Since the Fed announced a plan to purchase $500 billion of
mortgage-backed securities on November 25, mortgage rates have moved
progressively lower, and the trend continued this week. Conforming
fixed-rate mortgage rates dropped to levels last seen in 2003. Weak
Retail Sales data and low inflation figures released during the week
also supported the move lower.

As the government strives to offset the current weakness in the economy,
its actions have exerted a much stronger than usual influence on
mortgage rates. Programs to purchase mortgage-backed securities and to
provide capital to financial institutions have been favorable for
mortgage rates, while a bill introduced in Congress this week could have
the opposite effect if passed. The bill would permit bankruptcy judges
to modify troubled mortgages by reducing the principal and payments. The
goal would be to help prevent foreclosures, which is a worthy objective.
However, opponents of the plan are concerned that investors may require
higher mortgage rates to compensate for the increased risk that loan
contract terms may be changed. At this point, it's not certain when the
bill will come up for a vote.

The big news next week will be Tuesday's Fed meeting. Expectations are
for a 50 or 75 basis point rate cut, and the accompanying statement will
provide the Fed's latest views on the state of the economy and the
financial system. The Consumer Price Index (CPI), the most closely
watched monthly inflation report, will also come out on Tuesday. CPI
looks at the price change for those finished goods which are sold to
consumers. Industrial Production, an important indicator of economic
activity, will be released on Monday. Housing Starts is scheduled for
Tuesday. The regional manufacturing indexes will also be released next
week.

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