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Last Week's Market Review

An excerpt from Mortgage Market Guide brought to us by Gillian Meadows with Humphries Mortgage (for full length article, click here):

"THE PATH TO SUCCESS IS TO TAKE MASSIVE, DETERMINED ACTION." Anthony Robbins. And success in stabilizing the markets and the economy is exactly what the government is hoping will happen as a result of the massive, determined actions they took late last week in response to unprecedented happenings in the financial markets.

Treasury Secretary Hank Paulson announced that the US government will guarantee money market funds, after panic led to a "run on the bank" type of environment. A whopping $180 Billion was withdrawn from market funds on Thursday alone. And the fear was so great that a premium to put money into Treasury securities was paid, which actually exceeded the rate of return. So effectively, the return was negative! People were actually paying for a place to put their money that would be safe because they had fears of losing principal. The government guarantee helped to ease these fears and stabilize the markets.

The Fed announced plans to create a market place for illiquid mortgage debt. This should do a lot of long-term good to help the housing and lending environment. As if that weren't enough, the Securities and Exchange Commission also placed a temporary ban on the short selling of 799 different financially related stocks.

What prompted these dramatic actions? Very dramatic happenings earlier in the week.

After 158 years in existence, Lehman Brothers filed for bankruptcy last Monday due to overexposure of high-risk loans in the mortgage arena. Then, the Fed gave insurance giant AIG an $85 Billion lifeline to keep it from going into bankruptcy, after initially stating it would not intervene. Then it was announced that Merrill Lynch is being acquired by Bank of America, which will save them from the same fate as Lehman Brothers, and now troubled bank Washington Mutual is looking for a buyer as well.

Also playing a role was the fact that the Fed left its benchmark Fed Funds Rate (the rate banks charge each other for overnight lending) unchanged on Tuesday, not wanting to counter the recent improvements the US economy has made in the way of inflation. While this benefited Bonds and home loan rates earlier in the week, Stocks felt heavy selling pressure on the news...which added to the reasons for the actions taken late last week.

The government's announcements on Friday are great news for the overall health of our financial system, though they did cause Bonds and home loan rates to move away from their best levels of the week. All in all, Bonds and home loan ended the week slightly worse than where they began. Additionally, stocks had their most volatile week in history - but ended the week almost exactly where they started.