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How Is Unemployment Calculated?
Here in the US, the unemployment rate is estimated by a household survey called the Current Population Survey, conducted monthly by the Federal Bureau of Labor Statistics. The unemployment rate is calculated by dividing the number of unemployed persons by the size of the workforce. An unemployed person is defined as a person not employed but actively seeking work. The size of the workforce is defined as those employed plus those unemployed.

Largest Employer In U.S.
Who is the largest private employer in the United States? Wal-Mart! 2.1 million of us work there. In the public sector, the US Government employs about 2% of the nation’s workforce. The US Postal Service is the largest civilian employer, with about 600,000 folks. Private sector job growth continues to be the key to a sustainable economic recovery, especially if we expect to see much of an improvement in housing prices. Economists continue to believe the probability of a double-dip recession remains low, but are cautious. Heading into this employment data, most believe that if private sector job creation does not improve (or at least hold-up) in the near term, there will be significant ramifications on the economic horizon ranging from the outcome of the November mid-term elections to the likelihood that the Fed proceeds with an additional dose of quantitative easing. more…

No More MBS Buying From Fed
Rates continue to trend lower, helped yesterday by the release of the FOMC meeting’s minutes which alluded to the possibility of the Fed reinvesting in MBS’s. (But heck, as one trader told me, low mortgage rates are helping agency-qualified borrowers, not others in the economy like renters who can’t qualify, not those that don’t have jobs or those that simply pay cash for houses.) “A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’s readiness to resume large-scale asset purchases,” the Fed said in the report, referring to mortgage-backed securities. The minutes from the August 10 meeting made it clear that the Fed is far from ready to restart Quantitative Easing Round 2.

FDIC Banks Report $22b Aggregate Profit
“It’s hard to make a comeback when you haven’t been anywhere.” Conversely, banks have certainly made a comeback: FDIC-insured institutions reported an aggregate profit of almost $22 billion in the second quarter of 2010, a $26 billion improvement from the $4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007. Earnings remain low, however; the primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. more…

In July Fannie Mae issued over $42 billion in new mortgage backed securities, up 6.4% from June, and the highest level of MBS issuance since February. Freddie, however, dropped slightly from June to July at about $26 billion, possibly due to a drop in the purchase of refi’s. Fannie reported that the serious delinquency rate (90 days or later) on its guaranteed single-family mortgages was down for the 4th month in a row, and fell below 5% for the first time since October 2009. Freddie’s serious delinquency rate on its guaranteed single-family mortgages fell once again, remaining below 4% for the second consecutive month.

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…

Why Banks Aren’t Lending More
Why aren’t large depository banks loosening their credit guidelines and lending more money? Market watchers suggest that one reason is the buy-back issue: FNMA & FHLMC have sizable losses on bad loans and are considering forcing eleven large lenders (the biggest being BofA and Chase) to buy back loans which would result in losses of over $100 billion. Not only are banks grappling with that potential issue, but there may also be a lack of confidence in the health of our economy banks, businesses, and consumers. No one wants to borrow money to buy a house or expand their business if they aren’t confident about their job or more optimistic about the economy. And right now, as there often is, investors can’t seem to decide if the bond market (which is pointing toward further weakness) or the stock market (pointing toward stability and moderate growth) is more correct about predicting the future health of the US economy.

Is There A Bond Bubble & Are Rates Set To Spike?
Rates have an inverse relationship with fixed-income prices, meaning that when bond prices go up, rates go down. With the major drop in rates in the last several months comes talk of a “bond market bubble”. Most economists do not feel that we’re in a bond market bubble where there is a disconnect between prices and fundamental reality, but it is still worth talking about. All bubbles follow a common pattern, whether it concerns high-tech stocks, tulip bulbs, or real estate. Initially prices increase when a new opportunity presents itself with the prospect of good returns. Investors become more optimistic and lenders become less risk-averse. Suddenly everyone is chasing prices regardless of fundamental values, expectations become unrealistic, and speculators who are more concerned with short term gains rather than long term returns flood the market. But clearer minds begin to prevail, and insiders start to sell. Asset prices stop rising, panic sets in, and investors rush to unload positions before the next guy, and prices crash. more…

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. more…

Rates Lower Still
Mortgage prices rising (agency MBS’s, not non-agency stuff). Not only are all rates dropping, but the spread between Treasury and MBS’s is still fairly tight – further helping mortgages. The demand for agency MBS cash flows is strong, but the primary market can’t churn out enough supply. Investors know that, on average, current mortgages have sparkling credit quality, and that the risk of investing in them is minimal since both Treasury and mortgage securities are firmly backed by the same entity: the US Government. Whatever spread now exists is based not so much on fear of default, but more fear of early pay-off.

Thursday saw a lot of selling in agency MBS’s, but on Friday it dropped off a cliff, nearing $1.2 billion. Regardless, rates continue down. The 10-year U.S. Treasury note yield fell to a fresh 16-month low in Europe today with weakness in Japan and in equity markets stimulating demand for U.S. government debt – we’re down to a yield of 2.62% (weren’t we just around 3%?) and mortgages are better between .125 and .250 in price this morning. Overall it’s a pretty decent news week. Today is the Empire State manufacturing index; tomorrow will be a bigger day with Housing Starts & Building Permits, Industrial Production & Capacity Utilization, and the Producer Price Index. Jobless Claims, Leading Indicators and the Philly Fed manufacturing index will be released on Thursday. 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…

Mortgage bonds closed up 19 basis points today following a Fed meeting where they kept their low rate stance. Mortgage lender rate sheets didn’t decrease commensurately as lenders held the line ahead of a 10yr Treasury note auction Wednesday and a 30yr T-Bond auction Thursday. Lenders do this because longer-dated Treasury auctions compete with mortgage bonds for buying attention, and can cause mortgage bonds to sell off which pushes rates higher. More on today’s FOMC meeting below.

The Federal Open Market Committee voted to keep the overnight bank-to-bank Fed Funds Rate steady at 0-0.25% and the overnight Fed-to-bank discount rate at .75%, citing subdued inflation that’s likely to continue for “some time.” For the fifth straight meeting in 2010, Kansas City Fed President Thomas Hoenig dissented on the belief that modest rate hikes now (in the form of overnight rate hikes and/or Fed selling of their massive mortgage bond portfolio) could avoid having to sharply increase rates later. The FOMC also said it wouldn’t start selling the $1.25t of mortgage bonds they purchased from January 2009 to March 2010, and they’d reinvest principal payments received on these holdings into Treasury securities—not selling mortgage bonds and buying more Treasuries with profits keeps yields (or rates) on mortgages and Treasuries low. more…

FHA Mortgage Insurance Increasing October 4
FHA mortgage insurance will be increasing as of October 4, 2010 because the FHA insurance pool only has $3.5 billion in cash and Treasury securities left in its “capital reserve account” The money sitting in the CRA represents a 71% decline in just the last three months. The Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold. On the good news side of the ledger, from October through June the FHA had 19,310 fewer insurance claims on loans gone bad and paid $3.7 billion less than projected by the audit, perhaps due to solid foreclosure efforts although some feel that this is only because some states are experiencing a backlog in processing foreclosures.

Under HR 5981, FHA plans to adjust its annual mortgage insurance premium (effective with any new loans October 4) from .55% to 1.55%, yielding approximately $300 million per month in value to the FHA Mutual Mortgage Insurance Fund at a time when its reserves are perilously low. To offset this, FHA will lower its upfront premium from 2.25% to 1.25%. This will be effective for 30yr fixed loans. As you can guess, mortgage insurance companies are pleased with this news, since annual FHA premiums will be closer to annual PMI premiums and that could encourage lenders and borrowers to turn to non-FHA products for more mortgages. Borrowers currently shopping for FHA loans should revisit their strategy with their lender given this new news. more…