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For the past three weeks, rates have closed market trading days within .25% of record lows. But the intraday rate swings have been dramatic as mortgage bond traders sort through economic data releases.

Case in point: how rate markets reacted to today’s Jobs Report. Stocks rallied and mortgage bonds (that rates are tied to) sold off on the initial reaction to unemployment decreasing from 10% in December to 9.7% in January. But the report also said that actual January job losses of -20k were greater than the 15k new jobs estimates called for, and December’s previously reported -85k job losses was revised up to -150k. Markets seemed to realize this as the trading day continued because stocks went negative and bonds rallied.

All told, mortgage bonds traded in a 68 basis point range today, which caused rates to trade in a .25% to .375% range as lenders issued new rate sheets throughout the day (Sidebar: can we still say “rate sheets” in this online era). more…

A common question among mortgage shoppers is: what if rates get better after I lock a rate for my loan? The answer is that locking a rate is much like buying a stock.

When you choose to buy a stock at a specified price, you’re executing a Limit Order. This means you set the price at which the trade will be executed rather than being subject to the market price at a trade interval.

So if you execute a limit order to buy a stock at $55.00, you own it at $55.00. If the market price declines to $52.50 after you own that stock, you can’t go back to the securities firm and re-purchase those shares at the lower price. You could elect to use some kind of hedging strategy to offset the loss but even then, you’d be incurring more cost to buy more securities to create a hedge. more…

Since sending the WeeklyBasis 2010 Rate Outlook this Monday (as opposed to normal Friday delivery), rates are still holding. See below for current levels as of the end of mortgage bond trading today.

Now onto the critical alert for the week: Homebuyers intending to use FHA loans to finance condo purchases should be advised that FHA condo “Spot Approvals” are going away February 1. A Spot Approval is when a lender can approve and fund a loan on a specific unit in any condo building provided the building meets certain conditions (building is 4 units or greater, 90% of units sold, 51% owner-occupied, no more than 20% commercial space, healthy condo budget, etc.). more…

WeeklyBasis is normally published Fridays, but this Monday report is an exception so I can do an outlook on this first business day of 2010. To summarize, my outlook is for waning Fed support to push rates to about 1% higher, and choppy economic recovery marked by modest GDP growth and minimal employment improvement. Rationale for these positions is below.

Please note that conforming rates are assumed when discussing rates because these are the broadest proxies for how all rate tiers behave. Current conforming, super conforming and jumbo rates are also included at the bottom along with loan amounts designated by each of these categories. more…

There are certain elements of economic analysis that elude or bore many consumers. One of them is the yield curve. But the yield curve is pretty easy to understand and it’s very important for how consumer credit—like credit cards, car loans, mortgages, etc.—is priced. A yield curve is a simple line graph plotting short to long term rates. If short rates are roughly the same as long rates, the yield curve will appear flat, and this usually means there is a lot of uncertainty in the economy. If short rates are significantly lower than long rates, the yield curve will be steep, and this usually means the economy is improving.

There are many iterations of yield curves to plot many different short-to-long cost-of-money relationships but the record steep curve that’s been cited is the relationship between 2yr and 10yr Treasury note yields. Most consumer rates aren’t tied directly to Treasury yields but since these securities are so widely traded, they do provide a good representation of broad economic expectations. And again, a steep yield curve like this Treasury curve contains expectations of an improving economy. more…

RELEVANCE OF FHA LOANS

Q: Are FHA loans even relevant for the San Francisco Bay Area?
A: Yes. In the 9 county San Francisco Bay Area, FHA loan limits are $729,750. With a 3.5% down payment, this translates into a $756,217 home purchase price. So on a condo with $350 HOA dues, all-inclusive pretax monthly costs are $5632 and all-inclusive cash-to-close is $46,172. With a 10% down payment, this translates into a $810,833 home purchase price. So on a single family home, all-inclusive pretax monthly costs are $5405 and all-inclusive cash-to-close is $103,252. Cash-to-close figures include 8mo prepaid taxes and 1yr prepaid insurance. About $145,000 gross annual household is needed to qualify for these scenarios.

OVERVIEW OF FHA LOANS more…

RATE/MARKET UPDATE
This is the sixth consecutive week with rates hovering just above record lows we saw from January to through May 21. That day began a massive mortgage bond selloff caused by bond oversupply concerns. It was the pre-summer kickoff of an unprecedented campaign of Treasury security issuance to raise money for government economic stimulus. When mortgage bonds sell off, bond yields (or rates) rise.

Market sentiment shifted in the past six weeks to be more in favor of Treasury debt since government-backed assets seemed the better bet than the stock market. As we kick off this week, we’ve got yet another record $112b of 2yr, 5yr, and 7yr auctions to absorb. After such a nice run, we may see a shift back to oversupply sentiment for mortgage bond traders. It will depend largely what the Fed says Wednesday after their FOMC meeting. If they say firmly inflation isn’t a threat, bonds and rates should hold their ground. If there’s a signal inflation will be an issue sooner than anticipated, rates will suffer. more…

Rates on conforming loans up to $417k and super-conforming loans up to $729k end this week down another .125% following two weeks of already-low rates. Rates for jumbo loans above $729k aren’t down as much because those rates don’t trade all day every day like conforming loan rates do. The mortgage bonds that rates are tied rallied 9 straight trading sessions (on tame inflation data and stock weakness) before giving up ground today (on news of “only” 216k jobs lost in August). All year, mortgage bonds have traded up for about two to three sessions before correcting, so this past two weeks may put bonds an overbought position and rates will rise next week as bonds sell off.

It’s a light economic calendar following the holiday weekend, so the rate moving news will be Treasury auctions Tuesday (3yr Note), Wednesday (10yr Note), and Thursday (30yr Bond). Especially the 10yr and 30yr auctions will create direct supply competition for mortgage bonds to compete against, and this is very likely to cause a selloff in mortgage bonds, so for anyone who has noticed the rate drops of recent weeks and is ready to transact—either in contract on a purchase or ready to do a refi—Tuesday looks to be the best rate lock day. more…

RATE/MARKET UPDATE
Rates on conforming loans up to $417k and super-conforming loans up to $729k are net even for the second week in a row, which is rather shocking given the volatility of the last 18 months. Rates for jumbo loans above $729k remain steady because those rates don’t trade all day every day like conforming loan rates do. The mortgage bonds that rates are tied to were about even this week. Improving housing and economic data hurt bonds (home prices measured by S&P Case Shiller declined less for fifth straight month, 2Q2009 GDP was -1% instead of -1.4% expected), and tame inflation data helped bonds (measured by the Fed’s favorite measure: Personal Consumption Expenditures Index).

A key reason bonds didn’t do worse is because the money didn’t have much of a place to go. After touching highest levels of the year last week, stocks couldn’t break much higher: the Dow closed this week at 9544 (39 points better than last week) and S&P 500 closed at 1028 (two points better than last week). There are no Treasury auctions next week so the biggest market moving news will be Wednesday’s and Friday’s jobs reports. more…

RATE/MARKET UPDATE
Rates on conforming loans up to $417k and super-conforming loans up to $729k continue to trade up and down as much as .5% per week but as of today we’re about .125% lower than last week. Rates on Jumbos from $729k to $3.5m are competitive for borrowers with strong down payments, income and credit profiles, but borrower scrutiny—even for the most stable borrowers—is intense so borrowers should expect to provide full financial documentation to obtain financing.

This week S&P Case Shiller home prices for May showed a -17.1% decline, but the fourth straight month where declines shrank. GDP for 2Q2009 was -1% vs. -6.4% for 1Q2009, making this the fourth straight quarter of declines, something that hasn’t happened in 62 years. The decrease in GDP loss from 1Q to 2Q is due mostly to a +5.6% increase in government spending, rather than the consumer who typically accounts for two-thirds of spending. Also this week we had about $100b in Treasury auctions (this is how the government raises money to spend). Some attribute better rates to well-received Treasury auctions that benefit Treasury and mortgage bonds, but it’s the negative economic news that is the more likely factor behind a move toward bonds this week. more…