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UKRAINE AND CHINA

Tensions in Ukraine flared up again this week, causing investors to shift assets from stocks to the relative safety of bonds. Weaker than expected economic data in China also favored bonds over stocks, while the US economic data was
roughly neutral. As a result, mortgage rates ended the week lower.

The most significant US economic report released this week, Retail Sales, contained some good news and some bad news. On the positive side, the results for February were stronger than expected. Unfortunately, the figures for January were revised lower.

Overall, this left the data over the two-month period a little weaker than expected.  Given the offsetting effects of the solid headline number and the downward revisions, combined with weather related distortions, the report caused no change in the economic outlook and had little impact on mortgage rates.

There was a lot of talk in the mortgage industry this week about a proposal out of the Senate Banking Committee that would replace Fannie Mae and Freddie Mac.  Together Fannie and Freddie purchase or insure the majority of fixed-rate mortgages, so any changes to their structure would have enormous implications for mortgage lending. In the proposal, a new government entity would take over many of the functions of Fannie and Freddie, while some of the default risk would be shifted to private insurers. Both political parties support a reduction in the risk to taxpayers, but beyond that opinions vary widely about the appropriate role of government in the housing market.  As a result, this proposal is viewed as a starting point for a long
political debate, and the implementation of major reform of Fannie and Freddie is projected by most experts to be many years away.

The biggest upcoming event may be an important vote in Ukraine’s Crimean region on Sunday. If Crimea votes to secede from Ukraine, investors will be concerned that it could lead to an escalation in the tensions between Russia and the US / Europe. In the US, the next Fed meeting will take place on Wednesday.  Investors expect the Fed to proceed with another cut in its bond
purchase program. Industrial Production will be released on Monday. Core CPI inflation and Housing Starts will come out on Tuesday. Existing Home Sales and Philly Fed will be released on Thursday.