Employment Report Does Little to Help Bonds

      Investors rushed for the exits today in after having a 200 basis point gain since September 30 in Mortgage Backed Securities.  You would think that the 95,000 job losses would have investors flocking to bonds, but not today. 

      Some investors took profits ahead of the long weekend while others moved money back into stocks anticipating the much rumored additional round of Quantitative Easing.  It is likely that the selling will continue when the market re opens on Tuesday.  Remember, Mortgage rates move higher when the price of Mortgage Bonds move lower.

Bernanke’s Speech

      On Monday Fed Chairman Bernanke gave a speech Entitled ” Fiscal Sustainability and Fiscal Rules”.  He issued a strong warning that the US Federal Budget deficit is growing and is on an “Unsustainable path”.  And if not addressed soon, would mean “serious economic costs and risks’.  “Concerns and uncertainty about exploding future deficits could make households, businesses and investors more cautious about spending, capital investment and hiring” 

      Benanke went on to say, ” a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity and economic growth. 

      While Mr. Bernanke has no official role in the area of tax policy, he cleverly said “economic conditions provide little scope for reducing deficits significantly further over the next year or two” and that “premature fiscal tightening could put the recovery at risk”.

In other words, the Bush Tax cuts should not be allowed to expire.

Bond Bubble

      There is no question that the next bubble to burst is going to be the bond market.

And when it bursts, it will end quickly and decisively and it’s going to take mortgage rates with it.  So, a word of caution to those who are trying to time the bottom.  Don’t gamble a guaranteed $400 savings in your mortgage payment to save an extra $150.

      I am recommending locking into rates at this time.

Market Update Friday,

October 1^st, 2010 4:48 PM ET

By John Sauro, North Atlantic Mortgage Corp.

Bonds Can’t Break Through

On Tuesday, Mortgage Bonds fell below the level of resistance of $101.00. This pattern has occurred eight times since early August, where Mortgage Bonds traded up to resistance, only to turn lower. What’s important to note is that mortgage rates which move in the opposite direction of Mortgage Bond prices, may have seen the bottom.

Home prices up in July

The Case Shiller Index reported that home prices in July rose 0.6% and have moved up 3.2% from July of 2009. While the pace of the gain was slower than the 4.2% increase seen in June, it still is a positive sign.

Could The 10 Year Note Yield Double in the Next Six Months?

Economists at the Fed have a financial model that shows that Treasuries are too expensive for the risk they carry.  It suggests that Treasuries are at their most over-valued levels since the financial crisis in December 2008.  Back then the 10-Year Note yield nearly doubled over the next six months. Will this happen again? It will depend on the economic data being released over the next few weeks.

We are currently recommending floating interest rates.

Fannie Mae 3.50% $100.72  +6bp

By John Sauro

North Atlantic Mortgage Corp.

Bonds Remain Pressured

Investors running towards equities pushed stocks to their 4^th weekly gain.

Decent economic news sparked the rally in stocks which pressured Bonds lower.

Our 3.5% coupon Bond fell 31 basis points to end the session at $100.28, closing just near support at the 25-day moving average. The Dow rose 197.84 to 10,860.26.

So why do you need to know this and how does it effect you if your buying a home or refinancing one?

Very simply, if you are trying to lock into a low interest rate, you need to stay informed and understand some simple underlying fundamentals about the markets and how it affects mortgage rates.

While there are many things to know, there is one single thing that will help you to get a low mortgage rate.  As a general rule; “When the stock market goes up, Bond prices go down and mortgage rates move higher”.  So for those of you who consider yourself to be good at timing things or gambling, checking this daily can make a significant difference in the rate you lock into.

Fed to Make a Move in November?

Tuesday, the Fed clearly stated they are ready to jump in with more quantitative easing if necessary.

The well known Kiplinger letter reported today, that the Fed is laying the groundwork for further credit easing by propping up subpar activity in the housing markets with the continued buying of Treasuries and mortgage backed securities. “The Federal Reserve is walking a tight rope”.  They stated that “too much buying of Treasuries and Mortgage Backed Securities by the Fed will fuel investor fears of future inflation;

 “Fair odds that the “gurus will make a move in early Nov. at their next meeting”

Let Your Voice be Heard

There are 5 weeks before Election Day.  I speak with many people from all walks of life and different political persuasions.  But there is a common thread within all of these conversations.  They are all disgusted with the current economy, the out of control government spending and government overreaching into our lives.  I heard someone say recently “voting in the same politicians that are spending our money, is like giving a pyromaniac a can of gasoline and a book of matches”.

Now more than ever it is time for all of us to do our homework on the alternative candidates that are running for office. Do what we can to help support their campaign, vote them in and vote the bums out. 

Fannie Mae 3.50% $100.28  -31

Portfolio Lending – A Safer Bet

      What do Chase, Citi, Bank America and Wells Fargo have in common?
They all sell their loans to Fannie Mae & Freddie Mac. These banks do not “Lend” their own money. Rather, they do business like a broker. This is concerning as Fannie & Freddie continue to need billions in tax payer money.  
 
     This means if your loan does not fit the “underwriting matrix” required by Fannie/Freddie you are not getting financing.     
 
      Portfolio lenders use “common sense underwriting” practices because they do not broker their loans to Fannie/Freddie.  Therefore, they have more flexibility with their decision process.
A good example is someone who has a derogatory mark on their credit report. A Portfolio lender will consider other compensating factors such as, cash assets, strong appraised value, and stable employment.  While the automated underwriting system for Fannie/Freddie loans may decline it.   
 
Mortgage Bonds Continue Lower
 
      Mortgage Bonds moved lower today on a report that there could have been a large foreign seller in the market.
The benchmark 3.50% coupon fell 16bp to end the week at $99.44.
We continue to maintain our bias toward locking into mortgage rates. 
 
Fannie Mae 3.50% $99.44  -16

      Hence, the “Portfolio Lender”.  A Portfolio lender is a bank that makes loans from their deposit base, much like the Bailey Savings & Loan in the Holiday movie classic “It’s a Wonderful Life” , which we’ll be watching soon as the Holidays are around the corner.

      Another benefit of “Portfolio Lenders” is they generally have better terms for Jumbo Loans, can have longer rate lock periods (90+ days) and no tax escrows required at closing . They also do not have to abide by the HVCC (Home Valuation Code of Conduct) appraisal law that requires lenders that sell loans to Fannie/Freddie, to use appraisers through central management companies.

      The HVCC law has been problematic as the appraisals are not portable (cannot be used with multiple lenders), the management company pays the local appraiser half of his normal fee (happy appraiser?) and most importantly, the out of state management companies that have the final say on the appraised value, do not know your homes local market the way a traditional appraiser does. So appraisals generally come in under valued.

Bonds Pressured Lower
      Mortgage Bonds continued their downward spiral with prices lower for the sixth trading day out of the last seven as investors took the opportunity to take profits. Stock markets rose as cash moved from Bonds into stocks as the Dow rose 47.53 to 10,462.77, the S&P gained 5.37 to 1,109.55, the Nasdaq was higher by 6.28 to 2,242.48. Bonds are now below support at both the 25 and 50-day Moving Averages. Our Alert to Lock yesterday was insightful and protected those of you who moved quickly. We maintain our bias toward locking rates and we will see if bonds can manage a come back. Recent better than expected economic reports, disappointing Bond Auction results along with St. Louis Federal Reserve Bank President, James Bullard changing his tune, predicting a pickup in the economy for 2011, are a few of the reasons for the deterioration in Bond prices.

Mortgage Applications Increase as Interest Rates Rise

     Typically, as rates rise, many who procrastinated or were wondering if we were at the bottom will now make their move and as they do, lenders pipelines will back up even more. Therefore, you should consider locking into a 90 day interest rate. The additional cost will be well worth it, as lenders will have difficulty approving and closing loans within the typical 45-60 day time frames.

Jobs, Jobs, Jobs
     Initial Jobless Claims came in at 451,000, better than the 470,000 expected. This was the lowest number since July 9th. This mildly positive report adds to the improving trend since the recent peak at 504,000, hit a few weeks ago. Emergency Unemployment Compensation (EUC) benefits claims decreased by 35,000, but is still very high at 4.5M. Reducing unemployment is key in restoring the real estate market and the economy.

Fannie Mae 3.5% Coupon Bond $99.03 -84bp

  Bonds Headed Lower, Interest Rates Higher

 
      Bonds broke below support today and the technical readings are negative.  Bonds started their loosing streak on Wednesday during what was an already volatile week. A better than expected reading on the labor markets fueled a rally in stocks, hence investors moved out of bonds and into stocks.  The benchmark 3.50% coupon ended the week 46bp lower at $100.16 resulting in mortgage rates .25% higher than earlier in the week.
 
      Bonds will likely move down to their 50-Day Moving Average from here, which is 38bp beneath present levels which should result in mortgage rates moving higher by .25% to .375%. 
 
Interview with Bloomberg’s Kathleen Hays    

      Click below for this week’s interview and find out more about the direction of the credit markets.Click here for interview  
Positive News For The Housing Market
 
      On Tuesday the Case Shiller Home Price Index gave a positive read on the housing market with a 1.0% rise in June for 20 major cities and a 4.2% rise over the past year.  These numbers were influenced in part by the home buyer tax credit.
 
Unemployment Rate at 9.6%        Friday’s Jobs Report had an upside surprise, showing 54,000 jobs lost in August, better than estimates of 120,000 jobs lost.  Note that the big part of the decline was due to the elimination of census worker j obs.        Private sector jobs also surprised to the upside with 67,000 job creations, much better than the 44,000 originally forecast. The unemployment rate did tick up to 9.6%, in line with expectations. Revisions for the past two months were at 123,000. 
 
We maintain our bias toward locking into mortgage rates.
  
Fannie Mae 3.50%-  $100.16  -46BP

Could This Be The Beginning of The End of Low Mortgage Rates?

     Bond markets hit record highs today only to be driven down hard on the heels of Federal Reserve Chairman Ben Bernanke’s speech at the Annual Fed conference in Jackson Hole Wyoming.

     I have been warning that the bond markets are overbought and that a reversal was inevitable and it happened today.  The 10 Year Note lost a staggering 141 basis point’s and the Fannie Mae 3.50% Coupon lost 59 basis points before it was all over. 
     

     Congratulations to all that heeded my warnings and locked into a mortgage rate. It feels good to walk away from the craps table a winner. Doesn’t it?
 
     We will have to wait for next week to see where we go from here. While there is no clear technical signal, it does show how Bond prices are range bound as the market hit both resistance and support today.
 
 
Big Ben Speaks at Jackson Hole
       

     Mr. Bernanke stated that it is reasonable to expect growth to pick up in 2011 and in the years that follow.  He went on to say that the Fed is supporting the economic recovery by maintaining extraordinary accommodative monetary policy.  “The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly” Bernanke told the Fed conference, held in Jackson Hole, Wyoming.
     Also helping to push bond prices down and mortgage rates up were comments by Fed member James Bullard stating that the Fed has done all it can in the Mortgage Bond Market.
     

     For many years I have watched the Fed get it wrong time and time again and it’s usually at the behest of what ever administration is in the White House at the time. It’s no different this time either. It is very clear that the Fed is playing a very dangerous shell game to keep the markets from collapsing long enough to get through this next election cycle.        There are a multitude of economists that are ringing the bell of concern and calling for the Fed and our elected officials to reverse their course of action and stop the out of control spending, which has not accomplished what they promised. Many are now calling for the White House to fire their Economic advisors. The Fed’s actions speak louder than their words.
 
     I maintain a bias towards locking into mortgage rates.  

Fannie Mae 3.50% Coupon $100.28  -59 BP

* Maximum Loan to Value of  80% with a Maximum loan amount of $729,000.

 The Fed Starts Buying Mortgage Bonds

     The Fed began buying Mortgage Bonds again on Tuesday.  Many fund managers followed the Feds lead as yields on Mortgage Bonds are significantly better than Treasuries. This helped Mortgage Bond prices, which helps to lower mortgage rates. 

      Also helping Mortgage Bonds was the terrible Jobless Claims Report on Thursday, as 500,000 people filed for unemployment benefits for the first time, higher than the expected 475,000. This is the highest reading since November 2009.

Wall Street Journal Op-ed piece by Jeremy Siegel

      Respected Economist Jeremy Siegel wrote a piece in the Wall Street Journal, entitled “The Great American Bond Bubble”.  He warns about the current rise in Bond Prices and cautions that investors getting in at these levels are “courting disaster”. He points out that capital losses to bond holders could be more than three times the current yield being paid, if the 10-Yr Note yield rises back to the 4% seen in April.  History has shown that interest rates can move up sharply and Jeremy’s warning should serve as an omen to those who have sat on the sidelines too long, betting on mortgage rates moving lower.

Where do we go From Here? 

      Mortgage Bonds lost 38 basis points to close at 100.31 on the 3.50% coupon as of today’s close.  This will put lenders in a position to increase mortgage rates.  More importantly, we can’t ignore the technical signals, that suggest higher rates ahead for the short term.

Chances are we will see the sell off in Mortgage Bonds continue on Monday. Will they recover in the coming days? Stay tuned.

 Our bias continues to be locking into Mortgage rates here.                

 FNAMA 3.50% Coupon – $100.31  -38 bp

New Program!

Refinance up to 90% of Your Homes Value…. No Mortgage Insurance Required! 

*4.10%  APR 3.90%
30 Year Jumbo  5/1 Arm

      Mortgage Bonds started the week trading higher at $102.71, but lost some ground by the end of the week. As of this morning Mortgage Bonds are priced at $102.53.  This led to some lenders raising interest rates on Thursday.       

      You would think that Mortgage Bonds would have benefitted more from the sell off in Stocks, but more money was being parked into Treasuries than Mortgage Bonds. Investors are now looking for total safety and higher returns. So investors are shying away from Mortgage Backed Securities in favor of Treasuries.      Thursday mornings prices were reflective of this as the 10 Yr Note Yield was unchanged from Wednesday’s close, while Mortgage Bonds were down .12 basis points from Wednesday’s close. 

       Remember, Mortgage Rates rise when Mortgage Bond prices fall.        

      Financial Markets were looking for more direction than The Fed was willing to give in Tuesday’s Fed Statement.  With no game plan in site on how to handle deflation, or longer term inflation, this was yet another reason for investors to move from Equities and into Bonds.  

      The Treasury and the White House will be hosting a “Conference on the Future of Housing Finance” next week. Word has it that they will discuss a bailout to help millions of homeowners upside down on their mortgage. Also to be discussed is the future of Fannie Mae and Freddie Mac.  

      Our position remains locking rates, even with the additional support The Fed is offering the Bond markets, the markets are fragile and interest rates can turn and move higher without notice. 

Fannie Mae 4.0% Bond: 102.53  +16 BP 

*Requires a minimum 750 credit score.  Maximum Loan to Value of  90% with a Maximum loan amount of $800,000.