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Rate Snapshot
It’s quite surprising that rate volatility has been minimal for three weeks. As such, zero-point rates on 30yr fixed Conforming loans (up to $729k) held last week near record lows for a third straight week, and one-point rates on Jumbo loans (above $729k) remain steady in the low- to mid-5% range. Rates for each category below.

Rate Factors Week of June 21
Volatility could return with a full economic slate next week. Here’s the market moving data for the week, each noted with what impact it could have on rates: more…

GM filed for bankruptcy a few days ago. A buddy told me, “This would be bad news if anyone had actually bought a GM car in the last five years. They say that the company will emerge from bankruptcy in three years or 36,000 miles, whichever comes first.” There are some witty folks out there.

Bernanke vs Greenspan
I guess when people become tired of Ben Bernanke, they look back at Alan Greenspan. The former Federal Reserve chief’s favorite economic indicator is men’s underwear sales. Supposedly, Greenspan often said one of the first things men stop buying when the economy is doing poorly is underwear, because it’s something no one really sees. You can reason that when men start buying new boxers and briefs, it means the economy is turning around. Interestingly, after a 12-month, 12% decline through the end of January, men’s underpants sales leveled off during February and March, according to NPD (a group which tracks clothing trends). That suggests the economy is stabilizing, right? Usually it goes up 2% to 3% annually – don’t ask me why, as I would think it would hover around population growth – so a return to that would be a good sign. more…

In his March Investment Outlook, Bill Gross head of PIMCO, the world’s largest bond manager, does a mock Q&A as though he was testifying before Congress about the financial crisis, its origins, how long it will last, what needs to be done with the banks, and where people should invest their money. Required reading. Below is an excerpt on bank nationalization:

Question: What do you think about nationalizing the banks? more…

In the midst of a crisis, there’s rarely time to question what caused the crisis. But it’s useful to know who helped get markets to where they are so we can avoid mistakes as we get through the triage and begin formulating policy solutions. Below are two stories that discuss a key player in the run-up to the crisis—Brooksley Born, the head of the Commodity Futures Trading Commission from 1996 to 1999. She pressed for getting derivatives such as credit default swaps under the purview of the CFTC so that they wouldn’t be viewed just by the two parties that entered into the contracts—her goal was to have the same level of transparency as other derivatives, where all market participants can see positions.

But she was shut down by Fed chairman Alan Greenspan, SEC chairman Arthur Levitt, Treasury Secretary Robert Rubin, and Rubin’s successor Lawrence Summers—and not long after she left the CFTC post in 1999, then-Senator Phil Gramm did the deregulatory bidding of these other leaders and got his CFTC Modernization bill through congress. This open market advocacy is fine because you can’t have over-regulated markets if you expect to compete globally. But you can’t let derivatives go utterly unregulated. more…

Former Fed Chairman and one of the world’s most seasoned economists said that this is the by far the worst economy he’s ever seen. Click link for full report and see video below. Greenspan says that this economy will not rebound until home prices start to stabilize:

Former Fed Chairman Alan Greenspan has been out in full force this week defending his monetary policies amidst growing criticism that his decision to keep the Fed Funds Rate at 1% from July 1, 2003 through June 30, 2004. He wrote a rebuttal to critics in the Financial Times, and then did an interview with CNBC. Some say it’s hard to believe a guy who led with: “If we can get forecasts right 60% of the time, then we’re doing extraordinarily well.” After all, if we could ascribe the same success metric to our own jobs, we’d all be wildly successful.

However, Greenspan has actually made some valid points in recent days. Regarding rates, he correctly points out that long-term rates were low during the home price run-up and would have spurred housing prices anyway. Regarding a fix for the housing crisis, he said that we should consider a solution similar to the Treasury’s Resolution Trust Corporation which ran from 1989 to 1995 as a way to help unwind the S&L crisis — the RTC was set up to liquidate assets of troubled savings and loan associations that had been declared insolvent by the Office of Thrift Supervision. more…

Fixed and ARM rates rose .5% two weeks ago, dropped .5% last week, then rose about .25% today following an ISM Index number that showed February manufacturing activity better than expected. Rates also moved up on public comments from Philadelphia Fed President Charles Plosser, a voting member of the rate-setting Federal Open Market Committee. He said Fed rates should be higher to avoid inflation. Actually he didn’t say that. But that’s what markets interpreted and rates shot up. What he actually said was that current financial market turmoil has caused the Fed to lower rates, and that these Fed policy “deviations should be temporary and limited and promptly reversed when conditions return to normal.”

The most important thing here is that rates are low and we can’t necessarily expect them to be low for the rest of the year. Rates too low for too long is what caused many to blame Greenspan for the market troubles we have now. more…

Since the credit crunch hit emergency status in August 2007, Ben Bernanke has been put to the test. But the exam is nowhere near over. So what type of Fed chairman are we dealing with? This extensive Bernanke profile ran in the New York Times magazine last Sunday, and it’s a great education on Bernanke and Fed history in general. It doesn’t change our position that Bernanke is going to emerge as a great Fed leader. He presides over a volatile era in markets, and his “data dependent” approach perhaps brings even more volatility. We’re right in the middle of his first significant cut cycle after he took over mid-stream through Greenspan’s hike cycle, and continued on that path. Once he reaches stimulative lows on the Fed Funds and Discount rates, just don’t expect him to hold there like Greenspan did. He will hike off lows quickly, and volatility is here to stay.

Fixed and ARM rates are up slightly this week on mortgage bond weakness. Factory orders came in stronger than expected today, and bonds took this as a subtle sign that the Fed may only cut 25 basis points instead of 50. They’ve already cut 175 basis points in the past 4 months, and it typically takes at least six months for Fed rate adjustments to reflect in economic data. My bet is that they still cut 50 basis points, since the Fed’s mission right now is to “reduce tensions in bank lending,” as Fed chairman Ben Bernanke very explicitly told the House Budget Committee 10 days ago. To me, this clear short- to medium-term Fed mission proves all the noise about the Fed being a slave to daily market movement is misguided. This week we also have GDP, the Fed’s favorite inflation measure (personal consumption expenditures), and the jobs and wage growth report Friday. The week has been somewhat quiet but the volatility is about to come back with a force.

For locks I have this week, I am locking ahead of all the data because rates are very good right now and will swing wildly in the coming days. Also, for all purchase clients up to $1m purchase price, I have been talking about loan strategies that enable them to capture the forthcoming conforming loan limit hikes – which will re-set for one year to somewhere between $625k and $729k. If this is the case it changes things for people buying right now. There are ways for buyers in this purchase price range to capture conforming 30yr rates (instead of jumbo 30fixed or settling for an ARM to get a lower rate). Even if they’re buying now, I am talking to people about free or deeply discounted refis when the conforming loan limits change. more…

There’s a term called “common sense underwriting” in the mortgage industry. It means that lenders should only approve loans that make sense from a risk standpoint. If a borrower is more risky, they need to compensate lenders for this risk by providing more proof of their ability to pay. If a borrower is less risky, they will be approved more easily and get lower rates.

In light of the subprime mortgage market troubles, the common sense underwriting credo has been called into question. Many lenders have closed their doors recently because they lacked common sense and approved overly risky loans. This quarter, we will discuss whether the subprime fate will extend further, and how all of this will affect you. more…