Which Bonds Are Mortgage Rates Tied To?, Debate On Loan Officer Pay, Primer On Case Shiller Index

Which Bonds Are Mortgage Rates Tied To?
Rates on mortgage loans up to $417k and up to $729k are tied to trading in “agency” mortgage-backed bonds—meaning bonds issued by Fannie Mae, Freddie Mac, and Ginnie Mae. So while many look to the 10yr Treasury Note for clues on mortgage rates, they should be looking at mortgage bonds. And specifically, there are different duration mortgage bonds to watch during different times in the market to predict what rates might do, and how to properly lock a rate at the best time.

Prices on agency mortgage bonds have been slightly abnormal lately, so we have to look at the security price difference between a 4% and a 4.5% security to see what’s going on. Historically, on average, price differences between .125% for a 30-yr mortgage is about .5 in price, or 2 points for .5%. This relationship, however, has gotten out of whack with the latest volatility and prepayment fears in the mortgage-backed security sector. Currently the price difference between a 4.0% security and a 4.5% security is now 2.75 in price (instead of 2.00), so therefore the difference in price between a 4.75% loan, which would typically be slotted into a 4.50% security, and a 4.625% loan, which would go into a 4.00% security, same impounds, same LTV, same credit score, is now much greater.

With FNMA 4.5’s around 102 (a 2 point premium) and FNMA 4’s trading near par, everyone is in uncharted territory – and the mortgage market is roiled. Low coupon product, now trading near par, has not yet been originated in any kind of volume that helps liquidity. News yesterday out of Spain, that Spain’s central bank had to prop up a regional bank, did not help the stock market, and stock prices are back down to early February levels. Bond prices also worsened, with traders attributing that to some profit taking by investors. And this morning the markets are not only spooked by Europe, but now also by some tension coming out of Korea – just what we need. The 10-yr is down to 3.11% ahead of the $42 billion 2-yr auction ($40 billion 5-yr’s tomorrow, $31 billion 7-yr’s Thursday) and mortgages are better by about .250.

Debate On Loan Officer Pay
In 1930, during the Great Depression, Babe Ruth was earning a salary of $80,000 a year. A reporter suggested that perhaps he was overpaid, since Herbert Hoover, the president of the United States, was only earning $75,000. Ruth replied, “Why not? I had a better year than he did.” If Congress can set loan officer compensation on a per loan basis, many are asking, “Why shouldn’t they set the pay for doctors, lawyers, title company officers, etc.?” Some expect the ability for Congress to set maximum compensation levels to be challenged in court, since the government is not setting limits on Realtors, heart procedures, dog grooming fees, boat rigging work, etc., etc.

FDIC Sells $233m In Commercial Notes
Helped by Barclays, the FDIC closed a sale of notes backed by commercial real estate loans from twenty-two financial institutions, the fourth such sale of structured notes by them since the early 1990’s and the fourth backed by the full faith and credit of the United States. The $233 million of notes are backed by performing and non-performing commercial real estate loans with a related aggregate unpaid balance of approximately $1.0 billion. The FDIC still retains its 60% equity interest issued by the LLC, and ColFin DB Funding, formed by entities affiliated with Colony Capital, still owns the 40% equity interest sold to it by the FDIC in January 2010. The notes don’t pay interest, but were sold at a discount like a T-bill.

Primer On Case Shiller Home Price Index
What Is the Case-Shiller Index? The Case-Shiller Index, which showed mixed results this morning, was developed in the 1980s by three economists: Allan Weiss, Karl Case and Robert Shiller, and distributed by Standard & Poor’s. The index includes foreclosures and is actually not one index, but 23! The national home price index, which covers nine major census divisions, is calculated quarterly and published on the last Tuesday of February, May, August and November. The 10-city composite index covers Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, DC. The 20-city composite index includes all of the above cities plus Atlanta, Charlotte, Cleveland, Dallas, Detroit, Minneapolis, Phoenix, Portland (Oregon), Seattle and Tampa. Twenty individual metro area indexes for each of the cities listed above. The indices, aside from the national index, are published on the last Tuesday of each month at 9AM EST. There is a two-month lag time in the data that is reported, so the report issued in May only covers home sales through March. Each index measures changes in the prices of single-family, detached residences using the repeat-sales method, which compares the arm-length sale prices of the same properties over time (so there is no new construction).

NAR: Existing Home Sales Up 7.6%
Yesterday we learned from NAR that Existing Home Sales data for April 2010 rose 7.6% due to the tax credit, improving consumer confidence and favorable affordability conditions. The pace of sales is almost 23% higher than April 2009. Is the housing market going to be saved by a strengthening economy and improving labor market? Honestly, I kind of doubt it – but what do I know? The inventory of existing homes for sale in April jumped 11.5 percent to 4.04 million units, the highest since July, and over an 8 month supply although the national median home price rose 4 percent from April last year to $173,100 — the highest since September.

Market Early Close Friday
Pre-Memorial Day bond market note: this Friday is the last early close for the bond market until Thanksgiving.

Daily Basis
Nancy and her husband Peter went for counseling after 43 years of marriage. When asked what the problem was, Nancy went into a passionate, painful tirade listing every problem they had ever had in the 43 years they had been married.

She went on and on and on: neglect, lack of intimacy, emptiness, loneliness, feeling unloved and unlovable, an entire laundry list of unmet needs she had endured over the course of their marriage.
Finally, after allowing this to go on for a sufficient length of time, the therapist got up, walked around the desk and after asking Nancy to stand, embraced her, and proceeded to eventually “have his way with her” for 30 minutes all the while kissing her passionately, as her husband Pete watched with a raised eyebrows!

Nancy shut up, buttoned up her blouse, and quietly sat down while basking in the glow of the event.

The therapist turned to Pete and said, “This is what your wife needs at least three times a week. Can you do this?”

Pete thought for a moment and replied, “Well, I can drop her off here on Mondays and Wednesdays, but on Fridays, I play golf.”