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

Last Week; by the end of the week mortgage rates were unchanged from the previous Friday. The bellwether 10 yr note also essentially unchanged at 3.69% -1 BP. Short term rates however increased last week, somewhat preparing for the Fed withdrawing from the quantative easing programs initiated when the economic recession began; the only program still alive by the end of this month will be the TALF (treasury auction lending facility) to purchase commercial real-estate loans. At the end of March the Fed will have completed purchasing $1.25T of MBSs over the past year. Questions abound as to the potential impact on mortgage rates as a result of the Fed’s exit. So far mortgage interest rates haven’t experienced any unusual activity, holding a tight spread between the 10 yr note rate and 30 yr fixed mortgages.

The FOMC meeting last week; in the post-meeting stated that “Economic activity continued to strengthen…” would get a poor reception in your average Main Street saloon. Improve, yeah, in places; but, “strengthen”?… nah. If it were truly strengthening, how come exceptionally-low-rate-for-extended-period? The Fed also hit the end game of its housing-forecast. In November, “Activity in the housing sector has increased”; December, “Some signs of improvement”; January, no comment; this week, “Housing starts have been flat at a depressed level.” The equity markets continue to improve, betting heavily there will be no double dip; the DJIA index jumped 117 points but the broader averages were only fractionally better. Skeptics point to the very low volume in the stock market as evidence the market is softening, so far though no retreat.

This Week; starts with nothing in the way of economic data on Monday; the day will likely be dominated with the health care reform package that is expected to have passed on Sunday. If Democrats fail to get the votes (not likely) it will spell the end of this plan and Congress will have to start again. The week has Feb home sales reports on both existing and new homes; estimates are for a decline of 1.0% on existing sales and +1.9% for new home sales. The home buyers tax credit is about all that is driving sales recently. Treasury will have more borrowing with $44B of 2 yr notes on Tuesday, $42B of 5 yr notes on Wednesday, and $32B of 7 yr notes on Thursday.

So far, and for the past year, the demand for funding US budget deficits has been very strong and we expect that will continue this week. There are two interesting Fed officials speaking this week; SF Fed Pres Janet Yellen, likely the next vice chair of the Fed, and KC Pres Hoenig. Hoenig has been THE hawk at the Fed, pushing for the FOMC to point the markets to rate increases possibly sooner than that “extended period” for low rates to continue. The rate markets last week were soft at the lower end of the curve with longer term rates flat. Technically the long end including mortgages is sending bearish indicators on the key moving averages and momentum oscillators.

In Summary:

• The Existing Home Sales data for February is released Tuesday, along with the Home Price Index
• The New Home Sales data for February is released Wednesday
• Consumer Confidence data hits Friday

Don’t forget, we are now in the week after the FED confirmed that they are in fact ending their Mortgage buyback program March 31st, 2010. We also have to be on the lookout for Kansas Fed President Thomas Hoenig. He will be out speaking why rates should be higher and what the are doing to prepare for the rest of this year and beyond.

As always, I welcome your comments! Email me if need help putting a mortgage together for a home purchase or refinance.

In its press release, the FOMC also noted that the U.S. economy “has continued to strengthen” and that the jobs markets “is stabilizing”. It also said that business spending has “has risen significantly”.

This is a slight departure from the Fed’s January statement in which housing was not mentioned and business spending was said to be “picking up”.

It’s also the sixth straight statement from the FOMC in which the Fed described the economy with optimism. This is a signal to markets that 2008-2009 recession is over and that economic growth is returning.

The economy is not without threats, however, and the Fed identified several:

1. High unemployment threatens consumer spending
2. Housing starts are at a “depressed level”
3. Consumer credit remains tight

The message’s overall tone, however, remained positive and inflation is within tolerance limits

Even bigger new for you and I in the mortgage world, Bernake also confirmed the end of its $1.25 trillion commitment to the mortgage market by March 31, 2010.  This is huge for the Real Estate Mortgage Markets. See my earlier post FED Pulls Out in 37 Days: You Need to get Your Butt in Gear! from February 2010 for my thoughts. Fed insiders estimate that the bond-buying program lowered mortgage rates by 1 percent since its start.

Mortgage market reaction to the Fed press release is, in general, ambivalent. Mortgage rates are unchanged this afternoon.

The FOMC’s next scheduled meeting is a 2-day affair, April 27-28, 2010.

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!

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.

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!

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.

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.