Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

Zeus Has Unleashed the Cracken on MBS

I know, cheesy headline but c’mon. Look at the chart above. See that last big Red Bar on the right? That represents the price drop in the 4.5 FNMA Mortgage Coupon. Too technical? Just know that if a price of a bond goes down, the yield or interest rates that is passed on to borrowers is higher. So, the more and bigger the red bars you see, the worse rates get.

This is a significant argument that the FED MBS purchase program that was announced in Nov 2008 had a definite impact on mortgage rates. Most experts agree the FED intervention affected rates by over 1% If that’s true, then rates could be headed up over 6% in short order.  They spent $1.25 trillion on the program, affected the range by 1.75 (6.25% – 4.5%) and rates changed up to 5 times per during the program term Nov 2008 to March 2010.

Do You Know When to Lock Your Rate?

During the timeline outlined above, rates were on a nauseous roller coaster ride. The above chart is a snapshot of the market in real time. Most consumers don’t have access to this info, but a good loan officer does, at least they should. If you are out rate shopping in Oregon or Washington for a home loan, I am an active loan officer and if you have questions about rate volatility, when to lock or other mortgage related questions, give me a call or send me an email.

“Unleash The Cracken”! — Zeus

The Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 26, 2010, increased 1.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 1.5 percent compared with the previous week. “Purchase applications have increased over the past month, and are now at their highest level since last October when many home buyers were rushing to get loans closed before the expected expiration of the home buyer tax credit,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “We may be seeing a similar pattern now, as the extended version of the tax credit ends next month.”

The Refinance Index decreased 1.3 percent from the previous week and the seasonally adjusted Purchase Index increased 6.8 percent from one week earlier. This is the highest Purchase Index since the week ending October 30, 2009. The unadjusted Purchase Index also increased 6.8 percent compared with the previous week and was 9.3 percent lower than the same week one year ago. While both conventional and government purchase indexes saw increases this week, the government purchase index and the government share of purchase applications are at their highest levels since October 2009. The government share of purchase applications is currently 47.2 percent. The four week moving average for the seasonally adjusted Market Index is up 2.2 percent.

The four week moving average is up 5.4 percent for the seasonally adjusted Purchase Index, while this average is up 0.9 percent for the Refinance Index. The refinance share of mortgage activity decreased to 63.2 percent of total applications from 65.0 percent the previous week. This is the lowest refinance share recorded in the survey since the week ending October 23, 2009. The adjustable-rate mortgage (ARM) share of activity increased to 5.2 percent from 4.8 percent of total applications from the previous week.

The plain and simple? Looks like the market is turning to being driven by purchases. We know this because the refinance index failed to make much progress in the first quarter 2010, even as mortgage rates held below 5.00%.  It’s also entirely likely that the ‘fence sitters’ are getting nervous about rates rising coupled with the expiring home buyer tax credit are giving them the proverbial ‘kick-in-the-butt’ they so desperately need.

Last Week; after all the chopping around the longer end of the yield curve ended generally unchanged, mortgage rates and prices were unchanged. At the middle and short end of the yield curve rates increased, the 5 yr treasury increased to 2.41% up 7 basis points, the 2 yr note jumped 6 basis points to 0.96%. The short end saw position covering from the relaxing of the Greek deficit problems as European countries vowed to keep Greece from defaulting on its sovereign debt.

Not a lot of economic measurements to work on, but what there was added to the conviction that the economy is continuing to improve. Feb retail sales increased 0.3%, slightly more than expectations; when we strip away auto and gasoline retail sales were up 0.8%. Weekly unemployment claims continued to decline, down 6K for the previous week. Treasury once again found strong demand for its debt, selling $74B in 3 yr, 10 yr and 30 yr instruments. Equity markets moved up a little, but volume through the week was thin.

This Week; no Treasury borrowing, it is an every other week event. The key this week is the FOMC meeting on Tuesday with the Fed’s policy statement at its conclusion. Look for the statement to be re-worded on the issue as to when the Fed will begin to increase short term interest rates. For the last three meetings the phrase “for an extended period of time” was how the Fed answered how long it would leave interest rates low. An increasing number of FOMC members and Fed Presidents are pushing for a statement that has has less certainty, and want the extended period changed to allow more wiggle room for the Fed. This week the economic calendar has housing starts and permits for Feb, both expected to have declined from Jan; two measurements on inflation with Feb PPI and CPI, and the Philadelphia Fed business index.

Interest rate markets continue to have a slight bearish technical pattern but are completely fixated on how stock investors act; any decline in rates will be keyed on stock market declines as the ebb and flow on the future of the economy continue to dominate all thinking. Also on tap this week; it looks like Congress is going to ram through the health care reform. A plan that few understand, and a plan that in six years will blow another hole in the federal budget deficit. Look for the interest rate markets to be choppy again with not much change this week.

In Summary:

• Monday : Industrial Production and Home Builder Index
• Tuesday : Housing Starts and Building Permits
• Wednesday: Consumer Confidence
• Thursday : Producer Price Index and Initial Jobless Claims
• Friday : Consumer Price Index and Continuing Jobless Claims

If all that weren’t enough to digest, the Federal Open Market Committee meets for a scheduled, 1-day event Tuesday. They are expected to vote and hold the Federal Funds Rate a it’s Target of 0%. However, that doesn’t mean mortgage rates won’t change. Remember, it’s not so much what the do, it ‘what’ and ‘how’ they say it. I’ll and the markets will be paying close attention to their language.

If you are floating a mortgage rate right now… strap in! It’s gonna be a bumpy ride!

USDA Section 502 loans are primarily used to help low-income individuals (here in Oregon that starts at $80,500 gross income for a family of 1-4) or households purchase homes in rural areas.  You can view the eligible areas via their website.  Funds can be used to build, repair, renovate or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities. There is no required down payment. The lender must determine repayment feasibility, using ratios of repayment (gross) income to PITI and to total family debt.

USDA official release can be found below:

This message is to notify you that program funding for the Single Family Housing Guaranteed Loan Program will likely be exhausted by the end of April, 2010.

Once funding is exhausted, the Agency will not issue Conditional Commitments “subject to receipt of appropriated funds.”  This is because it is not certain when additional funding will be available.

Limited funding may become available for disaster areas declared in 2008, or in disaster areas declared for Hurricanes Katrina and Rita.  Limited funding may also become available as prior Agency commitments are de-obligated, however, such funding will be very limited.

We apologize for any inconvenience this may cause you.  Should you have any questions, you may contact the Single Family Housing Guaranteed Loan Division at (202)720-1452.

—– End Release

Technically speaking USDA runs out of money every year and this usually doesn’t affect anything. They just source the fund somewhere else in government. Last year USDA ran out of money too but the stimulus plan buffered that shortfall. Things are different this year because of the huge demand placed on the program.  It looks like the 502 guaranteed Rural Housing program will have exhausted their funds by April 2010!!! For this to not happen, the USDA would need to receive about 150 million in funds to be able to continue the rest of the fiscal year which runs September 2010.

We are just now finding out about this so what is a consumer to do? Or for that matter, my industry peers; Realtor, Loan Officer etc..? We need to contact our local government representation and get them working on a solution. If they don’t, I’m afraid many folks are going to be left up that certain creek without a paddle. You can look up your local representation here. Once at the site, just click your state.

Some lenders have already stopped taking USDA loan applications. If you are in the middle of a transaction, contact your Loan Professional or Realtor immediately and find out your status.

Mortgage rates will rise in response to yesterday’s Fed action.

If you’re in the process of shopping for a mortgage or buying a home, the longer you wait to commit, the higher your mortgage rate will likely be.  Call or send me an email and I will send you a rate quote based on what the market is doing today.

Rates are changing very quickly and every day counts.

The Federal Reserve said yesterday it is raising the rate it charges banks that borrow from the central bank when they run short of funds by a quarter percentage point, or 25 basis points, to 0.75%. The central bank said in a statement it made the move in response to improving financial market conditions.

Don’t everyone panic here, because the move is largely symbolic – banks do little borrowing at the discount window and the discount rate has no effect on the more widely watched federal funds rate, which measures the rate banks charge each other for overnight loans. That rate is expected to remain between 0% and 0.25% for the foreseeable future, given the slack in the labor market and the still fragile state of the economy.

But raising the discount rate allows Federal Reserve chairman Ben Bernanke to take another small step toward normal monetary policy, after the past two last years of  financial firefight.  The Fed also shortened the term of some discount window loans an  d raised the minimum bid in the term auction facilities it uses to supply overnight funds to banks.

The central bank said Thursday’s increase should “encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds” and added that it will “assess over time whether further increases in the spread are appropriate.”  It added: “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”

The Federal Open Market Committee ends a scheduled, 2-day meeting today in Washington. It’s the first of 8 scheduled meetings for the policy-setting group in 2010.

The group adjourns at 2:15 PM ET.

As is customary, upon adjournment, the Fed will issue a press release to the markets recapping its views of the country’s current economic condition, and the outlook for the near-term future.

The post-meeting statements from the Fed are brief but comprehensive. And Wall Street eats them up.  Every word, sentence and phrase is carefully disected in the hope of gaining an investment edge over other active traders.

It’s for this reason that mortgage rates tend to be jittery on days the FOMC adjourns. Wall Street is frantically rebalancing its bets.

Today should be no different.

The FOMC is expected to leave the Fed Funds Rate within its target range of 0.000-0.250 percent — the lowest it’s been in history.  However, it’s what the Fed says Wednesday that will matter more than what it does.

After the Fed’s last meeting in December, it made several observations:

1. The jobs market is getting “less worse”
2. The housing sector is making improvements
3. Financial markets are stabilizing further

The economy is gradually improving, the Fed told us, but there are still risks to the economy ahead.  Furthermore, inflation remains in check.

As compared to December’s press release, today’s FOMC statement will be closely watched. If the Fed changes its verbiage in any way that alludes to strong growth and/or inflation in 2010, expect mortgage rates in Beaverton to rise as Wall Street moves its money from bonds to stocks.

Conversely, reference to slower growth in 2010 should lead rates lower.

We can’t know what the Fed will say so if you’re floating a mortgage rate right now or wondering whether the time is right to lock, the safe approach would be to lock prior to 2:15 PM ET Wednesday. After that, what happens to rates is anyone’s guess.

Mortgage pricing worsened Monday, driving mortgage rates to their highest levels since October.

The day’s action was drastic, too.

Some banks issued as many as 3 rate sheets Monday — each worse than the preceding and one reason why rates got so bad, so quickly, is because this week marks the beginning of mini-Vacation Season on Wall Street.

Between now and January 4, 2010, be prepared for big swings in pricing from day-to-day. Shopping for a mortgage could be a challenge.

The relationship between vacation days and mortgage rate volatility is rooted in how mortgage rates are “made”.

1. Conforming mortgage rates are based on the price of mortgage-backed bonds, a security that is sold on Wall Street
2. Mortgage-backed bonds can’t sell without a bond buyer and a bond seller agreeing to a specific sale price

So, during vacation week, when the total number of market participants are less, there are fewer opportunities for buyers and sellers to meet at a specific price. As a result, bond prices rise and fall with a higher velocity than on a “normal” day. Rallies and momentum plays are exaggerated, too.

Now, mortgage market action like this can work in your favor, or it could work out of your favor. Unfortunately, on Monday, rates moved out of favor.

This rest of this week is stacked with market-moving economic data. The data could be better-than-expected, or worse-than-expected. Either way, markets will react a little more feverishly than normal. Therefore, if you have a chance to lock a favorable rate, consider taking it.

Before long, the rate could be gone.