Government announcements dominated the financial news this week. Updates on two major programs both were favorable for mortgage markets, and mortgage rates fell modestly during the week.

The most highly anticipated news concerned Tuesday’s speech from Treasury Secretary Geithner on the financial institution assistance plan. This “Financial Stability Plan” involves multiple programs to remove bad assets from banks’ books and to support new lending. It also contains funds to help prevent foreclosures. Investors were sorely disappointed by the lack of details about how the plans would work, however.  They responded to the uncertainty by purchasing relatively safer assets and the stock market plunged, while Treasury and mortgage-backed security markets rallied, pushing rates lower. Geithner suggested that more information about a plan to purchase troubled assets and a comprehensive housing program will be released in the next few weeks.

Later in the week, the House and the Senate agreed on a compromise $789 billion fiscal stimulus plan, which is expected to pass within days. The Obama administration estimates that the plan will create 3.5 million jobs. Both the House and the Senate had passed versions which were larger than the final compromise plan, and the reduction in scope helped mortgage markets. A smaller plan means that the government will have to issue less debt. Unfortunately, one of the spending cuts in the final plan was a provision for a $15,000 homebuyer tax credit, which came with an estimated price tag of $35 billion. Instead, the government will leave in place an existing $7,500 tax credit, applicable to only first time homebuyers. The primary change to the tax credit is that it will no longer need to be repaid. The estimated cost of this $7,500 tax break is less than $3 billion.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, corey@frontstreetmtb.com

Despite weak economic data and sizable Fed purchases of mortgage-backed securities (MBS), mortgage rates actually rose a little during the week. After falling by more than 1.0% since late November, mortgage rates have resisted any move lower over the last couple of weeks, even with extremely bond-friendly economic news. Still, mortgage rates remain near the lowest levels seen since the 1950s.

The tame inflation reports and weak economic growth data released during the week should have been favorable for mortgage markets. The December Consumer Price Index (CPI) declined -0.7% from November, mostly due to lower energy prices. The core CPI rate, which excludes food and energy, rose a scant 1.8% from one year ago. The December Producer Price Index (PPI) report contained similar results, and inflation concerns are low right now. Meanwhile, the economic growth indicators were much weaker than expected. Both Industrial Production and Retail Sales dropped significantly in December. In 2008, Retail Sales showed their first annual decline since the data began being tracked. Until the economy shows solid signs of improvement, we should see little inflationary pressure on mortgage rates.

As the stock market fell to five-year lows during the week, investors moved to less risky investments. Treasury markets were the primary beneficiary of the flight to safety, and Treasury yields reached the lowest levels in decades. Mortgage rates fell during the week as well, but to a much lesser extent.

The news during the week on inflation pointed to lower future levels. The October Consumer Price Index (CPI) inflation report showed a large monthly decline in the overall index due to lower oil prices. The core rate, which excludes food and energy, saw its first monthly decline in over 25 years, and the annual rate fell to 2.2% from 2.5% in September. Oil prices have continued to move even lower this month, which will be reflected in the November data. Lower expected inflation is almost always a good thing for mortgage rates.

In the housing sector, October Housing Starts fell to a record low, and Building Permits, a leading indicator, fell 12%. These were weak numbers, but a decline in new home building will reduce the number of unsold homes on the market, which should help to stabilize home prices sooner. The recent decline in home prices has one bright spot. Combined with relatively low mortgage rates, homes have reached their highest level of affordability in four years, according to the National Association of Home Builders (NAHB). The NAHB index compares the cost of paying for a home, based on average home prices and mortgage rates, to the median household income. Increased affordability allows more people to participate in the housing market and should boost demand.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email corey@frontstreetmtg.com

For mortgage markets, the biggest news of the week came from Treasury Secretary Paulson during an update on the $700 billion TARP rescue plan. Paulson surprised investors with the news that the Treasury has scrapped the original plan to purchase troubled assets from banks and will use the funds in other ways to support the still “fragile” financial system. Lawmakers and investors were provided few details about the anticipated future use of the funds, and this abrupt shift in plans added to the uncertainty confronting investors in recent weeks.

While mortgage rates ended the week nearly unchanged from the prior week, daily volatility remained high. During October and November, movements in mortgage rates have been much larger than usual, primarily due to the high degree of uncertainty facing investors. Will there be a second major government stimulus package and what form will it take? What will be the impact of the extra debt issued to fund the government programs? Will other countries such as China have less money available to invest in US bonds, including mortgage backed securities, while they stimulate their own economies? Finally, how will the Treasury use the remaining funds from the $700 TARP rescue plan (discussed above)? Once investors have answers to these and other questions, we should see less volatility in mortgage rates.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

This week’s economic data and comments from Fed officials confirmed the economic outlook shared by most investors, namely that the economy is slowing sharply. Wednesday, the Fed cut the target Fed Funds rate by one half point to 1.00%, as widely expected. The vote was unanimous and followed a coordinated half point rate cut on October 8. Investors believe the statement left the door open for further rate cuts and have priced in another half point rate cut before the end of the year. The Fed appears to be most concerned with boosting near-term economic growth. While aggressive short-term stimulus is good for the stock market, mortgage investors are worried about its impact on long-term inflation, and those concerns helped pushed mortgage rates higher during the week.

A second factor also contributed to this week’s rise in mortgage rates. The federal government’s takeover of Fannie Mae and Freddie Mac in September left mortgage investors with the impression that there was explicit government backing of the debt and guarantees issued by Fannie and Freddie. Government officials have been sending mixed messages, however, raising some concern about whether the two companies really will have the long-term backing of the government. Due to the uncertainty, investors, particularly important foreign investors, have been reluctant to invest in Fannie and Freddie guaranteed mortgage backed securities. Yields required by mortgage backed security investors directly affect most mortgage rates. If the government were to unambiguously convince investors that it will stand behind Fannie and Freddie guarantees, then mortgage rates could be expected to move lower.

Thanks to Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

All eyes were on Congress this week as they debated the financial rescue plan. Fed Chief Bernanke and Treasury Secretary Paulson proposed the $700 billion plan to purchase troubled mortgage assets from financial institutions, providing the institutions with much needed capital. The expectation is that the institutions will use the freed up capital to make credit more readily available. On Monday, the House unexpectedly voted against the plan, and the stock market plunged. A revised plan, which retained the core of the original plan, passed by a wide margin in the Senate on Wednesday and passed in the House on Friday. Despite the historic events this week, mortgage rates ended the week nearly unchanged.

In the shadow of the debate over the rescue plan, the economic data released during the week continued to highlight the weakness in the economy. The monthly Employment report showed that the economy lost -159K jobs in September, worse than the consensus forecast of -105K. The economy has lost jobs for nine straight months, which is the worst performance since the period following 9/11. The Unemployment Rate remained at 6.1%, which was up from 4.7% one year ago. Exports have been a source of strength this year, but economic weakness around the world has hurt in this area as well.

It is hoped that the rescue plan will be a strong first step in boosting the economy, and other actions are also expected to help. Falling oil prices and low wage inflation have eased inflationary pressures. This will allow the Fed more flexibility to cut rates and stimulate the economy. Investors have priced in a half-point cut in the Fed Funds rate by the end of the year.

Thanks to Corey Phelps, Front Street Mortgage, email: corey@frontstreetmtg.com, (231) 360-7283

Usually the monthly Employment report is the main event of the week, but Fed Chief Bernanke stole the show. Following the theme of other Fed officials in recent weeks, Bernanke focused on inflation risks in multiple speeches, and his comments were unexpectedly direct. According to him, inflation expectations are a “significant concern.” He explained that the decline in the value of the dollar and the increase in the cost of energy were adding to inflationary pressures. Inflation is negative for mortgage investors, and mortgage rates rose for the fourth straight week due to increased concern.

At the end of a volatile week, investors were closely watching Friday’s important Employment report. The headline number came in right on target, with a loss of -49K jobs in May. The big surprise came from the change in the Unemployment Rate. Expected to rise slightly to 5.1% from 5.0% in April, it instead jumped to 5.5%, the highest level since October 2004. Economists attributed the spike to an unusually large influx of young adults entering the labor force to find summer jobs, so the reaction in the mortgage market was modest.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

This week, mortgage investors focused on the Fed, inflation, and oil prices. The week started off on a positive note, and mortgage rates fell on Monday and Tuesday. Even higher than expected levels of core inflation in Tuesday’s Producer Price Index had little impact. The atmosphere changed quickly on Wednesday, though, after the release of the FOMC minutes from the April 30 Fed meeting. In the minutes, the Fed lowered its forecast for economic growth in 2008, while raising the expected level of inflation. Also notable, Fed officials ruled out further rate cuts unless the outlook for the economy turns significantly worse. The Fed’s heightened inflation projections were bad news for mortgage markets, and rates ended the week a little higher.

Investors closely watched the continued climb in energy prices during the week. Rising energy prices are particularly bad for the stock market, while the impact on mortgage markets is less clear. In one sense, they act similar to a tax increase, since they result in less disposable income, and economic growth slows. An economist at a major investment bank pegged the added cost this year to US consumers and businesses at $300 billion, more than double the $130 billion in tax rebates being issued by the government. Normally a decline in economic activity reduces future inflationary pressures and is good for mortgage markets. In this case, however, higher energy prices are seen as adding to inflation by more than a slowing economy would reduce it.

In the housing sector, this week’s data was close to the expectations of investors. April Existing Home Sales fell slightly from March, while inventories of unsold homes rose to the highest level since June 1985. Separately, OFHEO, a government agency, announced that US home prices fell 3% during the first quarter compared to the same period one year ago. Prices fell in 43 states. Analysts suggested that the recent difficulty in obtaining jumbo mortgages has led to a smaller proportion of sales of more expensive homes, which has skewed the housing data somewhat lower.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

Mortgage rates ended the week close to where they began the week, but the end result masked a lot of movement. The week began poorly for mortgage markets. Stronger than expected Retail Sales data and tough talk on inflation from Fed officials pushed mortgage rates higher on Monday and Tuesday. In particular, Tuesday’s Fed speakers suggested that the economy was beginning to recover – even if there is still a long way to go – and that inflation concerns have increased. The tide turned on Wednesday, however, when CPI, the most closely watched inflation report of the month, showed a lower than expected increase in inflation. Mortgage rates fell every day through the remainder of the week.

The April Core Consumer Price Index (CPI) rose at a 2.3% annual rate, below the consensus forecast of 2.4%. So far, higher food and energy prices have not been passed through in a large way to the prices of other goods. The Fed has been emphasizing inflation fears for a couple of weeks, which has had a negative impact on mortgage markets, so the good news on inflation was a relief to many investors. The Fed is generally considered to be comfortable with Core CPI readings below 2.5%.

In the housing sector, this week’s news was mixed. Against a consensus forecast of 940K, April Housing Starts rose 8% to an annual rate of 1,032K units. Building Permits, a leading indicator of housing market activity, rose 5%, the first increase in in five months. The construction of single family homes remained weak, however. The strength in the Housing Starts report came from new apartment construction, which is extremely volatile on a monthly basis. Separately, the National Association of Realtors (NAR) reported that median home prices fell 8% during the first quarter from the same period one year ago. The chief economist of the NAR suggested that the data may be a little misleading, since a smaller percentage of high end homes were sold during the period due to the difficulty in obtaining jumbo mortgages. In addition, the results varied in different parts of the country. 100 out of 149 metropolitan areas saw price declines during the first quarter.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com