NeWS to KnOW

The fear, overshadowing the progress being made in fighting financial collapse in the world's credit markets, is that the global economic climate is deteriorating at such a rapid pace that a drawn-out recession is inevitable. I think the jury is still out on that one - but it appears that stock investors are increasingly headed for the exits nonetheless - selling stocks and moving the proceeds into the relative safe-haven of the bond and mortgage-backed securities market. As long as this migration of capital out of world-wide stocks into dollar denominated assets continues - mortgage market conditions will tend to be supportive of steady to fractionally lower interest rates.

In other news of the day the Mortgage Bankers of American announced that their seasonally adjusted index of mortgage applications slipped 16.6% lower last week. The purchase application component of the index fell 10.9% while refinance applications edged 23.5% lower. Worth noting was the fact that the national average 30-year fixed rate mortgage dropped 19 points to 6.28%. For comparison, according to Freddie Mac, the monthly average 30-year mortgage fixed-rate during the month of October was 6.38% in 2007 and 6.40% in 2006. Against this backdrop it is easier to see that the mortgage market is currently dealing more with a crisis of confidence on the part of prospective borrowers - as opposed to the ramifications of notably higher interest rates.

Worth repeating: Research shows it tends to take a minimum of three months for market participants to begin to show even the faintest signs of overcoming a market shock. Such was the case in the major mortgage market swoon of 1987 and again in the big sell-off in 1998 following the fall of hedge fund Long Term Capital Management. Predicated on historical experience, if we assume the apex of the financial crisis in the mortgage market probably occurred in mid-September when the government seized control of Fannie Mae and Freddie Mac, the first sign of the return of "normal" trading conditions in the mortgage market won't likely start to manifest itself until sometime in January of '09.