Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

Last Week; interest rates increased on treasuries but remained unchanged for the mortgage markets The stock market rallied, defying those that continue to expect a big decline. Equity markets had a small retracement two weeks ago but it only lasted a few days and took the DJIA down 6.0% from its recent high last year. Jan personal income was less than expected, up 0.1% while personal spending was strong at +0.5%. Feb auto sales were expected to have increased, and they did; the only company that reported a decline was Toyota.

The Feb employment report last Friday capped a good week for the various economic reports; non-farm job losses early in the week were for a decline of 10K but as the week progressed the estimates rose to -70K based on guesses as to what the bad weather might have done to employment. A waste of energy as it turned out, non-farm job losses were only down 29K and when the revisions to Jan and Dec are taken into account, there have been no job losses in the past 3 months. On the housing front; Jan pending home sales jumped 12.3% frm Dec. Summing it; the data last week was better than expected and rallied equities while forcing treasury yields higher.

This Week; there are only a few data points that will garner attention; they do not appear until Thursday and Friday when retail sales, weekly jobless claims and the U. of Michigan consumer sentiment index hit. The key this week is Treasury auctions; a total of $74B in 3 yr and 10 yr notes and a 30 yr bond on Tuesday, Wednesday, and Thursday. While the rate markets don’t pay direct attention to them; Treasury also will sell an additional $136B in Treasury bills (obligations with one year or less in duration). Each month Treasury sells $192B in notes and bonds (2 yr through 30 terms), so far the demand for the debt has been very good, foreign investors and direct bidders (anonymous) are stepping up to the table of deficits to fund it. The interest markets are still holding firm, but hitting up against strong technical resistance on the bellwether 10 yr note at 3.60%/3.58%.

Its been a solid resistance level since mid-January; the 10 yr note closed at 3.68% last Friday after declining to a 3.59% close the previous Friday (2/26); last week the 10 yr tested the resistance level everyday, until Friday. The 10 yr note rate at Friday’s close is the highest since 2/23. Mortgages have held strong against treasuries recently, ignoring the choppy and generally non-trending treasuries. Although the mortgage markets are presently holding well, if treasury rates break out to an up-trending move (3.75% on the 10 yr) mortgage rates will follow quickly. Unless there is a major shift in sentiment about the strength of the economic rebound, to the view of a double dip coming, interest rates won’t likely decline much more. The overall view is for increasing rates this year; estimates from 4.15% on the 10 yr note to as high as 5.00%; we don’t see 5.00%, more likely 4.25%. That would mean 30 yr mortgage rates at 5.50% to 5.60%

Summary:

If you’re shopping for a home or a refinance, though, don’t rest on your laurels. After Friday’s big sell-off, this week opens into a major headwind and, plus, the Federal Reserve’s support for mortgage markets ends in just 3 weeks. (You can also see my blog post as well.)  So, without much data for the markets to lean on, I’m afraid upward momentum is the name of the game. After last week’s mortgage rate performance, Thursday may have been the best day to lock in. To minimize your risk, consider locking in against any further rate hikes.

By Zach Fox
SNL Financial LC www.snl.com

While several industry observers worry about negative equity and unemployment driving foreclosures, a couple of experts point out that interest rates on mortgages remain a cause for concern.

Credit Suisse made waves in 2007 among housing bears with a chart that estimates the volume of adjustable-rate mortgages to face a reset each month. An updated version of the chart, which was provided to SNL, shows resets remain a worrying force over the next few years.

Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period.

“Option ARM resets are still pending. … Nothing much has happened yet because rates were so low that resets were pushed back,” Chandrajit Bhattacharya, head of non-agency RMBS and ABS strategy at Credit Suisse, told SNL.

Though option ARMs have grabbed some headlines recently, they are not the primary concern for analysts such as Bhattacharya and Greg McBride, senior financial analyst at Bankrate.com. McBride told SNL he is more concerned about ARMs that do not even show up on Credit Suisse’s chart.

Borrowers who already have seen their ARMs reset might be sitting on their hands and not refinancing into fixed-rate products, McBride said. Because mortgage rates have been so low recently, resets can actually lower, not raise, monthly payments. When that happens, borrowers might feel little urge to refinance into a fixed-rate product that would cost more per month. Alternatively, ARM borrowers might simply struggle to qualify for a refinance because of low or negative equity.

The problem, McBride said, is that when interest rates increase — which many analysts expect to happen over the next year — borrowers’ monthly payments might increase beyond what is affordable for them. And at that point, the fixed-rate products will no longer be attractive, or even financially viable, options.

McBride said the government’s Home Affordable Refinance Program could help many of those homeowners avoid such payment shocks. But the program does not appear to be gaining much traction.

“The avoidable scenario is interest rates start to go up over the next couple of years, and all of a sudden, millions of homeowners who are stuck in adjustable rate mortgages and haven’t been able to refinance out of them become sitting ducks for big payment increases,” McBride said. “And then here we go again. It’s like 2007 all over again. And again, the HARP program is key to avoiding that iceberg, and we’re headed right for that iceberg, and no one’s turning the wheel because everyone’s focused on mortgage modifications.”

Yet Bhattacharya said the ARM reset chart does not portend the all-out doom some housing bears infer. For one, option ARMs are concentrated in just a few states. A Fitch Ratings study from Sept. 8, 2009, reported that three-quarters of all option ARMs were in California, Florida, Nevada and Arizona.

Likewise, McBride was cool to the idea that option ARMs could flood the foreclosure rolls. Option ARMs are less concerning, he said, because so many have defaulted already. Indeed, the September 2009 Fitch Ratings report showed that 30-day delinquencies on option ARMs sat at 46% even though just 12% had recast. Further, option ARM foreclosure rates already match the sky-high subprime foreclosure rates.

Instead, McBride is worried about the prime ARMs posted in the Credit Suisse chart. The chart shows $10 billion to $15 billion resetting each month. If a substantial number of those borrowers do not refinance and interest rates shoot up, McBride said he could see $50 billion worth of prime ARMs facing payment shocks each month by 2011.

To be sure, the economy and the large number of delinquent mortgages yet to enter the foreclosure pipeline remain larger concerns than ARMs, both Bhattacharya and McBride said.

“If you look at it, there’s almost probably 5 million borrowers sitting there in some sort of delinquency right now who have yet to be foreclosed upon. So if you say [the Home Affordable Modification Program] is going to save only a small fraction of that, the rest of them have to go through in some form of foreclosure or distressed sale,” Bhattacharya said. “So it’s definitely not over by any means.”

Credit Suisse projects 10 million foreclosures over a five-year period starting in 2008.

Cristian de Ritis, a director at Moody’s Economy.com, agreed with Bhattacharya’s balancing between interest rates and the economy, in large part because de Ritis sees interest rates increasing incrementally.

“That should give a signal to some of the hold-outs of ARMs to refinance while they still have the opportunity,” de Ritis told SNL. “So I would say it’s something to watch for, but it’s not the primary concern at this point. We’re still mostly concerned about unemployment being the burden.”

Last Week; wasn’t a good one for the economic bulls, and particularly those that think the housing markets are making a turn. Jan existing home sales were expected to have increased about 1.0%, they tanked to a decline of 7.7% with the inventory of unsold homes increasing to 7.8 month from 7.2 months in Dec. New home sales in Jan really fell, with the forecast of an increase of 3.7% over a weak month in Dec, sales plunged 11.2%. Bernanke testified in Congress last week, it went OK and markets only took out of it that once again Bernanke reiterated interest rates would stay low for a lot longer.

We are hearing that it will likely be four more meetings before the FF rate is increased, that takes to out to the latter part of this year. It all depends on the economy; we still think the foundations of the present optimism are too optimistic are too excessive, but that is that famous wall of worry it takes. Not only housing data; consumer confidence in Feb declined substantially; the Conference Board’s index of confidence dropped over 10 points (20%) from Jan to Feb to a low read of 46.0; the U. of Michigan consumer index didn’t slide at all and remained unchanged on the month——more to be confused about. Although the week was punctuated with very soft economic data, the equity markets held well with very little change in the key indexes. The interest rate markets improved; the 10 yr note yield fell 16 basis points to 3.62% and 30 yr mortgage rates declined about 8 to 10 basis points.

This Week; we believe will be one of the most important weeks in the last few months for the financial markets. Very key economic data this week; but none more important than Friday’s Feb employment data. The key data points this week are personal income and spending for Jan, both ISM manufacturing and services reports, Feb auto and truck sales, and the Fed’s Beige Book release. What will make this somewhat of a watershed week, and the relevance of the data releases, is what occurred last week with the very deep decline in consumer confidence. Markets are translating the collapse in confidence to more job losses and no improvement in wealth. We will add that many consumers that have managed to hold on, and hoped to wait the recession out, are now beginning to retreat as the end is slipping farther out for many that so far have “weathered” the economic recession. The early estimates for the Feb jobs report are for just 20K jobs lost and the unemployment rate to increase to 9.8% from 9.7% in Jan.

Early this week we are not expecting any additional improvement in the bond market, and equity markets to be relatively quiet. Based on the early estimates for the non-farm jobs, we believe the decline in jobs will be more than that, and the unemployment rate will be closing back toward 10%. The decline in interest rates last week had two legs; the continued increase in sovereign debt caused by debt problems in Greece, and safe haven moves by investors into treasuries that are taking some money off the table. Look for the week to become increasingly volatile at mid-week as players make adjustments for employment data.

Summary:  Las Week’s Negativity

• Consumer Confidence posted 16% short of expectations
• New Home Sales posted 13% short of expectations
• Initial Jobless Claims were higher than expected

Rates look fantastic right now; however all the risk of floating (not locking your interest rate) falls to Friday and the employment numbers.  The markets expect that 30,000 jobs were lost in February.  If the actual figure is better than 30,000 jobs lost, mortgage rates will rise. If it’s worse, rates will fall.

4.5 FNMA Mortgage Coupon 8-2008 to 2-2010

Remember all the writing I did in the past year about how the Federal Government has been artificially propping up the mortgage markets and keeping interest rates low?

It is all coming to an end … in 37 days!

*HINT* If you click the graph at left, it will open a new window so you can examine it closer. As you can clearly see, the moment the FED announced this program in Nov 2008 mortgage bond pricing improved, which means interest rates went immediately down. You can also see that in the summer of ‘09 the improved again when the FED announced it would extend the program through 1st quarter 2010.

In case you don’t remember, since November of 2008, the Federal Reserve Bank of New York has been the single-largest buyer of Mortgage-Backed-Securities (MBS) on the Bond Market. This is where interest rates are determined. It’s all about supply & demand.

Mortgages are packaged and securitized, and major investors buy those MBS securities as investments. The larger the demand, the lower interest rates need to be. If demand falls, then interest rates will need to rise to make the MBS more attractive to investors.

Without this market, banks would not be able to replenish their funds to do more loans. Now you can see how important this is.

Part of the original Stimulus Bill was for the Federal Reserve to purchase over $1trillion in MBS. This has been happening in phases over the last 15mo, and IS the ONLY REASON rates have been this low. In other words, the US government has bought more MBS than all the other buyers combined, making demand strong.

The program was originally scheduled to end Dec 31st, but was extended through March 31st. (see the chart above in summer ‘09 when they announced the extension) What will happen then? True market forces will take over. Many experts believe rates will jump rather quickly, and others say gradually. Either way, EVERYONE agrees that rates will go up probably by summer at the latest.

IF YOU ARE BUYING, YOU NEED TO GET YOUR ‘You Know What’ IN GEAR. Is it worth the risk to wait? When all the market data points to a rate increase, and not a decrease, there isn’t a compelling reason to hold back any longer. Same with refi’s. If you wait, you could miss the chance of a lifetime.

Call or email me today. Rates are still fantastic. If you are a first time or move up buyer, you have to call. Time is running out on the Tax Credit!

Note the Red columns for 2009. In December 2009, a record low 23 thousand new homes were sold (NSA); this ties the previous record low set in December 1966.  Sales in December 2008 were at 26 thousand.

Last Week; interest rates spiked on continued better economic data and an increase in the producer price index. Therewere four data points on the manufacturing and business sectors, all of which were improvements from Dec. The NYEmpire State manufacturing index jumped, the Philadelphia Fed business index also stronger. Jan industrial productionup 0.9% and Jan factory usage at 72.6%, the best since Dec 2008; within the factory use data the manufacturingpercentage increased to 69.2% up from 68.4% in Dec. While we continue to believe inflation will not be a serious factorfor the rest of the year, the January producer price index surprised with a gain of 1.4% double what analysts wereexpecting. As noted many times here, although the immediate outlook on inflation is subdued, anytime an inflationreading is stronger than markets expect it sends chills through the spines of fixed income investors and traders. Not allthe selling in the bond market was attributable to better economic data; after months of preparing the bond market for theend of monetary easing, the Fed increased the discount rate to 0.75% frm 0.50%. It in itself is not going to increaselending rates, but it once and for all signals the Fed is finished supporting banks and other recipients of governmentlargesse.

This Week; Treasury will be back to the table to borrow another $118B of notes; $44B of 2s, $42B of 5s, and $32B of 7yr notes. On top of that Treasury will auction $8B of 30 yr inflation indexed bonds on Monday. Jan housing statistics thisweek with new and existing home sales, both expected to have increased from Dec. The Dec Case/Shiller home priceindex also out, it attracts attention from a wider national perspective but home price levels are indigenous to each marketarea so other than a indication it has little relevance unless you live in one of the 20 large market areas it specificallydetails. And there is more; two consumer sentiment indexes (the Conference Board’s consumer confidence index and theU. of Michigan consumer sentiment index). Rounding out the week, the Feb Chicago purchasing mgrs index and thesecond look at Q4 GDP, the preliminary read is expected to be unchanged at +5.7%. Interest rates are headed higher, ina choppy pattern but up. The path won’t be straight up and we do not expect rates to increase more than another 50basis points for mortgages or the 10 yr note through the rest of the year. As for any potential for a sizeable decline inrates; it will take a solid break in the equity markets which at this point doesn’t seem likely.

Summary: This week, there’s a lot of economic data set for release.

• Tuesday : Case-Shiller Home Price Index, Consumer Confidence
• Wednesday : New Home Sales
• Thursday : FHFA Home Price Index, Initial Jobless Claims
• Friday : Existing Home Sales, Personal Consumption Expenditures

Any better than expected news on any of headlines above will be bad news for mortgage rates. If you were waiting for the right time to lock, it might have been 2 weeks ago.  We lost all of January’s gains.  If you are in the market for a home loan, consider locking in to protect against futher deterioration.  Need help, give me a call or email.

Last Week:  interest rates on treasuries increased, the 10 yr note yield jumped 12 basis points,, mortgage rates however remained generally unchanged.  The week brought the Greece deficit into full focus early in the week generating a little safe haven buying in treasuries but it didn’t las long as markets quickly realized the European Union would put a plan ion place to keep Greece from defaulting on its debt.  Spain and Portugal are also being observed closely as their financial conditions are not much better than in Greece.

The take away from the revelations that sovereign deb among many  nations is still on the edge of breaking down; not what markets need now as the debate about recover is heating up.  Las week had very little economic releases from which to measure economic conditions.  The week’s major headline was the quarterly refunding by Treasury; it sold $81 billion of 3 yr notes, 10 10 yr notes and 30 yr bonds.  The 10 and 30 yr auctions were not up to recent standards of strong bidding, but were not failures.  China’s decision to increase their bank reserves by 50 basis points was met with concern in the US that Asian countries may try to slow growth rates that have escalated to increase concerns over inflation.

This Week:  unlike las week there are a number of economic report that will draw attention; no Treasury borrowing buy on Thursday treasury will announce the following week’s borrowing, 2 yr notes, 5 yr notes and 7 yr notes will be sold.  Wednesday Jan housing starts and permits, starts will likely be up while we expect permits to have declined after a big jump in Dec.

Most of the economic data this week will be on the manufacturing and business sectors with industrial production and factory use for Jan and the key Philadelphia Fed Business index expected to be a little better.  Interest rates remain tethered to a narrow range for mortgages, moving in a 10 basis point yield range; all focus is on the equity markets with a growing outlook of a major correction coming.  That said, the equity markets have been looking for a correction for the past month but so far… nothing.  A day or two of selling then a day or tow of rallies keeping the key indexes from and serious declines.  It is overdue, we expect the stock market will deliver a huge decline but as long as traders see any decline as a buying opportunity, no bis sell-off is likely.

Market Moving News for this week:

1. Housing Starts and Building Permits (Wednesday)
2. The release of the last month’s FOMC Minutes (Wednesday)
3. Business and consumer inflation figures (Thursday and Friday)

The chart above is a graphical representation of the foreclosures that have been filed in our state of Oregon by county.  At first it doesn’t appear all that bad, however this is for just the month of January. Take a look at the chart below and tell my what you see?

From the chart above we can see that Oregon is ranked 9th.  The media would have you believe this problem is a lot more national… from the chart it’s obvious that it’s not. Nevada, Arizona, California and Florida make up a full 50% of the foreclosure data. 40 states are under the average!

So, this makes a unique problem but also creates opportunity.  Foreclosures are selling like mad across the country and right here in Oregon.  Our higher foreclosure rate has let to some unique buying opportunities.  If you want to buy a foreclosure, here are some sites that can get you started.

• HUDForeclosed.com offers free access to homes
• Foreclclosure.com offers free access to homes
• RealTrac offers free access to homes

Once you have found a list of home you like contact your real estate agent.  As a side note, you are going to want a competent agent.  Negotiating these types of purchases  are not normal so you need an agent with the right experience.  If you need help finding someone, I can get you a few referrals.

I am very familiar with Short Sales, REO (bank owned) and Foreclosures and can arrange for mortgage financing if you are not in the fortunate position to pay cash.  My rates are competitive and we can still close fast even with all the new regulations.

Mortgage markets improved last week on domestic jobs data and international banking concerns. The news triggered buying in the bond market and, as a result, conventional, FHA and VA mortgage rates improved for the 4th consecutive week.

Mortgage rates are now at a 6-week low but probably shouldn’t be.  It underscores just how important global events can be to U.S. mortgage markets.

For example, corporate earnings continue to improve and key elements of the economy are strengthening.  Even the Federal Reserve acknowledges this.  In most circumstances, that would be a boon for the stock markets and bond markets would suffer, including mortgage bonds.

Last week, that wasn’t the case.

Early in the week, as (1) China tightened its monetary policy, (2) Greece did little to quell lingering default fears, and (3) Spain raised its deficit forecasts, global investors sought to reduce their collective risk exposure. For safety of principal, many sold some of their more aggressive positions and moved the cash proceeds into the U.S. bond market — which includes mortgage bonds. 

On Wall Street, this type of trading pattern is called a “flight-to-quality”.  Because mortgage bonds are backed by U.S. government entities, the debt is considered to be ultra-safe.  Last week’s extra demand for bonds helped to push prices up and mortgage rates down.

And that was before Friday’s weak jobs report. Although the Unemployment Rate fell to 9.7%, the government reported a net loss of 98,000 jobs last month and this, too, helped mortgage rates tick lower.

This week, we’ll hope for momentum to continue.

There’s very little domestic news to move rates this week so keep an eye on the global market for similar stories like what we saw last week.  Or, if you’re not sure what to look for, just give me a call or send me an email and I’ll be happy to watch the markets and mortgage rates for you.

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 markets showed little conviction last week, carving out just a narrow trading channel. There was very little data on which for markets to move, leaving mortgage rates momentum-bound.

Luckily for rate shoppers, mortgage rate momentum was favorable. Rates were slightly lower Monday through Thursday before breaking downward Friday afternoon. Home shoppers this past weekend caught a nice break.

Last week marked the second straight week in which mortgage rates fell.

This week, in holiday-shortened trading and with little economic data set for release, expect mortgage rates to again move on momentum. The biggest report of the week is Wednesday’s Producer Price Index.

Producer Price Index is important to mortgage rates because of its role in inflation.  PPI is akin to a Cost of Living-type measurement, but for business.  As business costs rise, the thought goes, it’s not long before consumer costs rise, too. Businesses eventually pass on costs, after all.

In this manner, a rising Producer Price Index can foreshadow rising consumer prices, and, therefore, inflation.

Inflation is awful for mortgage rates.

PPI expectations have revised downward this month, especially because last week’s data showed a deceleration in consumer prices nationwide. If PPI isn’t as weak as expected, mortgage rates will rise.

Other influential data this week includes Housing Starts, Consumer Confidence and Initial Jobless Claims.

So far, 2010 has been good for mortgage rates in Washington and around the country. If you’re in need of a rate lock, this week may be a good time to take one.