Events This Week:

Employment Lower

ISM Services Rose

Pending Sales Fell

Manufacturing Mixed

________________________________

Events Next Week:

Wed 1/14
Retail Sales
Import Prices

Thur 1/15
PPI

Fri 1/16
CPI
Industrial Prod.
Sentiment

Fed Begins MBS Purchases

Weak economic data and strong demand for mortgage-backed securities
(MBS) helped mortgage rates remain at historically low levels during the
week. Refinancing activity has increased dramatically as borrowers have
rushed to take advantage of low rates. As a result, backlogs have
developed at almost every step in the origination process, extending the
time necessary to close many loans.

On November 25, the Fed announced a plan to purchase as much as $500
billion in MBS. On Monday, the Fed revealed that it had begun to
actually purchase securities. The Fed reported that it bought $10.2
billion of a wide range of MBS. Mortgage rates are affected by MBS
prices, and this added demand for MBS helped support low rates.

Investors knew that the economy was in tough shape in December, so there
was little reaction to Friday's ugly Employment report. The economy lost
524K jobs in December, and 2.6 million jobs were lost in 2008, mostly
during the final four months of the year. The manufacturing and
construction sectors remained weak, while there were small gains in
education and health care. One bright spot was that wage growth
increased at a faster than expected 3.7% annual rate. The current
economic weakness also helps support these low mortgage rates.

Capacity Issues Force Rate Pressure and Slow Transactions to a Crawl

As the mortgage industry contracted over the past 12 months, many
lenders cuts costs and reduced staff. With the recent surge in
refinance business due to historically low rates, lenders are unable to
handle the inflow of loans. Most lenders will no longer allow loans to
be locked on a 30-day commitment unless the completely processed file
(verified income and asset documentation, appraisal, and title work) has
already been submitted. In the past, brokers were allowed to lock for
30 day pending the receipt of the file. With some lenders taking 18
business days before they even touch a submitted file, it could take as
long as 45 calendar days to complete a transaction. The greatest effect
this capacity issue has had on the mortgage market is that lenders
swamped with business no longer need to price to be competitive. Many
lenders this week raised rates at times that were contrary to movements
in the bond market..

Also Notable:

* The December Unemployment Rate jumped to 7.2%, the highest since
1993
* The Fed's Yellen favors "pulling out all the stops" to stimulate
the economy
* The Bank of England cut interest rates by 50 basis points
* After rising to $50 per barrel on Tuesday, oil prices fell back
to $40 per barrel

Daily Rates from Hawaii’s Top Lender’s

Average 30 yr fixed rate:

Last week:

+0.14%

This week:

-0.09%

Stocks (Weekly):

Dow:

8,599.18

-178.49

NASDAQ:

1,571.59

-5.44

Week Ahead

The monthly inflation reports will highlight the 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. In addition to the inflation data, Retail Sales will be
released on Wednesday. The Retail Sales report is a major indicator of
spending levels by consumers, who account for about 70% of economic
activity. Industrial Production, another important indicator of economic
activity, will be released on Friday. Consumer Sentiment and Import
Prices will round out the schedule