How the current rate cuts and other stats will impact the market

Implications: The reduction in interest rates is going to have a negative impact on the existing mortgage portfolios due to adverse selection. The decrease in those seeking unemployment benefits is very misleading. The stimulus package is not going to help those in real trouble and will pay some bills for most.

Analysis: The news the last few days could not be worse for the existing mortgage investors. The pools of loans they hold are going to be adversely selected by good quality borrowers leaving for lower interest rates leaving only those that are currently in default and those that can not refi behind. This is true whether it is subprime or conforming.

Fannie Mae will take a hit as their exisiting pools at 7% prepay so the performing borrowers can get 5.5%. The accounting is simple to see, incur a prepayment out of one pool and a new loan for another at a reduced rate. Result is a 1.5% margin reduction. Plus a lower rating on the existing pool if enough payoff and hit a prepay trigger. 

For non-conforming loans that are already causing write downs it is even more severe. The percentage that were performing keeping the top traunches performing will now be decreased as well resulting in further MBS, CDO and SIV losses.

The unemployment benefits news is very misleading. Everyone knows that the numbers are not true numbers. Many have used up their benefits and fall off the rolls. Others do not file. If the numebr was inclusive of all unemployed then it would mean something. The only thing it means is that the governments expense for unemployment benefits is down. Certainly not that unemployment itself is down.

As to the stimulus package, $400, $500, $800, whatever the number is not going to make a big difference. The money will be used to pay bills. Whether it is paying your utilities or paying down the credit card. Some will be used for groceries and gas so that will help stimulate the economy but I do not believe that was the stimulation the market was looking for. It certainly will not buy the new washer or dryer or car. It also will not create jobs. In our economy jobs are based on capapcity and sales. With no sales we do not need excess capapcity so exisitng jobs are held in check and new jobs are not created.

The off shoring of jobs is great for an immediate bottom line impact for a corporation, however it does take away from the tax base and employment base. For our new high school graduates the question is at which MacDonalds are they going to find a job. The manufacturing, service industry, automotive, etc are all not hiring.

If there is no one left working from the lower middle and lower economic strata, who is going to buy anything to keep the economy going. The upper 20 % of the workforce can only own so many cars, houses, dishwashers, etc.

The scary part is that the same issue will apply to the commercial loan pools as well.