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Often I start the commentary off saying something witty, but I couldn’t think of anything clever so I thought I’d suggest you take a look at this video about seat belts (also embedded below). It is making the rounds, and with good reason.

Why Rates Won’t Rise On March 31
The Federal Reserve has a little more than ten business days to complete their well-publicized purchase of agency mortgage-backed securities (MBS). Last week it bought $10 billion, breaking their 3-week streak of $11 billion. Only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are/were eligible assets for the program. Everyone knows that the end of the program is imminent. more…

This report covers weeks 60-61 of a mortgage bond purchase program by the Federal Reserve—here’s weeks 57-59. In the last two weeks, the Fed bought $21b net of mortgage bonds as follows: $11b Feb 18-24, $10b Feb 24-Mar 3. For the past 6 months, the Fed has focused 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 have held below 5% since dipping last week, but are advancing higher this morning’s release of the February jobs report which was interpreted as positive despite the economy losing 36k jobs and forced-into-part-time workers increasing by 500k. Rates are still just a touch above all-time lows, but how long will it stay this way? more…

Market Reaction To Greece’s Plans, ADP Shows 20k Jobs Lost
Greece announced a well-publicized $5.4 billion plan to cut its deficit (3rd one in 3 months), which of course has their workers protesting. Taking a longer term view, these measures should help the country. Depending on the news from Greece, money either flows in to or out of our Treasury market with the “safe haven, flight to quality” attitude. Greece cutting its massive budget deficit by 4% is obviously a help. (10-yr Notes in Greece yield about 6 %.) ADP showed February private sector jobs declining 20,000, with a back-month revision. Later this morning we’ll see some ISM numbers, and the Beige Book, but overnight (and for now) the rate markets are pretty quiet with the 10-yr sitting around 3.63% and mortgages slightly better given some intra-day price improvements yesterday.

Foreign Investment … In Detroit
Foreign intrigue is always interesting (check today’s joke at the bottom) as is a foreign report (in this case, British) on property values in Detroit. $1 for a house sounds tempting. more…

Mortgage Markets After March 31
For the week that just ended for the Fed, their MBS purchases totaled $17.6 billion, and they sold $6.6 billion, netting out that magical $11 billion weekly total. They are right on target to end this in about a month. After March 31st, the program ceases. People will still buy homes, mortgages will continue to be originated, but will some of the dire production predictions come true? Everyone in the business is hoping not, but the large investors would prefer not to wait to find out. Big investors have cut profit margins and prices, resulting in some very good (relatively speaking) mortgage rates for borrowers. Investors, account executives, production managers may be already worried that they won’t hit their numbers for the year, and appear to be doing what they can to move a little ahead of the pack prior during the first quarter. Because after March 31st, it’s anyone’s ball game. And keep in mind that any loans that fund and are placed into securities settling in March had better close sooner than later due to lag times. Make hay while the sun shines.

Should Foreclosures Be Run By Government?
Should foreclosures be run by the government? Lordy lordy… the Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program. Bloomberg reported that the proposal was reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan. At present, lenders can initiate foreclosure proceedings on any loan that hasn’t been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification. The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan. more…

Following Ben Bernanke’s semi-annual monetary policy testimony to the House Financial Services Committee this morning, stocks are rallying, Treasuries are up modestly and mortgage bonds are flat. The full testimony is below and the core message hasn’t changed: a “nascent” economic recovery means that inflation is likely to remain subdued for some time, the Fed will wind down asset purchases between now and March 31, it will evaluate rate hike measures and further asset purchases as needed, and the first signal of a post-crisis reversal of policy is hiking the Fed-to-bank Discount rate and decreasing the term from 90 days back to the more traditional overnight terms.

Bernanke had a special section of his testimony called Federal Reserve Transparency where he discussed how the Fed is the most transparent central bank in the world and while they do share explicit details about their policy decisions and methodology, “it is vital that the conduct of monetary policy continue to be insulated from short-term political pressures so that the FOMC can make policy decisions in the longer-term economic interests of the American people.” As we’ve said repeatedly, it’s unfortunate that short election cycles are completely out of sync with long-term economic cycles and this kind of Fed message is therefore lost on lawmakers who are more concerned with a election year soundbytea than long-term solutions. We’re glad Bernanke got this message out officially but that doesn’t mean it will change the approach of most lawmakers. We also think Bernanke is perhaps a bit too easy on inflation messaging but he’s got a tough job: the US raises money by selling Treasuries to the entire world and a hawkish inflation message in the midst of the largest Treasury issuance in history erodes the value of those efforts. That said, we still think that inflation became a sudden threat Bernanke would tighten policy just as quickly as he loosened beginning in Fall 2007. more…

State of Mortgage Industry
Let’s start off with two basic premises. First, there has always been a range of borrowers (credit & risk-wise) that need home loans at rates that match the risk. Second, there have always been investors out there with varying degrees of appetite for risk, and demand more return for higher risk. For prime borrowers, the end of the Fed’s MBS program is in sight: 5 weeks, $55 billion, that’s $11 billion a week. After which, of course, mortgage rates zoom out of reach, everyone still left in the business will have nothing to do, all refi’s and purchases will end, and I will fill the commentary every day with the worst puns and one-liners imaginable. Seriously, what is going to happen?

Based on anecdotal evidence, it appears that many mortgage companies had great Decembers, then January volumes of about half of December’s, and expect February to be somewhere between January and December’s volume levels. And although 2009 profits tended to make up for 2008 losses, profit margins also appear to be coming down as the realization sinks in that companies will want the production to support staffs. more…

Extreme rate volatility discussed in this WeeklyBasis report two weeks ago still holds. Rates traded up and down about .375% this week on fears about business inflation and Fed rate hikes. Today’s tame consumer inflation contributed to rates dropping again, and rates end the week roughly .25% above all time record lows. But this record low rate window looks to be closing. Rates could rise by about 0.5% by summer for three reasons:

(1) The Fed will end it’s $1.25t mortgage bond buying program March 31 (they’re 95.8% into their MBS buying budget as of today), and then we’ll likely see profit taking on mortgage bonds as private investors sell, which pushes prices down and yields—or rates—up. The San Francisco Chronicle published a very good consumer-friendly story on this topic Monday, and my quote in that story explains other factors affecting rates after March 31. more…

This report covers weeks 57-59 of a mortgage bond purchase program by the Federal Reserve—here’s week 56. In the last three weeks, the Fed bought $34b net of mortgage bonds as follows: $12b Jan 28-Feb 3, $11b Feb 4-10, $11b Feb 12-17. For the past 5 months, the Fed has focused weekly buying on 4.5% and 5% coupons (table 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. Despite Fed buying, mortgage bonds lost ground this week and rates are higher. The selling came after higher than expected business inflation, some rate hike bias signals in Fed minutes from their last FOMC meeting, and a confirmation of that bias in the form of a .25% hike to the Discount Rate which is now at .75%. The Discount Rate is the the rate at which the Fed lends to banks, and this is the first move since the crisis began toward weaning banks off of cheap Fed funds.

How Long Will Current Rates Last?
The purpose of the Fed mortgage bond buying program initiated January 1, 2009 is to elevate mortgage bond prices which pushes rates down. It’s very likely that the record rate low markets hit on November 25, 2009 will remain the record low. The Fed will continue buying through March 31, 2010 until they reach their $1.25t budget (see program-to-date tally below), but as we move into the program’s final weeks, we’re already seeing rates rise as markets realize there will be one less large buyer of mortgage bonds. more…

The most-asked questions by home mortgage borrowers so far in 2010 are about where rates will go, how to lock rates in a volatile trading environment, and how home appraisals affect the lending process. Each question is addressed below.

Where Will Rates Go By Summer?
Rates on loans up to $417,000 are about 5% as of mid-February, and rates could rise as much as .5% by summer for three macro reasons: (1) The Fed will end it’s $1.25t mortgage bond buying program March 31, and then we’ll likely see profit taking on mortgage bonds as private investors sell, which pushes prices down and yields—or rates—up; (2) An improving economy and resulting inflationary fear will cause mortgage bonds to sell off because inflation eats up bond returns, so this would also push bond prices down and rates up; and (3) Inflation will cause the Fed to start hiking short rates from current near-zero levels. Global investors currently borrow on these short-term rates to buy long-term securities with higher returns. When short rates rise, it will erode the benefit of this interest rate trade and force selling of long-term securities—including mortgage bonds—to repay short-term loans. That selling will also push rates higher.

How Do You Decide When To Lock A Mortgage Rate?
We can expect continued rate volatility as markets struggle to interpret the impact daily economic indicators have on the aforementioned macro rate factors. For now, rates are holding close to record lows, but intraday rate swings can be .25% to .5% as mortgage bonds trade on different interpretations of daily economic data. So how do you decide when to lock a rate? You need to set a rate target with your mortgage advisor based on current trading ranges and estimated results of upcoming economic data, and you need to be ready decide on a rate lock based on those rate expectations. If it looks like rates will trade above that target, it’s time to lock your rate—this includes locking ahead of economic releases that might have surprise results: better to lock at your target than having rates trade the wrong way on surprise data. It’s a very simple strategy, and making the lock decision process more complicated than this adds unnecessary stress. more…

A San Francisco Chronicle mortgage rate story yesterday does a good job simplifying the factors affecting mortgage rates as we move through 2010. It’s a useful consumer-friendly piece on how the Fed’s mortgage bond program works, when it’s ending and what might happen when it does end. It also includes updates on the homebuyer tax credit, FHA loan guidelines, and loan modifications. The Basis Point contributor Julian Hebron was quoted in the story and is excerpted below.

Click the Mortgage Bonds tag below for lots of weekly coverage we do on this topic. Our next report on the Fed’s mortgage bond program and what it means for rates will be this Friday, February 19. more…