Government announcements dominated the financial news this week. Updates on two major programs were favorable for mortgage markets, and mortgage rates fell modestly during the week.
Financial Institution Assistance Plan
The most highly anticipated news concerned Tuesday’s speech from Treasury Secretary Geithner on the financial institution assistance plan. This “Financial Stability Plan” involves multiple programs to remove bad assets from banks’ books and to support new lending. It also contains funds to help prevent foreclosures. Investors were sorely disappointed by the lack of details about how the plans would work, however, and they responded to the uncertainty by purchasing relatively safer assets. The stock market plunged, while Treasury and mortgage-backed security markets rallied, pushing rates lower. Geithner suggested that more information about a plan to purchase troubled assets and a comprehensive housing program will be released in the next few weeks.
Fiscal Stimulus Plan
Later in the week, the House and the Senate agreed on a compromised $789 billion fiscal stimulus plan, which is expected to pass within days. The Obama administration estimates that the plan will create 3.5 million jobs. Both the House and the Senate had passed versions which were larger than the final compromise plan, and the reduction in scope helped mortgage markets. A smaller plan means that the government will have to issue less debt.
Unfortunately, one of the spending cuts in the final plan was a provision for a $15,000 homebuyer tax credit, which came with an estimated price tag of $35 billion. Instead, the government will leave in place an existing $8,000 tax credit, applicable to only first-time homebuyers. The primary change to the tax credit is that it will no longer need to be repaid. The estimated cost of this $8,000 tax break is less than $3 billion.
More Mortgage News to Come
Inflation data will highlight a full Economic Calendar next week. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Thursday. Industrial Production, an important indicator of economic activity, and Housing Starts will be released on Wednesday. In addition, investors will continue to wait for details from the Treasury on the Financial Stability Plan. Mortgage markets will be closed on Monday in observance of Presidents’ Day.
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