The Week Ahead

This is from MND......Mortgage rates rose, stabilized, then rose again and again and again on Friday last week. That's a three day skid of rising rates. Economic data wasn't necessarily great, but it wasn't bad either. The Federal Reserve did hike the rate at which they lend emergency funds to banks in need. While this event did cause a commotion and alter market sentiment, the net effect was not seen as a reason behind increases in mortgage rates. The Federal Reserve's planned exit from the secondary mortgage market has also played a minimal  role in rising rates. The general explanation behind rising mortgage rates has been a slow and steady uptick in benchmark Treasury yields.  Because mortgage-backed security yields track the direction of benchmark Treasury yields, mortgage rates have been generally higher lately.

There are several technical and fundamental reasons behind rising government borrowing costs (benchmark Treasuries), but the all encompassing explanation is that economist outlooks are "less bad". A record economic contraction now appears to have stabilized. The record dip in stocks that came along with it has almost completely corrected, and benchmark Treasury yields are now rising from all-time record lows. 2009 was a year of extremes, something we all grew accustomed to, but something that is not expected to continue forever.

As long as nothing drastically negative occurs economically or financially in the next few months,  which global governments have been diligently responsive to, mortgage rates are expected to continue to gradually rise. Unless housing really falls flat on it's face when the Federal Reserve exits the secondary mortgage market, which we are not expecting.

Today was a very slow day in the rates marketplace but the week ahead is full of Fed speak and plenty of economic data.   

Here are the highlights:

Tuesday

• S&P Case Shiller Home Price index (medium impact unless its really far from expectations)
• Consumer Confidence (medium impact)
• $44 billion 2 year notes will be auctioned  by the US Treasury (more than medium impact less than big impact)
• St. Louis Federal Reserve Bank President James Bullard speaks in Virginia on regulatory reform (more than low impact less than medium, next guy overshadows)

Wednesday

• MBA Applications Index (low impact)  
• New Home Sales (medium impact. high impact if S&P surprises in either direction)
• Ben Bernanke delivers his semiannual Monetary Policy Report to House Financial Services Committee (high impact)
• $42 billion 5 year notes will be auctioned by the US Treasury (more than medium impact less than big impact)

Thursday

• Durable Goods Orders (probably medium impact. potential for high impact)
• Initial Jobless Claims, Continued Jobless Claims, Emergency Benefits (medium impact. high impact if Bernanke says something like the labor market is weaker than anticipated)
• Ben Bernanke continues repeats his semiannual Monetary Policy Report to Senate Banking Committee. (Q&A will be high impact)
• James Bullard speaks again, this time in Texas regarding the economy. (low impact. Bernanke overshadows)
• $32billion 7 year notes will be auctioned by the US Treasury (high impact potential)

Friday

• Advance 4th Quarter GDP is revised to Preliminary 4th Quarter Real GDP read. One more revision after this revision. (medium impact if better. high impact if revision is down)
• Chicago Purchasing Managers Index (more than low impact. less than medium impact)
• Consumer Sentiment (medium impact)
• Existing Home Sales (medium impact if as expected. high impact if far from forecasts)

For a more in-depth discussion, read MND's The Week Ahead

Reports from fellow mortgage professionals indicate lenders offered slightly improved mortgage rate pricing today.  The par 30 year conventional rate mortgage has fallen back to the 4.875% to 5.125% range for well qualified consumers.  To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.  You may elect to pay less in upfront costs, but you will have to accept a higher interest rate.

It will be a very busy week of economic data releases and headline news events. We have casually discussed the idea of a short term float position. This is a very risky move, but if you are approaching the 10 day window to lock your loan, and have a few days to watch, there might be an opportunity to pick up 0.125% in rate. That's really not much in the grand scheme of things unless you are floating a high-cost area loan amount.

With that said, if you are 20 days out of closing, I still I favor locking over floating.

Good Day!

Hope all of you had a great Fourth of July extended weekend!!!  A few thoughts on the economy and the politics as we head into the second half of 2011.

1)       The economy is probably in better shape than the Republicans want to admit and in worse shape than the Democrats are communicating.  My thought is that if you are an independent, then you probably have the most realistic viewpoint.  Anecdotally, it appears to me that the economy is growing and not shrinking.  Every time I am out and about, restaurants are full and stores are busy.  Listening to CNBC this morning, one of the commentators said “if Europe was hurting or was truly concerned about an impending financial crisis, he certainly did not see it when he was in Paris”.  Again, this is anecdotal.  (I do not wish to play the flute of “everything is great” when I know some folks cannot make ends meet.)   I know from other reports that businesses are stockpiling cash uncertain of the governmental mood rather than of the economic future.  

Monday Mortgage Bonds

After a 53bp intraday swing the 4% coupon ended down 12bp at 100.56 today ahead of this week's economic reports and the FOMC meeting. Mortgage Bond prices were capped by a rising Stock market today that was fueled by a decisive favorable court ruling by Wal-Mart and as Luxembourg’s Jean-Claude Juncker assured investors that the Greek debt woes will be dealt with and a solution will be found. The Dow gained 76.02 to 12,080.38, the S&P 500 Index jumped 6.86 to 1,278.36 while the Nasdaq gained 13.18 to 2,629.66. Oil settled at $93.26/barrel up 25 cents. Tomorrow's lone economic report is Existing Home Sales. 

Home builder Toll talks housing with Bartiromo

One of the leading home builders says mortgage rates will begin to rise in the next few weeks as the Federal Reserve's quantitative easing program, or QE2, winds down. And Bob Toll would not be surprised to see rates spike from 4½% now up to 7½% within two years. But the founder of Toll Bros. also says even with home prices down 30% to 50%, and rates at "beyond-belief" levels, housing remains a buyer's market. I spoke with Toll about why his industry has been missing in action in the economic recovery and whether that signals tougher economic times ahead. The following is our talk, edited for clarity and length.

Q: Can you characterize where we are in this recovery?

A: We're slowly getting better. There's no reason to celebrate if you're a seller. It's a buyer's market, but that's got some opposing facts that make it a good time, such as interest rates that are beyond belief and prices that are, in some cases, down 30%, unless we're talking distressed, in which case prices can be down 40% or 50%.

Q: Why has housing taken so long to recover, and how much supply is on the market?

A: Supply in the market really has to be divided to understand where we are. You have a distressed market, which is short sales and foreclosures. Then you have an existing home market that is not a short sale or a foreclosure. Then you have a new home market. So you have three distinct markets. You've got still a load of supply of foreclosure, though it's less than it was. You do not have new home supply at all. New home sales have gone down to 250,000 a year single-family, 300,000 a year on an annualized basis. That's less than a third of a normal year supply for new home sales.

Q: Are prices still coming down?

A: In some places you see price increases in new homes. At the same time, you see price decreases on short sales and on foreclosures. And that makes sense because some of that has been around for a long enough time for the seller to say, "You know what? I don't care if it's a third, give me my money. Get me out of here."

Q: How long can rates stay this low?

A: I've seen plenty of cycles. And interest rates, since I've been in business, have never been this low. You've got a 10-year Treasury at 3%. You've got mortgage rates for 4% and 5%, a jumbo is 4⅞%, You've got tremendous interest rates. We've got to wait until the Fed stops QE2. When the Fed stops buying bonds, you should see some escalation in interest rates and some drop in the price of bonds because the biggest element of demand is going to leave the market.

Q: Do you think we'll see QE3?

A: It would be an awful tough one. We have been told of the politics and the deficit focus, so there's no more beer to go around anymore. We can't spend our way any longer out of the problems that we've got without really roughing up the system to an extent that it may become dangerous. I don't see QE3, and I don't see additional stimulus out of the administration being possible. You can't reduce the deficit while starting another program to stimulate the economy.

Q: But even if we were to see rates back up a little after QE2 ends, you're still looking at a very low level, right? So aren't we talking about low rates for an extended period?

A: It very much is determined by items beyond our control. We don't know what's going to happen in the oil market from day to day. The Middle East. We don't know if Greece collapses. If it does, does it take with it Portugal or Ireland or Spain? We don't know what the world holds for us, So I couldn't say that interest rates should stay low. I would have no problem believing that interest rates on 10-year Treasury could go from 3% to 4% to 5% in a space of two years. And if interest rates are 5% on a 10-year, your mortgage is going to be 7% or 7½%. We existed for 40 years with an average interest rate for mortgages at 8½% and thought we were doing pretty well.

Q: How hard is it to get a mortgage right now? Are banks lending?

A: Well, if you really don't need the loan, you can get it in a minute. If you've got decent credit and you're going for an 80% mortgage, there's no problem whatsoever. People will chase you all over town trying to get that to you. If you're looking for an all-pay as opposed to prime, you're going to have a little more difficulty. Anything other than prime or alt-A (the next riskiest) mortgage, yes, it's difficult. But that's not what's restraining the market.

Q: What is restraining the market, then?

A: It's fear, a lack of confidence in home prices. You've got an awful lot of talk in the media, discussing whether house prices are going to go down another 5%, 10%, 15% or 20%. I think time heals all. And we believe that down the road, we are going to go back into what was a normal housing market for a long, long time in the U.S., which is that housing goes up in value every couple of years. We're not helped by discussions out of Washington that we ought to consider putting the GSEs (government sponsored enterprises) out of business, Freddie Mac, Fannie Mae; we ought to consider lessening the mortgage deduction. It doesn't matter whether you do put the GSEs out of business, and it doesn't matter if you do take away some of the mortgage interest rate deduction, as long as you give us a static situation where people know what the rules of the game are. Right now, people are confused.

Q: Can you walk us through the country and tell us where the strong spots are for housing and where there still are troubled spots?

A: Oh, sure. Trouble spots for housing are Vegas; Phoenix; for more expensive housing, Chicago; inland empire in California; Georgia, Atlanta. Better markets are Massachusetts down through Washington, D.C.; Raleigh; Charlotte; surprisingly, Texas, Dallas, Houston,San Antonio

. Austin's a little rough. I think that's about it.

Q: If housing stays stagnant, will the rest of the economy stagnate or even worsen?

A: The answer is yes, yes, yes. It's housing that took us into the mess that we got into. Mortgages became available if you could wear a tie and chew gum. And they were securitized. And everyone was doing it. Well, how's a guy ever going to pay it off? People said he doesn't have to pay it off. Everybody knows houses are going up 10% a year. In five years, it'll be 50% paid off just on the basis of appreciation. Oh, OK. What are my people going to do with the extra money? That's easy, buy a bigger house. Everybody's happy. And if the price goes up more and more, that creates even greater demand. And it's the age-old snowball that's been going on for the last 3,000 years.

So there you are with a market that finally collapses, and it employs probably more than any other industry in the U.S. Until housing gets back up to a level of production that puts enough people to work so that it's clear that our job market is going in the right direction, you're going to have what Jimmy Carter called the malaise.

New Federal Government Golf Rules

Looks like some of you are in luck. The rest of you will somehow become 18+ cappers by April 1!  

President BHO has recently appointed a Golf Czar and major rule changes in the game of golf will become effective in January 2011. This is only a preview as the complete rule book (expect about 2000 pages) is being rewritten as we speak. Here are a few of the changes.
Golfers with handicaps:
- below 10 will have their green fees increased by 35%.
- between 11 and 18 will see no increase in green fees.
- above 18 will get a $20 check each time they play.

The term "gimme" will be changed to "entitlement" and will be used as follows:
-handicaps  below 10, no entitlements.
-handicaps from 11 to 17, entitlements for putter length putts.
-handicaps above 18, if your ball is on green, no need to putt, just pick it up.  

These entitlements are intended to bring about fairness and, most importantly, equality in scoring. In addition, a Player will be limited to a maximum of one birdie or six pars in any given 18-hole round. Any excess must be given to those fellow players who have not yet scored a birdie or par. Only after all players have received a birdie or par from the player actually making the birdie or par, can that player begin to count his pars and birdies again. The current USGA handicap system will be used for the above purposes, but the term 'net score' will be available only for scoring those players with handicaps of 18 and above. This is intended to 'redistribute' the success of winning by making sure that in every competition, the above 18 handicap players will post only 'net score' against every other player's gross score. These new Rules are intended to CHANGE the game of golf.

Golf must be about Fairness.  It should have nothing to do with ability, hard work, practice, and responsibility. This is the "Right thing to do for Americans, legal or otherwise". 

What's New at LeaderOne Financial for 2011 -: Gasoline Prices, Charlie Sheen, and Low Interest R...

What's New at LeaderOne Financial for 2011 -: Gasoline Prices, Charlie Sheen, and Low Interest R...: "2011 has started off crazier than a Charlie Sheen Saturday night bender. The current oil prices are trading over $100 a barrell. Global..."

Here's To a New Week

Current trend Direction: Sideways

Advise your Clients:  Locking

Current Price of FNMA 4.0% Bond: $98.47, -6bp

Bond markets are trading near unchanged levels this morning, after economic data revealed that inflation remains tame here in the States.

The Commerce Department reported today the Core Personal Consumption Expenditure (PCE), rose by 0.1% in January, in line with estimates and up only slightly from 0.0% in December.  The Core PCE year-over-year rose by 0.8%, again up just slightly from the previous reading of 0.7%.  The report also showed that Personal Incomes jumped by a pretty juicy 1.0%...but we have to remember that this number is a bit skewed, as a large chunk of the increase came from the reduction in Social Security payments workers get this year as part of the recently passed Tax Package.

If you filled up the tank in your vehicle this weekend, you may have noticed gas prices have crept up in recent days due to the unrest in the Middle East and North Africa - but at least oil has somewhat backed off the highs of last week.  Continued high oil prices would hurt economic recoveries struggling to keep traction all over the world.  

There are no Treasury auctions this week, but POMO marches on…the Fed, through its Permanent Open Market Operations, will purchase of $5B -$7B worth of 2013-2015 maturities.

Chicago PMI was reported at 71.2, which was much better than expectations of 67.5.  And the best reading since July of 1988. 

Looking ahead - the big data point for this week will be the February Jobs Report coming on Friday morning, where it is expected that 180,000 jobs will be created with all gains coming from the private sector.  We will discuss this more later in the week, but we may just see an upside surprise on Friday.

For now, the Bond is trading right at a layer of resistance.  Prices could move higher here as the Middle East uncertainty continues to buoy the Bond market - but the ride will be volatile and short lived if it happens.  Even though inflation numbers aren't showing in our reports as evidenced this morning - inflation is most certainly growing.