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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. more…

Normally this report is measured, but it’s hard to temper the current situation: we’re in an unprecedented government credit explosion. Low rate bonanza. Full tilt refi boom. Best time for homebuyers who select the right deal.

The ironic reason for this boom is that is that global developed economies are so unstable because of the last credit boom. But the late-1990s to 2007 credit boom wasn’t just loose monetary and fiscal policies, it was also loose credit standards born out of sweeping financial deregulation. We all know the story: Home loans made to unqualified (mostly U.S.) borrowers underpinned bond funds around the globe and countless derivatives were created from those bonds—and it all crashed when home prices plummeted.

At least this time credit guidelines are more strict, as any homebuyer or refinancer knows all too well. Getting a mortgage funded involves painstaking scrutiny of borrower and property profiles. The rewards, of course, are the rates. You can view current rates below and see this rate chart from 1971-Present. more…

Thomas Hoenig is a voting FOMC member who’s voted against keeping rates low at every Fed meeting in 2010. He gave a speech today providing his rationale for why he thinks U.S. monetary policy is too accommodative. The full speech is below—fairly dismal but all good points. His basic premise is that using loose monetary policy as an economic panacea will just repeat the recessionary cycle.

Hard Choices
Speech By Thomas M. Hoenig, Kansas City Federal Reserve Bank President
Lincoln, Nebraska August 13, 2010 more…

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.

The FOMC just announced the results from their third meeting of 2010, and all members except for Thomas Hoenig voted to leave overnight bank-to-bank Fed Funds Rates unchanged at the target 0-.25% range—the rationale for this is in their unchanged language on inflation: “inflation is likely to be subdued for some time.”

As for long-term mortgage rates, the Fed didn’t indicate any motivation to sell their $1.25t portfolio of mortgage bonds. If/when they do this, it would push mortgage bond prices down and rates up. More analysis on this when the full minutes of the meeting are released in a few weeks. In the meantime, you can view this consumer-friendly primer on the Fed’s mortgage rate strategy. more…

Despite a volatile week, rates were net down .125%, bringing conventional conforming rates (on loans up to $417,000) within .1% of all-time record lows. Below is a recap of last week and rationale for a rate lock bias going into next week. And don’t forget that Friday is the last day homebuyers can be in contract to be eligible for the Federal homebuyer tax credit—those in California have a new state credit with different deadlines. More on both tax credits here.

Rate Factors Week of 4/19/10
The largest factor pushing rates down early and late last week was the ongoing debt crisis in Greece. As bond market investors have grown more skeptical about Greece’s ability to fund their debt obligations, they have sold out of Greece and other European bonds to buy mortgage and Treasury bonds. When mortgage bond prices rise on this buying, rates drop. more…

As most know from our weekly coverage over the last 64 weeks, the Fed has been using a $1.25 trillion budget to buy mortgage bonds since January 1, 2009 in order to elevate mortgage bond prices and push rates down. Rates are 1.125% lower than they were when the program was announced, and the Fed will use up it’s final $3b next week, then the program is over. Below is more information on what this means going forward.

Rates rose about .2% last week, so any quote a mortgage shopper received before March 23 will be higher now. This rise came from overall bond market panic about the ability of governments to meet future bond repayments. This started with worries about Greece and Portugal, then spread further in Europe and there’s been ongoing rumors about whether ratings agencies will downgrade America’s AAA credit ratings. Mortgage bonds sold off and rates rose on this sentiment as well as paltry performance on new Treasury auctions. We’re now about .375% above all-time record lows and could move higher. more…

Bond markets were crazy last two days (mostly bonds selling off, pushing rates higher) so we didn’t have time to update site much, but below is Bernanke’s full House testimony with the latest on the Fed’s exit strategy from mass stimulus. See the very last paragraph, that pretty much sums it up: the Fed will only start to sell mortgage bonds (which would push long-term mortgage rates up), and/or hike overnight fed funds and discount rates when economic conditions warrant. That decision will be largely based on inflationary threats.

Chairman Ben S. Bernanke on Federal Reserve’s exit strategy
Before the Committee on Financial Services, U.S. House of Representatives, March 25, 2010
Chairmen Frank and Watt, Ranking Members Bachus and Paul, and other members of the Committee and Subcommittee, I appreciate the opportunity to discuss the Federal Reserve’s strategy for exiting from the extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity. As you know, I previously submitted prepared testimony for a hearing on this topic that was canceled because of weather conditions. I request that that testimony be included in the record of this hearing. This morning, in lieu of repeating my previous prepared statement, I would like to summarize some key points from the earlier testimony and update the Committee on recent developments. more…

This report covers weeks 62-63 of a mortgage bond purchase program by the Federal Reserve—here’s weeks 60-61. In the last two weeks, the Fed bought $20b net of mortgage bonds as follows: $10b March 4-10, $10b March 11-17. For the past 6 months, the Fed has focused most of its weekly buying on 4.5% and 5% coupons (tables below), which represent outstanding loans in the 4.75%-5.125% and 5.375%-5.75% ranges respectively. This makes sense since most of the new bond supply coming to market from new loans being made are at those rate ranges.

Rates are still hovering around 5% on flat inflation data this week, but have moved slightly higher yesterday and today based on improving Leading Economic Indicators data, and the fact that ratings agencies Fitch and Moody’s have said that the U.S. AAA credit rating is at risk. Rates are only about .25% above all-time record lows, but how long will it stay this way? more…

Below is Bernanke’s House testimony from Wednesday defending why the Fed is the best bank regulator in a global banking environment. It’s build around the following case: the Fed must have vast knowledge of markets, economies, financial products, trading strategies, accounting practices, etc. in order to properly perform its central bank functions, and this is precisely the breadth of knowledge that’s needed to properly regulate banks in our interconnected world. There’s naturally furious debate in financial and political circles about financial regulation, but this point is well taken. Some like to blame the Fed for contributing to the financial practices that led to the 2007 meltdown, but where would we be without their actions to right the ship? And if not the Fed, who else can properly comprehend and regulate the financial sector? Lawmakers? That’s a laugh.

The Federal Reserve’s Role in Supervision
Like many central banks around the world, the Federal Reserve cooperates with other agencies in regulating and supervising the banking system.1 Our specific responsibilities include the oversight of about 5,000 bank holding companies, including the umbrella supervision of large, complex financial firms; the supervision of about 850 banks nationwide that are both state-chartered and members of the Federal Reserve System (state member banks); and the oversight of foreign banking organizations operating in the United States. more…