Home price declines feed into higher mortgage defaults, which hit banks and investors, and trigger the credit issues that we’ve seen. A Fed cut, although widely expected, may alleviate some of these issues, especially if the US economy is as stable as many believe. The Fed cannot fix the broken banking/financial institution situation but it can help the market recover with lower short term borrowing rates.

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WaMu clocked in with their “Soft Market Policy”: For properties located in a “soft market”, as identified on the Soft Market Index, in the DU findings, or in the Appraisal Report, all products will be reduced by 5% below the maximum published LTV/CLTV.

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Today’s Pending Home Sales report for November, thought of as a leading indicator of home sales, is expected to fall 0.7%, after being +.6% in October. The only other news is Consumer Credit, expected +$8 billion. Overall, rates are slightly higher this morning (the 10-yr is at 3.85%) but mortgage prices might be slightly better than yesterday morning.

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Treasury Secretary Paulson was in the news, saying that he believed that there will likely be further indications of slower economic growth in the coming weeks and months. “The rise in housing inventories ‘will contribute to a prolonged adjustment, and poses by far the biggest downside risk,’ Paulson said, “However, ‘while growth looks to have slowed considerably in the last part of 2007, our economy remains resilient and I expect it to continue to grow.’” Paulson warned that there will be no quick announcement of a fiscal stimulus package, and said that at this time of economic turmoil, investors “will remain cautious” about funding new mortgages until they are confident that prices have stabilized. He added that “the reduced availability of non-conforming mortgages clearly has impacted the ability of some to buy or refinance a home.”

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When the graveside service had no more than terminated, there was a tremendous burst of thunder accompanied by a distant lightning bolt and more rumbling thunder.

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The little old man looked at the pastor and calmly said, “Well…, she’s there.”

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Rob Chrisman   925-295-9380   rchrisman@rpm-mortgage.com