Rates are up about .125% following a mortgage bond selloff late last week, but rates are still at unprecedented lows. There was very little economic news last week, and the selloff (which pushes rates higher) came as bond markets traded on two main factors that will continue next week.

Rate Factors Week of August 23
First is market calendar for the week beginning Monday, August 23. We have July’s Existing Home Sales (from the NAR) and New Home Sales (from the U.S. Census Bureau) Tuesday and Wednesday, then the second reading of 2Q2010 GDP and Consumer Sentiment on Friday.

These are all key reports that move bond markets, but they’ll be overshadowed by $109b in new Treasury bond auctions as follows: $7b in reopened 30yr TIPS Monday, $37b in 2yr notes Tuesday, $36b in 5yr notes Wednesday, and $29b in 7yr notes Thursday. This massive Treasury supply will disrupt bond markets and mortgage bonds may sell off, pushing rates higher.

How Long Can Low Rates Last?
Which brings us to the second rate factor for next week: bond markets realizing that their boom era can’t go on forever.

Last week I explained how government issues billions in new Treasury debt biweekly, why global markets have had such a big appetite for Treasury and mortgage debt over the past 18 months, and what might happen to rates if this bond rally reversed into a selloff.

A few days after those comments, Wharton finance professor Jeremy Siegel published a Wall Street Journal OpEd entitled The Great American Bond Bubble discussing similar concerns about an overbought Treasury bond market. He thinks a bond market selloff is imminent, and presented estimated investment losses for bondholders.

But you don’t have to be a mortgage or Treasury bondholder to experience investment losses. The rate increase that comes from a bond selloff is, in essence, an investment loss for consumers seeking mortgages.

The fragile global economic climate still justifies investors seeking the safety of mortgage and Treasury bonds, but Siegel is not alone in his sentiment, and markets can shift violently. If the U.S. had a debt crisis like they’re having in Europe, it would cause huge mortgage and Treasury selloffs and sharp rate spikes.

But the more likely scenario is a correction off current price levels for mortgages and Treasuries, and even this would push mortgage rates up .25% to .5%.

For now though, it’s still a full tilt U.S. credit boom, so consumer rates are stunningly low. The rest is whether a homebuyer can negotiate the right deal on a home in an area with price stability.

CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.375% (4.49% APR)
FHA 30 Year: 4.375% (4.50% APR)
5/1 ARM: 3.25% (3.37% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 4.75% (4.87% APR)
FHA 30 Year: 4.5% (4.62% APR)
5/1 ARM: 3.75% (3.87% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.25% (5.37% APR)
5/1 ARM: 4.125% (4.24% APR)

Daily Consumer-Friendly Commentary
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Saw this story on San Francisco Realtor Katy Dinner’s blog today, a WSJ piece I missed which highlights a Fed study about underwater homeowners. According to the Fed, “the median borrower who ‘strategically’ defaults doesn’t walk away from the mortgage until the amount owed exceeds the value of the home by 62%.” Below are some other good excerpts from WSJ, the whole piece is worth reading.

Nearly 80% of all defaults in the sample resulted from the traditional combination of income shocks and negative equity. But for borrowers that had a loan-to-value ratio of 150%, half of all defaults were strategic defaults, driven purely by negative equity.

Most defaults are typically driven by a combination of income shock and negative equity, or what’s known as the “double-trigger” hypothesis. While borrowers who lose their jobs but have equity in their homes can sell and avoid default, those without any equity are left with fewer options.

“Borrowers do not ruthlessly exercise the default option at relatively low levels of negative equity, broadly consistent with the ‘double-trigger’ hypothesis,” the authors write. “But by the time equity falls below -50%, [half] of defaults appear to be strategic.”

Dear Chad: I wanted to say thanks for the follow on Twitter last week. I fully appreciate all of my early @TheBasisPoint followers, but your follow hit me right in the feelings. I think it’s because of your phrases like “it hurt me too, right in the feelings,” and because of the epic pinky ring you wear as the A-hole stockbroker you play in Scottrade’s ads, which are just as funny every time I see them.

For those interested, below are two of my favorite ads with @thechadridgeway as the A-Hole stockbroker. Doug, Doug, Goose is an outtake of a longer ad where he doesn’t even know his client’s name. It’s the best riff on the name Doug since Ed Helms sang The Doug Song in The Hangover.

And as for you Mr. Ridgeway, the votes have been counted: you’re a hit. So don’t leave us hanging, Chad. Do some more Scottrade ads or movies or whatever—and promote them heavily so we don’t miss out.

Sincerely,

TheBasisPoint
(who recently compared Scottrade’s Chad ads vs. their old ads)

This post is a few days late because I don’t watch FoxBusiness, but Cody Willard who co-anchored their recently cancelled market wrap show Happy Hour has left the network. In what many would call true-to-Fox form, they blocked Willard’s farewell blog post even though he called his experience with Fox a “dream job.” Click link to see for yourself, I discovered same when clicking on HuffPo’s link, where some of his final blog comments were excerpted.

Happy Hour was a market wrap and current affairs show hosted in a bar. Despite this poorly conceived concept and even setting aside Willard’s excitable tendencies, he brought more credibility than most other FoxBusiness anchors in the network’s short history—mainly because of his independent thought. His show has been replaced by The Willis Report, hosted by former CNN financial editor Gerri Willis. Despite a media resume some might find impressive, this is a major dumbing down as evidenced in this Daily Show clip of Willis during the heat of the financial crisis. During the interview, Jon Stewart asked her to comment on a few financial media clips, and she demonstrated her outright ignorance about market basics. Good move Fox, no surprises I suppose.

As for Willard, I wish him the best. Like him or hate him, he’s a true entrepreneur, and that’s respectable. I’d just ask him to remember my previous case for keeping his hair short, so as to avoid having the UPS guy ‘Lady Wig’ look.

Joshua Brown, author of The Reformed Broker blog, posted a funny list of media words used to describe stock selloffs. Below are my favorites in each of his categories, and here’s TheReformedBroker’s full list, well worth the read, he’s got some funny ones.

“Today, stocks were …
Crushed
Creamed
Crowbarred

“The market responded by …
Flash-Crashing
Collapsing
Retreating

“Thusday’s sell-off was …
Disorderly
Broad-based
Typical

How Lenders Create Rate Sheets
Zero-point rates on loans up to $729k held at record lows for the second week last week even though mortgage bond levels might suggest rates would have dropped further. Jumbos also held steady at very attractive levels. Mortgage bonds benefitted as the EU/IMF’s $140b Greece bailout caused investors to sell European debt and buy more conservative U.S. mortgage and Treasury bonds. When bond prices rise on these buying rallies, rates drop.

But it’s not actual mortgage rates that drop when mortgage bond prices rally, it’s mortgage bond yields (the rate of return on those bonds) that drop. Then lenders re-price mortgage rate sheets based on those lower yields. This lowering of mortgage rates didn’t happen to quite the extent that lower mortgage bond yields might suggest because last week was wildly volatile. Mortgage bond prices swung more than 100 basis points Thursday and Friday—in the bond world, this is similar to the massive swings we saw in the Dow Thursday (when it was down 1000 at one point).

And when lenders see this kind of volatility, they sometimes hold the line on rate sheet re-pricing. This is what lenders did Thursday and Friday so they can wait to see if the mortgage bond rally can sustain itself or if it washes out. Nevertheless, current low rates still speak for themselves.

European Debt Issues To Drive Markets May 10-14
Next week is light on economic data with Trade Balance Wednesday, Retail Sales Friday, and Consumer Sentiment Friday being the three biggest reports. We also have 7 public speeches by senior Fed officials throughout the week.

Market movement next week will continue to be dominated by the European debt situation. To keep the Greece debt crisis from spreading throughout the 16-country Euro zone, the EU announced today that they will “defend the Euro, whatever it takes” by creating a fund. By Sunday, before Asian markets open, the EU will roll out further details of their plan.

And since government debt issues are front and center, next week’s Treasury auctions will strongly influence the direction of trading—and rate levels. Treasury will auction $78b in new debt as follows: $38b 3yr notes Tuesday, $24b 10yr notes Wednesday, $16b 30yr bonds Thursday. Logic would suggest strong uptake on these auctions since this debt is a better credit risk than other government debt options, but as we saw Thursday and Friday, logic can be fleeting.

Where To Get Daily Consumer-Friendly Market Updates
In addition to this WeeklyBasis report, you can get daily updates on this fluid situation (written in terms consumers can understand) by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will be added to your Facebook stream. Also you’ll see Twitter and Facebook boxes on the right side of this site—can click ‘Follow’ for Twitter, or ‘Like’ for Facebook right here on the site.

CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.875% (4.99% APR)
5/1 ARM: 3.25% (3.37% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 5.25% (5.37% APR)
FHA 30 Year: 5.125% (5.26% APR)
5/1 ARM: 4.25% (4.37% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.5% (5.62% APR)
5/1 ARM: 4.625% (4.74% APR)

This week has been quite gut wrenching in the markets, so it’s time for a bit of fun. This awesome diagram originated on San Francisco blog TheBoldItalic along with a good piece on the demise of Hippie Hill—which is the meadow and accompanying hill as you enter Golden Gate Park off Haight Street. It’s a hilarious statement on the identity crisis of young adults.

As for me, I’ve had my more hipster days but now if I self-apply any label, it’s working dad. Even if there are days when I still feel cool, I would never want to be known as a hipster because like Dr. Evil said to Austin Powers: “There’s nothing more pathetic than an aging hipster.” And so on the weekends I prefer to take my kid to Golden Gate Park to watch him run around and join in the drum circle at the base of hippie hill. I’ve even bought him a few drums. Only now that I’m seeing this picture, I fear for what I may be doing to him. But I’ll roll with it because it’s either the drum circle or subjecting him to the market carnage. And I think we’re all a bit better off knowing that there are people out there keeping the beat for us working dads … and moms, to whom I wish you all the happiest of Mother’s Days.

Rates dropped last Tuesday when S&P downgraded Greece and Portugal debt, which caused bond investors to reallocate to safer mortgage (and Treasury) bonds—when bond prices rise on buying, rates drop. This positive mortgage sentiment generally held throughout the week, and zero-point rates on loans up to $729k ended the week at record lows.

GOOD JUMBO MORTGAGE NEWS
Jumbo rates also improved slightly, and the latest sign of life in the Jumbo marketplace was news Thursday from Wells Fargo: they’ll be expanding their mortgage securities trading team from five to 30 on expectations that the market for mortgage bonds based on pools of Jumbo loans (above $729k) will improve by the end of 2010. This team will build and sell Jumbo mortgage bond products for all eligible lenders and also for Wells.

This announcement follows last week’s $222m jumbo mortgage bond offering by Citigroup and Marin County-based Redwood Trust. This was the first Jumbo mortgage offering since the credit crisis began.

These signs suggest jumbo mortgage momentum is building, but it’s important to note that this is happening because the jumbo loans accumulating in lender portfolios are made based on extreme borrower and property scrutiny—this scrutiny makes good loans, and good loan pools make good securities.

This trend eventually means more jumbo loan availability for consumers, and better rates resulting from the liquidity that securitization provides for lenders. But borrowers should continue to expect meticulous evaluation of their entire financial profiles as well as painstaking property appraisals while their loans are being approved.

JOBS & OTHER RATE MOVERS WEEK OF MAY 3
Rate volatility is now a market norm, so borrowers and their lenders should continue to have their finger on the rate lock trigger next week.

Coming off a positive rate week last week, we start Monday with the March Personal Income & Outlays report which includes the Fed’s favorite inflation measure: the Personal Consumption Expenditures Index. Following Friday’s 1Q2010 GDP (+3.2%) that showed consumer spending at +3.6%, Monday’s report will give markets more data to evaluate whether there’s a real consumer recovery underway, and also show us whether any inflation is building.

Tuesday we have factory orders, the National Association’s March Pending Home Sales Report, and Treasury Secretary Tim Geithner will testify on The Hill about TARP—this session will essentially be a regulatory reform debate.

Wednesday is the ADP jobs report for April and Friday is the official Bureau of Labor Statistics April jobs report. March’s BLS report showed 162k jobs created, by far the largest since December 2007, and estimates for April range from +175k-190k. The number will still be skewed by temporary Census hiring which is counted on these rolls, so the unpredictability of this jobs report makes rate market reaction more volatile.

The X-factor will continue to be the Greece (and broader European) debt situation. Last week’s Greece and Portugal downgrades helped mortgage bonds, but if a Greece aid package is worked out, we could see mortgage bonds correct and rates rise.

CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.875% (4.99% APR)
5/1 ARM: 3.25% (3.37% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 5.25% (5.37% APR)
FHA 30 Year: 5.125% (5.26% APR)
5/1 ARM: 4.25% (4.37% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.5% (5.62% APR)
5/1 ARM: 4.625% (4.74% APR)

Bloomberg scores high marks for simply reporting and not editorializing. Which is why this picture of Goldman Sachs CEO Lloyd Blankfein they’ve been running repeatedly all over their site for the past 1.5 weeks raises an eyebrow (or causes one to furrow). Sure you could argue this is editorializing, especially when they used it in a homepage banner today to promote Blankfein’s Senate grilling. But put yourself in the editors’ shoes: this picture does accurately convey the subject matter, and isn’t that the goal of reporting?

Today was the the SEC’s One Day As A Lion as they filed the first big claim against Wall Street—a subprime MBS fraud suit against Goldman Sachs—since the great recession began in 2007. So this installment of bTunes is for the SEC from Zach De La Rocha. The former Rage front man named his new band One Day As a Lion on the belief that “it’s better to live one day as a lion than a thousand years as a lamb.” And since Wall Street gets paid to slaughter any lambs that threaten profit, it’s good to see the SEC put up a fight … if only for one trading day. So rock out to this song, then back at it Monday.

One Day As A Lion: Wild International [iTunes] [Amazon MP3]