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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…

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…

Back in January, here’s what we said about rates and the economy:

“As we move through 2010, our outlook is for waning Fed support to push rates approximately 1% higher, and for a choppy economic recovery marked by modest GDP growth and minimal employment improvement.”

Conforming 30-year fixed rates were at 5% at the time. At this July 14 writing, rates are much lower at 4.57%. Clearly our rate view was conservative but at least our economic outlook is still accurate, and at least rates are lower. more…

Rate Snapshot
Conforming, Jumbo, and FHA rates ended last week at record lows again (see rates below), which makes a two-month streak of record lows. A significant rate spike is not expected in the near future, but it’s also not likely rates will stay this low. Here’s why rates could tick up next week.

How Bond Markets Affect Mortgage Rates
We will see June Retail Sales figures Wednesday, June business inflation figures Thursday, and June consumer inflation Friday. These reports are important, but will likely show continued tame inflation and tentative consumers, which won’t surprise rate markets. more…

Can The Fed Stimulate Economy Better Than Congress?
It seems that Congress is tied up in knots and compromises lately, so Federal Reserve officials may be taking matters into their own hands for improving the economy. The Fed has a limited set of tools with which to work, especially with its overnight Fed Funds target rate already near 0%. It would appear that massive infusions of cash are not in the cards, but that risks of the recovery losing steam have increased. There is certainly little chance of the Fed selling off its holdings of MBS’s – much of which has been going away with lower rates leading to some refinancing – and discussion has actually begun about the chances of the Fed buying more MBS’s. The Fed could change the wording of its statements to make sure that the market knows that rates will stay low for a long period of time. It could also cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25% to 0%, which would give banks more incentive to lend money to customers rather than leave it with the Fed.

From the mortgage industry’s view point, the Fed buying mortgage backed securities certainly help push home loan rates down – but few people at this point believe that rates are the big issue with housing. Just ask anyone who has had a loan fall through due to the property not qualifying, the borrower’s credit being an issue, or the borrower’s debt loan being too great. more…

Subprime Investment Comeback?
As an investor would you rather own IBM or Pepsi stock, or subprime loans? Think hard… and buy them while you can? Apparently, subprime loans are making a comeback (investing, not originating). Remember that these older subprime loans are like old cars: the new ones are better, but the old ones that are still working have a place too. Those in the business know that credit risk, appropriately ascertained and valued, is typically a good investment.

Managing Mortgage Trades When Rates Drop
From the point of view of anyone originating mortgages, what is occurring in the investor ranks is not too interesting. Any A-paper pools of loans being bought or sold at prices near 107 or 108 or 109, as 30-yr 5.75%-and-above mortgages are, don’t impact current rate sheets. But investors are grappling with carry and prepayment projections, along with convexity issue. Overall MBS volume was below “normal” although Freddie Mac security volumes have increased recently as Freddie’s prepayment speeds have diverged from those of Fannie’s. more…

Zero-point rates on 30yr fixed Conforming loans (up to $729k) begin the week back at record lows, and one-point rates on Jumbo loans (above $729k) are steady in the low- to mid-5% range. The European debt crisis flared up again last week and Friday’s jobs report was drastically lower than expected. The result was that global investors continued to be net buyers of Treasury and mortgage bonds as a safe haven, and when mortgage bond prices rise on these buying rallies, rates drop.

Record Low Rates To Start Week
As of market close Friday mortgage rates were again at their lowest levels since 1971. Here is a chart showing this. more…

Current Financial Reform Bill Status
The House-Senate conference committee is where the action will be on the Financial Reform Bill. Several key issues will have to be resolved there, including restrictions on derivatives trading by banks, mortgage broker compensation and yield spread premium, the proposed liquidation fund to be financed by financial firms and the relationship between the Fed and the new consumer financial protection agency. One can expect a vote by the July 4th recess.

73 Banks Failed Year To Date
The FDIC “only” took over one bank Friday: Pinehurst Bank (MN) is now owned, lock, stock, and barrel, by Coulee Bank, based in La Crosse, Wisconsin. The failure of Pinehurst Bank, #73 this year, double the pace of 2009, is expected to cost the deposit insurance fund about $6 million. more…

Zero-point rates on 30yr fixed Conforming loans (up to $729k) ended last week at their lowest levels since official records began in 1971, and Jumbo 30yr fixed loans (above $729k) touched the low-5% range. By the time last week’s rate levels are officially announced by Freddie Mac on May 27, rates are likely to be higher. Below is a recap of how rates got here and rationale for why rates may rise next week.

Why Rates & Stocks Have Dropped
The Dow dropped 1000 points before closing down 348 points on May 6. The press has dubbed it a “Flash Crash,” but let’s go beyond the clever label to understand what happened that day, why the Dow is down 675 points since that day, and why mortgage rates are down .25% since then. more…