The WSJ reports that the Obama administration will roll out an expanded program this week to help home owners whose home values are less than their mortgages (excerpts below). Banks that reduce loan balances will have more flexibility in refinancing existing loans into new FHA-insured loans. Hats off to the administration for trying to help, but FHA loans come with mortgage insurance, and the FHA will be increasing that monthly mortgage insurance from .55% to 1.45% effective Monday, October 4.

Let’s say this program allows someone with existing financing of $350,000 at 6.25% with no mortgage insurance to refinance to $300,000 at 4.25% with mortgage insurance. The politicians and press would say this 2% rate improvement and lower loan amount would save $679 per month, which if true, would indeed be enough savings for a borrower who qualified for the refi (under FHA loan approval standards) to keep their home. But it isn’t true. When you factor in the new FHA mortgage insurance rates, the savings is $298, or 56% less savings than projected. Which means less chance that such a change would be a long-term fix.

But the FHA absolutely must raise insurance premiums because their ability to back loans that go bad is funded from FHA mortgage insurance premiums. And the fund has been depleted due to rising foreclosures in the past few years. It’s an extremely tough problem that either political party is going to face despite any election results.

Officials say between 500,000 and 1.5 million so-called underwater loans could be modified through the program, the first initiative to target homeowners who are current on their mortgage payments but are at risk of default because they have no equity in their homes. Some experts are warning, however, that the same knots that tied up prior initiatives could do so again.

Under the new “short refinance” program, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration.

While the program puts taxpayers at risk—officials estimate one in five loans in the program could default—the government has set aside $14 billion previously earmarked for housing aid from the Troubled Asset Relief Program to cover losses.

FHA Mortgage Insurance Increasing October 4
FHA mortgage insurance will be increasing as of October 4, 2010 because the FHA insurance pool only has $3.5 billion in cash and Treasury securities left in its “capital reserve account” The money sitting in the CRA represents a 71% decline in just the last three months. The Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold. On the good news side of the ledger, from October through June the FHA had 19,310 fewer insurance claims on loans gone bad and paid $3.7 billion less than projected by the audit, perhaps due to solid foreclosure efforts although some feel that this is only because some states are experiencing a backlog in processing foreclosures.

Under HR 5981, FHA plans to adjust its annual mortgage insurance premium (effective with any new loans October 4) from .55% to 1.55%, yielding approximately $300 million per month in value to the FHA Mutual Mortgage Insurance Fund at a time when its reserves are perilously low. To offset this, FHA will lower its upfront premium from 2.25% to 1.25%. This will be effective for 30yr fixed loans. As you can guess, mortgage insurance companies are pleased with this news, since annual FHA premiums will be closer to annual PMI premiums and that could encourage lenders and borrowers to turn to non-FHA products for more mortgages. Borrowers currently shopping for FHA loans should revisit their strategy with their lender given this new news.

Treasury Won’t Increase Underwater Refi Stimulus
The rumor regarding a massive government-sponsored refinancing of over $1 trillion in loans continued to play in the market until it was shut down by a US Treasury official Thursday. The conjecturing, helped along by Jim Pethokoukis’ Reuters blog, spooked the market for high-coupon loans (at this point, anything 5.25% and above), and could certainly be construed as a political gambit. Investors, of course, are counting on that high yield for a few years, so a made-up threat of a huge refinance drove prices down by almost .5 in some areas. The loans that have not refinanced may not, so the risk in owning such high dollar price MBS’s is headline risk like this. “The administration is not considering a change in policy in this area,” said Treasury spokesman Andrew Williams.

Fannie Mae Negative $1.4b Net Worth
What is not a rumor, unfortunately, is Fannie Mae losing $1.2 billion in the 2nd quarter, and asking the U.S. Treasury Department for another $1.5 billion to stay afloat. At this point, are we supposed to say, “No.”? Optimists are quick to point out that this loss is much better than the nearly $15 billion Fannie lost in the same period a year ago. Regardless, this leaves Fannie with a negative net worth of $1.4 billion at the end of June. The company’s regulator, the Federal Housing Finance Agency, asked for $1.5 billion from the Treasury to eliminate the deficit and so the Treasury will buy another chunk of senior preferred stock from Fannie and bring its equity up to about $86 billion. Credit-related costs, which include provisions for loan losses, provisions for losses on loan guarantees and foreclosed property expenses, were $4.9 billion in the most recent quarter. That’s down from $18.8 billion in the second quarter of 2009, Fannie said.

Low Rates Lead To First 3.5% Mortgage Bond Coupon
A new coupon has been created: the Fannie or Freddie 3.5% MBS. Think of it as a bucket for 3.75%-4.125% loans.) Rates have not been this low before, so there was no need for the bucket/MBS coupon. But like someone feeling around in a dark room and not wanting to stub their toe, MBS traders and originators are being very tentative about trading this new 3.5% coupon. Most small and mid-sized mortgage banks are pricing hefty margins into these low note rates and selling this low coupon production on a best efforts basis, letting an accumulator such as Wells or BofA handle the risk. In this uncharted area, liquidity is critical, and the volume of bonds being bought and sold is being carefully watched as acceptance slowly grows.

Mortgage Bond Flows This Week
$2.4 billion flowed into the MBS market yesterday, with the lion’s share being 4% securities. (The 10-yr was up almost .5 in price and the yield closed at 2.91%, the 5-yr Treasury was better by almost .25 which was the same for mortgages.) Of particular interest to investors, however, was the release of the Fannie Mae prepayment speeds, since maintaining cash flows is important if an investor is going to pay a premium for a pool of mortgages. Overall early pay-offs were about as expected, but the recent lower-coupon production has seen a trend of paying off slightly earlier than had been hoped, which is causing some nervousness out there. That being said, lenders know that refinance volumes might be constrained by pricing in order to keep volumes manageable, so that there is a backlog of business out there – which causes even more nervousness among investors since prepays might pick up steam.

Jobs Report Influence On Fed/Markets
Today we had “the big employment number”, certain to influence the Fed’s meeting next week. The pace of the economic recovery continues to rely on private-sector employment growth, which is a problem since in the last 7 months the private sector added only 593,000 jobs. The ADP survey indicates that small firms (1-49 workers) represent about 45% of the level of employment, but accounted for only 16% of the increase in employment over the past five months. And Initial jobless claims have now fallen in three of the last four weeks, but remain stubbornly around 450,000 – weak.

Prior to this morning’s number, interest rates were about unchanged. The data was weak, pushing the dollar and the stock markets down, but has helped interest rates. Nonfarm payroll was -131k for July, with private sector jobs increasing 71k. The headline unemployment rate was at 9.5%, unchanged from June, and Hourly Earnings were +.2%. The yield on the 10-yr has moved down to 2.89% and mortgage security pricing appears to be better by at least .250 – we’ll see if investors pass that onto their rate sheets.

Daily Humor
Boudreaux, a good old boy from South East Louisiana, while not a brilliant scholar, was a gifted portrait artist. His fame grew, and soon people from all over the country were coming to South Louisiana to have portraits done. “Dah boy could paint dat stuff!” they’d say, and it looked good too!
One day, a stretch limo pulled up to his house. Inside the car was a beautiful woman, and she asked Boudreaux if he would paint her in the nude. This was the first time anyone had made this request of Boudreaux. The woman said money was no object; she was willing to pay $50,000.

Not wanting to get into trouble with his wife, Boudreaux asked the woman to wait while he went in the house and conferred with Clotille, his missus. In a few minutes, he returned and said to the lady, “I can do dat, ain’t no big thang. I’ll paint ya in da nude, but I gotta leave my socks on………. so I’ll have a place to wipe my brushes.”

Below is a chart from Mortgage Market Guide showing 4% coupon Fannie Mae 30 year mortgage backed securities trading for the last 6 months. Currently, this is the most common benchmark lenders use to price consumer mortgage rate sheets daily. When these bond prices rise, rates fall, and vice versa. Note the drop in prices leading up to the March 31 expiration of the Fed’s 15 month, $1.25 trillion mortgage bond buying program. The Fed was buying mortgage bonds to drive rates down and stop the great recession from becoming a depression. When this was coming to an end, you can see here MBS sold off and rates rose. But then the European debt crisis set in, inflation has been nonexistent, GDP is ok but shaky, and consumer sentiment and jobs also shaky (scroll to data section for current stats).

The result is mortgage bonds have risen to record levels, pushing 30yr fixed rates (on single family home loans up to $417k) down to new record lows: they were around 5% late-March and around 4.5% today. It’s unsustainable, but unquestionably favorable for those who qualify for home loans in this rigid underwriting environment.

Rate Snapshot
Rates have dropped steadily since May 6 and hit two new record lows in each of the last two weeks. Rates for Conforming loans up to $417k, Super Conforming loans $417k-729k by county, FHA loans, and jumbo loans above $729k are below. Here is a chart showing Conventional (non FHA) 30yr Fixed mortgage rates from 1971 to Present (FULL SIZE CHART). The all-time record low of 4.58% with .7% in points was set the week ending July 1. Here’s the fine print on rates used in the chart. The fine print on the rates in this WeeklyBasis report is at the bottom of the report.

Why Rates Are So Low
In an unprecedented rate stimulus exercise from January 1, 2009 through March 31, 2010, the Federal Reserve bought $1.25 trillion in mortgage bonds. Rates are tied directly to mortgage bonds, so when those bond prices rise on buying rallies, yields (or rates) drop. Rates were already near all-time lows as of March 31 when the Fed ended its program.

Then a month later on May 6, Greek parliament voted on austerity measures to increase taxes and cut spending (including wage cuts for about 20% of their workforce), and rioting ensued. That caused a brief 1000 point drop in the U.S.’s Dow stock index, and despite recovering from lows that day, stocks (again using the Dow as a benchmark) have lost 1240 points, or 11.35%. European bonds have taken big losses as the debt crisis spread beyond Greece. And here in the U.S., weaker new and existing homes data in the past 2 months, and June’s weak employment report has also caused market participants to question the strength of the economic recovery.

The end result is heavy buying of Treasury bonds and mortgage bonds since they’re both considered the safest investments relative to other options globally. Mortgage bonds have steadily risen from Fed-induced March 31 highs to staggering new heights, which is why rates are down.

Rate Lock Bias Continues
This report has maintained a rate lock bias since mid-May for current homebuyers and for homeowners who have borrower AND property profiles that qualify for refinancing. It seems improbable that current levels of mortgage bonds can hold, and if they break lower, rates will rise. There are no economic reports of particular note for the holiday shortened week beginning Tuesday, July 6.

Hope everyone has a wonderful Independence Day Weekend…

Daily Consumer-Friendly Commentary
In addition to this WeeklyBasis report, you can get daily updates by following The Basis Point’s Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.625% (4.74% APR)
FHA 30 Year: 4.75% (4.89% APR)
5/1 ARM: 3.5% (3.62% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.75% (4.88% APR)
5/1 ARM: 3.875% (3.99% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.375% (5.49% APR)
5/1 ARM: 4.25% (4.37% APR)

Refi Rates Continue, But Who Qualifies?
The difference between 2-yr and 10-yr yields is the flattest since October, signifying the potential for deflation and evening the playing field between ARM and fixed-rate mortgages. This especially impacts folks looking to refinance. Interestingly, according to The Royal Bank of Scotland, about 37% of the mortgage market is “truly refinanceable” at current rates. If mortgage rates improve .25%, RBS calculate that around 51% of the market would enter this camp. But borrowers and properties still must qualify and deal with higher fees.

And will those borrowers looking to refinance, or obtain a loan on a purchase, be doing it in person or on line? Kate Berry with American Banker suggests that most bankers agree that online lending applications can attract customers and drive up volume, but few actually offer such services. At this point the majority of lenders either already offer or know that they have to offer some type of interactive, online mortgage application at some point in the future. But per a recent study, only 18% actually offer applications online now. Many offer only a basic form that borrowers must download and print, and then an employee must re-enter the data manually later. Of course, one problem is that liens and mortgages still must be “wet signed,” and few counties and municipalities will accept an electronic signature on a mortgage because they do not have the technology infrastructure. Loan officer should know that, per the article, “online application volume is expected to triple by 2013 with volume growing from just 4% this year, to 13% of total volume”. Lenders still expect loan officers to be the dominant channel, accepting 57% of all mortgage applications by 2013, down from 67% this year. And employees who work at bank branches are expected to originate roughly 13% of mortgage applications by 2013, the same as this year. Four of the top 10 residential lenders dominate online originations: Quicken, JPMorgan Chase, PHH, and SunTrust.

Presidents Keep Their Jobs If Voters Keep Theirs
Today we had the unemployment data, which inevitably brings up a status report on how the administration’s efforts are going with job creation. If one thinks about it, however, the President of the United States has very little effect on the economy – much less so than the Chairman of the Federal Reserve Ben Bernanke or Congress. The President’s popularity, however, is greatly impacted by the economy. Although through speeches and actions the President can influence the confidence of citizens, the President does not directly create significant numbers of jobs. And certainly confident consumers help the economy, but entrepreneurs and companies are the ones that create jobs based on the economic climate. Congress, of course, is involved with tax cuts or increases, tariffs, etc.

Stocks Down, Rates Down
The pattern continues: stocks go down, bond prices go up (and thus rates go down). Hmmm, let’s see. The S&P and DJIA dropped 10% last quarter. Yesterday we learned that Pending Sales of Existing Homes Fell 30% in May, the biggest on record since 2001. (And Pending Home Sales are a precursor to Existing Home Sales.) The Institute for Supply Management’s manufacturing gauge fell, and Jobless Claims increased. The yield on the 10-yr risk-free Treasury note touched 2.92%. All of this has economists wondering if we’re entering another round of recession, or if a quick economic downturn is typical of any expansion.

With the drop in rates came selling from investors, money managers, and mortgage bankers – it would appear that locks are picking up. Let’s hope that the new locks aren’t coming from some other lender’s existing pipeline, and vice versa! Originations were believed to be heavier at $2.5 to $3 billion, causing mortgage prices to “widen out” versus Treasury prices early in the day – one trader said that “You couldn’t give away a mortgage this morning.” Fortunately for mortgage prices this situation changed mid-Thursday and rates improved slightly.

BLS Payrolls Report
This week we had a weak ADP jobs number, and a week Jobless Claims number. Today Nonfarm payrolls, projected to have contracted 110k with private payrolls growth at +112k, came in at -125,000, the Unemployment Rate dropped to 9.50%, and Hourly Earnings rose again +.1%. There were some back-month revisions higher. Later on we’ll have Factory Orders – and then look for the bond market to get very quiet as folks head out for a three day weekend. Ahead of the numbers, the 10-yr was yielding 2.95%, and dropped to 2.92% after the numbers. Mortgage prices are slightly better.

Daily Humor
Men are not mind readers.

Ask for what you want. Let us be clear on this one: Subtle hints do not work! Strong hints do not work! Obvious hints do not work! Just say it!

Come to us with a problem only if you want help solving it. That’s what we do. Sympathy is what your girlfriends are for.

Learn to work the toilet seat. You’re a big girl. If it’s up, put it down. We need it up, you need it down. You don’t hear us complaining about you leaving it down.

“Yes” and “no” are perfectly acceptable answers to almost every question.

Anything we said 6 months ago is inadmissible in an argument.

If something we said can be interpreted two ways and one of the ways makes you sad or angry, we meant the other one.

You can either ask us to do something, or you can tell us how you want it done. Not both. If you already know best how to do it, just do it yourself.

If we ask what is wrong and you say “nothing,” we will act like nothing’s wrong. We know you are lying, but it’s just not worth the hassle.

If you ask a question you don’t want the answer to, expect an answer you don’t want to hear.

And when we have to go somewhere, absolutely anything you wear is fine. Really.

Securities and Mortgage Associations Weigh In On Reform
The Security Industry and Financial Markets Association published a comprehensive guide to the Financial Reform Bill. It appears that, in the mortgage section, most of the details are left to either regulators or investors. The Mortgage Bankers Association also weighed in.

Mortgage Provisions of Reform Bill
The bill requires lenders to have “skin in the game” on riskier types of loans-such as option ARMs or loans that don’t require full documentation of income-that are bundled and sold to investors as securities. Don’t look for these loans to come back, unless the investor wants to keep 5% of the loan amounts around as capital. The bill sets stricter limits on prepayment penalties. The legislation also forces lenders to ensure that borrowers have the ability to repay loans and gives borrowers greater scope to seek damages or contest a foreclosure if they are given a loan that they can’t afford. Provisions that require stricter checks on a borrowers’ ability to pay could make it harder or more expensive for self-employed borrowers or those who rely on commission or seasonal income to qualify for loans.

The bill tries to make compensation of mortgage brokers and loan officers more transparent, and bans any sort of payment based on steering the consumer to a particular type of loan or rate. It stipulates that lenders must compensate appraisers “at a rate that is customary and reasonable” and mandates regulation of AMC’s. Regulators “may” issue regulations on the “portability” of appraisals from one lender to another.

Translating the bill and countless amendments, and determining what (intended and unintended) impacts the bill will have is something that will only come with time.

Standard Message Out of G20
Leaders from the Group of 20 nations agreed during the weekend to reduce their deficits and take action to make their banking systems safer and more stable, but they likely will take different paths to reach those goals. The countries will strive to cut their deficits by at least half by 2013, according to a statement released by the G-20. The group also said banks will need to significantly raise their capital.

Fed Adjusts MBS Trading
The Federal Reserve Bank of New York said it will begin using “a limited amount” of coupon swap operations to aid the settlement of its purchases of mortgage-backed securities – less than $10 billion. So it will replace outstanding contracts to purchase Fannie Mae 30-year, 5.5% coupon securities with other so-called agency mortgage-backed debt that is “more readily available for settlement,” the bank said today in a statement. A “coupon swap” is a trade in which an investor enters into a contract to buy mortgage bonds with one coupon and sell mortgage bonds with a different coupon. So what? The Fed will be selling Fannie 5.5% securities and buying current coupon 4% and 4.5% coupons – helping those prices.

Four Week Rate Decline
Interest rates have declined for four weeks now. Mortgage rates are as low as 4.69%. Are pipelines bursting at the seams? Probably not. But look at this 10-yr yield, down near 3%, and mortgage rates could drop into the low 4′s before too long. But there is a reason. Unfortunately the housing statistics point to slow sales, still-high inventories, and more foreclosures and short sales on the horizon. Unemployment is still high, which obviously doesn’t help the economy, and Europe will be a cause for worry for quite some time. In many areas, however, home prices are rising, albeit gradually.

Market Update
Yesterday 10-yr Treasury notes rose 24/32 in price, and got down to a yield of 3.02%, their lowest since April 2009. But mortgage traders reported low volumes. After the NY Fed announcement (see above), Fannie 5.5′s dropped .5 in price, but then closed unchanged on the day; Fannie 4 & 4.5′s did very well. Personal Income was +.4% and Personal Consumption (spending) rose .2% – perhaps the consumer is becoming more confident…? The Chicago Fed Survey fell slightly. But critics say that the billions of dollars of stimulus have only moved the problems with our economy from the private to the public sector.

Here this morning interest rates are taking a bit of a breather. The stock markets are pointing to a big down day, but the 10-yr yield is at 3.06% and mortgage prices are worse slightly after a nice rally yesterday.

Daily Humor
There was a Scottish painter named Smokey Macgregor who was very interested in making a penny where he could, so he often thinned down his paint to make it go a wee bit further.

As it happened, he got away with this for some time, but eventually the Baptist Church decided to do a big restoration job on the outside of one of their biggest buildings..

Smokey put in a bid, and, because his price was so low, he got the job. So he set about erecting the scaffolding and setting up the planks, and buying the paint and, yes, I am sorry to say, thinning it down with turpentine.
Well, Smokey was up on the scaffolding, painting away, the job nearly completed, when suddenly there was a horrendous clap of thunder, the sky opened, and the rain poured down washing the thinned paint from all over the church and knocking Smokey clear off the scaffold to land on the lawn among the gravestones, surrounded by telltale puddles of the thinned and useless paint.

Smokey was no fool. He knew this was a judgment from the Almighty, so he got down on his knees and cried:

“Oh, God, Oh God, forgive me; what should I do?”

And from the thunder, a mighty voice spoke:

“Repaint! Repaint!

How Many Can Refi vs. How Many Qualify
There was a story in the Wall Street Journal wondering “But if rates are so low, why isn’t demand for new loans picking up? For one, most borrowers who could refinance probably did so last year, when rates fell below 5% in March, August, and December. Many borrowers with an incentive to refinance can’t qualify with today’s tougher lending standards or don’t think it’s worth paying the closing costs on a new loan. Credit Suisse estimates that around 61% of all borrowers with a 30-year fixed rate mortgage could lower their mortgage rate by 0.75 percentage point at current rates. But analysts estimate that only 38% of those borrowers could actually qualify at current standards. More borrowers can’t qualify because they don’t have enough equity in their homes, their credit scores have taken a hit, or they’ve seen their income reduced.”

Covered Bonds Rejected By Reform
It is one thing to pass financial reform, and other to actually implement and enforce financial reform. That may be what faces the mortgage industry after the Dodd-Frank (nicknamed “Frank ‘n Dodd”) reform bill passes. Votes on flood insurance and the extension of loans funding under the First Time Home Buyer Tax Credit are due this week. Due to opposition from the Treasury Department, an amendment that would allow covered bonds to get a start in the U.S. mortgage market was blocked (wait a second, didn’t previous Treasury Secretary Hank Paulson advocate for covered bonds during the crisis?). Federal regulators will oversee appraisal management companies that are affiliated with federally insured banks under the Dodd-Frank regulatory reform bill.

Lenders Selling Loans Must Keep 5%
It appears that “private lenders” will be required to keep at least a 5% stake in loans they package and sell as a form of risk retention. This would affect credit-card debt, auto loans, mortgages and other securitized debt. But originators of long-term, fixed-interest-rate mortgages would be among those that would not be required to retain risk. The exemption would not apply to mortgages with risky features such as negative amortization, interest-only payments and balloon payments. In addition, FHA, VA, and USDA loans don’t fall into this bucket. But loans guaranteed by Fannie Mae and Freddie Mac, the mortgage companies taken over by the government, are not specifically exempted in the legislation.

Fate of Volcker Rule
The bill creates two huge government entities: the Consumer Financial Protection Bureau and the Systemic Risk Council, which will have unprecedented power and authority to regulate the financial services industry in the years ahead. Also the conference agreed on a version of the “Volcker Rule” which bars proprietary trading, but provides numerous exemptions. It also permits banks to invest up to 3% of Tier 1 capital rather than 3% of tangible common equity in hedge funds and private equity funds. Expect a vote from the House tomorrow.

Latest Bank Failure
On Friday, the FDIC said Peninsula Bank (FL) was closed, and taken over by Premier American Bank (also of Florida). First National Bank (GA) was shuttered and taken over by National Association Bank (GA). And in New Mexico, regulators closed High Desert State Bank and First American Bank will assume its deposits. The newest failures on Friday were expected to cost the FDIC’s insurance fund a combined total of $284.6 million.

Rates Drop on GDP, Other Economic Worries
On to mundane things, like our economy. Friday we learned that GDP grew by 2.7% in the first quarter, less than previously reported. Conversely, the University of Michigan Consumer Sentiment increased to 76, the highest since January 2008, from 73.6 in May. After this news we had a nice rally (again) toward lower rates and investor price improvements. There is no Fed meeting in July, and the futures market is pricing in a 75% chance that the Fed keeps rates at .25% through November so don’t look for higher rates soon unless investors become nervous about the amount of debt in the US… Mortgage rates are low because investors, nervous about global economic stability and a volatile stock market are plowing their money into Treasury debt and mortgage securities, assets that investors perceive to be relatively safe bets.

Economic Preview For Week
The data calendar is full this week with the main highlight being the June employment report on Friday. This morning one can expect May personal income to rise 0.4% and for personal spending to be up 0.2%; the core PCE deflator is projected to come in at 0.1%. And so for economic news – today we have the Chicago Fed numbers, along with Personal Consumption and Income. Tomorrow we have the S&P/Case-Shiller Home Price Indexes, and the Conference Board’s Consumer Confidence stats. Wednesday some ISM numbers, Thursday Jobless Claims, ISM Manufacturing, and Pending Home Sales, but the biggest economic event next week will be the important Employment report on Friday. Early estimates are for a decrease of about 70K jobs in June.

Every Thursday, Freddie Mac releases its Primary Mortgage Market Survey (PMMS). This is the official record on mortgage rates and source material for the overwhelming majority of rate reports in the media—reports that very often exclude critical details rate shoppers need to know. Since the one-day market crash May 6, mortgage bonds have rallied to insane levels and mortgage rates have dropped to new record lows several times. So news stories about record low rates hit at the end of each week, but they are for rates that were available the previous week. And only if you have a single family home, and a loan of $417,000 or less, and lots more fine print. Below is a checklist of characteristics used in the Freddie Mac PMMS survey, so you know if these rates apply to you or not.

PMMS rates reported in the press each Thursday are for the week leading up to (and not including) Thursday. Mortgage rates are tied to mortgage bond trading, and as such, rates change all day everyday. The Thursday PMMS report on rates is for rates that are long expired, so it’s critical to get market-relevant quotes from a mortgage lender, not a news source. Also below are some other useful links for understanding rate quotes and rate locks.

• PMMS rates are on Conforming loans up to $417,000. Super-Conforming loans up to $729,750 are excluded. Jumbo loans above $729,750 are excluded.
• PMMS rates are on Conventional loans, and exclude FHA loans.
• PMMS rates are for single family homes, and exclude other property types like condos and duplexes.
• PMMS rates are for borrowers with at least 20% equity in their homes.
• PMMS rates are for owner-occupied homes.
• PMMS rates always include points to buy down the rates. Many press reports exclude this fact. This is the source that shows the points.
• PMMS rates are national averages based on survey responses from 25 lenders located in Freddie Mac’s 5 regions.

Here are some other links on the topic of rate quotes and rate locks. You can also click the Topics links in post footer to dive in deeper to current rate perspective.

• Why Locking A Rate Is Like Buying A Stock
• How Are Rates Derived?
• A full archive of Rate History
• WeeklyBasis rate market report (published Saturdays), commentary and also Conforming, Super-Conforming, Jumbo & FHA rates.

Rate shoppers and watchers should note that the lowest rates on official record are here now. The chart below shows rates from June 2010 back to April 1971, when Freddie Mac started officially tracking 30 year mortgage rates. The high was in October 1981, when then Fed chairman Paul Volcker was hiking rates to battle inflation (more on this below). At that time, borrowers paid an average of 2.3 points to buy a rate down to 18.45%. The low was May 27, 2010 when borrowers averaged 0.7 points to buy a rate down to 4.78%—note that 4.78% with 0.7 points was also achieved three times in 2009: April 2, April 30, and November 25. These are national average rates on loans up to $417,000 for single family homes with 20% or more equity in the property. Rates change daily as mortgage bonds trade.

FULL SIZE CHART

In 1981, Volcker and his FOMC pushed the Fed Funds Rate to an average of 19% (compared to .25% today) in order to beat the 14.6% average inflation of the day (compared to 2.2% full and 0.9% ex-Oil&Energy now). This inflation battle caused two back-to-back recessions. The first one began in January 1980 and unemployment peaked at 7.8% in August 1980. The second one began in July 1981 and unemployment peaked at 10.8% in December 1982 (compared to 9.9% now).

Fed’s Consumer Credit Card Search Site
Looking for a credit card? Knock yourself out on this Federal Reserve website. In an intersting move by the Federal Reserve, they have placed 300 credit card compnay agreements (mostly companies with 10,000 or more open credit card accounts) online in a searchable database for public viewing. Can something for mortgages be far behind?

Rates Low But Refis Still Tough
Rates certainly continue to surprise folks who expected higher rates by this time in 2010. The 10-yr neared 3.10%, closed at the lowest yield in over a year and some were beginning to yap about the 10-yr down into the 2%’s. We have a different story today, as hedging mortgage pipelines continues to be difficult, as the 10-yr yield has shot back up into the 3.20%’s. Overall the news yesterday helped bonds: continued European fears, the Euro hitting an 8-year low versus the yen, Korean fears, the Case-Shiller index lower, Consumer Confidence slightly higher. We also had a $42 billion 2-yr auction, which is now under water. At one point the DOW was down over 300 points and the 10-yr was up a point. Mortgage prices did well, relative to Treasury prices, as servicers apparently have been buying pools. Large servicers and investors are, of course, worried about prepayment risk of recently originated loans.

Of course, one can argue that everyone who could possibly refinance and prepay their mortgage already has—meaning low rates don’t help homeowners underwater, in default, or headed for foreclosure (whether intentionally or not) because tight loan approval guidelines won’t allow for a refinance. Keep in mind that there is a large amount (in the trillions) of good quality mortgages at higher rates who may be interested in refinancing at no cost. Regardless, new origination being seen in MBS’s seems to be running at about $1.5 billion a day.

Purchase Loan Applications Lowest Since 1997
Today we have already seen the report on mortgage applications for last week. Apps were up over 11%, with refinancing (no surprise at these rates) up 17%, but purchase applications are at their lowest levels since 1997. Of total applications, refinancing accounted for over 72%! Later this morning we will have New Home Sales for April, expected to increase. We also have a $40 billion 5-yr auction, which typically goes pretty well. Durable Goods came out at +2.9%, with a back-month revision higher from -1.3% to unchanged. But ex-transportation the number was down, so cars and planes played a big role in this number. Stocks are pointing to a higher opening, the 10-yr is up to 3.21%, and down between .125-.250.

Less Loss For Toll Brothers
Toll Brothers, known as a builder in the luxury home market, reported that losses for the second quarter (through April) had narrowed. But still, homebuilder red ink flows: Toll Brothers lost $40 million in the quarter. Revenue fell 22% to $311.3 million from $398.3 million. Write-downs in the latest quarter were $42.3 million, a bit more than a third of the $119.6 million a year earlier.

Daily Humor
A Catholic priest, a doctor, a rich businessman and a mortgage banker were waiting one morning for a particularly slow group of golfers in front of them.

The mortgage banker fumed, “What’s with those jerks? We’re waiting fifteen minutes between shots!”

The doctor chimed in, “I don’t know, but I’ve never seen such poor golf!”

The rich businessman called out, “Move it, time is money!”

The Catholic priest said,”Here comes the greens keeper. Let’s have a word with him. Excuse me, sir! What’s wrong with that group ahead of us? They’re rather slow, aren’t they?”

The greens keeper replied, “Oh, yes. That’s a group of blind fire fighters. They lost their sight saving our clubhouse from a fire last year, so we always let them play for free anytime.”

The group fell silent for a moment.

The Catholic priest said, “That’s so sad. I think I will say a special prayer for them tonight.”
The doctor said, “Good idea. I’m going to contact my ophthalmologist colleague and see if there’s anything that he might be able to do for them.”

The rich businessman replied, “I think I’ll donate $50,000 to the fire fighters union in honor of these brave souls!”

The mortgage banker said, “Why the heck can’t they play at night?”