“The ‘50-50-90 rule’: Anytime you have a 50-50 chance of getting something right, there’s a 90% probability you’ll get it wrong…”

“A fine is a tax for doing wrong, and a tax is a fine for doing well.”

The big news in the market yesterday was the August New Home Sales report which came in at 795k vs. an expected 825k. (These numbers are on an annualized basis, so on a yearly basis 795,000 new homes are expected to be sold instead of 825,000.) This 8.3% decline in sales was a much larger drop than expected, a 7-year low, and indicates that the housing sector is still not at the bottom. This is generally good news for bond & mortgage prices, as a slower economy (in theory) would lead to lower rates. It certainly led analysts to increase their expectations of another Fed rate cut at their next meeting.

This morning prices have improved somewhat, and rates have dropped. We had Personal Income +.3% and Personal Consumption (Spending) +.6%, pretty much as expected. They give us an indication of consumer’s ability to spend and current spending habits, important to the markets because consumer spending makes up two-thirds of the U.S. economy. Contained in these numbers are some of the Fed's favorite inflation barometers, which showed that price increases were as expected. The University of Michigan Confidence number is also due out today and is expected to show a small recovery (0.2) from its sharp decline in August (-7.0). The Michigan index measures consumer confidence and is believed to indicate future consumer spending strength.

Investor news, guideline, and price adjustment changes have been relatively quiet this week. Astoria announced several changes to their programs, however, reducing their LTV/CLTV levels on higher balance loans (especially on cash-out transactions), increasing reserve requirements, and requiring that any second liens follow an Astoria first lien.

A news report indicated that HSBC’s closing Decision One is just the “tip of the iceberg”. HSBC still has a sizeable portfolio of subprime auto loans, mortgages personal loans and credit cards through its Household Bank and Orchard Bank units, and the Boston Globe noted that HSBC doubled the number of credit offers it sent to subprime borrowers within the first half of this year. So Decision One was only one of their subprime lending businesses!