This Week’s Market Commentary

This week brings us the release of four relevant economic reports in addition to another FOMC meeting and two relevant Treasury auctions. With all of the volatility in the markets of the past two weeks, it is difficult to say whether this will be an active week for mortgage rates. Under normal circumstances, it would be. But it is hard to label any week as active if comparing to the previous two.

The first economic data of the week is Employee Productivity and Costs data for the second quarter that will be released Tuesday morning. It will give us an indication of employee output per hour. High levels of productivity are believed to allow the economy to grow without fears of inflation. I don’t see this being a big mover of mortgage pricing, but since it is the only data of the day it may influence rates slightly during morning trading. Analysts are currently expecting to see a decline in productivity of 0.6% and a 2.2% jump in labor costs. A stronger than expected productivity reading and a smaller than expected increase in costs could help improve bonds, leading to lower mortgage rates Tuesday.

The FOMC meeting is a single-day event that will be held Tuesday and will adjourn at 2:15 PM ET. It is expected to yield no change to key interest rates. Usually, the post-meeting comments seem to have more of an influence on the markets than the rate adjustments themselves, or a lack of one in many cases. Look for the statement to lead to volatility during afternoon trading if it hints at what the Fed’s next move may be and when it will come. Market participants will be looking for any indication of a move to help boost economic activity. If the statement does not give us new information, mortgage rates will probably move little after its release.

There is no important economic data on the calendar for Wednesday. June’s Trade Balance report will be released early Thursday morning. It gives us the size of the U.S. trade deficit but is the week’s least important report and likely will have little impact on the bond market and mortgage rates. Analysts are expecting to see a $48.0 billion deficit, but it will take a wide variance to directly influence mortgage pricing.

Friday has the remaining two pieces of economic data, one of which is highly important to the markets and mortgage rates. July’s Retail Sales data is that report. This data is very important to the financial markets and mortgage rates because it helps us measure consumer spending. Since consumer spending makes up two-thirds of the U.S. economy, any data related to it can cause a fair amount of movement in the markets. A smaller than expected increase would indicate that consumers are spending less than previously thought, potentially further slowing the economic recovery. This is good news for the bond market and mortgage rates as it eases inflation concerns and makes long-term securities such as mortgage-related bonds more attractive to investors. Current forecasts are calling for an increase of 0.5%.

The last report of the day will come from the University of Michigan, who will release their Index of Consumer Sentiment for August at 9:55 AM. This index gives us a measurement of consumer willingness to spend. If confidence is rising, then consumers are more apt to make large purchases. This helps fuel consumer spending and economic growth. By theory, a drop in confidence should boost bond prices, but this data is considered moderately important and carries much less significance than the Retail Sales report does. Analysts are expecting to see a reading of 62.5, which would be a decline from July’s revised reading.
Also worth noting are two important Treasury auctions this week. The sale of 10-year Notes will be held Wednesday while 30-year Bonds will be sold Thursday. We often see some weakness in bonds ahead of the sales as the firms participating prepare for them. However, as long as they are met with decent demand from investors, the firms usually buy them back. This tends to help recover any presale losses. But, if the sales are met with a lackluster interest from investors- particularly international buyers, the bond market may move lower after the results are posted and mortgage rates may move higher. Those results will be announced at 1:00 PM each sale day.

Overall, it is difficult to label one particular day as the most important. Friday’s sales data is the most important economic report, but Tuesday’s FOMC meeting has the potential to cause plenty of movement in the markets and mortgage pricing also. Tomorrow will also be interesting, especially considering the size of the sell-off in bonds Friday. I would not be surprised to see that negative tone extend into tomorrow’s bond trading and mortgage rates. I suspect the FOMC meeting will not have as much of an influence on mortgage rates as one may expect, but the markets can react wildly to a single word or omission of a word in the statement, so we need to be cautious. This is certainly another week that continuous contact with your mortgage professional is highly recommended if you are still floating an interest rate.

This Week’s Market Commentary

There are four relevant reports scheduled for release this week that are likely to affect mortgage pricing, but it may end up being news out of Washington that may have the biggest impact on the markets and mortgage rates. As of this evening, there appears to be much more progress being made on the debt ceiling issue than we have seen yet. There actually have been rumors of an agreement in general between the House and Senate, which could mean a finished deal by Tuesday’s default deadline is possible.

The stock markets took a beating last week, even before the surprisingly weak GDP reading Friday morning. The potential for a default on our debt and the credit downgrade that would have followed was expected to have a huge negative impact on our economy. That led to stock selling most of the week, and support in the bond market, although we did see softness in bonds at times also. The big day for bonds came Friday after the 2nd Quarter GDP reading fell well short of forecasts and a significant downward revision to the 1st Quarter reading fueled a sizable rally in bonds that gained momentum during afternoon trading. The yield on the benchmark 10-year Treasury Note fell below 3.80%, causing many lenders to revise rates even lower late Friday.

Friday’s rally caught us off guard a bit. That is one way of describing it. Another is to use the word unjustified. We certainly got bond-friendly news out of the GDP report, but I think we saw more flight-to-safety buying than long-term buying due to weak economic conditions. That is evident by the afternoon surge in bonds Friday that pushed yields below recent levels. The flight-to-safety is a bonus for mortgage shoppers closing in the very near future, but extremely problematic for borrowers that need a couple weeks or months before they go to closing. Time and time again (duplicate that many more times), we see gains from several trading sessions of flight-to-safety buying unwind in a single day of trading. In other words, rates can give back last week’s gains, and some, much quicker than they were able to capture them as soon as stocks appear ready to head higher. A resolution to the debt ceiling issue is definitely a strong enough event to do this. If the threat of a credit downgrade and default dissolves, I would not be surprised to see a couple hundred point gain in the Dow over a single, maybe two, trading sessions. That would likely cause most of the flight-to-safety funds to shift away from bonds and back into stocks. And a noticeable upward move in mortgage rates.

In addition to the debt ceiling topic, we do have a couple of extremely important economic reports for the markets to digest. The first important release is the Institute for Supply Management’s (ISM) manufacturing index for July late tomorrow morning. This index measures manufacturer sentiment by surveying trade executives about business conditions during the month and is considered to be of fairly high importance to the markets. A reading above 50.0 means that more surveyed executives felt that business improved last month than those who said it had worsened.

Wednesday morning brings us the release of June’s Factory Orders data at 10:00 AM ET. It helps us measure manufacturing sector strength by tracking orders for both durable and non-durable goods during the month of June. It is similar to last week’s Durable Goods Orders report that tracks orders for big-ticket items only. Since a significant portion of the data was released last week, this report likely will not have as big of an impact on the markets as last week’s did. Analysts are expecting to see a decline in new orders of approximately 1.0%. A larger than expected drop would be considered good news for bonds and mortgage pricing.

There is no relevant monthly or quarterly economic news scheduled for release Thursday, but Friday is a different story. The most important piece of data this week and arguably each month is the monthly Employment report. This report gives us the U.S. unemployment rate, number of jobs added or lost during the month and the average hourly earnings reading for July. The ideal situation for the bond market is rising unemployment, a sizable loss of jobs and little change in earnings.

While the preliminary reading to the GDP is arguably the single most important report in general, it is posted quarterly rather than monthly like the Employment report. Friday’s report is expected to show that the unemployment rate slipped 0.1% to 9.1% last month while approximately 78,000 jobs were added to the economy. The unemployment rate probably will not be much of a factor unless it moved much more than the 0.1% that is expected. However, due to the importance of these readings, we will most likely see quite a bit of volatility in the markets and mortgage pricing Friday morning if they vary from forecasts.

Overall, I am expecting to see another extremely active week for mortgage rates. I think that the most important day is tomorrow due to the debt ceiling crisis coming to a head and the ISM index being posted. Friday is also a key day with the monthly Employment report being released. We may see some pressure in bonds mid to late week ahead of Friday’s employment numbers (assuming Washington puts the debt ceiling issue to bed), but we also need to watch the stock markets for significant moves that can influence bond trading. We are getting key economic data during a period of great uncertainty about our economy with a major national crisis climaxing at the same time. If still floating an interest rate, I would definitely maintain constant contact with my mortgage professional. And hold on tight, it’s going to be quite an interesting week!

Low Mortgage Rates Make it a Good Time to Buy

With mortgage rates at a 30 year historic low, the Wall Street Journal is suggesting now is the best time to buy. Ken Rosen of the U.C. Berkeley Fischer Center for Real Estate said that mortgage rates will be much higher five years from now, and to take advantage of the current low rates.

The Wall Street Journal video below elaborates:

http://online.wsj.com/video/time-to-buy-housing-recovery-is-under-way/52EDA9A3-4F24-4600-A369-B32AF30C37D0.html

FHA Loans VS Conforming Loans

The FHA is insuring a greater percentage of loans than during any time in recent history. In 2006, it insured roughly 5 percent of the purchase mortgage market. Today, it insures one-quarter. "Going FHA" is more common than ever before -- but is it better?

The answer -- like most things in mortgage -- depends on your circumstance.
Like its conforming counterpart, an FHA-insured mortgage is available as a fixed-rate loan and as an adjustable-rate one. Payments are made monthly and come without prepayment penalties.
That's where the similarities end, however, and decision-making begins. For homeowners and buyers , FHA mortgages carry a different set rules as compared to conforming loans through Fannie Mae or Freddie Mac that can render them more -- or less -- attractive for financing.

For example:

• FHA mortgages can be assumed by a subsequent buyer. Conforming loans may not.
• FHA mortgages require mortgage insurance, regardless of downpayment. Conforming loans do not.
• FHA mortgages do not have loan-level pricing adjustment. Conforming loans do.

FHA mortgages also require smaller downpayment requirements versus a comparable conforming mortgage. FHA calls for a minimum downpayment of 3.5%. Conforming mortgages often require 5 percent or more.
And, lastly, FHA mortgages are priced differently from conforming ones. Since 2005, the average FHA mortgage rate has been below the average conforming mortgage rate more than 50% of the time, meaning that an FHA mortgage's principal + interest payment is lower than a comparable Fannie/Freddie loan.
Today, conforming mortgage rates are lower.

So, which is better -- FHA loans or conforming ones? Like most things in mortgage, it depends. FHA-insured loans can be big money-savers or money-wasters. To find out which is best for you, ask your loan officer for today's market interest rates and study the results.

With less than 20% equity, the answer is often clear.

Markets

Today marks the 21st anniversary of the signing of the Americans with Disabilities Act, which guarantees "equal opportunity for people with disabilities in public accommodations, commercial facilities, employment, transportation, government services and telecommunications." According to the Census Bureau, 36 million people here in the US have a disability - 12% of the population - which certainly includes existing and potential borrowers. (Disabilities include problems with hearing, vision, and difficulty concentrating, or walking.) State-wise, West Virginia leads the nation with almost 19% having a disability, while Utah has the lowest with 8.9% of its residents reporting a disability.

How do the budget crisis and a potential government shut down impact mortgage banking? One should remember that since 1976 there have been 17 shut downs, with the 1995/96 shutdown of 21 days the longest in modern history. If on August 2nd there is no budget deal, then we should see number 18. Oddly enough, the last shutdown occurred precisely when Italy and peripheral Europe were going through their last major crisis of confidence. If there is no deal in the early part of this week, the Treasury will issue a statement to the market and outline it's directive to the Fed as to the priority of payments and it will outline an alternative auction structure for Treasury notes and bonds . Most other governments never shut down as parties bicker over spending - in fact Belgium hasn't even had a government since 2010 and there has been no shutdown. The world will not end and the US government will eventually keep on spending, with the financial markets hoping for growth to cure the US debt problems combined with some spending cuts.

But markets (stocks, bonds, whatever) don't like uncertainty, and certainly would not like a downgrade of the United States. One can expect this uncertainty to continue to weigh on risky assets in the short-term - like the stock market. There is the potential that banks could see higher capital requirements for mortgage securities. (Currently, Ginnies are a zero risk weighting, while conventionals are 20%.) Banks may not rush to sell MBS's, but their appetite for the product could drop. Central banks could sell, or reduce their future purchases of, mortgages in a downgrade scenario. But from a cash flow perspective, few experts expect Ginnie, Fannie, or Freddie cash flows to be affected. But they could be downgraded if US government debt is downgraded, and this would lead to higher mortgage rates.

When will the housing market return to normal, per the SF Fed? "If the foreclosure inventory is worked off at this rate and house prices change as described above, then housing starts are predicted to return to normal levels by the beginning of 2014." Fed

Under the "what else can happen" category, Fannie downgraded its housing predictions for this year. Fannie's economists believe that mortgage interest rates will move up just slightly over the year to finish at 4.7% and rise again in 2012 to an average of 5%.  Total mortgage originations in 2011 will decline to $1.07 trillion from $1.51 trillion in 2010 (about 30%) and decline further still next year to $999 billion.  Single family mortgage debt will fall an additional 2.6 percent from $10.54 trillion to $10.26 trillion. Home prices are expected to decline further this year and next.  The median price in 2010 for a new home was $221,800.  This year it is expected to be $216,900 and in 2012 $214,100.  Existing homes are expected to sell for a median price of $165,600 this year and $163,700 next, compared to $173,000 in 2010.

Many in the industry wonder why the rating agencies seem to have escaped a good portion of the blame for mis-rating countless securities and helping to cause the credit crisis. It is a complex question, but some rating agencies are working to solve it. Kroll Bond Ratings, for example, recently published an "Investor Bill of Rights" for bond investors. "Article l: Kroll Bond Ratings will make its research reports, including criteria and analysis, supporting its published, non-subscriber ratings available to every fixed income investor without charge. Article II: Kroll Bond Ratings will make its transaction analyses available on its website in a timely manner and will provide a forum to respond to investor questions. Article III: All ratings and analyses will be clear, transparent and usable for investors, thereby avoiding rating conclusions derived from a 'black box.' Article IV: Kroll Bond Ratings will confirm that its analysis includes appropriate and professional due diligence as part of the rating process. Article V: All ratings will be subject to ongoing review throughout the life of the security or entity to ensure that the rating is accurate." For more information go to KrollBondRatings .

Looking at the markets, current coupon MBS prices ended Monday where they began: down/worse by about .250, and the 10-yr T-note was down about .375 to a yield of 3.00%. There were no economic releases, which is just as well since the focus is on Republicans and Democrats who continue to talk at and blame each other for the debt ceiling impasse with no resolution yet in sight. Tradeweb reported below normal volume at 84% of the 30-day average.

This Week’s Market Commentary

There are seven reports scheduled for release this week may affect mortgage pricing in addition to two relevant Treasury auctions, but despite all that, the current debt ceiling issue may take center stage. With no data scheduled for release today, the stock markets and updates out of Washington will drive the markets.
Friday evening’s collapse of talks on the topic happened after the markets closed, so it will be interesting to see how we fare this morning. I suspect it is going to be ugly if significant progress is not made in Washington. At posting time of this report, the Japan indexes are showing losses, but not by a concerning amount.

The economic data starts Tuesday when the Conference Board posts their Consumer Confidence Index (CCI) for July at 10:00 AM ET. This index measures consumer sentiment, giving us an idea of consumer willingness to spend. If consumers are more confident in their own financial situations, they are apt to make large purchases in the near future. This is important because consumer spending makes up two-thirds of the U.S. economy. If the CCI reading is weaker than expected, meaning that consumers were less confident than thought, we may see bond prices rise and mortgage rates drop Tuesday. Current forecasts are calling for a reading of 56.0, which would be a lower reading than June’s 58.5 and indicate consumers are becoming less comfortable with their finances.

June’s New Home Sales will also be released late Tuesday morning. It gives us a measurement of housing sector strength and mortgage credit demand. Analysts are expecting it to show a small increase in sales of newly constructed homes, indicating that the housing sector gained some strength. That would be considered negative news for bonds, but since this data tracks only 15% of all home sales it usually has little impact on the bond market and mortgage rates unless it varies greatly from forecasts.

Wednesday brings us two events that are relevant to mortgage rates. The first will come from the Commerce Department when they post June’s Durable Goods Orders at 8:30 AM ET. Current forecasts are currently calling for an increase in new orders of 0.4% from May to June. This data gives us an indication of manufacturing sector strength by tracking orders at U.S. factories for big-ticket items, or products that are expected to last three or more years. A stronger than expected number may lead to higher mortgage rates Wednesday morning. If it reveals a decline in new orders, mortgage rates should drop because it would indicate manufacturing weakness. It should be noted though that this data is known to be extremely volatile from month to month, so a minor difference between forecasts and the actual reading may not move mortgage rates much.

The Federal Reserve will release its Beige Book report Wednesday afternoon. This report is named simply after the color of its cover, but it is considered to be important to the Fed when determining monetary policy during their FOMC meetings. It details economic activity and conditions by region throughout the U.S. Since Fed Chairman Ben Bernanke’s testimony to Congress two weeks ago gave us a recent update, I don’t think we will see any significant surprises in this report. Therefore, we will likely see little movement in mortgage rates Wednesday afternoon as a result of this report.

There is no relevant monthly or quarterly data scheduled for release Thursday, but there are three releases scheduled to be posted Friday morning. The first is the preliminary reading of the 2nd Quarter Gross Domestic Product (GDP), which is considered to be the best indicator of economic activity. It is the sum of all goods and services produced in the U.S. and usually has a great deal of influence on the financial markets. This reading is arguably the single most important we get regularly. Current forecasts are estimating that the economy grew at a 1.6% annual rate during the second quarter. A faster pace will probably hurt bond prices, leading to higher mortgage rates Friday. But a smaller than expected reading would likely fuel a bond market rally and lead to lower mortgage pricing.

The second report of the day Friday is the 2nd Quarter Employment Cost Index (ECI) that measures employers’ costs for wages and benefits. It is considered to be an important measurement of wage inflation and can impact the bond market and mortgage rates if it varies much from forecasts. If it shows a rapid increase, raising inflation concerns, the bond market may drop and mortgage rates rise. It is expected to reveal an increase of 0.5%, but the GDP reading likely will have more of an influence on the markets and mortgage rates.

Friday’s third piece of data is the final revision to July’s University of Michigan Index of Consumer Sentiment that will help us measure consumer optimism about their own financial situations. As with Tuesday’s CCI release, this data is considered important because rising consumer confidence usually translates into higher levels of spending. This adds fuel to the economic recovery and is looked at as bad news for bonds. Friday’s release is an update to the preliminary reading we saw two weeks ago, so unless we see a drastic revision to the preliminary estimate, I think the markets will probably shrug this news off.

Also worth mentioning are a couple of Treasury auctions that may affect bond trading and mortgage rates this week. The two most important are Wednesday’s 5-year Note and Thursday’s 7-year Note sales. Results of this week’s auctions will be posted 1:00 PM ET each day. If investor interest is strong, we can expect the broader bond market to rally and mortgage rates to move lower. However, lackluster demand could lead to bond selling and higher mortgage rates Wednesday and Thursday afternoons. Unless progress is made on the debt ceiling prior to these sales, it is highly unlikely that they will go well.

Overall, I am expecting an extremely active week in the financial and mortgage markets. With several important economic reports on tap, we will likely see noticeable movement in mortgage rates more than one day. The most important report of the week is Friday’s preliminary GDP reading, making it one of the most important days of the week. But it is difficult to say which day we can expect to see the most movement in rates as several of the releases and scheduled events have the potential to influence mortgage rates. The wild card is the debt ceiling. Any news on that topic will probably heavily influence the financial and mortgage markets. Therefore, I STRONGLY recommend maintaining contact with your mortgage professional this week if still floating an interest rate!

New Federal Program to Help Struggling Homeowners

The federal government has created a program to help the over four million unemployed homeowners behind on their mortgage payments – a loan that doesn’t need to be repaid.

According to an article in the Wall Street Journal, the effort by the Department of Housing and Urban Development will allow qualified homeowners that have lost their jobs to borrow up to $50,000 which they may never have to repay if they meet the requirements.

HUD’s goal with this $1 billion effort, called the Emergency Homeowners Loan Program, is to help people in the short-term who will likely be back on their feet soon. There are conflicting viewpoints on the chance of success of this program; some see it as a band-aid, others as not enough help.

Applications for the program will be accepted through July 22.