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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…

The Federal Open Market Committee voted today 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 fourth straight meeting in 2010, Kansas City Fed President Thomas Hoenig dissented on the belief that modest rate hikes now could avoid having to sharply increase rates later. There was no explicit mention of how they’ll handle their $1.25t of mortgage bonds purchased from January 2009 to March 2010, but the minutes from this meeting (that will be released in a few weeks) will likely reveal that they won’t sell mortgage bonds until after some overnight rate hikes.

Selling mortgage bonds has a much more direct upward impact on mortgage rates whereas the overnight rate hikes would indirectly influence mortgage rates. So the minutes from this meeting will most likely reveal that they will hike overnight rates first (when they determine inflation is a potential issue), then sell mortgage bonds as the economic recovery demonstrates it’s self-sustaining. Until then we can expect more mortgage rate volatility as markets trade on every little sign that we may (or may not) be moving out of a low inflation (or deflationary) era, and we can expect that volatility to continue despite Fed decisions. More below on debate about whether Bernanke’s Fed is leaving rates too low for too long. more…

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…

Signs of Life In Jumbo Mortgages
There are definitely signs of the ice cracking in non-agency (or Jumbo) lending. For example, folks in the biz know that Quicken Loans is the largest online mortgage lender. But in recent weeks Quicken, who is also the 4th largest FHA lender, has moved into “private-label” originations. PHH, according to an article in American Banker, is the largest private-label originator (and which handles originating mortgages for Charles Schwab and Merrill Lynch) expanded into correspondent and wholesale lending. An executive with PHH stated that most clients prohibit PHH from selling servicing, especially to one of the competitors.

Will FHA Down Payments Go To 5%?
From Washington DC: the House is taking up HR 5072, the FHA Reform Act. While it seems that mortgage industry organizations are in favor of the Act, which provides the FHA with resources to manage risk, there are a few amendments that are raising some eyebrows. The first is the Garrett Amendment, which raises the minimum FHA down payment to 5%. The second is the Price Amendment that would limit FHA’s market share to 10% of the housing finance market. Third, the Turner Amendment would reduce FHA’s loan limits, which were “temporarily” increased in 2008. Stay tuned… or call your Congressman ASAP. more…

The FOMC just announced the results from their third meeting of 2010, and all members except for Thomas Hoenig voted to leave overnight bank-to-bank Fed Funds Rates unchanged at the target 0-.25% range—the rationale for this is in their unchanged language on inflation: “inflation is likely to be subdued for some time.”

As for long-term mortgage rates, the Fed didn’t indicate any motivation to sell their $1.25t portfolio of mortgage bonds. If/when they do this, it would push mortgage bond prices down and rates up. More analysis on this when the full minutes of the meeting are released in a few weeks. In the meantime, you can view this consumer-friendly primer on the Fed’s mortgage rate strategy. more…

Rates were net down .125% for the week ended April 9 mostly on positive overall Treasury auctions. This regains half of the .25% rise we had as the Fed ended it’s 15-month mortgage rate stimulus program on March 31. Conventional conforming rates are now back within .25% of all-record lows.

INFLATION & FED OUTLOOK DOMINATE WEEK
The WeeklyBasis rate lock bias going into the past three weeks is now shifting to a floating bias going into Monday, with more rate lock caution as the week goes on. Here’s why… more…

Rates are net up .25% in the past 2 weeks, with rates up even higher on certain trading days. This WeeklyBasis report’s rate lock bias for the past two weeks continues into next week. Below is a recap of why rates have moved up and why they might continue up next week. Also remember that FHA up-front mortgage insurance increases from 1.75% to 2.25% as of Monday, April 5—all FHA mortgage shoppers should obtain revised quotes.

Rate Factors Last Week
The key rate factor 3/22 to 3/26 was Treasury auctions causing mortgage bonds to sell off. Key rate factors 3/29 to 4/2 were two jobs reports interpreted as signs of economic improvement. ADP, a private payroll company with data on 22m workers, showed 23k jobs lost and the official Bureau of Labor Statistics jobs showed 162k new jobs in March. more…

Bond markets were crazy last two days (mostly bonds selling off, pushing rates higher) so we didn’t have time to update site much, but below is Bernanke’s full House testimony with the latest on the Fed’s exit strategy from mass stimulus. See the very last paragraph, that pretty much sums it up: the Fed will only start to sell mortgage bonds (which would push long-term mortgage rates up), and/or hike overnight fed funds and discount rates when economic conditions warrant. That decision will be largely based on inflationary threats.

Chairman Ben S. Bernanke on Federal Reserve’s exit strategy
Before the Committee on Financial Services, U.S. House of Representatives, March 25, 2010
Chairmen Frank and Watt, Ranking Members Bachus and Paul, and other members of the Committee and Subcommittee, I appreciate the opportunity to discuss the Federal Reserve’s strategy for exiting from the extraordinary lending and monetary policies that it implemented to combat the financial crisis and support economic activity. As you know, I previously submitted prepared testimony for a hearing on this topic that was canceled because of weather conditions. I request that that testimony be included in the record of this hearing. This morning, in lieu of repeating my previous prepared statement, I would like to summarize some key points from the earlier testimony and update the Committee on recent developments. more…

Despite volatility last week that caused rates to move up and down about .2%, we ended the week even. Business and consumer inflation reports both showed that inflation is under control. The Fed reiterated this after their FOMC meeting Tuesday, and left overnight bank-to-bank and Fed-to-bank rates at .25% and .75% respectively.

Rates were especially volatile Friday as mortgage bond traders contented with the threat from Moody’s and Fitch that U.S. debt may lose its AAA rating, and the volatility will continue next week. We’ve got 2, 5 and 7 year Treasury auctions, and while these shorter durations don’t directly compete with mortgage bonds, it’s still more bond supply—too much supply can cause mortgage bonds to sell off which pushes rates up. more…

Below is Bernanke’s House testimony from Wednesday defending why the Fed is the best bank regulator in a global banking environment. It’s build around the following case: the Fed must have vast knowledge of markets, economies, financial products, trading strategies, accounting practices, etc. in order to properly perform its central bank functions, and this is precisely the breadth of knowledge that’s needed to properly regulate banks in our interconnected world. There’s naturally furious debate in financial and political circles about financial regulation, but this point is well taken. Some like to blame the Fed for contributing to the financial practices that led to the 2007 meltdown, but where would we be without their actions to right the ship? And if not the Fed, who else can properly comprehend and regulate the financial sector? Lawmakers? That’s a laugh.

The Federal Reserve’s Role in Supervision
Like many central banks around the world, the Federal Reserve cooperates with other agencies in regulating and supervising the banking system.1 Our specific responsibilities include the oversight of about 5,000 bank holding companies, including the umbrella supervision of large, complex financial firms; the supervision of about 850 banks nationwide that are both state-chartered and members of the Federal Reserve System (state member banks); and the oversight of foreign banking organizations operating in the United States. more…