Mortgage Martket Snapshot 07/18/2011

by: Sigma Research

Treasuries started better this morning on continuing debt problems in Europe; today its Italy and Greece but also Portugal, Spain and Ireland also rattling global markets. Sovereign debt in those countries is serious and unlikely to be resolved anytime soon. Increasing concerns that in the end there will be actual defaults in Europe; here in the US the debt mess and budget impasse continues. The US isn't near the problems in Europe but the country is headed that way unless Americans get serious about deficit reductions, a very hard pill to swallow in these soft economic times. In the meantime Congress and the Administration will continue to kick the can down the road until citizens demand them to cut spending-----a decision many will have trouble with. By 9:00 the 10 yr note had lost all its early gains and mortgage prices went negative (-3/32, 0.09 bp) frm Friday' close.

President Barack Obama is pressing congressional leaders for a multitrillion-dollar agreement in deficit-cutting talks as negotiators near an Aug. 2 deadline for raising the debt limit. A default would cause more panic than the collapse of Lehman Brothers Holdings Inc. in 2008, former Treasury Secretary Larry Summers told CNN in an interview broadcast yesterday. Treasuries rose and the euro fell amid concern European leaders will fail to stop the region’s spreading debt woes at a summit this week.

Mortgage rates being pulled lower as treasuries get safety driven buying; the stock market opening lower this morning also helping. Crude oil lower today as stocks decline; Brent crude declined for a third day in London as investors bet that Europe’s worsening debt crisis may slow the economy and crimp fuel demand. Gold back over $1600.00 also driven by safety moves with investors becoming less comfortable with any currencies.

At 9:30 the DJIA opened down 65, the 10 yr note +2/32 and mortgage prices +1/32 (.03 bp).

 This Week's Economic Calendar:

 Today;
       10:00 July NAHB housing index (as reported 15 frm 13; still very negative)
 Tuesday;
       8:30 am June housing starts and permits (starts +1.75%, permits unchanged)
 Wednesday;
      10:00 am June existing home sales (+2.5% at 4.93 mil units annualized)
 Thursday;
      8:30 am weekly jobless claims (+6K at 411K)
      10:00 am July Philly Fed business index (0.0 frm -7/1 in June)
                     June leading economic indicators (+0.3%)
                     FHFA May housing price index (N/A)


Economists in a Bloomberg News survey projected long-term U.S. financial assets would show net buying of $40B in May; as reported net purchases were $23.6B. The Treasury’s reporting on long-term securities is a gauge of confidence in U.S. economic policy, and today’s report suggests the U.S. continues to offer safety from the economic crisis in Europe even with the White House and Congress at odds over raising the Treasury’s borrowing authority; although the increase was much less than was thought suggesting all is not that rosy.

US interest rates still have a bullish bias based on Europe's problems and the on-going debates in Washington over the debt ceiling and budget cuts; however, we remain somewhat defensive with interest rates as low as we have them now. We don't want to fight the tape but at the same time we have to be cautious and not get too optimistic. Go with it, but be prepared to take advantage of the low rates when markets turn. It is highly unlikely the US will lose its AAA credit rating by rating agencies, and the US will not default on our debt; nevertheless markets are dancing on a hot skillet as the deadline approaches. It is a day-to-day trade these days; unfolding and very fluid events can have a swift and big move in markets; interest rates are at all time lows now, it will take a lot of surprising bad news to drive rates lower.

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July 15: Homeownership declines - is it a bad thing? Prepayments; Ginnie vs. Fannie price differences

Everyone knows why squirrels swim on their backs. (It's Friday, I couldn't figure out how to tie that joke in with in with any mortgage related news.) To keep their nuts dry.

Here is an interesting note that I received this week. "In Phoenix for the month  of June we recorded the highest number of sales EVER, our market is on fire!  Almost 12k sales with less than 25k active listings puts us around 2 months' supply at this absorption rate, though with the summer heat sales are likely to drop to 9-10k in the coming months which is still very high.  The number of REO homes for sale  is at new lows; new notices of trustee's sales have also been declining rapidly  over the last 6 months.  Many homes are getting multiple offers and selling above asking, it is like the boom all over again minus the rapidly rising prices.  In my dealing with clients the general sentiment towards our market is very positive, most if not all buyers are aware that the worst is behind us and now is the last  chance you may have to take advantage of these prices."

Up in the San Francisco area, DataQuick reported that home sales rose 14.5% between May and June, but still remain 4.5% below year-ago levels, and that the median sales price also rose sharply between May and June. It hit $377,750, up 1.5% from May but under the $410,000 median from last year.

The popular press continues to point out that while a record share of Americans want to buy homes, both U.S. government and corporate policies (often working at  cross-purposes) are making it more difficult. Of course, it is Wells or Chase or the servicer who bear the brunt of the liability if the loan "goes south," not the newspaper, yet reporters are quick to point out that "Government-controlled Fannie Mae and Freddie Mac have boosted standards so high that some people previously considered prime borrowers no longer qualify. That's limiting a real estate rebound that also has been damped by a state attorneys general probe into foreclosure practices and an Obama administration loan-modification program that has fallen short of expectations."

Few want to return to SISA loans being mainstream, but most agree guidelines need to swing back somewhat.

If the results of Fannie Mae's monthly national consumer survey accurately portray their attitudes, Americans appear to have increasingly realistic expectations of  the housing market.   Data from the June survey indicate that Americans are resigned to lower house prices and higher rents and have come to expect rock-bottom interest rates. (Fannie's National Housing Survey polls 1,000 home owners and renters each month to assess their attitudes toward owning and renting a home, mortgage rates, homeownership distress, household finances, and overall consumer confidence then  compares the results to answers to the same survey conducted monthly since June 2010.)

Lastly, the MBA suggested that the U.S. homeownership rate could fall another one to two percentage points if credit conditions and the economy remain in the same  crisis mode exhibited in 2009. Most in the business agree that not everyone deserves to own a home, and the current homeownership rate of 66.4% is in line with historic norms. The peak came in 2004 at 69.2% - so perhaps the press should spend more time wondering why it was so high in 2004, and not why it is falling now? But perhaps  we are back to a more sustainable level.

Let's turn to prepayments, which, if you're in the biz, are of interest. After all, if rates drop, investors begin to worry about that mortgage (that they just bought at 102) prepaying. In the past borrowers have been much more sensitive to drops in rate, but now refinancing is limited by cost, underwriting guidelines, and the possibility of a decline in the value of their house. Many Wall Street research firms appear to have bought into the concept that mortgage prepayments are now decoupled from the general level of interest rates (and even mortgage origination rates), as deficiencies in home-owner equity and challenges in the underwriting process keep voluntary speeds quite low. That concept, combined with the view that the Fed remains on hold for the rest of 2011, suggests that investors may not be so shy about owning premium mortgages (at higher rates). And most are skeptical that "vague and amorphous fears" that some new government plan will emerge that enables large segments of the current and potential homeowner base to take advantage of still low mortgage rates in an effort to reduce defaults, will appear. On top of that,  it may be "full speed ahead" with the GSE's reducing the maximum conforming loan limits, suggesting that the government is pulling back, rather than growing, the  government's mortgage risk.

July prepayment speeds were recently released. Fannie, Freddie and Ginnie prepays were up 15% to 18%, in line with many expectation of a 15% increase in speeds. Overall, prepays on lower coupons were higher than expectations whereas prepays on higher  coupons were marginally slower. A majority of this increase occurred on the 2009 and 2010 loans once again highlighting the "refinanceability" of these newly originated loans. Across servicers, Wells Fargo serviced loans saw the biggest jump in prepays followed by Chase and then Bank of America. For the 2009 vintage, having the HARP program include loans before June 2009 helped increase refi's. (An interesting trend was the fact that for the 2009 vintage, prepays on HARP eligible and ineligible Freddie loans were fairly similar whereas there was a significant spike in prepays on HARP eligible Fannie loans. This may be attributed to the LLPAs being charged  on HARP refinancings till June.)

Along those lines, traders and investors carefully watch the factors that have been driving Ginnie Mae (primarily FHA & VA loans) and Fannie Mae (conforming conventional) swaps. While many factors can be attributed to the recent run-up in GN/FN swaps,  most traders believe it has been primarily driven by: 1) excess supply in conventionals relative to FHA/VA loans, and 2) the recent MIP increases by the FHA which have sharply reduced the "convexity" of Ginnie Mae MBS. But others feel that these factors are transitory and consequently expect GN/FN to weaken, which will change the price spread between the two. Conventional supply has been moderating over the past few months and future supply should remain low relative to Ginnie Mae's. As new production, post MIP increase, moves into securities, they expect the prepayment advantage that Ginnie Mae securities currently enjoy to deteriorate, leading prices to weaken on a relative basis.

A number of lenders sent out price changes (for the worse) Thursday, and MBS prices were worse by .250-.375. Treasury 10-year notes ended the day worse by about .5 in price (2.95%). We had a strong 30-year bond auction which helped (demand & supply), but then rumors of an agreement on the debt plan provided a boost to equities while Treasury prices fell. The problems in Europe, which will go on for a very long time, took a backseat to the drama between the Democrats and Republicans, more clarification from Chairman Bernanke that the Fed was not prepared to add further stimulus at this time, and some favorable economic and earnings reports.

Today is another busy data calendar. The CPI for June was -.2%, with the core rate

+.3%. The Empire State Index was -3.76 for July. At 9:15 EST are

+Industrial Production and Capacity Utilization (Jun), expected at 76.9 and +0.3, respectively, versus

76.7 and +0.1% in May. Finally at 9:55 is the preliminary July Consumer Sentiment report called higher to 72.5 from 71.5. After the first round of news the 10-yr is at 2.94% and MBS prices roughly unchanged.

A Minneapolis couple decided to go to Florida to thaw out during a particularly icy winter. They planned to stay at the same hotel where they spent their honeymoon 20 years earlier. Because of hectic schedules, it was difficult to coordinate their travel schedules. So, the husband left Minnesota and flew to Florida on Thursday, with his wife flying down the following day. The husband checked into the hotel. There was a computer in his room, so he decided to send an email to his wife. However, he accidentally left out one letter in her email address, and without realizing his error, sent the email to a different address.

Meanwhile, somewhere in Houston, Texas, a widow had just returned home from her husband's funeral. He was a minister who was called home to glory following a heart attack. The widow decided to check her email expecting messages from relatives and friends. After reading the first message, she screamed and fainted.

The widow's son rushed into the room, found his mother on the floor, and saw the  computer screen which read:

To: My Loving Wife

Date: July 15, 2011

I know you're surprised to hear from me. They have computers here now and you are allowed to send emails to your loved ones. I've just arrived and have been checked in. I see that everything has been prepared for your arrival tomorrow. Looking forward to seeing you then!

Hope your journey is as uneventful as mine was.

P.S. Sure is darned hot down here!

Rob   (Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx

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or www.TheBasisPoint.com/category/daily-basis [http://r20.rs6.net/tn.jsp?llr=zy6u9cdab&t=rajytsgab.0.v7uif6dab.zy6u9cdab.8721&ts=S0648&p=http%3A%2F%2Fwww.thebasispoint.com%2Fcategory%2Fdaily-basis].

For archived commentaries, go to www.robchrisman.com [http://r20.rs6.net/tn.jsp?llr=zy6u9cdab&t=rajytsgab.0.fpg7qedab.zy6u9cdab.8721&ts=S0648&p=http%3A%2F%2Fwww.robchrisman.com%2F].

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Market Snapshot 07-05-2011

by Sigma Research

 A nice start today with treasuries and mortgages doing much better after the huge increase in interest rates last week. The 10 yr note rate jumped 37 basis points and mortgage rates up 25 percent last week. Looking for some retracement after the beatdown last week, and volatility this week will be very high. This is employment week and the expectations are not that great so if we were to see any less than thought reads on jobs some rte improvement is likely. Last week it was the stock market making big moves higher in the indexes, the best week for stocks in 2 yrs; the DJIA up 648, NASDAQ +208 and S&P +71. Like the bond market it too was likely a little ahead of itself.

  This morning in early activity (9:00 am) the 10 yr note +10/32 at 3.15% -5 bp and mortgage prices +11/32 (.34 bp); the DJIA +7 but the S&P -2.


Although the potential for a bounce in the bond and mortgage markets is likely, the trend and technicals have changed to bearish or at best sitting here for awhile. That said, as noted its employment week. The early forecasts for Thursday's ADP non-farm private job growth an anemic +60K, the forecast for the BLS non-farm private job growth on Friday, also a weak +110K. These are not numbers that show much improvement. Expect estimates to change a little as the week progresses.


In Europe Thursday it is expected the ECB will increase its base rate once again. European services and manufacturing growth were revised lower, with a composite index falling to 53.3, from an earlier reading of 53.6, London-based Markit Economics said today. Spanish and Italian bonds fell, increasing the additional yield investors demand to hold the securities instead of German bunds, on concern Greece's debt crisis may continue to harm its euro-area peers. Portuguese 10-year bonds also sank as the Financial Times reported commitments from banks to reinvest funds from maturing securities into new Greek debt may fall short of policy makers' target. Europe's debt problems are not over, even Greece is still subject to defaulting eventually as some continue to expect it will.


Crude oil higher this morning after two days of declines; crude is well trapped between $97.00 and $92.00 a barrel.


At 9:30 the DJIA opened -14, S&P -2; 10 yr note +11/32 at 3.14% -6 bp and mortgage prices +12/32 (.37 bp).


The only data today; at 10:00 May factory orders were up 0.8% against estimates of +1.0%; April orders were revised to -0.9% frm -1.2%. May durable goods orders revised to +2.1% frm +1.9%-----no initial reaction to the data.


This Week's Economic Calendar:

Today;

 10:00 am May Factory Orders as reported +0.8%


Wednesday;

 7:00 am Weekly MBA mortgage apps (N/A)

 10:00 am June ISM services sector index (54.0 frm 54.6)

Thursday;

 8:15 am ADP non-farm private jobs (+60K)

 8:30 am weekly jobless claims (-3K to 425K; con't claims 3,70 mil frm 3.702 mil)
Friday;

8:30 am BLS employment report (NFP jobs +80K, non-farm private jobs +110K; unemployment rate 9.1% unch)

10:00 am May wholesale inventories (+1.0%)
3:00 pm May consumer credit (+$3.5B, Apr +$6.5B)


Last week's strong stock market rally, the momentary deal worked out to keep Greece afloat, the end of QE 2 and the previous week's very poor demand for $99B of Treasury offerings combined to break the bond and mortgage markets. This week's employment data that will set the next move for the bond market. The US economy is feeble giving many the idea that US interest rates will move back below 3.00% after the spike last week; we do not subscribe to that view however. Although the economy isn't likely to grow quickly and inflation is not a problem, the recent auctions suggest risk levels for US debt will increase a little, keeping interest rates a little higher than 3.00% for the benchmark 10 yr note---driver for mortgage rates.


http://globalhomefinance.com