BNP Paribas - This could be a problem

French Bank BNP Paribas - the largest bank in France and second largest bank in Europe - announced it has temporarily halted withdrawals in three of its mutual funds that have exposure to US subprime credit. The problem the rapid reevaluation of what these securities are worth. And since the value has been declining so quickly in recent days, the French bank wants to see the markets settle before determining the net asset value per share of their funds prior to redemption. It is no coincidence that they are doing this on the heels of the Bear Stearns debacle, in which a similar situation occurred without any suspension of withdrawals, causing those funds to disintegrate.

What is additionally concerning about this story is that just last week BNP Paribas CEO said the bank's exposure to US subprime was "absolutely negligible''. This underscores the rapid and dramatic amount of the credit repricing, which has taken so many US mortgage companies by surprise. There may be more damage ahead where existing pipelines have exposure over the next 30 days - and it is not certain whether the credit markets themselves have stabilized.

BNP Paribas has about $400 Billion Dollars in holdings, with only $2B of that having exposure to subprime - so even this small exposure has sent shock waves through the market. In response to the BNP Paribas situation, the European Central Bank (ECB) has opened up the spigot and made $94B Euros (or $130B Dollars) available for banks to borrow, in an effort to calm fears about liquidity. As you can imagine, investors like you and I who are told that their own funds are not available for withdrawal would be quite worried - and even if they hadn't intended on withdrawing their money, the loss of confidence might prompt individuals to make a run on the bank and pull other funds out. This is why the ECB has made plenty of funds available, to keep investors confident that their investments will be liquid. And even here in the US, the Fed has just made an extra $9B Dollars available for borrowing, for similar reasons. As a follow through to our Fed injecting liquidity, it is now reasonable to assume that the Fed will indeed cut the Fed Funds Rate at the next meeting in September.

In the day’s only economic news, Initial Jobless Claims edged higher by 7,000 claims to 316,000, the highest weekly total since June 30. This is the second consecutive week with rising jobless claims and with the financial and housing sectors having issues, this could lead towards a trend for higher unemployment – a positive factor for the Bond market.
Mortgage Bonds are receiving a boost on the uncertainty and fear in the financial markets - but since this story is still developing, the picture may change quickly.

For now, we advise cautiously floating any conforming loans, but on non-conforming transactions, you should continue to lock upon application, and remind shoppers that the landscape in the non-conforming market has dramatically changed. They need to get into application and lock quickly, as guidelines and lending standards are being changed and tightened daily.