There's an old adage in the mortgage business: "Mortgage markets take the stairs down and the elevator up."  It's supposed to mean that mortgage rates rise faster than they fall.

It turns out the saw has no teeth.

Looking at data from the last 14 months, at nearly every price change delta of consequence, mortgage price improvements outnumbered deteriorations. An "improvement" pushes mortgage rates lower.  A deterioration moves them higher.

• Daily change of 0.2500 : 18 improvements, 8 deteriorations
• Daily change of 0.3125 : 27 improvements, 20 deteriorations
• Daily change of 0.3750 : 4 improvements, 11 deteriorations
• Daily change of 0.4375 : 13 improvements, 10 deteriorations

The trend continues at the higher price change points, of which each is a huge, one-day change in pricing. A 0.500 pricing change can move mortgage rates by as much as a quarter-percent.

• Daily change of 0.5000-0.7500 : 18 improvements, 15 deteriorations
• Daily change of 0.7500-1.000 : 8 improvements, 3 deteriorations
• Daily change of greater than 1.000 : 10 improvements, 11 deteriorations

Another interesting observation is that on the days of nominal price change, the day on which pricing changed by less than 25 basis points, markets tended to worsen.  From this pattern, we can infer that traders want to move mortgage pricing higher but don't have the conviction to make it stick long-term.

Which, of course, brings us to the other well-known saying: "Don't fight the Fed."  So far this year, that saying has held true.

Mortgage rates are based on mortgage-backed securities pricing and I get my data from MBSRateWatch in real-time. If you don't subscribe but need to stay current on rates, follow me on Twitter or on Facebook.  I often post updates when markets are moving and that can mean the difference between getting a good rate and getting a bad one.

Mortgage bond markets are signaling a slight return to risk this morning.  If you're watching the wrong market indicators, though, you probably didn't get the memo.

Looking at the chart above, we see that as of 9:02 AM ET:

• Mortgage-backed securities are improved by 28 basis points
• 10-year U.S. treasury notes are off by 106 basis points

This tells us that mortgage markets and treasury markets are moving in opposite directions.  It also tell us that mortgage rates are improved today. 

The chart counters the popular notion falsehood that 10-year treasuries are a good proxy for the mortgage market.  They're not.  Long-term, maybe.  But on a day-to-day basis -- no way.  This is because investors continue to treat the debt types differently even though the government nationalized the mortgage market six weeks ago.

That's kind of a big deal because, in theory, U.S. treasuries notes and mortgage-backed securities should behave the same.  In practice, however, they don't.

Investors still place risk premiums on mortgage-backed money and that prevents treasuries yields and mortgage rates from moving in lockstep.  The risk premium prevents the theory that 10-year treasuries can be used to predict mortgage rates from ever being true.

Last week offered a terrific, in-the-wild example.

For the first few days of the week, as stock market money headed for the exits, it flowed equally to treasury and mortgage-backed markets.  Rates on both types of debt improved. 

By the end of the week, however, fear had gripped the markets so tightly that money flowed into treasuries almost exclusively.  The assumption was that treasuries were a less risky market.

Mortgage rates got hammered as a result. 

If the risk in treasuries was truly equivalent to the risk in mortgage-backed markets, this separation would never have occurred.

So, today, what we're seeing is money is un-parking itself from the relative safety of U.S. treasuries, flowing back into stocks and mortgage markets.  This is helping to edge rates lower even as U.S. treasury yields rise.

(Image courtesy: Mortgage Market Guide)

After writing yesterday's blog post, my ThinkPad went blue.  Cue the video above.

It's a shame because the post went deep on Wall Street's recent troubles and how each piece of bad news actually helps everyday homeowners.  When I went to publish, the post vanished.  And by that point, markets were already open, mortgage rates were already plunging, and I wanted to be the phone with clients.  I did manage to Twitter, however.

A one-paragraph recap follows:

The government's takeover of Fannie Mae and Freddie Mac rendered mortgage bonds among the safest investments in the world.  Therefore, when political or economic uncertainty exists, mortgage rates should fall in safe haven buying.

The post was especially timely because safe haven buying driving mortgage rates down yesterday.  As the stock markets shed $800 billion in value, investors moved into safer instruments like bonds -- including mortgage bonds.  With more demand, prices were up and rate were down.  And how.

Because mortgage debt is now government-guaranteed, the sell-off in stocks was terrific news for both active home buyers and for homeowners that missed last week's gold rush.  However, it did little to soothe Wall Street's nerves. That job falls to Ben Bernanke.

Coincidentally, the Federal Reserve meets today.

The Fed may cut the Fed Funds Rate from its current 2.000 level, or it may do nothing.  It really won't matter.  Markets will be more tuned to what the Fed says than what it does.

The markets crave certainty right now and they want the Fed to give it to them.

See, one of the Federal Reserve's missions is to maintain the stability of the U.S. financial system -- it's right there on its Web site -- so you can be sure that Chairman Bernanke will address what's transpired on Wall Street, directly or indirectly, in his press release today. 

To ignore the turmoil would be catastrophic to market psychology.

If the Fed shows sympathy for markets -- implying more Fed support and action -- stock prices should rebound and mortgage rates will rise in response.  By contrast, if the Fed goes laissez-faire, mortgage rates should fall. 

All the market wants right now is a little bit of conviction and the Federal Reserve will help give it to them at 2:15 P.M. ET.  Expect mortgage rates to be volatile today -- we just can't know in what direction.

For years, people unfamiliar with the mortgage industry have said that the government's 10-year treasury note is a reasonable proxy for mortgage rates.

This is flat out wrong.  The only security that matters to mortgage rates is the price of a mortgage-backed bond.

The chart at right supports this idea.  It's shows the interest rate "spread" between the 10-year treasury note and the 10-year Fannie Mae note.

Notice how the spread is widening.

On a technical basis for Wall Street, the widening spread means that debt issued by the conforming mortgage securitizer is considered more risky of an investment.

On a personal basis for Main Street, though, the widening spread reflects the modern problems of Fannie Mae which will likely lead to both higher mortgage rates and larger loan fees for Americans.

Watching the 10-year treasury is not an effective way to track mortgage rates.  And if it was an effective way in the past, the chart shows us that it's certaintly not any longer.

This chart may read like gibberish, so I notated it. 

It's meant to illustrate that daily mortgage rates are not based on the yield of the 10-Year Treasury Note.  Sure, there is a long-term correlation between the two, but "long-term" doesn't do us any good when we're looking to lock an interest rate today.

We've covered this topic in-depth once before, but it's worth revisiting. 

Mortgage rates are based on the price of mortgage-backed securities, plus all applicable fees.  Specifically, the formula works as follows:

Read the rest of this entry »

The trend is still holding, so to hammer the point home: to know what mortgage rates are doing lately, just check the stock market.

• As stocks go down, mortgage rates go down
• As stocks go up, mortgage rates go up

This is not a long-term, direct relationship by any means but it's holding true this week. 

The interplay between stocks and mortgage rates is a welcome development for home buyers because it's simpler for laypersons to follow the stock market than it is to follow the mortgage-backed securities market.  When you know what to expect with rates, after all, the mortgage shopping "experience" can be a little bit less stressful.

So, enjoy it while you can -- by next week, we could back to watching esoteric data like Balance of Trade figures.

(Image courtesy: Google Finance)

Home buyers and other people in the market for a new mortgage should be thanking the Fed right now.

In its post-meeting press release last week, the Federal Open Market Commitee made a few choice statements about the economy that helped mortgage rates fall for the first time in 6 weeks.

The first Fed remark was that inflation appears to slowing and that it should be under control within 6-9 months. Comments like this are good for mortgage rates because inflation causes mortgage rates to rise.

The absence of inflation, it's worth noting, tends to help mortgage rates fall.

Then, the Fed also said that economic growth should stay steady this year because the full impact of its prior rate cuts have yet to work its way through the economy. 

This, too, is good for mortgage rates because economic growth is good for the U.S. dollar and a strong dollar tends to be good for mortgage rates.

Read the rest of this entry »

If you look at mortgage rates today and compare them to January's numbers, not much has changed:

• 30-year fixed: Still hovering near 6 percent
• 7-year ARM: Still lower than 30-year fixed rates
• 5-year ARM: Still lower than 7-year ARM rates

But on a day-to-day basis, the market is not as smooth as the comparison would have you believe.  Mortgage rates are more like The Vortex -- two double-loops, a corkscrew and a batwing. 

Enough to make you vomit.

If you've been shopping for a mortgage lately, you know what I mean (alternate link) and unless you're getting my Twitter updates piped to your mobile, you're left looking for clues anywhere you can find them.

For example, although mortgage rates were the mirror-opposite of the stock market Thursday and Friday, there's no long-term relationship between the two upon which we can draw.  We can't say "when stocks are up, rates are down", or vice versa, because there are many days that the two move in tandem.

The biggest clue we have about mortgage rates is that they respond to expectations about the economy.  Because of that, we should expect the loop-de-loops to continue until 1 of 3 things become clear:

1. It's proved that the U.S. economy is in a recession
2. It's proved that the U.S. economy is experiencing inflation
3. It's proved that the U.S. economy is experiencing both recession and inflation at the same time

Unfortunately, recognizing recession and inflation is a lot easier in hindsight; the same way we look back at a bubble.  While you're in it, it's too hard to tell what's happening.

For example, just when the experts think our economy is growing gang-busters, we get hit with record unemployment data and talk of panic.

So much for the experts.

Mortgage rates are getting whipped the ongoing Recession vs Inflation debate, so if you're not the type to gamble with your household budget, consider locking your rate right away.  What you're really doing is locking in a worst-case mortgage rate scenario.

Heck, even if you do like to gamble, think about locking in. Even though mortgage rates may fall, they may not fall during the time period that you need them to. 

In other words, rates may not fall until after your closing. 

Instead of waiting for the big drop, take some chips off the table by locking in now.  If rates fall after your closing, you can always remortgage down to the lower rate.  And by then, maybe we'll know if this was a recession or just a blip on the radar.

Broadly, mortgage rates fell in 2007.  It's befuddling because there are two major reasons why mortgage rates should have increased in 2007:

1. The U.S. dollar took a precipitous decline against world currencies, devaluing mortgage bonds
2. Inflation ran beyond the top of the Fed's comfort zone for most of the year, devaluing mortgage bonds

When mortgage bonds get devalued, there should be less demand for them.  But that wasn't the case.  If mortgage rates are lower now than they were a year ago, it means that demand for mortgage bonds must be higher.

There is an inverse relationship between the demand for mortgage bonds and mortgage rates.  As demand increases, mortgage rates fall.  As demand wanes, mortgage rates increase.

So, in 2007, mortgage rates fell because global investors' desire to hold U.S. mortgage bonds outweighed their desire to sell them -- despite the constant drag against their value.

We can hypothesize that mortgage rates would have fallen much, much more had the dollar been stronger, or inflationary pressures been weaker.

One way to envision this is to think of a runner with a parachute apparatus attached to his back. 

The athlete is moving forward but the parachute is adding a tremendous amount of drag.  Once the parachute detaches, the athlete picks up a lot of speed.

In this sense, a stronger dollar or weaker inflation could dramatically drop mortgage rates in 2008.  It would be like cutting the parachute loose and letting mortgage markets run at full-speed.

The U.S. dollar is another hot spot.  A weaker dollar should discourage foreign investment in mortgage bonds.  In this sense, the U.S. dollar represents the parachute and the weaker it gets, the larger the canopy.

The "Recession versus Inflation" should be a hot topic through June 2008. 

With every sign that recession is winning, expect mortgage rates to fall.  When inflation grabs the lead, expect mortgage rates to rise.  And watch out for world events that can landscape in an instant.

This morning, the Non-Farm Payrolls report showed a net loss of 4,000 jobs in the month of August, its first net decline since 2003.

Markets expected some weakness in the report, but not this kind of weakness.  Already, mortgage markets are up 31 basis points today. 

That's a swift, powerful reaction, especially considering that the unemployment rate remained unchanged at 4.6% and is viewed as "strong".

Today, mortgage rates are moving because the investors think the Fed now has an economic reason to lower the Fed Funds Rate later this month. 

But is the economics even there?  If we look deeper at the numbers, we can answer the question(s): What is the true significance of this morning's Non-Farm Payrolls report?  Is the mortgage market's reaction justified? 

Consider the following (subject to revision in October and November):

• 4,000 jobs were lost in August versus expectations of 110,000
• 24,000 fewer jobs were created in July than previously measured
• 57,000 fewer jobs were created in June than previously measured

Adding it up, today's actual news was that the number of working Americans was off by a measure of 195,000 against the total number of employed people of 146,000,000.  In percentage terms, the "surprise" represents 0.134% of the overall workforce.

Now, let's put that 0.134% adjustment in mathematical perspective:

• 0.134 percent is one foot in the height of the Golden Gate Bridge
• 0.134 percent is one person living in Foxfield, Colorado
• 0.134 percent is one double in the storied career of Charlie Hustle

Statistically, 0.134 percent is insignificant. 

And yet, mortgage rates are plowing lower today while economists chirp about dramatic economic weakness tied to the credit markets.  If I hear one more person say that Fed has to lower the Fed Funds Rate because of today's payroll report, I'll barf.

So, just like the last time I did a study like this, the market is reacting strongly to data because of its psychological implications, not because of a fundamental analysis.

I am working with a Dublin-based real estate developer, providing Irish real estate investors with mortgages for United States-based properties. 

A project on which we are currently working has been interesting in context of how the mortgage market is changing.

When we started work on this Chicago-based condo building, the lending landscape was very different than it is today. 

Our initial lender evaluation for the buyers/investors included eight separate banks and a multitude of mortgage products. 

As of today, we are down to one. 

It reminds me how thankful I should be that I represent buyers instead of a Hedge Fund, or other investment company.

Because I am a broker and not a bank representative, the mortgage market can crumble around us but I can still service Foreign National buyers without even a blip of  disruption -- when one bank closes it doors, I still have a stable of banks from which to choose.

And that's precisely what's happening. 

Most of the lenders in our initial evaluation have disqualified themselves for a number of reasons:

• Some <ahem> "closed their doors"
• More than a few tightened their mortgage guidelines and now the approval process is an onerous one
• Most raised interest rates so high that the math of investing in real estate in America no longer works

There is still (at least) one bank that fits the bill and I was pleasantly surprised this morning when I saw that its interest rates had dropped by 0.250% for the borrower profile and product that the Irish buyers will be using.

That's an overnight movement and signals to me that risk premiums may be dramatically reducing for certain sectors of the mortgage lending market.  If Foreign National lending risk is reducing, other areas may not be far behind and that could help provide some support to the Alt-A and portfolio lending markets -- all good things for housing as a whole.

I know it's a fairly narrow market but there's a core group of international readers around here for whom the Foreign National lending niche is important.  If it's important to you, it's important to me.  I'll be sure to keep an eye on things for you all.

I interviewed with First Business anchor Anchor Beejal Patel this week.  First Business produces news "shorts" that are syndicated nationwide. 

The story: "How would a Fed rate cut impact mortgage rates?"  You all know my answer -- it's well-documented around these parts.

I am a little embarrassed about having to use somebody else's office for the spot, though; you'll notice the photo of his three kids and one of their rainbow drawings over my left shoulder.

The rainbow does complement my tie nicely, though...

Most American homeowners:

• Live in homes whose loan sizes are less than $417,000
• Own one home and call it a primary residence
• Can document their income using W-2 statements and/or tax returns
• Have at least a modest savings account
• Have at least the average credit score of 678
• Do not have a history of bankruptcy or foreclosure
• Have monthly income that at least triples their monthly debts

These are the general and basic criteria of a Fannie Mae and Freddie Mac loan. 

Fannie and Freddie are government-sponsored entities whose charter is to help keep mortgage money flowing to people that want it.  The rough rules by which they'll lend are outlined above and encompasses the majority of America.

On the other hand, the host of privately-funded lenders that have bankrupted, merged or otherwise shut down had rules that apply to a small subset of Americans with very specific needs. 

Think grocery store shopping:  The GSEs are the regular bread, the mortgage banks are the gluten-free.

The majority of Americans qualify for Fannie- and Freddie-backed home loans so you shouldn't get nervous when reading the headline news.  For most of our country, the lending options are plentiful -- everyone can eat from world's largest loaves of bread.

If you're a first-time reader, here's the first thing you get to learn at The Mortgage Reports:

Mortgage interest rates are determined by the price of mortgage bonds.  Nothing else, nothing more. 

If mortgage bond prices are down, mortgage rates will be higher.  If mortgage bond prices are up, mortgage rates will be lower.

That's it.  Pretty basic stuff.  Except that mortgage bond pricing information is not very accessible to the general public. 

This includes the press.

Because the mortgage-backed bond market is somewhat foreign to the media, a lot of them use a government bond called the "10-Year Treasury Note" when predicting where mortgage rates will go.  The 10-Year Treasury Note is very easy to follow because it's accessible -- just turn on CNBC or Bloomberg and you'll see it in the ticker.

And, usually, it's okay to use the 10-Year Treasury Note as a predictor of mortgage rates because the two tend to move in the same direction.  But there's no direct correlation between them.

It would be like saying that Microsoft will trade higher because Google beat its earning estimates.  Sometimes, Google will pull up the whole Technology sector, but there are plenty of days when it doesn't.

It's like dreaming about Gorgonzola cheese when it's clearly Brie time.

Unfortunately for mortgage rate shoppers, a lot of loan officers don't get the difference.  They, too, will use the 10-Year Treasury Note as a mortgage rate benchmark.  Again, most days it works, some days it doesn't.

Yesterday was one of those days.

At one point, mortgage rates were getting killed (down 19 basis points) while the 10-year treasuries were thriving (up 53 basis points).  Into the afternoon -- even as the 10-year treasury note extended its gain to 100 basis points -- mortgage bonds had barely recovered to flat.

If your eyes were on the wrong indicator, you would have expected mortgage rates to fall yesterday.  They didn't.  And this same divergence has occurred several times in August.

For people watching the wrong indicator, it may have led to costly rate lock errors.

The only security to watch with respect to mortgage rates each day is the price of mortgage-backed securities.  And if you didn't get the message this time, stick around and I'm sure I'll bring it up again sometime soon.

Did you see the BNP Paribas press release last week that said it's halting withdrawals from some of its funds?

My favorite part is how blunt the first sentence is below (bold added for emphasis):

"The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating."

In other words, BNP stopped allowing withdrawals because it has aucune idée just what it's holdings are worth.  Imagine if you went to the ATM to take out $100 in cash and the bank couldn't give it to you because it doesn't know what the $100 is worth.

Same thing.

It's now been about 10 days since the "impossible to value mortgages" stage began for banks worldwide. If you're having trouble understanding why, this analogy should help.

Think of the NFL Draft.

The NFL Draft was held April 28-29, 2007 but it took two weeks for the first player to sign and he was a third-rounder.

In the NFL, no player wants to be the first to sign at his position because -- as soon as he does -- he is setting the value for every other player at that position.  If a linebacker drafted in the 3rd round signs with his team, he is setting the relative value of all of the other linebackers drafted that day.

If the LB was drafted in the 4th round or higher, his value is less.  If the LB was drafted in the 3rd round or lower, his value is more.  Until a player at linebacker signs, though, team owners and player agent don't know what a "2007-drafted linebacker" is worth.

This is one of the reasons why the #1 pick of the draft -- QB JaMarcus Russell -- is still holding out for a contract from the Raiders.  The next QB in the draft order was Notre Dame alum Brady Quinn at #22 and Quinn finally signed his contract with the Browns last week.

Quinn, presumably, was just waiting for the next quarterback after him to sign because just 13 days prior, second-round draftee QB Kevin Kolb had inked a 4-year, $4 million with the Eagles.

So, JaMarcus Russell isn't really being a jerk by not signing, it's just that he doesn't know what his true value is because -- until co-first rounder Quinn signed a 5-year, $20 million contract -- Russell had nothing of semi-close value to which to compare himself.  My guess is that Russell will sign in the next week.

As always, the fun part is tying this together.

BNP Paribas (and other funds worldwide) are making like NFL draftees.  Because there are no buyers for sub-prime or Alt-A mortgages right now, it's impossible for the funds to know what their holdings are worth. 

Are the home loans in their portfolios worth JaMarcus Russell money?  Brady Quinn money?  What about Kevin Kolb money?  Or -- maybe! -- they worth last-QB-selected-in-the-draft Tyler Thigpen money.

Unfortunately, we can't even come close to answering those questions until a buyer steps up and starts "signing" loans. 

As soon as the first buyer puts a "market value" on a specific type of sub-prime or Alt-A loan, a number of positive things will happen:

1. Funds will re-value their holdings and begin allowing withdrawals again
2. The sub-prime and Alt-A mortgage product menu will expand a bit
3. Wall Street will relax a bit

Until that buyer shows up, though, mortgage money will stay out of the market like JaMarcus Russell stays out of training camp.

I have fielded three separate questions from clients on the topic so that must mean it's time to address the issue in public.

The Fed does not control mortgage rates.  The Fed controls the Fed Funds Rate.

The chart above from HSH Associates shows the path of the Fed Funds Rate (in brown) against a few mortgage products since June 2004.  If there was a direct connection between FFR and mortgage rates, the chart wouldn't show the brown line playing catch-up.

The Fed Funds Rate is a short-term interest rate and its function is to make money more costly to borrow or less costly to borrow for homeowners and business owners.  This works because many bank loans are based on Prime Rate (which is 3.000% higher than the FFR).

As FFR goes up, so does Prime Rate.  And, as Prime Rate goes up, so does the cost of borrowing money.  The reverse is true, too, if FFR drops. 

Nowhere, you'll notice, do we mention mortgage rates in connection with the Fed Funds Rate.  That's because mortgage rates are based on the mortgage-backed securities market -- a global exchange similar to the NYSE or NASDAQ.  The Fed doesn't operate in these markets.

Mortgage-backed bonds are considered long-term products and pricing is based on long-term expectations of the U.S. economy and the U.S. dollar. 

A favorite question from my clients is "Should I lock my mortgage rate, or should I float my mortgage rate?"  I am firmly in the "Lock Now" camp and have written about this more than a few times.

My standard answer to the questions has lately taken a different spin, though.  I still recommend locking a mortgage rate as early as makes sense, but I am now making the recommendation for a different reason.

In short, lock your rate today because there's no promise that the mortgage product you want will be available tomorrow. 

The market is shearing products like sheep right now.

Six months ago, my clients fitting the descriptions below would have been fine.  Today, their product options are dwindling fast and -- in some cases -- are gone.

• Foreign Nationals / Residents of Ireland, Scotland, England and Europe
• Self-employed businessmen and women
• Holders of home loans greater than $650,000
• Credit scores below 680 and weak assets
• Commissioned salespersons
• First-time home buyers
• Owners of investment properties

Fewer choices means having less chance of finding the "optimal" product for mortgage planning purposes.  Settling for something else will usually transate into higher cost of carrying, higher loan fees, or both.

So, maybe you read me every day, or maybe you found me from the CBS MarketWatch article posted Friday.  Either way, we're friends now so let's talk about my breakfast.

To relate this to real life, I think about the time I went to Trader Joe's and found out that they no longer carried Fage Total yogurt.  What gives!

It turns out that there was an importing pricing dispute of some kind, the pirate-behind-the-register told me.  "We don't know when we'll get it back in stock," she said.  And I was pretty upset -- what if I never get the Greek yogurt again...?

Well, the dispute finally ended and Total was put back on the shelves.  By my count, it took about 4-6 months to work out the deal that brought the yogurt back into the U.S. market.

Now, to tie it all in. 

Would you believe that what happened with the yogurt is just like what is happening in the mortgage market these past few weeks? 

Because there are pricing disputes in mortgage products (e.g. "How much is a mortgage really worth?"), a bunch of mortgage products have been removed from the shelves until the disputes can be wqorked out.

And this is why I recommend locking.  If more questions arise about the worth of a mortgage in the coming days and months, more home loan products will be pulled and the financing options will shrink for those that need it.  The list above is just a starting point.

Eventually, this will all work itself out, but until markets can agree on what a mortgage is worth, we may all have to settle for Corn Flakes.

Matt Murphy, the man who caught Barry Bonds' 756th home run ball, is holding onto a valuable piece of babseball memorabilia. 

According to some, the ball could fetch as much as $500,000 in auction bidding.

If in the future, Barry Bonds is found to have used steroids, though, the value of Home Run #756 will drop dramatically. 

Most people get this concept. 

The ball's current valuation model is based on the premise that Barry Bonds did not use performance-enhancing drugs during his career.

If he did use steroids, however, the model used to price the ball today is flawed.  If it happens, we can only guess what the ball will really be worth.

This same line of thinking is what is causing mortgage markets to gyrate lately. 

The financial models that determined the "risk" in mortgages are now being proven to have been flawed.  And there is no history on which to base a new pricing model.

Until new financial models are tested and "approved", therefore, markets will continue to literally guess what mortgage bonds should be worth -- just like we'd have to do with a the-clear-and-the-cream-tainted Barry Bonds 756th home run ball.

Investor funds are trimming their overall risk exposure to compensate for the added risk of mortgage-related holdings.  And, until the broader market defines what a mortgage bond is worth, many investors are trying to stay as cash-heavy as possible. 

This is one reason why there is a global "dump" of stocks, bonds, and everything else.  Once the risk is finally defined, markets should regain their balance.

Did you notice: 

In what took many state governments over 18 months (and counting) to "fix", "free markets" eliminated in three days.

Regardless, a few years from now, state legislators in Illinois, Minnesota and elsewhere will take credit for the reduced number of foreclosures in their home states, without even nodding to the real reason. 

They will say: "We stopped predatory lending with our new laws!". 

Guys like me will say: "No, Wall Street just stopped providing money to homeowners most likely to default."

Foreclosure rates will be down across the country in the years ahead and it won't be thanks to state-by-state mortgage legislation.  Foreclosures will be lower because hedge funds, big banks, and global investors are getting really tired of selling their $100 million loan pools for $93,000,000.

Earlier this month, CNBC featured a segment on how sub-prime mortgages work.  The shame of it, though, is that it aired at a time when the probable audience was already well-versed on the topic.

This would be like holding a seminar on how to throw a baseball to the attendees of the Baseball Hall of Fame induction ceremonies this weekend.  Chances are pretty good they already know how.

The folks that really needed to see this clip are the average homeowners of America. 

In 4-minutes-and-18-seconds, CNBC very clearly explains how losses in the sub-prime market are beginning to trickle up to into "prime" market.  And this aired before some major, major fireworks.

Since the original air date, the following "bad things" have happened:

• United Capital Asset Management incurs $500 million in sub-prime losses (July 3)
• Braddock Financial incurs $100 million in sub-prime losses (July 5)
• Bear Stearns funds incur $1.5 billion in sub-prime losses (July 18)
• Basis Capital Funds Management incurs "steep" sub-prime losses (July 20)

Big numbers, folks, and they are creating a larger fear about United States mortgage-backed debt on the whole.  Previously contained, the fear is now creeping out of sub-prime and into the 'tweener Alt-A market. 

If sub-prime and Alt-A loans keep throwing off losses of this magnitude, investors around the world will eventually stop buying the "Triple AAA"-rated stuff described in the video, too.  If that happens, whoa Nellie!

Watch the clip.  It's only four minutes long.

Source
How Credit-Market Tremors Have Affected Junk Bonds, LBOs and Hedge Funds
The Wall Street Journal Online
http://online.wsj.com/public/resources/documents/info-BondTurmoil0707-sort.html