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Which Bonds Are Mortgage Rates Tied To?
Rates on mortgage loans up to $417k and up to $729k are tied to trading in “agency” mortgage-backed bonds—meaning bonds issued by Fannie Mae, Freddie Mac, and Ginnie Mae. So while many look to the 10yr Treasury Note for clues on mortgage rates, they should be looking at mortgage bonds. And specifically, there are different duration mortgage bonds to watch during different times in the market to predict what rates might do, and how to properly lock a rate at the best time.

Prices on agency mortgage bonds have been slightly abnormal lately, so we have to look at the security price difference between a 4% and a 4.5% security to see what’s going on. Historically, on average, price differences between .125% for a 30-yr mortgage is about .5 in price, or 2 points for .5%. This relationship, however, has gotten out of whack with the latest volatility and prepayment fears in the mortgage-backed security sector. Currently the price difference between a 4.0% security and a 4.5% security is now 2.75 in price (instead of 2.00), so therefore the difference in price between a 4.75% loan, which would typically be slotted into a 4.50% security, and a 4.625% loan, which would go into a 4.00% security, same impounds, same LTV, same credit score, is now much greater. more…

The National Association of Realtors said that March pending home sales—as measured by single family homes and condos that went into contract for the month—increased 5.3%. This 21.1% above March 2009 and follows an 8.3% increase in February. NAR’s chief economist acknowledged that the increases in recent months were helped by the federal homebuyer tax credit, saying:

“Clearly the home buyer tax credit has helped stabilize the market. In the months immediately following the expiration of the tax credit, we expect measurably lower sales. Later in the second half of the year, and into 2011, home sales will likely become self-sustaining if the economy can add jobs at a respectable pace, and from a return of buyer demand as they see home values stabilizing.” more…

The National Association of Realtors reported that the number of existing homes (as opposed to new construction) that entered into sales contracts in January dropped 7.6%. NAR’s chief economist Lawrence Yun said bad weather was a big reason, and also said that ‘sufficient’ job creation would create a self-sustaining housing recovery. Many other economists think 10%-range unemployment will be the norm for years to come. Yun’s comments below:

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NAR’s Proposal for Fannie/Freddie
My daughter and I went through the McDonald’s take-out window and I gave the clerk a $5 bill. Our total was $4.25, so I also handed her a quarter. She said, “You gave me too much money.” I said, “Yes I know, but this way you can just give me a dollar bill back.” She sighed and went to get the manager, who asked me to repeat my request. I did so, and he handed me back the quarter, and said, “We’re sorry but we could not do that kind of thing.” The clerk then proceeded to give me back $1 and 75 cents in change.

Numbers can really be confusing. And when you are dealing with companies that back half of the $11 trillion home loans, things become even more confusing. What would you do about the role of the agencies in the mortgage industry? The National Association of Realtors has put forth a proposal to convert Freddie & Fannie into nonprofit corporations that would largely leave the mortgage-finance giants intact. Of course, the NAR or anyone else just can’t snap their fingers to make this happen: the proposal is likely to meet stiff political resistance because of the bail out money already spent and Congress’s desire to make bold changes. NAR suggests that unlike a federal agency, the new government non-profit authorities will function as self-sustaining organizations, without needing annual appropriations from Congress and without a profit motive but with government backing and guarantees. MI companies would continue to mitigate risk on loans above 80% LTV, and MBS guarantee fees would still be paid by originators. Of course no one wants to endanger the currently fragile housing and credit markets, least of all the NAR and Congress, so look for this process to be a very long and involved one. more…

Lots of headlines have already screamed today that existing home sales fell 16.7% in December, but a few key longer-term data points were absent from most media reports, so those key details on home sales are below, and tomorrow we’ll have the S&P Case Shiller report of national home prices.

After existing home sales for single family homes, condos and townhomes rose four straight months, sales fell 16.7% in December 2009. For all of 2009 there were 5,156,000 existing home sales, which was 4.9% higher than the 4,913,000 transactions recorded in 2008. This was the first annual sales gain since 2005. more…

The original deadline for the new homebuyer tax credit was buyers had to close before November 30. The National Association of Realtors said today that deadline drove existing home sales significantly in November. They said existing home sales, which include single family homes, townhomes and condos, rose 7.4% to a seasonally adjusted annual rate of 6.54 million units in November. This is 44.1% higher than the pace in November 2008. They also said that current sales remain at the highest level since February 2007 when they hit 6.55 million. The chart here shows the trend July to November 2009.

NAR chief economist Lawrence Yun expects a temporary sales drop in December and January “while buying activity ramps up for another surge in the spring when buyers take advantage of the expanded tax credit, which hopefully will take us into a self-sustaining market in the second half of 2010. In all, 4.4 million households are expected to claim the tax credit before it expires and balance should be restored to the housing sector with inventories continuing to decline.” more…

The National Association of Realtors reported that October Pending Home Sales rose 3.7% from the previous month, and 31.8% year-over-year, a record gain and the highest level since March 2006.

Lawrence Yun, NAR chief economist, said home sales are experiencing a pendulum swing. “Keep in mind that housing had been underperforming over most of the past year. Based on the demographics of our growing population, existing-home sales should be in the range of 5.5 million to 6.0 million annually, but we were well below the 5-million mark before the home buyer tax credit stimulus,” he said. “This means the tax credit is helping unleash a pent-up demand from a large pool of financially qualified renters, much more than borrowing sales from the future.

Yun cautioned that home sales could dip in the months ahead. “The expanded tax credit has only been available for the past three weeks, but the time between when buyers start looking at homes until they close on a sale can take anywhere from three to five months. Given the lag time, we could see a temporary decline in closed existing-home sales from December until early spring when we get another surge, but the weak job market remains a major concern and could slow the recovery process. more…

Welcome back to your computer after the Labor Day holiday! Of course, it still feels like a Monday, but at least there are only four work days. Labor Day is usually when the real estate market in most parts of the nation begins to slow down, although lenders are hoping that this year may be an exception with a steady push to take advantage of government programs.

When was the last time someone you know bought a NEW condo? Interestingly, the National Association of Realtors does not measure the sales of new condominiums – only existing units. Condos have long been known as a choice in either vacation areas or in very low or very high priced areas. Therefore, some areas, like Phoenix, Las Vegas, or Miami, received a double whammy in terms of the demand for condominiums, leading to over a year’s worth of inventory waiting to be sold. Prices shot way up, and are now coming down just as steeply, units remain vacant, and projects remain uncompleted. And since developers are usually required to pay off their construction loans after completion, if the project isn’t completed they are not paying off the loans. more…

The National Association of Realtors, which has supported the Obama administration’s housing and stimulus plans, is opposed to the budget proposal that would reduce the mortgage interest deduction for thousands of families.

In a letter sent today to President Obama, NAR President Charles McMillan said, “There is never a good time to propose something that undermines the basic foundation of homeownership, but given our current housing crisis, this has to be the worst possible time.”

Any changes to the current mortgage deduction would have repercussions far beyond the homeowners directly impacted. “The tax deduction of interest paid on mortgages is both a powerful incentive for homeownership and one of the simplest provisions in the tax code. It should not be targeted for change,” McMillan said. more…

Despite predictions for a flat December number, Pending Home Sales were up +6.3% for the month following a -3.7% number for November. The data is from the National Association of Realtors and is based on signed contracts for the month.

So far stocks are up slightly and bonds, including mortgage bonds, are down, causing rates to tick up. Good economic news typically results in bond selloffs which pushes rates higher.