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Possible Bad Outcomes Of Fed Policy
We began the year believing that rates were heading higher, with the Fed “tightening” and making credit costs higher – but this tightening cycle will be different. There are two policy decisions for the FOMC to make, the first being increasing short term rates, but also having to deal with its asset holdings (all those securities it owns). Obviously some mortgages pay off, but the Fed doesn’t necessarily want to own mortgage-backed securities or agency debt until their maturity in 30 years – they prefer Treasury securities. Watch for selling to start this summer – which could lead to mortgage spreads increasing. One scenario I’d read about stated that if the Fed chooses to leave $1 trillion of 4.5% mortgages on its books as it starts to raise rates, and inflation really picks up, the Fed could find itself paying out 10% or more as interest on excess reserves and receiving only 4.5% on the assets. This, in turn, would lead to $55 billion of annual losses (and $300 billion in mark-to-market losses) will set them up as a politically weak inflation fighting central bank.

How Are Rate Lock Periods Determined?
How are rate lock periods determined? Companies certainly don’t want to run up against GFE and RESPA issues, for one thing, in setting deadlines. On the investor side, for brokers, Wells Fargo reminded them that “We’re serious about closing purchase deals on time!” Wells will “provide an initial decision within two business days of receipt of the complete file for all first mortgage purchase loans. If you submit your loan with a Wells Fargo Home Equity Line of Credit product, it will also be decisioned within two business days of the first mortgage approval. We can meet the closing date if the loan has been locked and all prior to close conditions (including all pre-close documents) are received at least 10 business days prior to the closing date.” Wells doesn’t outright tell brokers that it will close a loan within whatever lock period the broker sets, but it is almost the other way around. Wells goes on to tell brokers what pre-close documents are needed, how many days ahead of closing brokers should submit a complete file (20 business days), etc. more…

Despite a rate uptick today after a better than expected February jobs report, rates are holding to their sub-5% levels reached last week. To be specific: the market closed today at 4.75% on a 30yr fixed for a single family home with at least 20% equity, a loan of $417k or less, points of 1%, and a borrower credit score of 740 or greater. Headlines can be misleading since rates vary based on property type, borrower profile, loan amount, and fees.

Also be aware that most press reports on rates are based on Freddie Mac’s weekly average nationwide rate survey which is published Thursdays. The report is for the rates on loans with parameters noted above, and headlines rarely mention average points for the average rates highlighted. So if you’re reading press reports, read long enough to see what the average points are. And you can also go to the source. 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…

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…

Mortgage Rate/Lock Update
A small boy swallowed some coins and was taken to a hospital. His grandmother telephoned to ask how he was, a nurse said, “No change yet.” We started off the week with both the stock and bond markets making a little change for investors: both improved. The folks on Wall Street, if there is such a thing anymore, reported that selling was pretty heavy, suggesting that mortgage rate locks picked up as loan agents took advantage of intra-day price improvements. The Fed was in doing the usual MBS buying ($11 billion net last week), as were money managers and hedge funds, and lower coupons tended to do a little better price-wise versus higher coupons. Bonds closed near the highs of the day (lows in rates), and the 10-yr went back down to a yield of 3.66%. Gold was up $30 an ounce… what is wrong with this picture? Currently the futures market is pricing in an 82% chance that the Fed keeps rates somewhere between 0% and .25% through the end of June.

Exports Prices, Housing Starts Both Up
For economic news today we have Housing Starts & Building Permits, Export Prices, and Industrial Production & Capacity Utilization. U.S. import prices rose 1.4% last month, mostly due to oil, and it was the sixth consecutive monthly increase. Export prices gained 0.8 percent in January after a 0.6 percent rise in December. And U.S. housing starts (+2.8%) rebounded more strongly than expected to their highest level in six months in January, while permits fell slightly (-4.9%) less than forecast. Starts for the volatile multifamily segment increased 9.2%. After this news we find the yield on the 10-yr back up to 3.70% and mortgages worse by about .125. 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…

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…

This was week 56 of a mortgage bond purchase program by the Federal Reserve—here’s week 55. From January 21 to January 27, the Fed bought $12b net of mortgage bonds. This is just above the weekly low for the entire program set four weeks ago with $9.3b in net buys, and clarifies a trend of less buying as the Fed’s budget runs low. For the past 4.5 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 supply from new loans being made are at those rate ranges. Long-term mortgage rates were steady this week as Congress reconfirmed Fed chairman Ben Bernanke and the FOMC acknowledged ’subdued’ inflation.

How Long Will Current Rates Last?
The purpose of the Fed mortgage bond buying program is to elevate mortgage bond prices which pushes rates down. It’s very likely that the record rate low markets hit on November 25 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 this final two months, we’re likely to see private mortgage bond investors trimming positions which also creates upward rate pressure. more…

This was week 55 of a mortgage bond purchase program by the Federal Reserve—here’s week 54. From January 14 to January 20, the Fed bought $12b net of mortgage bonds. This is just above the weekly low for the entire program set three weeks ago with $9.3b in net buys, and a trend is emerging for less buying since the Fed’s budget is running low. Below is a breakdown of the budget-to-date and also buying this week by coupon and agency. The Fed continued focusing on 4.5% and 5% coupons for the fourth straight month, 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 supply from new loans being made are at those rate ranges. Rates improved this week as mortgage bonds traded higher and stocks sold off on questionable bank earnings and the threat of new bank regulations.

How Long Fed Rate Stimulus Will Last?
The purpose of the Fed mortgage bond buying program is to elevate mortgage bond prices which pushes rates down. It’s very likely that the November 25 record rate low that markets hit 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 this final three months, we’re likely to see private mortgage bond investors trimming positions which also creates upward rate pressure. more…