Thursday, April 2, 2009

A rally in the stock market sparked by this morning's announcement the Financial Accounting Standards Board has voted to give financial firms more flexibility in how they apply mark-to-market accounting rules has created some modest downward pressure on mortgage rate sheet prices.

FASB is an independent standard setter for accounting rules. The board has been under immense pressure from Congress to relax the mark-to-market accounting rule in the belief it will help fix banks and the country's financial problems. At a mid-March hearing, lawmakers told FASB chairman Robert Hertz to move quickly on new guidance or Congress would pass legislation to loosen the rules. Some say FASB made the changes in the mark-to-market standards to preserve their independence - but others say there is no independence when the government mandates change.

In any case, under the new guidelines financial firms will now have more flexibility to exercise their own judgment to determine if a market for an asset is inactive and if a transaction is distressed. Banks will be able to rely on cash flow models to set the price of an asset, generating in many cases a higher price than what the market is actually offering at the time. FASB said the new mark-to-market guidance will be effective for the second quarter, though exceptions may be made for some firms to use the new rule when reporting their first-quarter financial performance. With the single stroke of the pen many financial institutions' capital positions improved by an estimated 20% or more this morning. Companies weighted down by unmarketable mortgage-backed securities may see their balance sheet loses trimmed by 50% or more once the new rule is applied.

The jury will be out on this new accounting rule change for awhile. The rubber-will-really-meet-the-road on this issue once these financial institutions attempt to raise capital from other resources than the government. The flexibility to do a bit of financial creative writing and the direct impact this ability will have on the effective assessment of corporate credit worthiness by private investors may not mix well at all.

Taking center-stage in terms of the economic news today was the Labor Department's initial jobless claims report for the week ended March 28th. The number of Americans filing for first-time jobless benefits swelled by 12,000 last week -- while the number of unemployed workers continuing to receive benefits climbed to its highest level since 1982. Since it fell outside of the survey period - this morning's initial jobless claims data will have no impact on tomorrow's March nonfarm payroll figures.

Traders are prepared for extremely dire headline employment numbers when the government releases their March Nonfarm Payroll report at 8:30 a.m. ET tomorrow morning. The consensus estimate is calling for a loss of 650,000 jobs and a jump in the national jobless rate to 8.5% from its current level of 8.1%. Numbers that match or exceed the consensus estimate won't impact the mortgage market much while a lower than expected headline number and/or a jobless rate less than 8.5% will almost certainly put some noticeable upward pressure on rates. The probabilities favor a March nonfarm payroll report that either matches or closely approximates the consensus estimate -- rendering Friday's data virtually meaningless in terms of its influence on the mortgage market.

Here's a bit of good news from Freddie Mac. The average 30-year home loan rate fell 0.07 percentage points this week to 4.78% -- the lowest rate ever recorded by Freddie since they first began tracking them weekly in 1971. For comparison sake -- this week's rate is 1.10 percentage points lower than where it was during this same week one year ago.