Mortgage Rates Higher

After two weeks of nice declines, mortgage rates rose during the week, back to the levels seen at the end of February. March was an extremely volatile month, with large daily swings a common occurrence. Investors bought mortgage backed securities during periods of increased concern about the stability of the credit markets. Just as quickly, they sold mortgage backed securities when the fears eased. Last week, investors generally felt that the Fed’s rate cuts and other actions were sufficient to combat the difficulties in credit markets, demand for mortgage investments fell, and mortgage rates rose.

 Mortgage rates were also hurt last week by a series of Fed officials who talked tough about inflation. Higher inflation is bad news for mortgage markets, as investors require a higher yield to offset the inflation. With all the attention on inflation, Friday’s release of the Fed’s preferred inflation indicator was highly anticipated. The February Core PCE price index rose at a 2.0% annual rate, as expected, which was at the upper boundary of the Fed’s perceived comfort zone.

 In the housing sector, the news was somewhat encouraging. February Existing Home Sales came in stronger than expected. The inventory of unsold homes declined modestly, while median prices fell. Sales activity has held in a narrow range since September, and the chief economist of the National Association of Realtors (NAR) suggested that the data was “another sign that the market is stabilizing”. February New Home Sales also came in a little higher than the consensus. Separately, the government’s OFHEO housing index showed that January prices were down 3% from one year earlier.

Compliments of Corey Phelps, Front Street Mortgage. email corey@frontstreetmtg.com

Investors Push Up Mortgage Rates

In a week packed with major economic news, the biggest story for mortgage markets was the widening spread between mortgage backed securities and Treasury bonds. Issued by the US government, Treasury bonds are generally considered to be the benchmark for a “safe” security, since the risk of default is extremely low. During the week, the economic news was mixed, and Treasury rates barely changed. Mortgage rates, however, jumped by about half a point. Investors are demanding a higher return from mortgage backed securities, and the result is higher mortgage rates. In another unusual reversal, the mortgage market has been more volatile than the Treasury market, and wide swings in mortgage rates have become a daily occurrence.

 On the economic front, the highly anticipated Employment report failed to meet even Wall Street’s reduced forecast. Against expectations for a gain of 25K new jobs, the economy lost -63K jobs in February, and the figures for January and December were revised lower as well. This marked the largest monthly decline since March 2003. The Unemployment Rate surprisingly fell to 4.8%, but that reflects a large number of people who stopped looking for a job last month, meaning that they officially left the labor pool. Once again, the manufacturing and construction sectors showed the greatest weakness. Until November, the service sector had been steadily producing job gains of 100K or more per month, but even that sector barely produced any new jobs in February.

 Big news came out from the Department of Housing and Urban Development (HUD). In accordance with the new legislation passed a couple of weeks ago, HUD released the new loan limits for FHA, Fannie Mae, and Freddie Mac, and they did it a week earlier than expected. The new minimum for FHA is $271,050 with a maximum of $729,750. The Fannie/Freddie minimum remains at $417,000 with a maximum of $729,750. The formula is based on 125% of each region’s median price within the posted limits. 250 regions will be eligible for higher caps, and more than 70 regions will be eligible for the maximum. As a practical matter, it will still take some time for Fannie Mae, Freddie Mac, and FHA to prepare their systems and implement the changes.

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

Fannie, Freddie, and Bernanke

The biggest economic news of the week was expected to come from Fed Chief Bernanke, but a surprise announcement from OFHEO had the greatest impact on mortgage markets. Wednesday, OFHEO, the government regulator of Fannie Mae and Freddie Mac, announced that it will remove the limits placed on the portfolio sizes of the two companies as of March 1. This will enable the two companies to make or guarantee more loans. The limits had been instituted to constrain the growth of the companies while they fixed accounting errors. To make significantly more loans, the companies will have to raise additional capital, which will take some time. The regulators also announced that they are considering a reduction in the capital requirements the firms must hold for each loan, and this would accelerate the ramp up in loan volume. This measure follows the recent temporary increase in the conforming loan limits for Fannie and Freddie. The potential for Fannie and Freddie to increase their activity drove down mortgage rates. After rising Monday and Tuesday, the OFHEO news turned mortgage rates around on Wednesday. They continued to decline for the remainder of the week, finishing moderately lower than the prior week.

Also on Wednesday, Fed Chief Bernanke presented his semi-annual testimony before Congress. Overall, there were few surprises. Bernanke painted a grimmer picture of the risks to the economy than he had in the past. While he acknowledged that higher inflation is a threat, he expressed greater concern about slower economic growth. He sees housing market activity stabilizing later this year, while adding that home prices may continue to decline into next year. Bernanke also suggested that FHA modernization and Freddie Mac and Fannie Mae regulatory changes are “crucial” going forward.

 In the housing sector, the news was mixed. January Existing Home Sales fell by less than expected, but inventories of unsold homes rose by more than forecasted. Median existing home prices fell by 5% from one year ago. Meanwhile, January New Home Sales fell to a 13-year low. The Mortgage Bankers Association (MBA) activity index, which is released every Wednesday, showed a decline in the level of refinancing activity due to the rise in mortgage rates. Mortgage rates have declined since the data was collected, however, meaning that increases may be more likely next week.

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

A Roller Coaster Ride for Mortgage Rates

The short week turned out to be one of the most volatile in recent years. Early in the week, mortgage rates surged to the highest levels of the year, before they turned around and recovered nearly to their starting level, leaving only a small rise for the week. With the Fed cutting rates and pumping liquidity into the economy, and the government implementing fiscal stimulus programs, mortgage investors became increasingly worried that the stimulus would lead to higher inflation, which is negative for mortgage markets. The major inflation data released during the week amplified those concerns, as the January Core Consumer Price Index rose at a 2.5% annual rate, which was higher than the consensus estimate. Perhaps contrary to what one would expect, the recent Fed rate cuts have led to higher mortgage rates as opposed to lower mortgage rates. To understand why, it’s important to understand that the Fed only controls short term interest rates. When they cut rates, it generally has the effect of increasing bank lending and consumer spending, which leads to more economic activity. Long term rates, such as 30-year mortgage rates, are determined by trading in financial markets and are highly impacted by expectations for future inflation. To a mortgage investor, a Fed rate cut increases the risk of higher future inflation, and that has been the dominant sentiment in recent weeks. This explains why 30-year mortgage rates have jumped 0.75% since the Fed’s aggressive January 22 rate cut. In the housing sector, the news was mixed. January Housing Starts rose slightly from December, while Building Permits, a leading indicator of future activity, fell to the lowest level since November 1991. The National Association of Home Builders (NAHB) Housing Market Index showed a small increase. According to the NAHB, builders have been attempting to reduce the inventory of homes on the market, and there has been an increase in the flow of prospective buyers.

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

Mortgage Rates Rise on Inflation Concerns

Fed Chief Bernanke told politicians that the Fed stands ready to cut rates as needed to stimulate the economy. The politicians approved of faster economic growth, but mortgage investors worried that the stimulus could lead to higher inflation and pushed mortgage rates to the highest levels since January 2. According to Bernanke’s testimony on Thursday, the Fed’s next forecast will lower the economic growth projections made in November. The Fed expects a sluggish start this year followed by a second half pickup in growth. They are concerned that housing and labor market conditions could deteriorate more than previously anticipated, which led investors to expect additional rate cuts.

Wednesday, President Bush signed into law the Economic Stimulus Plan. In addition to sending an estimated 130 million Americans a tax rebate check, this new law temporarily (through the end of 200 increases the size of loans that Fannie Mae, Freddie Mac, and FHA can buy or insure. The new loan limits will be determined based on the median home price for each Metropolitan Statistical Area (MSA). Only MSAs with median home prices above $333,600 will see increases in the Fannie Mae and Freddie Mac loan limits. FHA loans limits will rise in most MSAs.

The Housing and Urban Development (HUD) agency has been given thirty days to publish the median home price for each MSA. It will take Fannie Mae, Freddie Mac, and FHA another thirty days or so to prepare their systems and implement the changes. In all, it is estimated to be about sixty days before the new higher loan limits will be available. The expected benefit from the new loan limits is that credit will be more widely available and that qualifying loans should have lower rates than if the limits were not increased, making homes more affordable and refinancings more attractive.

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