Currently the Dow is up 72 and mortgage bonds are down 47 basis points, bringing rates up by about .125% following the better-than-expected Bureau of Labor Statistics jobs report showing 67,000 new private sector jobs in August, positive revisions for July, and 763,000 new private sector jobs in 2010. Commentary and charts below.

The BLS report showed that the economy lost 54,000 non-farm jobs in August which reflects the fact that 114,000 government census workers have now completed their work. Actual new private sector jobs were 67,000 for August and 763,000 for 2010. Estimates called for a loss of 120,000 non-farm payrolls, much more than the actual 54,000 loss, and this disparity is why the market reaction is good for stocks and bad for rates. BLS also reported that 14.9 million people are unemployed. This is a 9.6% unemployment rate, up 4.7% since the recession began in December 2007. See charts and more commentary on the U.S.’s 8.9m involuntary part-timer workers below.

Additionally there are now 8.9 million people who would like to work full time but are working part time because their hours have been cut or they can’t find full-time jobs. This forced-into-part-time-work category is up 4m million since January 2008. This is the fine print of the jobs report—the headline job loss and unemployment statistics show that these 8.9 million people are employed and therefore not in the job loss category, but because of their job status these 8.9 million workers aren’t likely to be consuming at normal levels. This poor statistic in the jobs report is mostly unreported, but until there’s movement here, a sustained recovery will be elusive.

CHART 1: PRIVATE SECTOR JOB GAIN/LOSS DEC 2007 TO AUGUST 2010

CHART 2: AUGUST 2010 JOBS BY SECTOR

CHART 3: JOB LEVELS JANUARY 2000 TO AUGUST 2010

Rates are down this morning on continued fears of a double dip recession and the latest inflation report confirming tame prices. Overall Personal Consumption Expenditures, the Fed’s favorite measure of consumer inflation, were 0.2% in June and 1.5% year-over-year through June. Excluding volatile oil and food costs from the readings, “Core” PCE price index was 0.1% for June and 1.4% YOY through June. The Fed looks closely at Core PCE excluding food and energy prices because of the price volatility of these two items, and the Fed’s zone for reasonable inflation is 1-2% per year. At 1.4%, Core inflation is within their comfort zone, and PCE inflation has been stable for a year. Mortgage bonds are rallying once again to record levels, which pushes rates down to new record lows.

Personal income was up 0.2% in July, which is the same range of the last 6 months. Wages rose 0.3%, which is roughly the same monthly level for all of 2010. The household savings rate was 5.9%, which is down from the May 2009 all-time record of 6.9%. Below are all key details from the Personal Income & Outlays report. You can automatically create charts and download historical PCE data by scrolling to our data section on the right side of the site, or visiting our Data page.

Jumpy Rate Market Response To GDP & Home Sales Reports
Rates dropped 0.2% early last week then rose Friday to end the week even. The $109b in Treasury auctions throughout last week caused mortgage bonds to sell off slightly, and July’s record low New Home Sales (down 32.4% year-over-year) and Existing Home Sales (down 25.5% year-over-year) helped mortgages rally— rates rise on bond selloffs and drop on rallies. But then two factors caused a huge 59 basis point selloff Friday:

(1) The second of three 2Q2010 GDP readings showed the economy grew at 1.6% versus expectations of 1.4%. This was a big drop from both the first 2Q reading of 2.4% and the final 1Q reading of 3.7%. Normally economic weakness of this magnitude would cause a mortgage bond rally, bringing rates down. But the opposite happened because traders didn’t think the 1.6% number was weak enough.

(2) St. Louis Fed President and voting FOMC member James Bullard told CNBC that he thinks the Fed has “done as much as we’re going to do” in supporting the mortgage bond market. Remember: the Fed bought $1.25 trillion in mortgage bonds from January 2009 to March 2010, which has been the largest contributor to low rates since credit markets froze in 2007. Mortgage traders take Bullard’s comments seriously because, until now, Kansas City Fed president Thomas Hoenig has been the only FOMC member voting for tighter rate policies.

Rate Factors Week of August 30
Next week is packed with data: July consumer inflation, income and spending Monday; June S&P Case Shiller Home Prices, consumer confidence, and minutes from the August 10 Fed meeting Tuesday; payroll provider ADP’s jobs report Wednesday; June Pending Home Sales from the NAR Thursday; and the critical August BLS jobs report Friday.

After last week’s report that June-to-July Existing Homes Sales were down 27.2%, Robert Shiller (co-creator of the Case Shiller Home Price Index) said “this was the recording the month after the original closing deadline for the [homebuyer] tax credit, so it’s an anomalous month, but I do think that opinions about the market are weakening, and it may result in another decline in home prices going forward.”

Given the weight markets put on his Case Shiller Home Price Index, this Tuesday’s number should move mortgage bonds more than normal. As for Friday’s jobs report, estimates call for 105k job losses in August.

Weaker figures on next week’s data would normally help rates drop. But last week’s mortgage bond market reaction to the GDP figure shouldn’t be ignored: it was a very weak number but not weak enough in the mortgage traders’ eyes, so rates actually rose. Same goes for all data next week.

As discussed in the previous two WeeklyBasis reports (1, 2), mortgage bonds are overbought, very jumpy, and looking for any little reason to sell off—which would push rates up.

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: 5.125% (5.24% APR)
5/1 ARM: 3.875% (3.99% APR)

What If All Mortgages Were 1% Lower?
A Wall Street acquaintance of mine wrote to me about dropping trillions of dollars of mortgages by 1%. “I think that something like it may just happen. Many people I’ve talked to have said the same thing: ‘The money would go directly to the borrowers to help our economy, and totally bypass our government. There would be no claims of the government wasting the money on projects or programs at the taxpayer’s expense.’”

TARP Taxpayer Cost Continues To Drop
The government’s $700 billion bailout of the financial system (TARP) will be argued about well into the future, but the cost to the taxpayer for TARP continues to drop. The Congressional Budget Office projected that the overall deficit impact of the TARP will be about $66 billion, down from the $109 billion estimate the Congressional Budget Office made earlier in the year, and a significant drop from the initial projection of $350 billion. TARP, as we all recall (or maybe not) gave the government the authority to use $700 billion to prevent the collapse of the financial industry (and a few automakers along the way). Banks are repaying bailout money and automakers are continuing to payback their loans.

S&L Loan Volume Up
According to the OTS, the 753 federally chartered savings and loans, also known as thrifts, originated more single-family loans in the 2nd quarter (about $31 billion, or about $500 million per day) than in the 1st quarter. These thrifts sold $28 billion in single-family loans in the second quarter, up slightly from the first quarter, but down from the $60+ billion they did a year ago.

Loans Getting Harder For Property Flips
There’s growing sentiment among lenders that property flips—buying a home that was previously foreclosed on at a discount, doing some small cosmetic touch ups, and quickly selling it for more—may represent an unacceptable risk. For example, flips create quick and substantial profits for the property sellers, but potentially high losses for the investor, and the properties are typically located in areas with a high percentage of distress sales. Investors believe that second home occupancy is often dubious, and borrowers who purchase investment properties out of flip transactions are often gullible, inexperienced in property management and unfamiliar with the area where they are buying. The projected rental income may not be realistic because of an imbalance between rental properties and available tenants, or borrowers may be attracted by supposed guaranteed rental income not disclosed to the lender – which is unacceptable. There is a high potential for severe property abuse by foreclosed borrowers, vandals or squatters, and some properties purchased from institutional sellers do not include interior inspections that would discover plumbing or electrical problems. And often times any renovation is merely cosmetic.

Record Low Existing Home Sales
On to the markets. Tuesday bonds rallied and stocks got whacked with a huge drop in Existing Home Sales. Yesterday we learned that New Home Sales fell over 12% to the lowest levels since 1963 and giving us 9 months’ worth of inventory at current sales levels. Initially we saw the same reaction as we did on Tuesday, with prices improving and stocks selling off. The 10-yr Treasury moved into the low 2.40% range. But then the psychology changed, for no particular reason other than “we’ve come a long way, and nothing goes up or down forever – the markets are over-extended”. The 5-yr Treasury note auction came with a coupon of 1.25%, and 5 years is a lengthy amount of time to tie up your money and “only” earn 1.37% the entire time. Are things really that bad here, and expected to be that bad for 5 years, in the US? Mortgages went from better by .375 in price to roughly unchanged, which resulted in rate changes from investors zipping around e-mails like flying monkeys.

Today’s Market Activity
This morning we had the weekly Initial Jobless Claims number, and $29 billion 7-yr note auction. Claims were 473,000 from a revised 504,000 – a drop of 31,000. Treasuries sold off slightly, nudging rates higher. We need to see evidence in next week’s August employment report that the labor market continues to expand, even if only modestly. This morning’s number not a particularly great number, but stocks like it because it is not a terrible number. After it we find the 10-yr up at 2.54% and mortgages worse between .125 and .250.

Guns & Mortgages
This story speaks for itself, here’s the link and the epic lead paragraph below: Prosecutors: Mortgage Worker Got Drunk, Shot Computer Server

A Salt Lake City mortgage company employee allegedly got drunk, opened fired on his firm’s computer server with a .45-caliber automatic, and then told police someone had stolen his gun and caused the damage.

Effective Rate of All Mortgages is 6%
Jefferies, and other Wall Street firm’s analysts, have recently pointed out that the effective rate of interest on all US mortgage debt outstanding (about $11 trillion – more than US Treasury and corporate debt combined) has barely budged in recent years at just over 6%. Like a kid looking through the window at candy, originators know this, and that the overwhelming number of households, on average, are paying the same rate they have for quite some time, and funding conditions “for the largest and most important part of the US economy – the consumer sector – continue to be bad. And if a borrower can’t refinance, and lower their monthly payment, they tend to hunker down and put the money into savings – which often time is invested by banks into Treasuries. And of course this serves to push rates down even more.

Analysts believe that if overall rates drop by 1% for all borrowers, it may translate into potential annual savings of more than $30 billion in lower monthly payments. (No, I didn’t run the numbers myself.) This transfer would shift money away from investors and money managers and into the pockets of borrowers – the fabled consumer sector, which has been lagging. And it follows that this desperately needed money would help stimulate the economy, right? But as we all know, origination capacity remains a bottleneck either through regulation or through lack of equity/credit. Investors would probably rather have their holdings of 6% (on average) mortgages ratchet down to 5% then go to 4%. And so the conjecture about a massive government-led refi wave continues.

Government Loan Modifications Struggling
But few people, if any, who follow mortgage statistics are arguing that any of the government’s modification plans are working. In fact, few, if any, of the people with whom I have spoken who are actually in the front lines doing the modifications say that it is going well. Even the US Treasury, in its latest report on 17-month old HAMP, noted that “the percentage of homeowners dropping out of the Obama administration’s premier housing rescue program rose in July to nearly half of participants, as owners receiving aid continued to struggle with documenting their eligibility.” According to the Treasury Department, about 48% of the 1.3 million homeowners who started a mortgage modification through July have dropped out, up from the 41% noted in June. Modification trials offered in the program prior to June 1 did not require up-front documentation of income or eligibility, and many trials are now being canceled. As a result, Treasury said 100,114 participants dropped out of the program in July — more than four times the 24,577 new modification trials started. Overall, the Treasury said HAMP has lowered payments for a total of 1.3 million homeowners that received trial modifications since the program was launched.

Wells Ramping Up CMBS Team
In a story out of Bloomberg Businessweek, Wells Fargo & Co. is plunging back into the commercial mortgage-backed securities market by adding more than 20 bankers and support personnel during the past three months to increase loan originations and bundle them into CMBS. (I sure hope that they know what they’re doing, since every time I drive by a shopping center or office building I see plenty of “for rent” signs.) Wachovia, now owned by Wells, was the #1 underwriter of CMBS’s from 2005 to 2007, and then had over $2 billion in losses in 2007 and 2008. As we know, commercial property values have declined 39 percent from the 2007 peak, according to Moody’s Investors Service. The decline has made underwriting loans less risky, and banks can dictate more conservative terms and choose the most creditworthy borrowers.

Record Low Existing Home Sales
The stock and bond markets were somewhat quiet yesterday until NAR’s Existing Home Sales number “hit the tape”, plunging 27.2% to sales’ lowest levels since 1995 and setting a new record low for this series which goes back to 1999. In addition, the data was revised to show a bigger drop of 7.1% in June, which was the last month that homebuyers were able to receive the homebuyer tax credit, and pushes out the housing inventory to over a year. The national median home price rose 0.7 percent from July last year to $182,600, but why build a new house when there is a year’s inventory at current sales rates, and the huge overhang of foreclosures that are set to enter the market as re-sales over the next several years?

Market Reaction To Home Sales Data
As we saw, rates dropped and fixed-income prices improved. Two-year Treasury yields hit another record low, 10-year notes rose 29/32 to yield 2.50% from 2.60%, and mortgage securities were better by a solid .375 in price (some portion of which made its way onto rate sheets for originators). (Sometimes economists, when they are feeling their most dour, compare the US economy to Japan’s. As a point of reference, Japan’s 10-yr note first closed below 2.00% in the autumn of 1997, and since that time it’s averaged 1.48%) Reuters released a poll showing that 72% of Americans are “very concerned” about unemployment and more people now disapprove of President Barack Obama than approve of him – more evidence of a slowing economy and the consumer hunkering down.

Market Roundup
This morning we have already learned from the MBA what lock desks already knew – that mortgage applications up 4.9% to highest level since May 2009. Refi applications were up 5.7% while purchase only increased .6%. And we have already had the Durable Goods number for July. (In the debatable recovery from March 2009 through April 2010, durable goods orders rose more than 20 %.) Durable Goods were expected to be up between 2 and 3%, but were only up .3%, and ex-Transportation they were down almost 4%. Once again, stocks dropped, and bonds rallied. The 10-yr yield is now at 2.42%, and current coupon mortgage security prices are better by roughly .250 in price. Perhaps we really are headed for a 4% 30-yr fixed rate world on rate sheets. We still have a $36 billion 5-yr. Note auction ahead of us, along with New Home Sales.

Higher 2010 Rate Forecasts All Wrong
At the start of the year, not only were the smartest guys in the room talking about how mortgage rates would go up when the Fed ended their $1.2 trillion purchase program, but that rates would be going up in general given the expected economic rebound. Of course, neither turned out to be true and every originator can’t believe their good fortune by experiencing yet another refi boom, assuming their rolodex has borrowers with equity and decent credit.

Treasury Auctions Next Week
Yesterday’s economic news did nothing to suggest that higher rates will arise in the near future – assuming foreign investors don’t mind the US’s level of debt compared to GDP. The US Treasury said it will sell $109 billion of government debt next week, not far off analysts’ expectations for issuance of $107 billion to $108 billion. The Treasury will sell $7 billion of reopened 30-year TIPS on Monday, then $37 billion of 2-year notes on Tuesday, $36 billion of 5-year notes on Wednesday, and $29 billion of 7-year notes on Thursday.

Economic Stat Roundup
Take Leading Economic Indicators, for example, coming in +.1% but lower than many had hoped. LEI is comprised of 10 series: the factory workweek, new consumer goods orders, nondefense capital goods orders, stock prices, the Treasury yield curve, initial jobless claims, vendor deliveries, building permits, consumer expectations and M2 money supply. Five of the 10 indicators in the leading index contributed to the increase in July, led by the interest-rate spread between the overnight federal funds rate and the yield on the 10-year Treasury note. An increase in the factory workweek and longer delivery times also added to the monthly gauge. Four components retreated, including a drop in consumer expectations and fewer building permits.

The Philadelphia Federal General Economic Index, which like most numbers pales in comparison to the overall European debt crisis, for example, was yet another sign of a slow economy here in the US. It fell to minus 7.7 this month, the lowest reading since July 2009, from 5.1 in July – shrinking for the first time in a year. (Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.)

After all of this news, compared with a miserable Jobless Claims number, 2-yr notes sank to another record low yield. If we go into a “double dip”, or, as some believe, never came out of the initial recession to begin with, rates are not going anywhere higher. The signs of weakness are broadening and visible in housing, retail, manufacturing and the labor market (10% unemployment), although GDP in the US is expected to increase roughly 2% in the second half of this year.

(There is no doubt that the mortgage industry has lost a lot of jobs in the last few years. Regarding future job security, one secondary marketing veteran likes to say, “Well, I’m not buying any green bananas.”)

Zillow Survey: 1 in 3 Think Worst For Housing Yet To Come
Zillow, which for better or worse certainly seems to generate a large number of economic indicators, announced that “Homeowner Confidence in Real Estate Market Dips; 1 in 3 Think Worst Is Yet to Come, While 38% Think Local Home Values Have Reached Bottom.”

Mortgage Securitization Paper From NY Fed
At last, the Federal Reserve Bank of NY published a research paper that even I can understand – this time on mortgage-backed securities and certainly worth a read for anyone in secondary marketing and any mortgage sales person. “Most mortgages in the United States are securitized through the agency mortgage-backed-securities (MBS) market. These securities are generally traded on a “to-be-announced,” or TBA, basis. This trading convention significantly improves agency MBS liquidity, leading to lower borrowing costs for households. Evaluation of potential reforms to the U.S. housing finance system should take into account the effects of those reforms on the operation of the TBA market.”

24 Million Own Their Homes Free and Clear
For anyone giving a presentation on the economy, or housing, a good source of numbers and charts comes from our very own Census Bureau. (Yes, they do something besides hire and lay-off large numbers of workers.) Although the actual report won’t be released until around Halloween, the Census Bureau released a number of tables from the 2009 American Housing Survey. For example, there are about 76 million owner occupied housing units, and 24 million of them were owned free and clear! There were 24 million mortgages originated that had an interest rate above 6%.

Rates Net Even Last Two Days After Rising Then Dropping
Wednesday mortgage prices got whacked – you couldn’t give MBS’s away, but yesterday they came roaring back and were “unbuyable”. Origination dropped to a little over $2 billion, but buyers showed up, all types, and it was reported that most of the MBS sales took place in the first few hours of trading. Sales were mostly 4% MBS’s, but there was a smattering of 3.5%’s in order to hedge that 3.75-4.125% production. 30-yr bonds were up (better) by about 1.75 points, dropping down to 3.65% (weren’t we just there with the 10-yr yield?), 10-yr notes were better by over .5 in price dropping to 2.57%.

The economic calendar has zip today as we head into one of the final summer weekends. Bonds traded well overnight – it will be interesting to see if the investor rate sheets catch up a little with the market today. The 10-yr is sitting around 2.55%, and Fannie 4′s are a shade better than the close Thursday.

Currently the Dow is down 120, S&P is down 15, and mortgage bonds are up 25 basis points, bringing rates down by about .125% following the Bureau of Labor Statistics report showing only 71k private payrolls were added to the U.S. economy in July, and June was revised down 100k. Additional commentary and charts below.

The BLS non-farm payroll report showed that the economy lost 131,000 jobs in July which reflects the fact that 143,000 government census workers have now completed their work. Actual new private sector jobs were 71,000 for July and 630,000 for 2010, most of which was in March and April. Estimates called for 87k total jobs lost (instead of 131k), and this disparity is why the market reaction is bad for stocks and good for rates. BLS also reported that 14.6 million people are unemployed. This is a 9.5% unemployment rate, up 4.6% since the recession began in December 2007. See charts and more commentary on the U.S.’s 8.5m involuntary part-timer workers below.

Additionally there are now 8.5 million people who would like to work full time but are working part time because their hours have been cut or they can’t find full-time jobs. This forced-into-part-time-work category is up 3.6m million since January 2008. This number decreased 623k since April. This is the fine print of the jobs report—the headline job loss and unemployment statistics show that these 8.5 million people are employed and therefore not in the job loss category, but because of their job status these 8.5 million workers aren’t likely to be consuming at normal levels. This poor statistic in the jobs report is mostly unreported, but until there’s movement here, a sustained recovery seems hard to achieve.

CHART 1: PRIVATE SECTOR JOB GAIN/LOSS DEC 2007 TO JULY 2010

CHART 2: JULY 2010 JOBS BY SECTOR

CHART 3: JOB LEVELS JANUARY 2000 TO JULY 2010

How To Leave Your Underwater Home
Fannie Mae launched a new consumer website, KnowYourOptions.com, to educate homeowners about their options to avoid foreclosure and how to get help. There’s an accompanying site for lenders who want marketing materials to promote these KnowYourOptions features.

Treasury Auctions Next Week
The Treasury will sell $34 billion of 3-yr notes next week, down from $38 billion at its last quarterly refunding, $24 billion of 10-yr notes, and $16 billion of 30-yr bonds on Aug. 12. (The U.S. Treasury again cut the size of debt offerings, citing stronger tax revenues, but warned it may not be able to keep trimming sales at the same rate due to doubts about economic recovery.) By the end of the day, 10-yr Treasuries were down almost .5 in price to 2.96%, and current coupon mortgage security prices were worse by about .125. Originators sold $2.9 billion – mostly 4% – a little more than recent volumes.

PennyMac Profit Up
PennyMac Mortgage Investment Trust reported a Q210 net income of $8.2 million, up dramatically from the $1.3 million earned in the 1st quarter. PennMac, founded by ex-Countrywide employees, primarily invests in residential mortgage loans and mortgage-related assets to the tune of $133 million in distressed mortgage assets, including $97 million in nonperforming residential mortgage whole loans and $36 million in MBS’s last quarter.

Jobless Claims Up
Jobless Claims came out, so that must mean its Thursday. This morning Jobless Claims were up from 460k to 479k, but continuing claims were down. The 4-week moving average moved higher, and in fact Claims are at their highest level since April. Interest rates came down slightly after the number after having gone up overnight/overseas. That is the only news for today, and the 10-yr yield has improved to 2.92% and mortgages are .125-.250 better than Wednesday afternoon’s levels.

Riddle of the Day
Michael J. Fox has a small one.
Arnold Schwarzenegger has a big one.
Madonna doesn’t have one.
The Pope has one but doesn’t use it.
Clinton uses his all the time.
Bush is one…
Mickey Mouse has an unusual one.
Liberace never used his on women.
Jerry Seinfeld is very, very proud of his.
Cher claims that she took on 3.
We never saw Lucy use Desi’s.

The answer is: ‘A Last Name.’ Get back to work.

Below is a chart from Mortgage Market Guide showing 4% coupon Fannie Mae 30 year mortgage backed securities trading for the last 6 months. Currently, this is the most common benchmark lenders use to price consumer mortgage rate sheets daily. When these bond prices rise, rates fall, and vice versa. Note the drop in prices leading up to the March 31 expiration of the Fed’s 15 month, $1.25 trillion mortgage bond buying program. The Fed was buying mortgage bonds to drive rates down and stop the great recession from becoming a depression. When this was coming to an end, you can see here MBS sold off and rates rose. But then the European debt crisis set in, inflation has been nonexistent, GDP is ok but shaky, and consumer sentiment and jobs also shaky (scroll to data section for current stats).

The result is mortgage bonds have risen to record levels, pushing 30yr fixed rates (on single family home loans up to $417k) down to new record lows: they were around 5% late-March and around 4.5% today. It’s unsustainable, but unquestionably favorable for those who qualify for home loans in this rigid underwriting environment.

Rates continue their run down this morning on doubts about the economy and the latest inflation report confirming tame prices. Overall Personal Consumption Expenditures, the Fed’s favorite measure of consumer inflation, were 0.2% in May and 1.9% year-over-year through May. Excluding volatile oil and food costs from the readings, “Core” PCE price index was unchanged for May and 1.3% YOY through May. The Fed looks closely at Core PCE excluding food and energy prices because of the price volatility of these two items, and the Fed’s zone for reasonable inflation is 1-2% per year. At 1.2%, Core inflation is within their comfort zone, and PCE inflation has been stable since summer 2009. Mortgage bonds are rallying once again to record levels, which pushes rates down to new record lows.

Personal income was up 0.4% in May, which is the same range of the last 4 months. Wages rose 0.5%, which is roughly the same monthly level for all of 2010. The household savings rate was 4%. This is up from 3.8% last month as consumers again get more cautious about the economy, but it’s still significantly down from the May 2009 all-time record of 6.9%. Below are all key details from the Personal Income & Outlays report. You can automatically create charts and download historical PCE data by scrolling to our data section on the right side of the site, or visiting our Data page.