California’s 2009 Home Buying Stats
In California (state motto: “By age 30, our women have more plastic than your Honda”) last year 47% of all homebuyers were first-time homebuyers, up from 35.9% in 2008. And REO and short sales made up half of the assets sold in the state, up from 36% in 2008, according to the California Association of Realtors. Of those surveyed by CAR, 40% of the homebuyers said they would not have purchased a home without the first time buyer tax credit. Lastly, the higher FHA loan amounts ($729,750 for single family) helped: in 2009 FHA loans accounted for 32% of the market compared to 18.9% in 2008, according to CAR.

Bond Market 101
Mortgage analysts and traders often talk about “negative convexity.” What is that? It is critical to remember that, for fixed income instruments, when rates go up, prices go down. (In a 5% environment, a $100 bond pays $5 per year. But if rates go up to 10%, investors want $10 per year, so the price of the original bond has to go down so that the $5 per year it pays will equal 10% of the purchase price for an investor.) Conversely, if rates go down, prices go up – simple!

But if the bond is “callable”, meaning that the issuer can pay it off, like a mortgage, as interest rates fall, the incentive for the issuer to call the bond at par increases; therefore, its price will not rise as quickly as the price of a non-callable bond. In fact, the price of a callable bond (like a mortgage) might actually drop as the likelihood that the bond will be called increases. This is why the shape of a callable bond’s curve of price with respect to yield is concave, or “negatively convex.” A very simple way to explain it is that mortgages pay off when rates drop, just when servicers and investors don’t want them to pay off, so mortgage prices don’t improve as much in a rally as, say, a Treasury bond!

Bonds and Rates For 2011
There is definitely an argument for higher rates over the next few years. Although some analysts believe that the economy is going to head back down, everything I have seen suggests that everyone believes things are better than they were. If the economy is indeed beginning to do better and expand, in the past five-year Treasury rates have tracked fairly closely to nominal growth (growth not adjusted for inflation), and in fact nominal growth and long-term rates tend to converge. So if history is a guide, the 10-year Treasury yield will likely double from the lows of the recession to the end of 2011, due at least in part to much improved economic growth. Of course the good news in this scenario is that more borrowers will actually have jobs, and homes will be appreciating.

Bonds and Rates For Right Now
But for now, mortgage rates and prices are darn good. In fact, 4.5% securities are above a price of 101 (1 point premium), and if you add the value of servicing onto these 4.75-5.125% 30-yr loans, agents should have a very nice rebate. Origination has indeed picked up to $1.5-2 billion a day, and there is still demand for the product. And there is certainly demand for the Treasury securities – yesterday’s $21 billion 10-yr sale went well. In fact, the bid-to-cover ratio set a record of 3.45:1. Today we have $13 billion of 30-yr bonds to sell, a “re-opening” of the last batch. We have already had the weekly jobless claims and the Trade Balance figures (actually somewhat smaller than expected). Jobless Claims came in at 462,000, down from a revised 468k, but continuing claims were up slightly. The impact on the market of these numbers was nil: the new 10-yr is yielding 3.74% and mortgage prices are worse by about .125.

Daily Humor
An Irish priest is driving down to New York and gets stopped for speeding in Connecticut. The state trooper smells alcohol on the priest’s breath and then sees an empty wine bottle on the floor of the car.

He asks, “Father, have you been drinking?”

“Just water,” replies the priest.

The trooper asks, “Then why do I smell wine?”

The priest looks at the bottle, smells it, and exclaims, “Good Lord! He’s done it again!”

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

This is not the conventional wisdom. Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession). The V camp includes distinguished research groups and individuals such as Ed Hyman’s ISI, Larry Meyer’s Macroeconomic Advisors, the research group of JP Morgan, Michael Mussa and others. The U camp includes—among others—Roubini Global Economics, Goldman Sachs’ U.S. economic research group, PIMCO and Ken Rogoff. As early as August 2009, I worried in a Financial Times op-ed about the risk of a double-dip recession even if our RGE benchmark scenario characterizes the risk of a W as still a low probability event (20% probability) as opposed to a 60% probability for a U-shaped recovery. Others concerned about the double-dip risk include also David Rosenberg, Gary Shilling and John Makin.

Ed Hyman and I debated whether the recovery would be U or V-shaped on a February 22 conference call attended by over 2,200 listeners. Since that call, a slew of new U.S. macro data have come out. They have been almost uniformly poor, if not outright awful. Consumer confidence, based on the Michigan survey, has tanked. On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply, and construction activity (both residential and commercial) is sharply down. Durable goods orders are down, initial claims for unemployment benefits remain stubbornly high (way above the 400K mark). Real disposable income for Q4 has been revised downward while real disposable income (before transfers) for January was negative again. The manufacturing ISM index—while still expanding being above 50—has now fallen a couple of notches and its production and new orders index levels are falling, too; and global PMIs suggest a loss of momentum in the global economic recovery. Real inventories look unchanged in Q1 relative to Q4; auto sales were at best mediocre; core CPI was falling and core PCE was close to 0%, suggesting anemic demand and economic weakness. Q4 GDP growth was revised upward to 5.9% but most of it (3.9%) was due to inventories; final sales grew at a 1.9% rate while consumption grew at a dismal 1.7% (down from 2.8% in Q3). Q3 growth has been revised from an initial 3.5% to 2.8% to 2.2%, with final sales growing only 1.7%. So, at the time of maximum policy stimulus (H2 of 2009), final sales were growing only at a pathetic 1.8% average rate.

The eurozone (EZ) debt crisis, which RGE discusses in depth in a major new paper, predisposes Europe to a rising double-dip risk, due to the wave of fiscal austerity sweeping the periphery of the EZ. Even if the EZ doesn’t enter a double dip, the growth of domestic demand there will be as or more constrained than in the United States. This, in turn, will be a drag on the potential for U.S. export growth. The U.S. dollar rally on risk aversion reflects this risk. The U.S. dollar is settling back down and the threat of a debt crisis is headed off by a stronger Greek fiscal adjustment and potential adjustment package. But fiscal spending cuts, confidence hits and the looming threat of either rising unemployment or falling wages in the public sector—on top of private sector retrenchment—will remain. A similar retrenchment may well lie ahead in the United Kingdom, given rising fiscal sustainability concerns and the threat of a sterling crisis. Europe then will have great difficulty being a source of demand for U.S. exports, and may even provide impetus to faltering global demand growth, contributing to the threat of a wider double dip across high-income countries.

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.

Mortgage Apps Up Last Week
The MBAA released its weekly survey of applications for the previous week. Apps were up slightly versus the previous week, with refinancing was down 1.5% but purchases showed some life and increased 5.7%.

3yr Auction Well-Received, 10yr Auction Today
Yesterday’s 3-yr T-note auction of $40 billion was the fifth consecutive month of this size, and the auction went well. If you think about it, the short end of the Treasury market continues to be well supported with the ongoing sovereign debt issues (there is still some flight-to-quality bid) and outlook of rates. We’ve had three days (including today) of no real economic news, so supply (mortgage selling and the Treasury auctions) is continuing to be the main driver in the market. We have $21 billion of 10-yr notes to buy today. The current 10-yr is yielding 3.72%, and mortgage prices are about unchanged from Tuesday’s close.

Still Reading?
A new test allows men to check their sperm count at home. At least that’s what the men say they are doing… (This has nothing to do with mortgages, but figured I’d throw it in to see if folks actually read this.)

Underwriter Comments From The Trenches
A long-time underwriter wrote to me and opined,

“Consumers always want more than what they can afford and we gave them exactly what they wanted for the last 10 years (without any prudent financial advice). I actually like the guideline changes and feel it is necessary to eradicate some of the broker mentality that I hear in some underwriter’s voices. Manufacturing quality is still a problem for the Agencies, and originating mortgage companies are still closing loans that are not 100% purchasable by the aggregators upon delivery. Fannie and Freddie have technology in place to turn the lender’s cash immediately, and then are rejecting the loans once they figure out all the doctoring that happened to make a square peg fit a round hole.”

Another wrote saying,

“I oversee the Secondary desk at our company and I also originate loans. [Interesting.] As difficult as the last three years have been, I am still seeing mistakes due to a lack of educated and qualified workers in our industry. Unfortunately some of those people are compensated on a per loan basis, possibly even the underwriter. So until quality becomes a part of our DNA, expect more of the same for the next few years.”

Mortgage vs. Treasury Yields
Yesterday I mentioned how the spread between mortgage rates and Treasury rates were the lowest (tightest) they’d ever been. (Remember that any difference is due to a number of factors, including the higher risk in owning mortgages, the possible difference in duration, etc.) Mortgages continued to tighten yesterday – so even if Treasury rates moved higher, mortgage rates might stay the same. Investors want to “own yield”. The usual suspects were in buying: the Fed, money managers, and hedge funds, and it would appear that production volumes are lagging. So although traders were fretting over swap and roll levels, originators are more consumed with the general level of rates, which really hasn’t moved that much in quite some time.

Are You More Likely To Default On Credit Card or Mortgage?
Fair Isaac Company, known as FICO, reported that credit score trends indicate that mortgage default risk for consumers with high FICO scores is now moving toward exceeding their credit card default risk, in spite of the fact that credit cards are generally unsecured and mortgages are secured by real estate. In 2005 bankcard accounts were more than three times more likely to become 90 days delinquent, but in the last few years this has dropped to only 1.6 times more likely. And FICO reports for borrowers scoring high on the FICO score’s range (300-850) the level of repayment risk actually has become greater for real estate loans than for bankcards! And for more fun with numbers, in 2005, 46% of consumers who opened a new mortgage had a FICO score less than 700. In 2008 this percentage had dropped to 25% of the newly booked mortgage population. Fair Isaac reports that borrowers in the Northeast continue to present the least amount of default risk nationally for real estate loans.

Daily Humor
Father Murphy walks into a pub in Donegal, and asks the first man he meets, “Do you want to go to heaven?”
The man said, “I do, Father.”

The priest said, “Then stand over there against the wall.”

Then the priest asked the second man, “Do you want to go to heaven?”

“Certainly, Father,” the man replied.

“Then stand over there against the wall,” said the priest.

Then Father Murphy walked up to O’Toole and asked, “Do you want to go to heaven?”

O’Toole said, “No, I don’t Father.”

The priest said, “I don’t believe this. You mean to tell me that when you die you don’t want to go to heaven?”
O’Toole said, “Oh, when I die, yes. I thought you were getting a group together to go right now.”

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.

I am going to go out on a limb here, which is rare for me, and suggest that the consultants, market gurus, bloggers, paid services, etc., who firmly believe that mortgage rates are going to go up 50 basis points after March 31st are wrong. If NASA told you that it was certain a meteorite was going to hit the US next Tuesday, would that change your behavior now? You bet it would. Yet dealers are not seeing companies sell their entire pipelines and/or expected production (currently estimated at less than $1 billion a day) for April and May. If speculators are stocking up on puts on MBS’s, they are keeping it well hidden. (Of course, the option market for mortgage securities is practically nil.) Mortgages have been getting tighter and tighter to treasuries, which one wouldn’t expect if mortgage rates were going to skyrocket, and yesterday current coupons were the tightest they’d ever been. And why would any mortgage investor (currently hedge funds and money managers) want to own pools at these price levels if they were going to be two points lower in three weeks? Of course, no one wants to sell something that they don’t own in this market. I don’t think that the supply is there, no one wants to sell what they don’t have (exposing them to some extremely volatile swap and role markets), and with Fannie & Freddie buying back delinquent loans, I think mortgages hang in there with other rates.

Problem 2nd Mortgages
Anyone who has tried to refinance a 1st mortgage while having the 2nd subordinated knows what a nightmare that can be. Apparently modifications are not much smoother, and last week House Financial Services Committee Chairman Barney Frank called on the CEOs of four major investors/banks (WF, BA, C, CH) to work with the Treasury Department and banking regulators to deal with second mortgages that have become an obstacle to modifying troubled first liens. These four have $452 billion of 2nds on their books, and writing them down is supposedly fraught with problems – especially since a lot of them are worthless. Gulp. The issue is that banks have not acknowledged these losses under the accounting rules and will adversely affect their capital ratios.

Primer on Repurchase Agreements
What is a “repo”, and why should anyone in mortgage banking care about them? Also known as “repurchase agreements”, the procedure allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. The borrower agrees to sell the security to the lender and also agrees to buy the same security back from the lender at a fixed price at a later date; therefore it is a combination of a cash transaction and a forward contract. The difference between the forward price and the current (”spot”) price is the interest on the loan. The Federal Reserve Bank of NY announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions. This expansion, the first group being for domestic money market mutual funds, is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed’s traditional counterparties, the Primary Dealers. “In terms of operational details, the New York Fed anticipates that any transactions would be offered to primary dealers and the broader set of counterparties, conducted at auction for a fixed (not floating) rate, settled through the tri-party repo system, and held against all major types of collateral in the System Open Market Account (SOMA), including Treasury securities, agency debt securities, and agency MBS securities.

LendAmerica Exec Banned by FHA
Michael Ashley, a former senior official with LendAmerica, a nationwide lender of U.S.-backed mortgages recently shut off from government programs, was permanently banned from the industry by the FHA. In the March 3 judgment, Ashley was permanently banned from originating, marketing or submitting claims for FHA mortgages. He did not admit or deny liability regarding the allegations. The judgment also prevents Ashley from being employed in any capacity, including as a strategist or consultant, for any company connected to the FHA.

FDIC’s Plans To Auction $1b In Failed Bank Assets
A story from Bloomberg yesterday pointed to the impact on small banks from the FDIC’s plan to auction more than $1 billion in failed bank assets next month. (Remember, for a bank assets are loans owed them, liabilities are deposits.) Almost half of the loans were originated by Silverton Bank out of Georgia. The article points out that of the loans seized from failed banks currently held by the FDIC, “63% involve participations by other lenders.” The fear among small banks and commercial lenders is that the loans are going to be sold to someone who will flip them and cause them serious losses.

Treasury Auction Today, Market Impact
Today we start yet another Treasury auction, with the usual worries about financing our increasing debt. Who will buy the $74 billion? The usual suspects come to mind, and let’s hope that demand is strong because otherwise we could see all rates shoot up in a hurry. Given that there isn’t much data until the end of the week (weekly unemployment claims on Thursday and February retail sales on Friday), these auctions will be important. In spite of there being no data, the 10-yr has rallied back down to a yield of 3.68% and mortgage prices are better by roughly .250 this morning.

Daily Humor
(Best read out loud.)
Boudreaux was out in da field talkin’ with his friend Thibodeaux.

Thibodeaux said “Boudreaux, you see dat ole barn out dere? Well man, it is completely infestered wit rats. I tried everything I know an can’t get rid of dem.”

Boudreaux say, “Thibodeaux, I know xactly how to get rid of dem rats. You gotta get you one of dem bull constriptors.”

Thibodeaux say, “What’s a bull constriptor?”

Boudreaux explains, “Man, dats one of dem big ole snakes and he loves to eat rats and swallers dem whole, all at once”.

Well, da nex day Thibodeaux went down to Kliberts reptile farm and bought him da biggest bull
constripter dat dey got. He brought dat snake to da barn an let him loose right in da middle and
just sat dere and watched. Well, Thibodeaux was watchin’ for a long time, I mean long, an dere
wasn’t nuttin ‘ happening. Dat big ole snake jus curled up hiself in da middle of dat barn and
slept all day. He didn’t even move and dem rats jus run all around.

So Thibodeaux got real frustrated and he called up Boudreaux on da phone, “Boudreaux, man
dats some bad advice bout dat snake. Dem rats is still runnin’ al around and dat snake jus lays dere sleepin’ all day long.”

Boudreaux says, “Man, Thibodeaux, I know just what to do. Give dat snake some Viagra.”

Thibodeaux say, “What! Viagra! What’s dat gonna do?”

Boudreaux say, “I was just listening to da radio and de man say dat Viagra is da best ting to use for a reptile dysfunction.”

Four More Banks Fail
When I was a kid, I used to pray every night for a new bike. Then I realized that God doesn’t work that way. So instead I stole a bike and asked Him to forgive me. Neither strategy worked for four more banks, as the FDIC shut them down Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency’s insurance limits). Sun American’s (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was “absorbed” by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah’s Centennial Bank are now being run by the FDIC, with the help of Zion’s Bank, at a cost of about $96 million.

Credit Union Mortgage Market Share Growing
Roll on, credit unions! Over 7,700 of them (including Navy Federal Credit Union, the world’s largest with $40 billion in assets) originated $95 billion in residential mortgages in 2009, taking a 4.5% share of the nation’s total mortgage market. At the end of 2009, the credit union industry held $314 billion in real estate loans in 2009, up 1.52% from 2008’s origination level, and apparently has a goal of 10% of the mortgage origination market by 2016. Credit unions have increased total loan originations in 64 of the past 65 years, according to credit union research firm Callahan & Associates. NFCU said it funded $6.2 billion in mortgages last year, and has committed $7 billion to originate, purchase, and refinance mortgages with loan-to-values (LTVs) of up to 100% for its members this year.

Fannie/Freddie Forcing Lenders To Buy Back Loans
If 2008 and 2009 were known as companies going out of business and tightening underwriting guidelines, 2010 runs the risk of being the year of buy backs. Everything points to FNMA & FHLMC putting back loans in mammoth proportions to investors, who in turn will look to the smaller originators for remuneration. Let’s hope that smaller lenders have the resources not only to underwrite new loans but in scrubbing old ones.

In a report from Oppenheimer & Co., it is estimated that Freddie and Fannie (owned by us, the tax payers) could force large investors to buy back $21 billion of home loans this year, resulting in a loss to investors of $7 billion. (This follows a loss of $5 billion this year for the same reason.) And there are plenty of losses to share, since Fannie Mae and Freddie Mac have lost over $200 billion since 2007. Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, and had another $4 billion outstanding loan-purchase demands that lenders had not met. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying home has plunged.

Quicken Loans Posts Record Results
Quicken Loans’ call centers, according to its CEO, have remained profitable during the mortgage crisis, posted record results in its last fiscal year, and weighed in at #14 in terms of originations last year. The company is privately held, but reported that its origination more than doubled in 2009 to $25 billion. Like so many other companies, the company is trying to increase its market share in 2010. If one excludes loans made through correspondent lenders or brokers, Quicken was #5.

Mortgage Patents
Are there patents in mortgage banking? The Prieston Group’s application by its owner for a patent on the Method of Rating Lenders quantifying the risk associated with the “lending practice including fraud detection, organizational structure and management among other qualitative analytics was approved.” Prieston’s “Lender Rating will increase predictability of repurchase risk of any particular lender. One of the many uses of the Rating Methodology can be applied to determining potential financial strengths and weaknesses of lenders.”

Daily Humor
NEW UNDERWRITING UPDATES
All borrowers’ birth certificates will be required with pictures taken in the hospital with medical staff. Birth certificate with a live home delivery will not be eligible for first time home buyers.

Marriage certificate with bridal dress will be required if both husband and wife are required to qualify for the loan.

GFE will not require signature, but will require blood sampling from a recognized institution within three days of application.
DNA test will be performed at closing to avoid any non-arms length transactions. Loan funding will be contingent upon satisfactory receipt of DNA results.

Verification of deposit will be acceptable only if Bank representative is present at the closing.

Copy of Pay stubs and W2 will only be acceptable through IRS and only with a wax-sealed envelope mailed directly to the lender.

Seven witnesses from the neighborhood will be required as proof of primary residence in case borrower owns more than 1 property.

All appraisers will be required to use masks and ear plugs at the time of inspection to avoid any personal influence by the borrower or broker for the appraised value.

In order to correctly calculate DTI and true housing ratio a list of grocery items, monthly usage and brand names will be required with receipts and projected 12 month consumption chart.

Closing will not occur without loan officer presence at settlement and loan officer picture will be taken at the closing in a mug shot format with loan number. Picture should meet standard guideline of 2 X 2 inch in color format with one facing and one side view.

Loan officer picture will be attached to the Deed and note and will be made available for general public and security agencies in case borrower defaults on the loan.

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.

As for current rates on all tiers from $417k to $2m, see below. These are also single family home scenarios, and they’re as of market close today. Rates change all day everyday as mortgage bonds trade.

We’re now in the home stretch of the Fed’s mortgage rate stimulus program that began January 1, 2009 and will end March 31, 2010. The Fed has been buying mortgage bonds all this time to drive bond prices up and yields (or rates) down. Rates dropped 1% at the inception of this program and have held this range. Here’s a more detailed piece I wrote this morning on what might happen as we approach March 31 and beyond.

Next week is fairly tame in terms of economic data, so we’ll open the week with markets continuing to digest jobs data. Have a great weekend…

CONFORMING RATES ($200,000 – $417,000) – 1 POINT
30 Year: 4.75% (4.87% APR)
FHA 30 Year: 4.875% (4.99% APR)
5/1 ARM: 3.375% (3.49% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT
30 Year: 5% (5.12% APR)
FHA 30 Year: 5% (5.14% APR)
5/1 ARM: 3.625% (3.74% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.625% (5.74% APR)
5/1 ARM: 4.625% (4.74% APR)

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?

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 the end of this month until they reach their $1.25t budget (see program-to-date tally below), and then markets will begin to see just how much impact the Fed buying will have on rates.

As the Fed backs off their buying, total mortgage bond supply is also expected to decrease: most estimates call for 2010 loan originations that are 40-50% less than 2009’s. So this could prevent a big rate spike that many think will happen as the Fed ends its mortgage bond buying.

Also, three weeks ago, New York Fed President William Dudley, the man who runs the Fed’s MBS buying program, said there could be more Fed MBS buying if the economic recovery stalled or rates spiked too much, confirming the Fed’s current position that it “will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”

The hope markets have (and the long-term intent of the Fed’s program in the first place) is that private MBS markets will re-emerge as the Fed eases off. This is the end game. For housing and the overall economy to generate self-sustaining recovery, there must be a private MBS market that’s not reliant on the government as a core participant.

Until we get to that stage, we can expect lots more rate volatility during 2010. This morning is no exception, with mortgage bonds down nearly 50bps, translating into roughly +0.2% in rates.

What Mortgage Bond Buying Means for Rates And Consumers
We cover the Fed mortgage bond buying closely to try to help consumers make decisions but the main point is: rates are near all-time record lows, so if you can get the right price on a property purchase you’ll get a record low rate to go with it. And if you’re looking to refi, your window is closing.

Below is an excerpt from a post we did a few weeks ago that answers the question of where rates may go by summer and why:

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.

Tally Of Mortgage Bonds Bought By Fed
The Fed, according to their own reporting, has bought $1.219t net of mortgage bonds, which is 97.52% of their allotted $1.25t target by March 31, 2010. This isn’t an official number, it is a close tally The Basis Point has kept of weekly net MBS purchases since the Fed began buying in January 2009. Here’s the current and detailed report of the Fed’s MBS holdings.

Additionally there are now 8.8 million people who would like to work full time but are working part time because their hours have been cut or they can’t find full-time jobs. This forced-into-part-time-work category is up 4.1m million since January 2008, and increased by 500k this month, offsetting a big drop in January. January’s drop from 9.2m to 8.3m was the first improvement in nine months. This is the fine print of the jobs report—the headline job loss and unemployment statistics show that these 8.8 million people are employed and therefore not in the job loss category, but because of their job status these 8.8 million workers aren’t likely to be consuming at normal levels. Markets are interpreting today’s report as positive—stocks are rallying, bonds are selling off, and rates are higher—but this statistic is mostly undiscussed in market coverage.

Thornburg’s Last (and Next) Chapter
In a story out of Reuters, four top executives of Thornburg Mortgage improperly paid themselves handsome bonuses just before the mortgage lender filed for bankruptcy last year, and stole money and ideas from Thornburg to secretly launch a new firm, the bankruptcy trustee in charge of liquidating the lender alleged in a lawsuit. Per the complaint, the four executives and their outside lawyer and law firm conspired to launch a new company, called SAF Financial, using a strategy created by Thornburg to try to save itself. CEO Larry Goldstone, former CFO Clarence Simmons, and former VP’s Deborah Burns and Amy Pell were mentioned.

NY Fed Report on Small vs. Large Banks During Crisis
The New York Fed released an interesting paper, if you find these things interesting, on the events in the Fed Funds market in the 2008 financial crisis. In the immediate aftermath of the Lehman’s bankruptcy we see that the market seems to become sensitive to bank specific characteristics, not only in the amounts lent to borrowers but even in the cost of funds. There were sharp differences between large and small banks in their access to credit: large banks show reduced amounts of daily borrowing after Lehman and borrowed from fewer counterparties. In contrast, smaller banks were able to increase the amount borrowed from the interbank market and even managed to add lending counterparties during the crisis. The study showed that the worst performing banks in terms of ROA started accessing the Federal Reserve’s discount window after the Lehman’s bankruptcy. It seems reasonable to assume that these are banks which were rationed by the Fed Funds market since private banks were not willing to lend to them.

Less Loan Origination Means Less Need for Fed MBS Buying
Obviously the end of the Fed’s purchase program is coming to an end in a matter of weeks – but maybe mortgage rates won’t skyrocket. Once should keep in mind, however, that every estimate out there points to a mortgage origination market that is 40-50% less than 2009’s, so there is some hope that supply & demand functions enter into keeping mortgage rates relatively low – so maybe the rate increase will be less than 50 basis point. Traditionally, mortgage rates widen when Treasury prices rally, and tighten when Treasury prices worsen (and rates go up). “Negative convexity.” In addition, Fannie and Freddie will be buying hundreds of billions of delinquent loans. This has hurt the pricing on higher rate mortgages, but overall could be positive for the markets and mortgage rates.

Improving Stocks, and Rates. For Now
Both the stock and bond markets improved on Thursday, which was nice to see. Both the initial and continuing jobless claims posted week-over-week drops, causing traders to ratchet their estimates for today’s jobs data downward, and pending home sales dropped. Greece began selling 5 billion Euros of 10-yr debt after promising to reduce Europe’s largest budget deficit, which included wage cuts that has prompted more protests. Right now, the futures market is pricing in an 86% chance that the Fed keeps rates somewhere between 0% and .25% through June 23rd, 2010. But a rumor swept the markets yesterday that a very large buyer in 4.5% securities moved mortgages relative to Treasury rates. Supply from lenders (read: locks) has increased lately as rates have crept back down.

This morning’s news, however, has really moved interest rates initially. Non-Farm Payroll “only” dropped by 36,000, and the unemployment rate held steady at 9.7%. Hourly Earnings were up, and the average workweek was down slightly. Rates shot up on the news, as did the stock markets. Call it a knee-jerk reaction, and sometimes you wonder if the market conveniently forgets that the unemployment rate is still near 10%, but stock market futures did indeed rally on the news, the yield on the 10-yr rose from 3.61% up to 3.67%, and mortgage prices worsened by upwards of .250 in price.

Daily Humor
Barack Obama was out jogging along the parkway one morning when he tripped, fell over the bridge railing, and landed in the creek below.

Before the Secret Service guys could get to him, three kids who were fishing pulled him out of the water. He was so grateful he offered the kids whatever they wanted.

The first kid said, “I want to go to Disneyland.”

“No problem,” Barack said, “I’ll take you there on my special airplane.”

The second kid said, “I want a new pair of Nike Air Jordan shoes.”

“I’ll get them for you and even have Michael sign them,” Barack said.

The third kid said, “I want a motorized wheelchair with a built-in TV and stereo headset!”

Barack was a little perplexed by this and said, “But you don’t look like you’re handicapped.”

The kid said, “I will be after my dad finds out I saved you from drowning!”