Mortgages, Home Loans, Refinancing, and Loan News from Winchester Lending Group http://www.winchesterlendinggroup.com http://www.winchesterlendinggroup.com/images/wlg_logo_web.gif http://www.winchesterlendinggroup.com/content/modesto-mortgage-news.asp Tue, 9 Mar 2010 14:34:11 -0500 Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/275/ Well done Mr. Bernanke. Mission accomplished - you brought congressional members up-to-speed on current monetary policy, you adequately answered questions regarding the mechanisms available to recover the enormous amount of stimulus that has been injected into the economy without spawning massive amounts of inflation, and you withstood the badgering of a few less-than-informed legislative hacks. Had you failed to complete your tasks today so masterfully - the credit markets would now likely be engaged in a full-out, fear-driven rout. It was almost possible to hear the collective sigh-of-relief from mortgage investors as Chairman Bernanke told members of the House Financial Services Committee that the weak economy will warrant exceptionally easy monetary policy (low interest rates) "for an extended period of time." There was nothing in Mr. Bernanke's prepared text testimony -- or in his responses during the question-and-answer session that followed his formal comments -- that caused investors to believe the central bank was anxious to remove excess stimulus from the system. Credit market participants in general, and mortgage investors specifically, were soothed by the Fed Chairman's statement that assets on the Fed's balance sheet "may remain very large for some time" - an indication the Fed has no immediate plans to begin off-loading their massive mortgage-backed security position. Some analysts are still suggesting the Fed will ultimately announce their intention to hold their entire $1.2+ trillion residential mortgage portfolio to maturity - but I strongly suspect that will prove to be little more than an exercise in wishful thinking. At some point in the future the Fed will almost certainly become a major seller of mortgage-backed securities as they methodically begin to unwind the various elements of their "quantitative easing" programs - but that event is unlikely to take form this year. http://www.winchesterlendinggroup.com/mortgage-news/article/275/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/274/ It is show time. The Treasury Department's record setting $104 billion three-part auction officially kicks off with today's $40 billion 2-year note offering (concludes at 1:00 p.m. ET). Most observers believe credit market participants will have little trouble absorbing this record amount of supply - but they are not so sure investors will greet tomorrow's $37 billion of 5-year notes and Thursday's $27 billion of 7-year notes quite as enthusiastically. Right in the middle of Uncle Sam's massive record setting $104 billion dollar three-day borrowing spree Fed Chairman Bernanke and his band of merry central bankers are huddling to discuss monetary policy and what if any adjustments should be made to their current quantitative easing strategies. The Fed's two-day meeting will conclude tomorrow afternoon with the release of their post-meeting statement at 2:15 p.m. ET. The likelihood that policymakers will choose to leave their benchmark fed funds rate at zero is a virtual "no-brainer." Such an outcome is already priced into the mortgage market. Investors, however, will be firmly focused on the Fed's post-meeting statement for any hint the central bank intends to ramp-up their current authorization for the direct purchase of $1.25 trillion of agency mortgage-backed securities, $300 billion of Treasury debt obligations and $200 billion of the corporate debt obligations of Fannie Mae and Freddie Mac. So far, the Fed has burned through roughly 50% of their current interest rate supporting direct-purchase "war chest." The majority of market analysts tend to believe the Fed will choose to make no change to the size of their direct-purchase checkbook this time around - preferring to take a "wait-and-see" approach -- before printing up another gargantuan batch of dollars to temporarily send interest rates in general, and mortgage interest rates in particular, a few basis points lower. If this assessment proves accurate -- look for mortgage interest rates to drift fractionally higher for the balance of the week. In the unlikely case the Fed surprises the market place with the announcement of a notable expansion of their quantitative easing programs -- expect mortgage interest rates to slide incrementally lower from current levels. On a different subject - the National Association of Realtors reported this morning that May Existing Home Sales climbed 2.4%. The May sales gain was slightly lower than most economists had anticipated - but their disappointment was largely muted by the realization that existing home sales have now posted two consecutive monthly gains - something that has not happened since 2005. This report had no impact on the trend trajectory of mortgage interest rates today. http://www.winchesterlendinggroup.com/mortgage-news/article/274/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/273/ Earlier today, a Russian central bank spokesman said the Soviet Union intends to cut the share of U.S. treasuries in its $400+ billion reserve and buy bonds issued by the International Monetary Fund instead. The Russian government does not plan to liquidate their treasury position immediately -- but will make the move gradually - replacing U.S. government notes and bonds as they mature. The "so what" factor here is significant. Russia is the world's third largest financial power and a decision to reduce their dollar denominated holdings of Treasury obligations has sent the value of the dollar on foreign currency exchanges into a tailspin while simultaneously ramping-up market participants' concern regarding future supply issues. The timing of this event could not have been worse -- coming as it does in front of today's $19 billion 10-year note auction (scheduled conclusion at 1:00 p.m. ET) and tomorrow's $30 billion 30-year bond offering. The announced retreat of a major buyer from our domestic credit markets -- as the government continues to make plans to obliterate all standing records for debt issuance -- is a glaringly obvious impediment to the prospects for notably lower mortgage interest rates. To tell readers of this commentary that the Mortgage Bankers of America announced earlier that spiking interest rates have driven down total home loan applications -- is like telling a brand new mother about the birth of her child. She was there - and was very directly involved - so what's to tell? In any case, the MBA said their seasonally adjusted index of total applications dropped 7.2% during the week ended June 5th. The refinance index slumped 11.8% while the purchase index posted a modest 1.1% increase. The average 30-year fixed-rate mortgage rate jumped 32 basis points to 5.57%. http://www.winchesterlendinggroup.com/mortgage-news/article/273/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/272/ Many readers have asked if there has every been a period of time when prices in the mortgage market have fallen more dramatically than they have during the 443+ basis point plunge recorded from May 21st through the market close on Friday, June 5th. You may find it surprising to know that as recently as the two week period between 10/11/08 and 10/18/08 the Fannie Mae 4.5% 30-year mortgage-backed security plummeted over 500 basis points. The following two weeks it rallied 400 basis points -- before again slumping 350 basis points during the week of 11/1/08. Following the low set on 11/1/08 -- the Fannie Mae 4.5% 30-year mortgage-backed security rallied for more than 1000 basis points over the next seven weeks ended 12/20/08. The real rarity in terms of price history here is there has only been one nine-week period (dating back to at least 2000) where the trading range (measured from high to low) of mortgage-backed security prices has been limited to 100 basis points or less -- and that one magical time period occurred between the week ended March 28, 2009 and the week ended May 23, 2009. The "so what" factor here is that current price action in the mortgage market is, believe it or not, actually more the norm -- than the exception. I am certainly not suggesting any of us have to like the recent volatility - I am just respectfully suggesting we take just a moment to put the recent price swoon into its proper perspective -- as one of the ordinary dynamics of our business. http://www.winchesterlendinggroup.com/mortgage-news/article/272/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/271/ Trading action in the mortgage market will likely be dominated by the massive Treasury auctions scheduled for today, Wednesday and Thursday. Uncle Sam will be looking to borrow $40 billion in the form of 2-year notes today, $35 billion tomorrow and $26 billion of 7-year notes on Thursday. There are those that argue that the yields on these securities are high enough (last touched during November 2008) that demand will be strong - and further yield increases won't be necessary to attract the required capital. If so, this week's record-tying Treasury auction will likely have little, if any noticeable impact on the current level of mortgage interest rates. There are other analysts that strongly believe yields will move higher as global investors begin to fret that the sovereign creditworthiness of the United States will be severely threatened as the government makes an attempt to resolve the credit crisis by taking on mountains of additional debt. It will be months yet before the results of the government's massive borrowing and spending strategy to revive the economy will be clearly known. Many observers believe global investors will choose to take a "worst-case" approach and demand higher yields for their money now as they anticipate the government's effort to borrow the nation into prosperity will prove a dismal failure. If this perspective proves to be broadly represented in the global investment community -- look for rising yield requirements at this week's Treasury auction to drag mortgage interest rates higher as well. In my judgment the yield on the government's 2-year note is unlikely to fall much - but the 5- and 7-year notes are at levels that will likely draw significant and aggressive bidding from both domestic and foreign investors. If my assessment proves accurate, mortgage interest rates stand a good possibility of finishing the week fractionally lower than where they began. http://www.winchesterlendinggroup.com/mortgage-news/article/271/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/270/ Mortgage interest rates were nudged fractionally lower by weaker-than-expected retail sales figures for April. Retail sales fell 0.4% in April, baffling the significant number of economist who had been expecting April retail sales to make a much better showing. The 0.4% drop in the headline number followed a revised 1.3% drop in March that was also weaker-than-expected. Stripping out the volatile auto sales component did not help the numbers look any better. Even reduced to this base level, retail sales fell 0.5% last month. The "so what" factor attached to this morning's April retail sales report is that all investors were given a big reminder that the economy is staggering along a rocky, uneven road to recovery. In a separate report the Mortgage Bankers of America said application demand slipped to its lowest level since mid-March during the week-ended April 9th, driven by a drop in requests to refinance loans. The MBA's overall application index dropped by 8.6% compared to the previous week level. Refinance applications fell 11.2% -- while the component of the index that measures purchase loan requests posted a modest 0.5% improvement. Last but certainly not lest, selling pressure in the stock market is contributing to solid improvements in the mortgage market in today's early going. An increasing number of analysts are warning the rally in stock prices that began in early March is overdue for a correction to the downside. Should these forecasts prove accurate; a meaningful sell-off in the stock markets will almost certainly support the prospects for steady to perhaps fractionally lower mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/270/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/269/ The Fed is definitely making their presence felt in the Treasury market this morning. The Fed is actively buying Treasury obligations maturing in 15- to 30-years. Today?s Fed operation is part of its ongoing $300 billion plan to purchase government debt to help keep borrowing cost artificially low, giving the economy the opportunity to fight its way out of a major recession. That is good news. The even better news is that Mr. Bernanke has plans for an encore performance in the Treasury market tomorrow. For the time begin, expect these Fed buying sprees to limit any significant upside pressure on mortgage interest rates.Selling pressure in the stock market is contributing to solid improvements in the mortgage market in today?s early going. An increasing number of analysts are warning the rally in stock prices that began in early March is overdue for a correction to the downside. Should these forecasts prove accurate; a meaningful sell-off in the stock markets will almost certainly support the prospects for steady to perhaps fractionally lower mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/269/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/268/ Mortgage investors will no doubt approach the next two days as carefully as a naked cowboy facing the challenge of climbing over a barbed wire fence. There is nothing like a major Treasury auction, the release of a much anticipated government mandated bank stress test, and an upcoming major macro-economic report to make mortgage investors antsy. Uncle Sam is in the credit markets once again this morning looking to borrow $14 billion in the form of 30-year bonds. This will be the last leg of the Treasury Department's three-part quarterly refunding. A number of analysts are concerned that the current yield of 4.17% is not high enough to attract significant buying interest from auction participants. If these concerns are proven to be well founded -- the bid price for this offering will fall - pushing the yield on the 30-year bond higher. That's a scenario that will almost certainly result in higher mortgage data - the 30-year bond yield won't climb by much and the overall impact on the current level of mortgage interest rates related to these events will be minimal. The results of the government's "stress test" for 19 of the top banks in the country will officially be made public at 5:00 p.m. ET today. Treasury Secretary Geithner has reassured investors that none of the 19 banks under examination are at risk of insolvency. Some banks in the group may need injections of additional capital to meet the new government standards. Should the total amount of capital required to bring these banks "up-to-snuff" fall below $300 billion - most analysts believe investors will breathe a big sigh of relief -- and the rally in the stock markets will continue unabated. I'm not so sure - but should this scenario "pan-out" like most predict it will - this event will tend to put some modest additional upward pressure on mortgage interest rates. The unexpected drop in the number of people filing first-time claims for unemployment benefits during the past week was a bit unsettling for mortgage investors. The Labor Department reported weekly jobless claims for the period ended May 2nd fell by 34,000 - equaling a mark last experienced in January. The four-week moving average of jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, fell for the fourth week in a row. The survey period for this week's jobless claims data falls outside of the survey period for tomorrow's much more important April nonfarm payroll report. Nonetheless, a number of mortgage investors are marking their headline forecast for nonfarm payrolls down to a loss of 600,000 to 590,000 jobs from their earlier estimates for April job losses of 620,000 or more. Only a handful of analysts have elected to mark down their expectations for a national jobless rate of 8.9% to be reported tomorrow. interest rates. In my judgment, while the yield on the 30-year bond may indeed be pushed higher -- as investors chose to remain guarded in front of this afternoon's release of the government's bank stress test results and tomorrow's big April nonfarm payroll http://www.winchesterlendinggroup.com/mortgage-news/article/268/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/267/ Economic activity will turn a positive corner later in the year as long as the financial sector continues to mend. The improvement will come even as unemployment remains high. This was part of the fairly positive assessment of economic conditions Fed Chairman Bernanke provided to the Joint Economic Committee of Congress earlier this morning. Bernanke said central bankers see reason to believe the housing market may be approaching the bottom of its three-year slide, driven in part by tentative signs of a rebound in consumer spending, the primary driving force behind economic growth. He went on to say that even after the recovery begins, "the rate of growth of real economic activity is likely to remain below its longer-run potential for a while." The story behind all this mumbo-jumbo from a mortgage market perspective is that improved economic activity levels tend to lead to an increased demand for capital from consumers and businesses -- which in-turn ultimately leads to higher interest rates. I realize there are those that argue higher mortgage interest rates are unlikely if for no other reason than the Fed has been an aggressive buyer all year. Granted, at one time this year the Fed had roughly $1.25 trillion dollars in their back pocket to support steady to lower mortgage interest rates through the direct purchase of mortgage-backed securities. As of last Thursday, the Fed has spent a $404 billion of their available capital. The good news is that experts agree these purchases by the Fed have been instrumental in driving agency- eligible mortgage interest rates to historical lows. The bad news is that the Fed is running a "burn-rate" of roughly $100 billion per month in direct purchases of mortgage-backed securities. The "so what" factor here is definitely worth noting. Once the Fed passes the half-way point (roughly $612 billion in direct mortgage-backed securities purchases) their ability to hold mortgage interest rates near historical lows will begin to fade at an accelerating rate. The probability the Fed will choose to ramp up the amount of capital currently authorized is small. As we move into the second half of the year it is reasonable to expect conforming mortgage interest rates to begin a slow, but progressive march to 6.0% levels and above. http://www.winchesterlendinggroup.com/mortgage-news/article/267/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/266/ There is nothing in the way of economic data, Treasury auctions, or Federal Reserve purchases scheduled for today -- which leaves mortgage investors no clear incentive to drive rates one direction or the other. Against this featureless backdrop the trend trajectory of mortgage interest rates will probably once again be dictated by trading activity in the stock markets. Stock investors have been inundated with first-quarter earnings reports from Corporate America this week. So far, most of the reports have either matched or exceeded expectations - a condition which is causing capital that might have otherwise drifted into the relative safety of the bond and mortgage-backed securities market to remain "in-play" over in the riskier stock markets Look for mortgage interest rates to remain relatively steady at, or near current levels until either data or events or both become significant enough to serve as a catalyst to spur an increase in trading activity in the mortgage market. Tomorrow's durable goods orders and existing home sales figures for March won't likely do the "trick" - and Friday's March new home sales number is not likely to draw much more than a passing glance from mortgage investors. So it looks like we are temporarily joined-at-the-hip with the stock markets. Higher stock prices will tend to drag mortgage interest rates higher while lower stocks prices will probably support steady to perhaps fractionally lower mortgage rates. FYI: The Mortgage Bankers of America reported this morning that their seasonally adjusted mortgage application index rose 3.3% during the week ended April 17th. Refinance applications were up 7.7% while purchase money requests slipped 4.2% lower during the period. http://www.winchesterlendinggroup.com/mortgage-news/article/266/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/265/ Trading action in the mortgage market is light and choppy as investors tend to move to the sidelines on the last trading day of the quarter. That is probably a wise strategy -- since there is really nothing driving the market today. The light offering of economic data released earlier (Chicago area Purchasing Managers Index and the March Consumer Confidence figures) fell roughly in range of expectations rendering them completely toothless with respect to their influence on the direction of mortgage interest rates. The Fed announced they will not make any purchases in the Treasury market today but they expect to re-enter as a buyer tomorrow and Thursday. Some market participants were disappointed with The Fed's rather feeble buying appetite on Monday. The central bank only bought $2.5 billion in longer-dated Treasury obligations yesterday, compared with $7.5 billion on both Thursday and Friday of last week. In my judgment the Fed is clearly demonstrating their acute awareness that "all-day suckers" never really last that long - so it is important to stretch out the relative good times for as long as possible. As I mentioned in this space yesterday -- the money the Fed is spending is part of the $300 billion that it has allocated for the direct-purchase of Treasury obligations. While $300 billion sounds like a lot of money - it only amounts to roughly 15% of the $2+ trillion the government intends to borrow this fiscal year (ending in September). There is no denying the Fed's direct-purchase program is helping sustain mortgage interest rates at levels that would not otherwise be available. That's the good news. The bad news is that it is not a question IF the Fed's financial punch-bowl will run dry - it is simply a matter of WHEN. Without significant new infusions of capital pumped into the system by the Fed or a major event driven "flight-to-quality" buying spree -- I see reason to believe we will do well to get through the second week of April without sustaining a noticeable uptick in mortgage interest rates. If my assessment proves accurate, I expect the central bank will be a less-than-active buyer of mortgage-backed securities through the last week of May - choosing instead to "keep-their-powder-dry" to support the more important late-spring early summer buying season in the housing market. The few economic reports yet to be released this week will be completely overshadowed by Friday's March Nonfarm payroll figures. Nobody expects the numbers to show any sign of job creation - but should the data indicate the pace of job loss is beginning to taper off --such news will tend to put some upward pressure on mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/265/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/264/ Trading in the mortgage market is off to a sluggish start this morning as investors direct their attention to the details of the Treasury's plan to set up public-private investment funds to buy up to $1 trillion in troubled loans and securities at the heart of the financial crisis. Here's is a synopsis of how the plan will work. The Treasury will provide $75- to $100-billion to seed capital for public-private investment funds. These investment funds will combine taxpayer money with private capital. The investment funds are to be formed specifically to buy distressed loans from banks. The seed money the government will inject into these investment vehicles will come from the $700 billion financial rescue fund Congress approved last October. These investments funds will be able to use FDIC guaranteed debt to achieve a 6-1 debt-to-equity leverage ratio. That's a sweet deal. If private investors and the Treasury each contribute $1 billion to the investment fund, that entity can raise up to $12 billion in FDIC financing to purchase $14 billion in loans. Under this part of the program, banks would approach the FDIC with a pool of loans they want to sell. The FDIC would offer financing and the Treasury would partner with private investors to bid in organized auctions for the loans. Since the sale of these "toxic" assets will be made through a competitive auction progress (one investment fund bidding against the other) a market for loans and securities that otherwise could not be traded will be established. The competitive bidding process virtually assures the government will not pay to much as they help banks shed debt instruments that are severely limiting the banks available capital. The leverage offered by government financing to private investors ratchets up potential returns into double-digit ranges with minimal risk. On its face, this is not a bad deal all the way around. The program will not likely become effective until late May, but the early reaction from investors around the globe indicates most believe the strategy outlined by the Treasury Department this morning might just work to revitalize the banking system. Since the details of the Treasury rescue plan were made public earlier this morning a handsome rally in the stock markets has developed - particularly in financial shares - as the prospects for economic growth ahead has now shown flickers of hope. In other times mortgage investors might have responded to the hint of a future increase in the demand for capital (as banks take the first steps down the road to recovery) by nudging rates fractionally higher. Thank goodness the Fed is in the neighborhood with a fresh $750 billion in its back-pocket earmarked for the direct-purchase of mortgage-backed securities. Only a fool would try to trade against that kind of financial fire-power - and right now the Fed wants mortgage interest rates to remain near current levels. The release of the February Existing Home Sales report was completely overshadowed by this morning's news events surrounding the Treasury's bank rescue plan. The National Association of Realtors said that existing home sales rose 5.1% last month - a much stronger performance than was expected. After a knee-jerk reaction related to the solid headline number -- mortgage investors shrugged the whole thing off when the details of the report revealed the sharp improvement in sales last month was largely created by significant price-cutting. Even with the sharp February sales gains the inventory of existing homes for sales rose by 5.2%. There is nothing here to suggest a bottom in the housing market has yet been reached. http://www.winchesterlendinggroup.com/mortgage-news/article/264/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/263/ The trend trajectory of mortgage interest rates will likely be strongly dictated by trading action in the stock markets. Higher stock prices will tend to nudge mortgage interest rates higher while lower stock prices will tend to support steady to fractionally lower rates. I see an increasing number of indicators suggesting the rally in the stock market that began in earnest last Tuesday is vulnerable to a downward correction by the end of the week. From a timing perspective the strongest signature appears today, March 16th. If my assessment with respect to the price action in the Dow proves accurate, look for the prospects of steady to fractionally lower mortgage interest rates to benefit from the flow of capital out of equities and into the relative safe harbor of Treasury obligations and mortgage-backed securities. The members of the Federal Open Market Committee are gathering for a two-day session beginning tomorrow and ending with the release of their monetary policy statement at 2:15 p.m. ET on Wednesday. Investors will scrutinize every word and nuance of the statement as Fed Chairman Bernanke and his fellow central bankers outline their thinking on how best to help the economy with short-term rates already near zero. Those investors hoping the Fed will announce a formalized initiative to push-down mortgage interest rates by becoming a direct buyer of Treasury obligations will likely be disappointed. It is highly probable the Fed will choose to give other programs already in place - including their newly launched TALF project (Term Asset-Backed Securities Loan Facility) - a chance to work before giving serious consideration to any other initiatives. This week's economic calendar includes the release of the Producer Price Index on Tuesday and the companion Consumer Price Index on Wednesday. Both measures of inflation pressure are expected to remain benign and should therefore exert little if any influence on the direction of mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/263/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/262/ It is another very quiet start to the day in the mortgage market. Mortgage investors simply yawned at the surprise uptick in the February Retail Sales figures - especially since the weekly jobless claims report confirmed expectations for continued deterioration in the labor sector. The Commerce Department's headline February Retail Sales figure slipped 0.1% after rising by a revised 1.8% in January. Most economists had projected February Retail Sales would plunge by 0.5% or more. The real surprise contained in the Commerce Department's report was news that once auto sales were washed-out of the data - retails sales posted a 0.7% increase last month. The "so what" factor here is that all this statistical mumbo-jumbo clearly indicates the consumer is not completely wiped out. The trump to this better-than-expected news from the retail sector is data that shows the labor sector remains under withering downward pressure. In a separate report, the Labor Department said this morning that while first time claims for jobless benefits rose by a modest 9,000 - the number of people remaining on the benefits roll after drawing an initial week of aid rose to a record 5.3 million last week. Until conditions in the labor sector show notable signs of recovery -- mortgage investors are likely to continue to shrug off stronger-than-expected retail sales data - reasoning that sales are going nowhere on a sustained basis without job growth as the primary driver. At 1:00 p.m. ET this afternoon the Treasury Department will wrap-up the last part of this week's three-part auction with the sale of $11 billion of 30-year bonds. Judging by how stable the 30-year Treasury bond has been trading through the first two-trading hours of the day - it looks like fixed-income investors expect buyers' appetite for this offering will be decent. If that assessment proves accurate, the impact of today's Treasury auction on the trend trajectory of mortgage interest rates should be essentially non-existent. http://www.winchesterlendinggroup.com/mortgage-news/article/262/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/261/ Remember when . a massive 651,000 loss in headline nonfarm payrolls and a jump in the nation jobless rate to 8.1% (its highest mark since December 1983) would have spawned a towering rally in the mortgage market highlighted by notably lower mortgage interest rates and higher rate sheet prices? News of the dismal dimensions reported this morning use to send capital screaming out of the equity markets and other macro-economic sensitive investment vehicles into the relative safe haven of Treasury obligations and mortgage-backed securities. But that's all so "old school" now. Today the fact that "only" 651,000 jobs were "actually" lost in a single month draws nothing more than a disinterested passing glance and a yawn from mortgage investors. Why? Because the "whisper" numbers had mortgage investors bracing for a headline job loss of 800,000 or more. Since the "worst-case" scenario did not develop -- many observers think a "relief rally" in the mortgage market might be possible before the day is out. While I would agree such an outcome is possible - I don't think it is very probable. In my judgment it is far more likely mortgage investors will spend the balance of the day doing some profit-taking and squaring up positions in front of next week's $63 billion Treasury auction. The unrelenting pressure created in the credit markets by the government's gargantuan appetite for capital will continue to hold ultimate trump over all other conditions and events -- making it inescapably difficult for mortgage interest rates to move significantly lower from current levels. That is not to say there won't be days or perhaps even a week or two of improving conditions in the mortgage market - but eventually the law of supply and demand will reign supreme - you know the one I'm talking about - "when supply exceeds demand prices fall." In our world when prices fall - rate rise. My sincere hope is that an increasing number of your clients will come to see the greatest mortgage financing opportunity in a generation is now available. There is an old Chinese proverb that says, "Every banquet must come to an end." The same can be said for cycles favoring lower mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/261/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/260/ Another day - same old story. The direction of mortgage interest rates is being dictated by trading action in the stock markets. Since Friday, February 20th I have been writing in this space about a stock market plunge and the resulting support for the prospects of steady to fractionally lower mortgage interest rates it would create. In my judgment we are currently in the "sweet-spot" in terms of the amount of support mortgage interest rates can expect as a result of the swoon in global stock markets. Before the month is over I believe the worst of the sell-off in the stock markets will have passed As you undoubtedly know, markets are made up of both buyers and sellers. No matter how strong the desire to sell or buy may be -- the transaction can not be completed without the opposing party directly participating in the transaction. The "so what" factor here is extremely important . consider this . once all the sellers have been indentified and satisfied . that only leaves one component in the market place . active and aggressive buyers . who suddenly realize they have the opportunity to acquire stocks at the low point in the market cycle. This market dynamic has never failed before . and it will not fail this time around. (My personal opinion is the stock market as indexed by the Dow will put in a low on or about March 23rd.) Against this backdrop the Treasury department will be looking to issue a river of $2.5 trillion of debt. Without the "flight-to-quality" support of capital fleeing the volatility of the stock markets for the relative save harbor of the Treasury market - treasury yields will rise and drag mortgage interest rates higher as they go. My sincere hope is that an increasing number of your clients will come to see the greatest mortgage financing opportunity in a generation is now available. There is an old Chinese proverb that says, "Ever banquet must come to an end." The same can be said for cycles favoring lower mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/260/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/259/ It is definitely worth noting that so far this year mortgage interest rates have been completely unable to sustain a rally to lower levels without significant "flight-to-quality" support of capital fleeing the stock markets in search of a safe harbor. The trend trajectory of the stock markets in the coming days and weeks will strongly determine the direction of mortgage interest rates. Should the stock markets continue to sell off hard -- look for such an event to be supportive of steady to fractionally lower mortgage rates. On the other hand, should the stock markets mount a sustained move to higher share prices such an event will almost surely push mortgage interest rates higher. As I have expressed in this column for more than a week my personal opinion is that the DJIA is poised to initiate one more down-leg that into the mid- to low-6,000's range. I am looking for this price target to be achieved before the end of the month. If my assessment proves accurate, the bottom in the DJIA will likely be completely confirmed by June and before Labor Day stock prices will be engaged in a slow but steady climb to higher levels. The entire docket of the week's upcoming economic reports will likely take a far backseat to the directional dynamics between stocks and interest rates. Economists and investors have projected lousy data well into the third-quarter of the year. Even Friday's nonfarm payroll report will likely draw nothing more than a passing glance from mortgage investors unless the employment picture proves to be better-than-expected. While such an outcome is possible - it is certainly not very probable. For what it is worth manufacturing contracted in February for the 13th consecutive month. The Institute of Supply Management factory index rose to a reading of 35.8 last month from the 35.6 in January. The fractional improvement was welcome - but as long as the index remains below 50.0 analysts will consider the manufacturing sector to be in a period of contraction. The Commerce Department also chimed in this morning with a report that showed spending rebounded 0.6% in January, snapping six months of declines while incomes rose. The surge in spending was attributed to massive discounts offered by retailers looking to reduce high inventory levels. The 0.4% rise in January incomes was almost all a function of cost-of-living adjustments for government employees. http://www.winchesterlendinggroup.com/mortgage-news/article/259/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/258/ Trading activity in the mortgage market during this last business day of February is relatively light. Investors are taking a breather after they were called upon to absorb a record $94 billion of government debt this week. Uncle Sam won't return to the credit markets for another major feeding frenzy until the second week of March. With market participants growing accustomed to grim economic headlines price action in the mortgage market over the coming week or two will likely be most influenced by trading activity in the stock markets and reaction to headline news - particularly to anything related to the issue of Congressional approval of the proposed law that would allow bankruptcy judges to reduce the financial strain for some struggling borrowers. Let's look at each of these two mortgage market influences individually. Should the stock market collapse into one last final leg down (a fairly high probability event in my opinion - probably occurring before the end of March) the flight of capital from stocks to the relative safe haven of Treasury obligations will not only provide a buttress for the massive amount of government debt on the auction block - it should also be supportive of steady to perhaps fractionally lower mortgage interest rates. Democratic leaders of the House have postponed until next week a vote on a controversial measure to let bankruptcy judges unilaterally reduce mortgage debt for certain borrowers. It appears that influential members of Congress are beginning to see the light - recognizing that giving bankruptcy judges sweeping power to modify home loans could (and in my judgment would) cause mortgage investors to price-in a whole new dimension of risk to their mortgage-backed security purchases. If the risk structure on these investments rises - their prices will fall - and in our world falling prices equal higher mortgage interest rates. This issue is expected to come to vote on the House floor on Tuesday - if it passes - look for mortgage investors to register their strong disapproval by pushing mortgage interest rates higher. Speaking of next week, the economic calendar offers everything from the Fed's favorite reading of inflation at the consumer level (contained in the Personal Income and Spending report on Monday) to an analysis of the depth of the woes in the labor sector on Friday with the release of the February nonfarm payroll report. Investors have already priced-in expectations for gruesome economic data -- so the only risk is that the news is better-than-expected. While such an event is possible - it is certainly not very probable http://www.winchesterlendinggroup.com/mortgage-news/article/258/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/257/ The mortgage market is sagging under the combined weight of this afternoon's Treasury auction of $32 billion of 5-year notes, Fed Chairman Bernanke's continued aversion to suggesting the Fed is any closer to expanding its securities-purchase operations into government debt and investors disappointment that President Obama's address to Congress did not contain more in terms of concrete details regarding his administration's dual objective of stimulating the economy and slashing the federal deficit. Mortgage investors completely shrugged off this morning's Existing Home Sales report that showed a much larger-than-expected 5.3% decline in the pace of sales last month. Under more "normal" market conditions a decline in the pace of existing home sales would tend to be supportive of steady to slightly lower mortgage interest rates. The current period is obviously anything but normal - and this bit of macro-economic data drew nothing more than a passing glance from most traders. Continuing with the theme of unexpected weakness in the housing sector the Mortgage Bankers of American reported this morning that their seasonally adjusted index of mortgage applications, a value which includes both purchase and refinance requests, dropped by 15.1% during the week ended February 21st after posting an outsized 45.7% gain the previous week. Purchase applications fell 2.6% during the period while refinance applications sank 19.1%. As I first mentioned in this space on Friday - I think it will take an event -- like a major swoon in the stock markets -- to create enough "flight-to-quality" buying interest to support a move to notably lower conforming mortgage interest rates. Should this event occur (most likely within the next 30-days) look for a large part of the dramatic amount of capital that will flee stocks to find its way into the conforming mortgage-backed securities market -- temporarily creating a environment supportive of steady to fractionally lower rates. There is no need to front-run this projection - if this event actually occurs -- the positive impact on your investors' rate sheets will be abundantly clear. http://www.winchesterlendinggroup.com/mortgage-news/article/257/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/256/ Uncle Sam will sell a record $94 billion of notes this week -- $40 billion of 2-year notes today, a record $32 billion of 5-year notes on Wednesday, and a record $22 billion of 7-year notes on Thursday. Mortgage investors have grown increasingly concerned about the government's rising tide of red ink, which could ultimately lead to sharply rising mortgage interest rates. The counterbalance to these concerns is that investors the world over have few safe harbors in which to park their cash - a condition which will likely create solid demand for this week's trio of Treasury offerings. If my assessment proves accurate, look for mortgage interest rates to hover very near current levels for the week. As I write Fed Chairman Bernanke has completed the prepared text portion of his semi-annual monetary policy testimony and is now heavily engaged in a question and answer session with members of the Senate Banking Committee. In his testimony he told the committee, "If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability - and only in that case, in my view --- there is a reasonable prospect that the current recession will end in 2009 and 2010 will be a year of recovery." Bernanke reiterated his pledge that the Fed will keep short-term interest rates exceptionally low for an extended period of time and renewed his commitment to use "all available tools" to stimulate and revive the financial markets. Credit market investors were slightly disappointed that Mr. Bernanke made no mention of the likelihood the Fed was seriously considering becoming a direct buyer of Treasury obligations. Market participants were not totally surprised by Bernanke's aversion to this particular discussion -- since he has tip-toed away from "the Fed as a direct-buyer of Treasury debt" concept in every public address since initially raising the possibility in December. As I first mentioned in this space on Friday - I think it will take an event -- like a major swoon in the stock markets -- to create enough "flight-to-quality" buying interest to support a move to notably lower conforming mortgage interest rates. A bounce from current DJIA lows into the 8000 price range followed by a plunge back through the 7100 level will, in my judgment, set up one final down-leg for the stock market that will likely carry the Dow into the mid- to low-6000's range. Should this event occur (most likely within the next 30-days) look for a large part of the dramatic amount of capital that will flee stocks to find its way into the conforming mortgage-backed securities market -- temporarily creating a environment supportive of steady to fractionally lower rates. There is no need to front-run this projection - if this event actually occurs -- the positive impact on your investors' rate sheets will be abundantly clear. http://www.winchesterlendinggroup.com/mortgage-news/article/256/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/255/ The credit markets continue to sag as the weight of additional forthcoming government debt supply continues to mount. Yesterday the White House pledged up to $275 billion to help stem another wave of home foreclosures. This new round of debt comes on top of the $787 billion economic stimulus plan that was signed into law on Tuesday. Debt that generates a meaningful return is one thing - while borrowing efforts that send capital to the same place that a sock goes in the dryer is a completely different financial concept. Global investors are keenly aware of data from the Office of the Comptroller of the Currency shows that more than 53% of loans that were modified in the first-quarter of 2008 went into default again within six months. Nearly 36% of those modified loans went bad within just three months. And on top of all of that -- this loan performance was registered when the economy was in better shape than it is today - with employment at a considerably higher level. As Reuter's News columnist James Saft points out it is certainly possible that those earlier loan modifications were granted to the wrong people under the wrong circumstances and the new plan will address and resolve all of that - but judging by current price action in this morning's debt markets - most investors remain very skeptical of this new housing initiative from the government. Let's keep our fingers crossed that traders are simply proving to be too pessimistic with respect to the Housing Recovery & Reinvestment Act. It would add insult to injury if it turns out governmental efforts to speed recovery in the housing sector for up to 9 million homeowners -- wound up delaying the recovery by months (if not years) while simultaneously contributing to higher mortgage interest rates for everybody. Mortgage investors were unpleasantly surprised by a report on the level of inflation at the producer level delivered by the Labor Department this morning. The headline January producer price index rose 0.8% as a slowdown in auto production pushed prices higher. Makers of pharmaceuticals and communication equipment pushed through price increases during the first month of the year even as sales slumped. Excluding the more volatile food and energy components, the so-called core rate of producer inflation rose 0.4%, also more than anticipated. These producer price increases may not stick since the this morning's initial jobless claims report for the week ended February 12th confirmed the employment sector is performing at its worst levels since 1964. http://www.winchesterlendinggroup.com/mortgage-news/article/255/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/254/ President Obama will officially sign into law one of the largest pieces of legislation in American history at approximately 1:00 p.m. Mountain Standard Time. (The signing ceremony will be conducted in Denver, Colorado - the place Mr. Obama officially accepted his party's presidential nomination.) The economic stimulus package, a $787 billion assortment of tax breaks and government spending, is designed to re-ignite the engines of economic growth in the United States. While the impact may not be immediate, this event will likely mark the beginning of the end of the dramatic move to lower mortgage interest rates that began in August of last year. I am not suggesting that mortgage interest rates will soon begin touching double digit levels - but I do want you to be aware that the prospects of a 4.50% 30-year fixed-rate mortgage is rapidly fading from sight. Consider the following two scenarios: 1) If the Obama administration's stimulus package works as advertised economic growth will begin to accelerate sooner rather than later, driving up the demand for capital -- which in-turn will push-up interest rates of every description (including mortgage interest rates). 2) On the other hand, should the package fall woefully short of providing the necessary financial stimulus to grease the gears of the economy the government will be forced to borrow more money - or print more money - or create some kind of blend of these two revenue generating activities. In any case - returning to the credit markets to borrow massive amounts of additional capital (beyond the gargantuan sums already outstanding) and/or simply printing up enormous piles of new dollars will do nothing but put more upward pressure on mortgage interest rates. As in the case with prospective homeowners - there is a limit to the amount of outstanding debt they can have in place beyond which lenders will either demand significantly higher interest rates because of the increased risk of default - or if the lender deems the risk of default to be too large -- the loan request will simply be rejected. While Uncle Sam currently enjoys a reputation as the most creditworthy governmental borrower in the world - there is a point where his sovereign credit score will begin to degenerate significantly and with it his ability to easily access relatively cheap amounts of capital. Should the government chose to simply print cash instead -- each dollar that runs off of the government printing presses will directly reduce the value of each dollar you have in your billfold or purse. As this erosion of the value of the dollar continues suppliers of goods and servicers will find it necessary to increase their prices to offset the declining purchasing power of each dollar in revenue they generate. As you probably already know, Superman lost all his strength when exposed to kryptonite, and so it is with mortgage investors when they are exposed to rising levels of inflation. As inflation pressures rise -- so do mortgage interest rates. As I mentioned earlier in this commentary I am not suggesting mortgage interest rates will soon begin touching double digit levels - but I do want you to be aware the prospects for a conforming 4.50% 30-year fixed-rate mortgage being a common sight on investor rate sheets is rapidly fading from the realm of realistic expectations. http://www.winchesterlendinggroup.com/mortgage-news/article/254/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/252/ As you are probably aware, Congress is expected to pass, as early as tomorrow, a $789 billion stimulus package intended to revive the struggling economy. The stimulus package is split 36% for tax cuts and 64% in spending and other provisions. "Combine this new spending and borrowing it will require with the trillion of dollars still needed for the banking system, and we are about to test the outer limits of our national balance sheet," the Wall Street Journal said in an editorial this morning. In apparent concert with the assessment of the Wall Street Journal editorial staff, credit market participants are simply treading water as they await the results of the Treasury's auction of $14 billion of 30-year bonds this afternoon. This event will wrap-up a week of record-setting borrowing by Uncle Sam. Many market participants are hoping that yesterday's relatively firm demand for a $21 billion offering of 10-year notes from the government suggests today's 30-year bond sale will receive equally solid buying interest from the global investment community. Unfortunately there is little evidence to indicate a sharp correlation between 10-year note auction results and that of the 30-year bond. In my judgment the surprising 1.0% improvement in the January retail sales figure -- together with the likelihood that Congress will approve a major spending initiative before the week is over - provide reason enough to believe global investors will be hesitant to "bid-up" the price at the government's 30-year bond sale. If my assessment proves accurate, it will be difficult, if not impossible for mortgage interest rates to move notably lower today. http://www.winchesterlendinggroup.com/mortgage-news/article/252/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/253/ Mortgage investors are milling around nervously this morning as they await the results of the Treasury Department's record-breaking auction of $21 billion worth of 10-year notes. This auction is viewed by many as a major litmus test of global investor's appetite for longer-dated government debt. With Uncle Sam's debt burdened (currently estimated at $1.5 to $2.5 trillion in fiscal 2009) expected to escalate as Congress hammers out an economic stimulus package and the Treasury Department and the Federal Reserve tally the cost to rescue the crumbling banking system, solid buying appetite from investors, especially overseas investors is critical if mortgage interest rates are going to remain steady to fractionally lower. Mortgage investors fret that foreign investors will pare their purchases of longer-dated Treasuries as concerns grow that the Untied States will find it difficult, if not impossible to repay the massive debt burden it has piled up to finance the programs intended to end its year-old recession. If Uncle Sam is forced to raise the yield on his debt obligations to attract the required capital because of these creditor concerns -- you can "take-it-to-the-bank" that mortgage interest rates will likely rise as well. I have heard some analysts suggest were the yield (interest rate) on 10-year notes to rise - Fed Chairman Bernanke and his band of merry central bankers would ride to the rescue as a direct buyer of Treasury obligations. That idea sounds great on its face - but the money the Fed would require for this purpose would be created by turning on the printing presses. While this strategy would certainly provide the near-term funds the Fed would need to become a major player in the Treasury markets -- it would immediately reduce the value on every dollar you have in your pocket - directly creating significant inflationary pressures for us all down the road. I think it is telling that Fed Chairman Bernanke said little about buying Treasuries in his testimony to Congress yesterday. My bet is he hopes he and his fellow central bankers will be able to avoid being called upon to employ this "last-ditch" option to hold rates down. Keep your fingers crossed the Fed finds it possible to keep their hands in their pockets at upcoming Treasury auctions. http://www.winchesterlendinggroup.com/mortgage-news/article/253/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/251/ Mortgage investors have been keenly attuned this morning to Treasury Secretary Timothy Geithner's unveiling of a revamped rescue plan for the nation's financial system. The renamed "Financial Stability Plan" will, among other things, devote $50 billion to try to stem home foreclosures. In addition, the Treasury Secretary said a public-private investment fund will be established, seeded by government money, to provide a mechanism that will allow banks to clear "toxic" loans from their books so that they may resume lending to small business and consumers. The legislation includes significant new regulation and disclosure requirements banks will comply with to ensure that tax-payer money is being used to its highest effect. It all sounds good - but mortgage investors will likely remain skeptical until these strategies have been implemented to until there are actual measurable results to consider. Until the nation's banking system returns to health - the success of the $800+ billion financial stimulus package currently working its way through Congress will have little chance of success. Without the ability to borrow to invest in new business projects, or continuing education, the purchase of homes, cars and countless other goods and services -- the American consumer will not be able make their vitally important contributions to the revitalization of our economy. Mortgage investors nervously await the results of this week's record breaking government borrowing spree. The Treasury is scheduled to borrow $32 billion in the form of three-year notes today (event concludes at 1:00 p.m. ET), followed by $21 billion in 10-year notes tomorrow and concluding with $14 billion of 30-year bonds on Thursday. The Treasury has said it plans to borrow $1.5- to $2.5-trillion in this fiscal year. It is important to note that this estimate does not include the cost of the proposed federal stimulus package on its way from Congress, currently valued in the neighborhood of $800 billion, and the ultimate cost of financial rescue package for the banking system outlined earlier today. As you might imagine, the United State's perceived creditworthiness is beginning to be tarnished by the global investment community's worries about the unprecedented total costs stemming from our bailout programs. The trend trajectory of mortgage interest rates for the next week or so will largely depend on overseas demand at this week's three Treasury auctions. If demand is strong -- mortgage interest rates will likely remain steady to fractionally lower -- while poor demand will almost certainly lead to fractionally higher mortgage interest rates before the week is over. I'll provide an update on the result of each of this week's Treasury auctions as soon as possible following their conclusion. http://www.winchesterlendinggroup.com/mortgage-news/article/251/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/250/ It will be another day of finger-pointing and political squabbling as the Senate tries again to wrap up efforts to craft a version of a financial rescue package for the nation. As I write the price tag currently stands at roughly $827 billion. Some Senators believe this figure represents a value that it is far too high - while others believe the current sum is woefully too small. Let's keep our fingers crossed that calmer, cooler heads prevail to achieve a value that is just right - because once the capital is committed - we sure don't want to wind up going back to the global investment community and ask for more. International financiers are already beginning to questioning the nation's sovereign creditworthiness - and any sign of further fiscal incompetence on our part will almost certainly lead to notably higher required yields on government debt obligations. If that scenario were to develop -- you can bet that mortgage interest rates will rise as well. . Uncle Sam will be splashing around in the credit markets this week looking to borrow $32 billion in the form of 3-year notes tomorrow followed by $21 billion in the form of 10-year notes on Wednesday and concluding with $14 billion in the form of 30-year bonds on Thursday. http://www.winchesterlendinggroup.com/mortgage-news/article/250/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/249/ Employers slashed 598,000 jobs in January - a number that represents the deepest cut in payrolls in 34 years. The jobless rate shot up to 7.6%. Both components of this morning's jobs report represented a more dramatic erosion in the labor sector than most analysts had been anticipating. In the convoluted world of the mortgage market weaker than expected employment figures generally tend to be supportive of steady to fractionally lower rates. This time around the dynamic is considerably different as the fundamentals of next week's massive Treasury auctions trump all else. As I mentioned yesterday -- Uncle Sam will look to borrow $32 billion in the form of 3-year notes next Tuesday followed by $21 billion in the form of 10-year notes on Wednesday and concluding with $14 billion in the form of 30-year bonds on Thursday. Just half of the total amount ($36.3 billion) is needed to pay off existing notes and bonds that are set to mature; the remainder ($30.7) billion is new capital needed to cover the cost of bank rescues, fiscal stimulus and the deficit in the regular federal budget. Here's the "so what" factor attached to this otherwise boring tidbit of news. The portion of the capital needed to repay maturing debt ($36.3 billion) should be pretty easy to cover since investors will simply be looking for a place to reinvest the money Uncle Sam has just repaid them. It may be necessary to "sweeten-the-pot" just a bit to get these investors to recommit their payment proceeds -- but overall it shouldn't be too hard to raise this portion of the required funding. The second-half of the money Uncle Sam is looking to raise next week ($30.7 billion) may be a little harder to come by since it involves attracting new capital. The risk/return characteristic of Treasury debt is not particularly attractive these days. Yields are near 50-year lows and risks to investors from both the rate cycle and forward-looking inflation prospects are becoming a bit concentrated to the upside. Some commentators have suggested that the normal "riskless returns" of Treasury obligations has become inverted -- and they now provide "returnless risks". If yields at next week's Treasury auctions rise - it is almost a virtual certainty mortgage interest rates will rise as well. So far, the Fed was been able to limit a sharp drop in Treasury prices (higher yields) by promising or threatening to enter the credit market to buy these longer-dated government debt obligations -- should prices were to erode too far. Eventually the Fed may find investors demanding that the central bank either "put up - or shut up" on this issue. For the time being the Fed is finding simply "talking-the-talk" seems to be getting the job done in terms of holding yields down - and that's good enough to help hold mortgage interest rates relatively steady. Should the Fed move off-of-the-fence and become a direct buyer of a large amount of Treasury debt -- it would be reasonable to expect mortgage interest rates to move fractionally lower. In my judgment such an outcome will not likely occur unless the yield on the 10-year note moves sharply above 3.1%. I suggest you don't plan on holding your breath if you choose to wait for this particular scenario to develop. http://www.winchesterlendinggroup.com/mortgage-news/article/249/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/248/ The mortgage market is trading quietly again this morning. News that weekly jobless claims surged to a 26-year high together with a separate report showing a bigger-than-expected gain in fourth-quarter productivity have combined to soothe investors' frazzled nerves and support steady mortgage interest rates in today's early going. The Labor Department is set to release the January nonfarm payroll report tomorrow morning at 8:30 a.m. ET. Investors have already priced in expectations for a really nasty erosion in the nation's labor force matched by a sharp jump in the national jobless rate. It wasn't necessary for analysts to sit cross-legged in a cave flogging themselves with spruce branches to come up with this forecast - the high level of preceding weekly jobless claims data and the sharp rise in the weekly continuing claims figures for unemployment insurance have provide all the necessary clues. Tomorrow's traditionally important nonfarm payroll data will likely be a non-event this time around in terms of its impact on the trend trajectory of mortgage interest rates. Next week's looming mountain of debt that will be cascading into the credit markets next week continues to hold the majority of traders' attention. Uncle Sam will look to borrow $32 billion in the form of 3-year notes next Tuesday followed by $21 billion in the form of 10-year notes on Wednesday and concluding with $14 billion in the form of 30-year bonds on Thursday. Just half of the total amount ($36.3 billion) is needed to pay off existing notes and bonds that are set to mature; the remainder ($30.7) billion is new capital needed to cover the cost of bank rescues, fiscal stimulus and the deficit in the regular federal budget. Here's the "so what" factor attached to this otherwise boring tidbit of news. The portion of the capital needed to repay maturing debt ($36.3 billion) should be pretty easy to cover since investors will simply be looking for a place to reinvest the money Uncle Sam has just repaid them. It may be necessary to "sweeten-the-pot" just a bit to get these investors to recommit their payment proceeds -- but overall it shouldn't be too hard to raise this portion of the required funding. The second-half of the money Uncle Sam is looking to raise next week ($30.7 billion) may be a little harder to come by since it involves attracting new capital. The risk/return characteristic of Treasury debt is not particularly attractive these days. Yields are near 50-year lows and risks to investors from both the rate cycle and forward-looking inflation prospects are becoming a bit concentrated to the upside. Some commentators have suggested that the normal "riskless returns" of Treasury obligations has become inverted -- and they now provide "returnless risks". If yields at next week's Treasury auctions rise - it is almost a virtual certainty mortgage interest rates will rise as well. So far, the Fed has been able to limit a sharp drop in Treasury prices (higher yields) by promising or threatening to enter the credit market to buy these longer-dated government debt obligations -- should prices were to erode too far. Eventually the Fed may find investors demanding that the central bank either "put up - or shut up" on this issue. For the time being the Fed is finding simply "talking-the-talk" seems to be getting the job done in terms of holding yields down - and that's good enough to help hold mortgage interest rates relatively steady. Should the Fed move off-of-the-fence and become a direct buyer of a large amount of Treasury debt it would be reasonable to expect mortgage interest rates to move fractionally lower. While such an outcome would be nice -- I suggest you don't plan on holding your breath as you wait for this particular scenario to develop. http://www.winchesterlendinggroup.com/mortgage-news/article/248/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/247/ The Treasury Department will announce the size of their quarterly borrowing needs tomorrow - and investors are nervous. Expectations are high the government will describe plans to sell $32 billion in three-year notes, $22 billion in 10-year notes and $12 billion in 30-year bonds. If the total announced borrowing need exceeds $68 billion - mortgage investors will likely be very hesitant to push mortgage interest rates lower as concerns grow regarding the burgeoning federal deficit. Also worth noting is the likelihood Treasury Secretary Geither will announce plans for recapitalizing banks and other financial institutions and reforming the existing Troubled Asset Relief Program sometime this week. The devil will be in the details here. Should it appear that the government intends to do nothing more than swap "trash for cash" (quote credit to Noble Laureate economist Joseph Stiglitz) - look for mortgage investors to show their severe disapproval by pushing mortgage interest rates higher. At this juncture I think it is important to take just a moment to add some much needed detail to media reports swirling around suggesting the government is poised to push mortgage interest rates down into the 4.0% to 4.5% range. 1. The source all of the wire services are quoting as the authority from which this information was gathered is anonymous because by their own admission they have not been authorized to make such a statement. Once again it appears national media sources are more than willing to sacrifice creditability in favor of sensationalism. 2. The plan, if there is such a plan, is purportedly being offered by a few Republican members of Congress - the minority party in both the House and the Senate. The likelihood of something as politically meaningful as a major government sponsored mortgage incentive successfully making it through a clearly partisan Congress is extremely small. I'd rather bet that a meteorite will land in my coffee cup before you finish reading this sentence - than to bet Congress will be able to dictate interest rate levels in a free and open market place. 3. The bottlenecks currently plaguing the mortgage market with interest rates fully one percentage point higher than the unnamed and unauthorized source is suggesting they will be when Congress rides to the rescue - will not suddenly be resolved. It is not that originators can't get the applications taken - but rather the limits created by the massive consolidations in the wholesale mortgage banking community over the past two years. It is an absolute physical impossibility to but ten-pounds of potatoes into a five-pound bag. There is a point where one additional loan coming into a strained system no longer contributes a positive financial margin - but rather begins to erode that margin. Under these conditions mortgage wholesalers are compelled to move quickly to cut production flow the most effective way they know how -- by pushing prices lower and rates higher. In my judgment it is tragic malfeasance for unnamed and unauthorized sources to build expectations among the public for outcomes that are still so distant -- as to border on being unrealistic. The immediate result of these "rumors" is to perhaps cause untold numbers of borrowers to miss out on the mortgage finance opportunity of a lifetime -- while simultaneously delaying any meaningful recovery in the housing sector by months or longer. http://www.winchesterlendinggroup.com/mortgage-news/article/247/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/246/ Mortgage investors shrugged off economic reports showing consumer spending fell for the sixth straight month in December while incomes shrank. Data that showed factory activity in January slowed less sharply than anticipated drew nothing more than a disinterested yawn from mortgage market participants. The Commerce Department said spending decreased by 1.0% after falling a revised 0.8% in November. Incomes fell by 0.2% after November's 0.4% decline. For all of 2008, spending rose 3.6%, the smallest increase for this measure of economic activity since 1961. On a year-over-year basis incomes increased 3.7% -- the smallest increase since 2003. The Fed's favorite measure of inflation at the consumer level, the personal consumption expenditure index, was unchanged in December and posted a very modest 1.7% gain for all of 2008. This week it looks like it will be another one of those strange periods of time where events, rather than economic data, will most strongly influence the trend trajectory of mortgage interest rates. The Treasury Department will announce the size of their quarterly borrowing needs on Wednesday. Expectations are high the government will describe plans to sell $32 billion in three-year notes, $22 billion in 10-year notes and $12 billion in 30-year bonds. If the total announced borrowing need exceeds $68 billion - mortgage investors will likely be very hesitant to push mortgage interest rates lower as concerns grow regarding the burgeoning federal deficit. Also worth noting is the likelihood Treasury Secretary Geither will announce plans for recapitalizing banks and other financial institutions and reforming the existing Troubled Asset Relief Program sometime this week. The devil will be in the details here. Should it appear that the government intends to do nothing more than swap "trash for cash" (quote credit to Noble Laureate economist Joseph Stiglitz) - look for mortgage investors to show their severe disapproval by pushing mortgage interest rates higher. http://www.winchesterlendinggroup.com/mortgage-news/article/246/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/245/ Yesterday's relatively weak demand for a record $30 billion offering of five-year Treasury notes has heightened anxiety Uncle Sam will struggle to raise the $2 trillion he plans to spend this year on a mixed-bag of economic stimulus programs. These worries propelled government benchmark yields to their highest levels in nearly two months. As long as major questions exist with respect to the willingness of foreign investors to finance our burgeoning federal deficit -- the prospects for notably lower mortgage interest rates will be very limited. The Commerce Department reported this morning the economy shrank at its fastest pace in more than 25 years during the final three months of 2008. Gross Domestic Product, a statistical measure of total goods and service output within U.S. borders, plummeted at a 3.8% pace during last year's fourth-quarter. It was the sharpest quarterly decline since the first-quarter of 1982 when GDP contracted by 6.4%. In the convoluted world of the credit markets, weak economic news such as this morning's Q4 Gross Domestic Product numbers would generally spark a rally in the mortgage market to higher prices and fractionally lower rates. Many find it surprising, given the magnitude of the economic swoon, that mortgage interest rates have failed to improve much, if at all. I think there are two core reasons the mortgage market has not reacted as many had anticipated. 1.) Investors have already priced into the mortgage market their forward looking expectations for horrendous economic news. Under these conditions the actual data looses much of its relevance and by extension - its "power" to create a reaction among market participants. 2.) The fear that yields on longer-dated Treasury obligations will rise sharply as the government is forced to aggressively "sweeten-the-pot" to entice global investors to cover the cost of the largest federal deficit in American history will have a chilling effect on any effort by mortgage interest rates to move lower. When our own central bankers are hesitant to become a direct buyer of longer-dated Treasury debt -- it is highly unlikely foreign investors will be overly enthused about buying heavily in that asset class either. Rising yields on government debt tends to lift all the boats in the harbor - including mortgage interest rates. Looking ahead to next week -- Monday's release of the Fed's favorite measure of inflation at the consumer level, the personal consumption expenditure index (a component of the broader December personal income and spending report) and the January Institute of Supply Management's measure of manufacturing activity will likely draw little attention from mortgage investors. For the majority of the week the trend trajectory of mortgage interest rate will likely be most influenced by news reports surrounding the progress of a $900 billion package of tax cuts and spending programs that will be making its way through the Senate. Hopefully, some of the pork will be trimmed from the legislation -- like a program that would authorize the expenditure of $400 million to prevent sexually transmitted diseases. I don't think anybody doubts the importance of preventing sexually transmitted diseases - but most market participants believe job creation and economic recovery probably needs to take immediate precedence - especially if a massive amount of debt is going to be incurred to make it happen. The credit markets will also likely get bounced around a bit as Treasury Secretary Geither announces a much anticipated rescue plan for the banks next week. The plan may center on a "bad bank" that would purchase distressed debt instruments from banks and dump them into a taxpayer-backed portfolio that might someday turn a profit. This approach would theoretically clean up bank balance sheets while giving the credit markets a fresh start to help propel the economy of its current recessionary mire. If market participants like the proposal - they will likely be willing to nudge mortgage interest rates lower. On the other hand, should the proposal is deemed to be unworkable; investors will likely express their disappointment by pushing mortgage rates fractionally higher. In my judgment this event will be the "wild card" of the week. On Friday at 8:30 a.m. ET the Labor Department will release the January nonfarm payroll figures. Market participants have already priced in expectations for another 525,000 swoon in the headline payroll figure -- as well as a jobless rate of 7.5%. The actual numbers will probably fall within shouting distance of the consensus estimate - rendering this report essentially toothless with respect to its impact on the trend trajectory of mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/245/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/244/ Highest level of unemployment since 1967 Today's round of macro-economic news offered nothing investors were not expecting to see. Jobless rolls continued to climb during the week ended January 24th -- with first-time jobless claims edging higher by 3,000. The number of people remaining on the benefits roll after drawing an initial week of aid rose 159,000 to a higher-than-expected 4.776 million - the highest level for this measure on unemployment since records on this series began in 1967. Adding to the dismal economic news this morning the Commerce Department reported new orders for long-lasting manufactured goods dropped 2.6% in December. For 2008, overall orders tumbled 5.7%, the second biggest decline for this measure of factory activity since 2001. Considering the earlier gloomy data -- it came as no surprise to anyone when the Commerce Department reported December new home sales tumbled 14.7% -- its largest monthly decline since 1994. The December sales pace puts the supply of homes available for sale at 12.9 months worth - a record high. Against this dreary economic backdrop Uncle Sam is splashing around in the credit market today looking to borrow $30 billion in the form of 5-year notes. Let's hope that this offering draws as solid a bid from investors as Tuesday's auction of $40 billion of 2-year notes. A well bid 5-year note auction will tend to be supportive of steady mortgage interest rates. Should Uncle Sam be forced to "sweeten-the-pot" on today's 5-year notes by offering a higher yield to attract the required capital -- look for mortgage interest rates to edge yet higher as well. This auction will conclude at 1:00 p.m. ET - with reaction from mortgage investors following almost immediately thereafter. Heads up. http://www.winchesterlendinggroup.com/mortgage-news/article/244/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/243/ The trend trajectory of mortgage interest rates for at least the next week of so hinges on what, if anything, the Federal Open Market Committee has to say about its commitment to ease interest rates through other means than short-term interest rate cuts. As you probably already know, the Fed's benchmark fed fund rate is near zero - so the probability of further mortgage market friendly short-term rate cuts is non-existent. Mortgage investors expected the Fed to affirm in their post-meeting statement this afternoon that short-term interest rates will remain unusually low for an extended period of time. I think it would be reasonable to assume the anticipated outcome is "baked-in-the-cake." The big question in market participants' minds is whether the Fed will reiterate and formalize its commitment to reduce interest rates by becoming a direct buyer of longer-dated government debt. Yesterday's big rally in the bond market and the follow-up improvement in this morning's mortgage market are both reflections of investors hopes that this afternoon the policymakers will offer friendly remarks about the central becoming entering the credit market as a buyer of long-dated government securities. Last month the Fed explicitly promised it would explore other options of using its balance sheet to support credit markets and growth through direct purchases of long-date Treasury obligations. Fed Chairman Bernanke and other members of the Federal Open Market Committee have spoken of this possibility several times recently. Not all Fed policymakers are onboard with the aggressive manner in which the Federal Reserve Bank's balance sheet has grown through credit extensions to banks, the commercial paper markets and the direct purchase of mortgage-backed securities. Be very cautious here. I appears to me that the Treasury market has already priced in expectations the Fed will either outright announce their intention to become a major buyer of longer-dated government debt or they will at least indicate the concept is still under consideration. Either way, most of the market driving power behind the event will have been spent - a least for the next couple of days. On the other hand, if the Fed doesn't say anything about considering the purchase of long-term treasury obligations - look for a rather strong sell-off in the Treasury market to develop almost immediately. Falling prices in the treasury market will almost certainly generate upward pressure on mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/243/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/242/ The Federal Open Market Committee began the first-day of a two-day meeting this morning. Analysts have instantly begun hotly debating whether the central bank will use this opportunity to formalize their intent to become a direct buyer of Treasury obligations. The credit markets enjoyed a big rally last month's (December 15th - 16th) Fed meeting when Fed Chairman Bernanke first indicated the central bank might step in as a buyer of longer-term Treasury debt instruments. You can bet mortgage investors will pounce on the Fed's post-meeting statement, to be released tomorrow afternoon at 2:15 p.m. ET, to see exactly what, if anything, Mr. Bernanke and company have decided this time around with respect to this issue. With most observers anticipating Uncle Sam's borrowing appetite to run to about $2 trillion this year alone, many worry that yields on government debt obligations will spike notably higher, especially if foreign buying interest were to cool. Foreign accounts own roughly half of all U.S. government issued debt instruments. The "so what" factor here is significant and straightforward - rising government debt yields tend to put upward pressure on mortgage interest rates. Should the Fed choose to remain mum on plans to officially entry the long-term government debt market as a buyer- look for a big sell-off in the government debt market to develop which by extension will almost certainly cause mortgage interest rates to sling-shot higher. Under this scenario the selling pressure could be muted a bit if the post-meeting statement indicates the Fed is still studying the option of becoming a direct buyer of Treasury obligations. In my opinion, the Fed will likely choose to evaluate the impact of existing programs for at least another six weeks before implementing anything new. If I'm wrong, and the Fed officially indicates an intention to become a direct buyer of Treasury issues in the immediate future, look for mortgage interest rates to remain steady to fractionally lower through at least the end of the week. http://www.winchesterlendinggroup.com/mortgage-news/article/242/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/241/ William O'Donnell, U.S. bond strategist at UBS securities hit the proverbial nail-on-the-head when he said, "Investors are reluctant to crank rates much lower -- knowing that behind Door #1 looms the huge beast of new Treasury supply." In a nutshell, he has described perfectly the current status of the mortgage market. Though it has yet been formally announced, most credit market participants (including mortgage investors) are anticipating the Treasury Department will begin their massive round of borrowing by issuing $86 billion in short-term securities next week. Treasury is expected to follow those fireworks up by announcing plans to issue a record-setting $80 billion in notes and bonds the following week. The "so-what-factor" here is significant. Uncle Sam can either print money, tax, or create a combination of both revenue generators to pay his obligations. Because he has this unique power Uncle Sam is considered to offer a "riskless" rate of return to global investors. His ability to generate essentially unlimited amounts of capital for debt service also means Uncle Sam has little concern regarding the rate of interest investors' demand. Whatever the required yield - he can pay it. Much of the capital used to fund the mortgages you create come from investors who have the option to either invest in Treasury obligations or agency-eligible mortgage-backed securities. To successfully attract the capital away from Uncle Sam and into the mortgage market we have to offer investors a higher rate-of-return on their money. From this perspective it almost goes without saying that the endless bill being racked up by Uncle Sam's all-out-effort to restart the country's economic engines will almost certainly continue to mute any sustained effort by mortgage interest rates to move lower. Thank goodness the Fed still has a pocket full of cash earmarked specifically to support the mortgage market. Without their big checkbook - mortgage interest rates would likely be sharply higher than where they stand today. If ever there was a time to manage your pipeline by the numbers - I think this is it. http://www.winchesterlendinggroup.com/mortgage-news/article/241/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/240/ Inflation at the consumer level slowed to a half-century low last year and industrial output dropped for the first time since 2002. The Labor Department reported this morning the December Consumer Price Index fell a sharp 0.7%, its third straight decline that capped a year in which overall consumer prices advanced only 0.1%, the weakest 12-month reading since December 1954. Core prices, which exclude food and energy, were flat for the second month in a row last month. On a year-over-year basis, core inflation rose a very modest 1.8%, the smallest increase since December and well within the Fed's stated "comfort-zone." Speaking of the Federal Reserve -- they reported this morning that Industrial Production slumped a stronger-than-expected 2.0% in December - capping a dismal year for the manufacturing sector. Capacity Utilization fell to 73.6%, more than 5% lower than its average from 1972 to 2007. This round of miserable economic news simply adds to the pile of cruddy reports stacked in a corner of investors' offices. Market participants have become so cynical and pessimistic they have priced in desolate data for months to come. You-can-take-it-to-the-bank that next week's paltry economic data offering of December House Starts & Building Permits and the Initial Jobless Claims report for the week ended January 17th (both scheduled for release at 8:30 a.m. ET on Thursday, January 22nd) will not be a factor in terms of determining the trend trajectory of mortgage interest rates. It is getting tougher to produce much enthusiasm among mortgage investors regarding the opportunity to jump out there and buy tons of mortgage-backed securities at current yields - especially with expectations of colossal amounts of new debt from Uncle Sam washing through the credit markets in the next few months. If mortgage interest rates are going to move notably lower from current levels in the coming weeks and months -- I think it will take a ramped buying presence in the mortgage-backed securities market from the Fed combined with and a massive swoon in the stock market capable of creating the mother of all "flight-to-quality" stampedes. I have little doubt the Fed would have much trouble holding up their end of the bargain - but I do have doubts about an imminent panic in the stock market. Time will tell - but without a little help - the probabilities are small that the Fed will be able to drive mortgage interest rates lower for any sustained period of time. http://www.winchesterlendinggroup.com/mortgage-news/article/240/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/239/ The Labor Department reported this morning the number of workers filing new claims for unemployment benefits during the week ended January 10th grew by a stronger-than-expected 54,000. Mortgage investors simply shook their heads and shrugged -- since expectations for another dismal January nonfarm payroll report (scheduled for release February 6th) is already priced into the market. In a separate report the Labor Department said the price of goods and services at the producer level fell by 1.9% last month, sliding for the fifth straight month. Core prices, a value that excludes the more volatile food and energy components, increase by 0.2% -- slightly higher than the consensus estimate for a gain of 0.1%. On a rolling twelve-month basis core producer prices are up 4.3% -- their highest level since October's reading of 4.4%. Even though I heard a couple of media "talking-heads" trying to whip up a little excitement over the year-over-year increase in core producer inflation - they were quickly tuned-out by more experienced and skilled investors allowing the early market "concern" to fade quietly out of existence. http://www.winchesterlendinggroup.com/mortgage-news/article/239/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/238/ Mortgage investors barely flinched when the Commerce Department reported this morning that December Retail Sales drop 2.7% -- more than doubling the consensus expectation for a 1.2% decline. Excluding autos, retailers saw sales drop a record 3.1% last month. The mortgage market's casual reaction to this morning's nasty news from the Commerce Department dramatically highlights the monumental amount of "bad" economic news already priced into the market. I think the barely noticeable price impact from an otherwise mortgage market friendly economic report is also a function of the fact that there is really only one substantially active mortgage investor out there right now - and that is the Fed. Chairman Bernanke and his merry band of central bankers are committed to spending an average of $86 billion per month in the mortgage market come hell or high water. How sweet it is to be the beneficiary of a government entity with a big check book and a burning desire to spend gobs of money to ensure mortgage interest rates remain exceptionally modest. Speaking of mortgage interest rates - the Mortgage Bankers Association said this morning their seasonally adjusted index of mortgage applications increased 15.8% during the week ended January 9th, the highest mark for this overall index since the MBA started conducting its survey in 1990. The refinance share of applications was up 85.3% from 79.8% the previous week while purchase applications slipped 14.1% from week earlier levels. http://www.winchesterlendinggroup.com/mortgage-news/article/238/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/237/ Investors have already priced an economic meltdown of epic proportions into the mortgage market - so this week's menu of soggy economic data will not create significant support for notably lower mortgage interest rates. As I mentioned in this week's edition of "Viewpoint" the trend trajectory of mortgage interest rates will most likely be dictated by trading action in the stock markets. Stock trading, and what it reflects of investors' risk tolerance and sentiment, will probably be far more closely monitored than will the level of December retail sales. If stock prices manage to rally - look for mortgage interest to edge higher as well. The magnitude of any upward move for mortgage interest rates will almost certainly be sharply muted by a Fed determined to spend whatever it takes to keep anything really "bad" from happening to the mortgage market. On the other hand, if stock prices fall sharply this week - mortgage interest rates will likely take a stab at setting new historical lows with little, if any help from the central bank. From a technical perspective I see reasons to believe the DOW will make an attempt to work higher during the last two days of the week. For what it is worth, I'm looking for the DOW to make a low somewhere between 8450 and 8250 followed by a rally to at least 8700 -- if not up and through the 9000 level. If my assessment proves accurate - such an event will make it difficult for mortgage interest rates to move notably lower. Looking ahead to this week's schedule of economic data -- Wednesday's December Retail Sales report (8:30 a.m. ET) and Friday's December Consumer Price Index will likely draw the lion's share of mortgage investors' attention. Retail Sales are expected to have posted the worst holiday performance in years while the consumer price index is projected to confirm inflation pressures remain benign. If the consensus estimates proves accurate, these reports will at best be supportive of steady mortgage interest rates. The mortgage market will close early at 2:00 p.m. on Friday and will remain closed on Monday, January 19th for the Martin Luther King Holiday. http://www.winchesterlendinggroup.com/mortgage-news/article/237/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/236/ Employers slashed payrolls by 524,000 last month and the national unemployment rate climbed to 7.2% from November's 6.7%. The national jobless rate has reached its highest mark since January, 1993. November and October's headline payroll figures were revised lower by a total of 154,000 jobs as well. The December jobs report draws to a close one of the most significant quarters of job destruction since the end of WWII. The December payroll data was unequivocally bad, but not nearly as bad as the employment Armageddon some analysts had been projecting - which is the primary reason the reaction in the mortgage market has been so muted this morning. The rapid deterioration of the labor sector continues to put extreme pressure on president-elect Obama, Congress and our central bankers to quickly deploy a recovery program that among other things generates millions of jobs. That is a tall order for a group that has historically proven to be extremely masterful at "talking-the-talk" -- while simultaneously avoiding the politically uncomfortable necessity of "walking-the-walk." The stakes are high and time is short - as we all await the writing of this next very important chapter in American economic history. If you happen to believe in a higher power -- now is an excellent time to ask that these decision-makers be blessed with the divine wisdom to act together harmoniously for the common long-term good of all. Looking ahead to the coming week's schedule of economic data Wednesday's December Retail Sales report (8:30 a.m. ET) and Friday's December Consumer Price Index will likely draw the lion's share of mortgage investors' attention. Retail Sales are expected to have posted the worst holiday performance in years while the consumer price index is projected to confirm inflation pressures remain benign. If the consensus estimates proves accurate, these reports will tend to be supportive of steady mortgage interest rates. The mortgage market will close early at 2:00 p.m. on Friday and will remain closed on Monday, January 19th for the Martin Luther King Holiday. http://www.winchesterlendinggroup.com/mortgage-news/article/236/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/235/ The Labor Department reported this morning that the number of workers filing new claims for jobless benefits fell unexpectedly by 24,000 last week. This tidbit of normally mortgage market unfriendly news was strongly offset by the fact that the number of people remaining on jobless rolls rose to a fresh 26-year high during the same period. The initial jobless claims figures represent job destruction while the level of continuing claims indicates how hard or easy it is for the unemployed to find new jobs. This morning's initial weekly jobless claims report falls outside of the survey period for tomorrow morning's much anticipated December nonfarm payroll report. Analysts continue to expect employers to have aggressively slashed jobs for the 12th consecutive month in December, putting total job cuts at 2.4 million, the most since 1945. The latest survey of economists by Reuters News shows the consensus estimate for tomorrow morning's headline nonfarm payroll number is now calling for a loss of 550,000 jobs with a national unemployment rate climbing to 7.1%. Both values have edged fractionally higher as the week has progressed. Mortgage investors have already "priced-in" their expectations for a real ugly December nonfarm payroll report. The chances they will be proven wrong are extremely small -- which suggests to me the report may actually prove to be rather anti-climatic in terms of its impact on the current trend trajectory of mortgage interest rates. Heads up. http://www.winchesterlendinggroup.com/mortgage-news/article/235/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/234/ Uncle Sam will be thrashing around in the credit markets today looking to borrow $30 billion in the form of 3-year Treasury notes. Most analysts believe this offering and tomorrow's $16 billion 10-year note auction will be excellent early gauges of credit market investors' current perception of risk. Strong demand for both offerings will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. On the other hand, if demand is poor and Uncle Sam finds it necessary to "sweeten-the-pot" by offering sharply higher yields to induce investors to fork over the required capital -- look for mortgage interest rates to creep higher. I will send you a quick update on how things turnout as soon as possible following the conclusion of bidding at 1:00 p.m. ET. In other events of the day the Mortgage Bankers Association said its seasonally adjusted index of mortgage application fell for the first week in four during the week ended January 2. Refinancing applications decreased 12.3% while home purchase loan requests increased 7.3%. The overall index dropped 8.3% after setting a five-year high the previous week. Mortgage investors are braced for a real ugly nonfarm payroll report on Friday. ADP Employer Services said their data shows private employers shed 693,000 jobs in December. That is a number which was well above the consensus estimate from 20 leading economists that estimated the ADP job loss figure would likely fall somewhere near 473,000. The "so what" factor here is that mortgage investors barely flinched at news that would have normally sent them scrambling to push rates fractionally lower while simultaneously making rate sheet prices a bit more attractive. Today's reaction from mortgage investors suggests to me that Friday's much anticipated December nonfarm payroll report may prove to be anti-climatic in terms of its impact on the current trend trajectory of mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/234/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/233/ Thank-you Mr. Bernanke - your plan is working like a charm so far. In the past two trading session, the yield on the 30-year Treasury bond has jumped by more than 30 basis points, the biggest two-day rise in more than 15-years. Expectations that inflation will soar from a coming massive spike in government borrowing has led traders the world over to dump Treasuries. Normally, soaring Treasury yields would drag mortgage interest rates higher as well. But not this time. Fortunately for all of us in the mortgage industry Fed Chairman Bernanke and his fellow central bankers moved proactively in November to put a $500 billion buffer between rate sheets and the stresses in other areas of the credit market. While the Treasury market has been crushed with sell orders - the Fed has been busy aggressively buying mortgage-backed securities to support steady to lower mortgage interest rates. As long as the money holds out -- this will be a sweet, sweet deal for mortgage lenders and borrowers alike. I have intention of raining on anybody's parade but I think it is worth at least noting that at the current pace mortgage-backed securities will soon be approaching yield levels that only a Fed Chairman could love. Once Mr. Bernanke and his band of merry central bankers exhaust their available capital - no one else (in terms of other investors) will be at home to pick-up the slack and mortgage interest rates will rise. That is certainly not going to happen today, this week or even this month probably - but somewhere toward the end of the year (in my opinion) mortgage interest rates will likely begin to move notably higher from current levels as they are finally allowed to seek their natural level. The central feature on this week's economic calendar will be Friday's December nonfarm payroll report. The market has already priced in the expected loss of 485,000 jobs together with the likelihood the national jobless rate ratcheted up to 6.9% from last month's 6.7% level. Chances are the actual numbers will match or fall within shouting distance of the consensus estimate values. If so, the report's impact on the trend trajectory of mortgage interest rates will not be large, if it registers at all. In the off-chance the headline December payroll shows a job loss of 470,000 or less and/or the national jobless rates posts a reading of 6.7% or less look for mortgage interest rates to edge fractionally higher. http://www.winchesterlendinggroup.com/mortgage-news/article/233/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/232/ The big news of the day (so far) is that the Fed actually made their first purchase of mortgage-backed securities this morning. The total amount of the purchase will not be known until it is announced on Thursday, January 8th. The Fed intends to keep a running tally of its aggregate purchases and will update its figure every Thursday until they've spent the allotted $500 billion. It is worth noting that the money the Fed will spend to support the mortgage and housing market is not attached to any debt - the Fed just printed it up. While this capital solves the near-term problem of providing attractive financing to stimulate home buying - it comes with a price that will be paid later - in the form of higher inflation levels. Ah, but that is a concern for a different day. The Fed's mortgage-backed securities purchases could not have come at a better time. Treasury prices have "taken-it-on-the-chin" since Friday as a growing number of investors are pacing the floor and wringing their hands over the massive $1.5 to $2.0 trillion worth of debt Uncle Sam plans to issue to support the financial markets and the economy in general this year. As I think about it there is really no need to worry about something that is going to happen. Fed policymakers and the incoming Obama administration have made it abundantly clear that the risk of doing too little to re-fire the country's economic engines poses a greater risk to our collective financial well being than the risk associated with doing too much. The central feature on this week's economic calendar will be Friday's December nonfarm payroll report. The market has already priced in the expected loss of 485,000 jobs together with the likelihood the national jobless rate ratcheted up to 6.9% from last month's 6.7% level. Chances are the actual numbers will match or fall within shouting distance of the consensus estimate values. If so, the report's impact on the trend trajectory of mortgage interest rates will not be large, if it registers at all. In the off-chance the headline December payroll shows a job loss of 470,000 or less and/or the national jobless rates posts a reading of 6.7% or less look for mortgage interest rates to edge fractionally higher. http://www.winchesterlendinggroup.com/mortgage-news/article/232/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/231/ May you and your family have a very safe and joyus Christmas and a Happy New Year!! http://www.winchesterlendinggroup.com/mortgage-news/article/231/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/230/ Trading activity in the mortgage market this morning is sparse and currently controlled by market participants looking to take profits before closing the books on 2008. News that the Bush Administration authorized the government to offer up to $17.4 billion in loans to ailing automakers has nudged stock prices higher at the expense of bond and mortgage-backed security prices. Almost immediately after the White House approved the bailout - Treasury Secretary Paulson requested the release of the second half of the $700 billion rescue package. In little more than three months Paulson, with help from Congress, has burned through $350 billion of total funds set aside for the Troubled Asset Relief Program. Congress is leaving Capitol Hill today for an extended Holiday break so approval to spend the $350 billion balance of the rescue package funds will not likely be granted until the Obama Administration takes over on January 21, 2009. Looking ahead to next week's holiday shortened week there is nothing on the economic calendar -- from Monday's final revision to third-quarter Gross Domestic Product -- through Wednesday's November Personal Income and Spending report -- that will likely pack enough "punch" to influence the trend trajectory of mortgage interest rates one way or the other. http://www.winchesterlendinggroup.com/mortgage-news/article/230/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/229/ Trading activity in the mortgage market this morning is sparse and currently controlled by market participants looking to take profits before closing the books on 2008. News that the Bush Administration authorized the government to offer up to $17.4 billion in loans to ailing automakers has nudged stock prices higher at the expense of bond and mortgage-backed security prices. Almost immediately after the White House approved the bailout - Treasury Secretary Paulson requested the release of the second half of the $700 billion rescue package. In little more than three months Paulson, with help from Congress, has burned through $350 billion of total funds set aside for the Troubled Asset Relief Program. Congress is leaving Capitol Hill today for an extended Holiday break so approval to spend the $350 billion balance of the rescue package funds will not likely be granted until the Obama Administration takes over on January 21, 2009. Looking ahead to next week's holiday shortened week there is nothing on the economic calendar -- from Monday's final revision to third-quarter Gross Domestic Product -- through Wednesday's November Personal Income and Spending report -- that will likely pack enough "punch" to influence the trend trajectory of mortgage interest rates one way or the other. http://www.winchesterlendinggroup.com/mortgage-news/article/229/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/228/ Father Time is slowly but surely shuffling along toward the end of a year investors the world-over will not soon forget. Next week's holiday shortened trading session will likely see mortgage investors doing little else than squaring up their positions in these few remaining days of 2008. During the past twelve months everything from Treasury bills to bonds to mortgage interest rates have fallen to record lows. Global economic recession sent investors from every corner of the universe scrambling to park cash in our Treasury and agency eligible mortgage-backed security markets. I see reasons to believe there is a better than even chance that once the New Year is upon us -- these same investors will begin to cautiously creep out of their foxholes - sniffing around for higher rates of return than 0.0%. If the macro-economic numbers in the first-quarter of 2009 prove to be less severe than currently anticipated -- the probability my assessment will be proven accurate will jump dramatically. My forecast here could be way-off-base if investors prove to be far more risk adverse than I believe them to be. Equity and credit investors generally get ahead of economic cycles -- so I don't think it will take more than a couple of trading weeks into the New Year to determine whether I've got it right - or whether I need to develop a taste for eating crow. http://www.winchesterlendinggroup.com/mortgage-news/article/228/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/227/ Mortgage investors are taking a little breather today - after the massive rally yesterday when the Fed cut benchmark interest rates as low as zero and said it would use all available means to revive the economy. Central bankers' assertion that they are willing to keep interest rates low for an extended period of time and that they plan to buy more debt issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac fueled yesterday's massive rally in the mortgage market. I think it is worth noting that so far the Fed has done little more than "jaw-bone" mortgage rates lower. Of the $600 billion authorized back in November to be used by the Fed to support housing and the mortgage market - central bankers have so far only spent $8 billion. My bet is the Fed only intends to spend their available capital to support interest rates - rather than lead them lower. In a free and open market it would be difficult for the government to target and sustain mortgage interest rates at a certain level. Markets are dominated by the golden rule - "He who has the gold makes the rules". The mortgage market is far too large and trading action far too dynamic for any one investor to dominate for a sustained period of time - even an investor with $500 billion to spend. I expect to see the Fed acting to mute heavy selling (an event that if left unchecked tends to push rates higher) rather than directly attempting to lead mortgage interest rates lower. If my assessment is accurate - mortgage interest rates will seek their own level as they have always done - they just won't move higher at quite as brisk a pace as normal - at least until the Fed has depleted their war chest. I am watching trading action in the stock markets closely -- and I think you should do the same. Yields on Treasury obligations have now fallen to such a point that investors may find it necessary, especially in the New Year, to increase their risk tolerance in order to generate a positive rate-of-return on their capital. When the perception starts to take root that stimulative moves by the Fed and the government will eventually lift the economy out of a recession, investors the world over will begin aggressively selling Treasuries as they look for higher returns elsewhere - particularly in the stock markets. My technical analysis work currently suggests a strong likelihood this prominent market condition will develop in earnest between mid-January and early February 2009. http://www.winchesterlendinggroup.com/mortgage-news/article/227/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/226/ The Fed "surprised" market participants a little by voting to push the benchmark fed fund rate into a range between 0.0% to 0.25% -- from its current level of 1.0%. This is the first time the Fed has ever used a "target range" to dictate short-term interest rate levels. In their post-meeting statement policymakers said that they will "employ all available tools to promote the resumption of sustainable economic growth and price stability." Nothing new there - central bankers have been pulling-out-all-of-the-stops in their effort to rekindle economic growth since the waning days of summer. The Fed reiterated their intent to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets. This is stale news as well - the Fed was granted the authorization to purchase up to $500 billion of mortgage-backed securities in November. Chairman Bernanke a couple of weeks ago indicated the Fed would begin to make purchases of mortgage product before the end of the year. It now appears nothing of consequence will happen in this regard until next year. There was a nice little knee-jerk rally in the mortgage market minutes after the rate cut was announced - but the early euphoria is slowly beginning to fade as investors realize that other than a nice little drop in overnight lending rates for banks - there is really nothing of consequence that has changed in terms of Fed policy. http://www.winchesterlendinggroup.com/mortgage-news/article/226/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/225/ The Commerce Department reported this morning that the closely monitored November Consumer Price Index plunged 1.7% from last month's level, lead by a massive 17% drop in energy prices. It was the largest monthly decline for the headline consumer price index since the government began keeping records in 1947. Core prices, a value that excludes the more volatile food and energy components, were flat in November. In a separate report the Commerce Department announced housing starts and building permits plunged to record lows in November. Starts were 18.9% lower while permits slumped by 15.6%. The sharp drop in the rate of inflation at the consumer level leaves the door wide open for the Fed to cut their benchmark fed fund rate by 50 basis-points today - a move that has been priced into the mortgage market for weeks. Futures traders are assigning a 66% probability to the idea that central bankers will choose to slash 75 basis-points from short-term interest rates. It really doesn't matter how much the Fed actually cuts - market participants are well aware that the fed fund rate (the interest rates banks charge each other for overnight loans) and the discount rate (the interest rate at which member banks may borrow short-term funds directly from the Federal Reserve Bank) can't go below zero. While it may not happen today - the Fed is almost certain to push short-term rates to 0.0% at their January 28th meeting. With rates approaching zero, mortgage investors will scour this afternoon's post-meeting statement from the Federal Open Market Committee for hints on what Chairman Bernanke and his band of merry central bankers plan to do next to help pull the economy out of this steep recessionary dive. I suspect policymakers will "talk-up" plans to become a major buyer of treasury obligations and mortgage-backed securities. Look for mortgage investors to show little reaction to this chatter -- since the Fed has done little with the $600 billion they have already been authorized to spend. The committee will wrap-up today's meeting by 2:15 p.m. ET - and I will update this commentary as quickly as possible thereafter. http://www.winchesterlendinggroup.com/mortgage-news/article/225/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/224/ Many investors are headed into their last full trading week of the year. Everybody is sticking around to see what, if anything happens, when the Federal Open Market Committee cuts their benchmark fed fund rate to its lowest level since 1958 tomorrow afternoon. It is a virtual "given" that the members of the committee will vote unanimously to cut the fed fund rate (the interest rate banks charge each other for overnight loans) to .50 percent from its current level of 1.0% level. Of even greater interest to the global investment community is what hints, if any the central bank might drop in tomorrow's post-meeting statement about its remaining policy options. As I mentioned in this week's edition of my weekly newsletter "Viewpoint," I see reasons to believe another Fed rate cut will likely amount to nothing more than an attempt to drain the ocean with a teaspoon. We've reached a juncture in the credit markets where it really doesn't matter how low interest rates go -- banks are refusing to lend and consumers either have no desire to borrow - or they are in such troubled financial straits they can't meet the qualification criteria for a loan. So what's the Fed to do? Many believe the Fed will announce in their post-meeting statement tomorrow afternoon (2:15 p.m. ET) that the answer to rekindling economy growth is actually quite simple - print money like crazy. In a nutshell the idea here is that by flooding the economy with money - banks will ultimately find themselves bursting at the seams with capital - and they will essentially have no other option than to start lending. As the short-term credit market swings back into action, business confidence will rise, employment will improve and the engines of commerce will roar back to life. On its face it all sounds like a perfect "storybook-ending" to a very difficult period in American financial history. Unfortunately, there is a pretty big "fly-in-the-ointment" here. The potential for very high inflation down the road if the Fed is successful with this "quantitative easing" strategy is exceptionally high - but from the Fed's perspective -- that's a story for a different day. I'm not so sure mortgage investors will be so lackadaisical with their forward-looking inflation concerns. Should the Fed announce big new plans to ramp up their "quantitative easing" -- look for mortgage interest rates to find it increasingly difficult to move notably lower from current levels. http://www.winchesterlendinggroup.com/mortgage-news/article/224/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/215/ As you are probably aware by now, the measure to provide $14 billion in loans to avert a possible bankruptcy of one or more of the big three U.S. automakers failed to pass the Senate last night. The reason any of this is a "big deal" to the mortgage market - beside the massive loss of jobs and related longer-term damage a major failure of the auto sector would wreak on the economy -- is the fact that an outright failure of the automakers carries the potential to send another major financial tsunami crashing through the world's credit markets. United Auto Workers President Ron Gettelfinger and congressional Democrats are calling on the Treasury and the Fed to "prevent the imminent collapse of the automakers" by using money from T.A.R.P. (Troubled Asset Relief Program) to keep the union/industry afloat. Mr. Gettelfinger says the union has already made "enormous concessions" to justify the investment of billions of dollars of American taxpayer money. As I understand it, the Senate rejected the relief package because their definition of "enormous" and the timing of these concessions differed significantly from the U.A.W's definition of "enormous" and their related implementation timelines. The stakes are high for all of us and the issue remains unresolved. Mortgage investors are keeping their "powder-dry" and monitoring this developing story. The trading activity in the mortgage market so far this morning has been light and largely dominated by sellers. As I write, the Treasury Department has indicated it is willing to provide financing to American automakers "until Congress reconvenes and acts to address the long-term viability of the industry." The Bush administration appears to be onboard with that idea saying, ". given the current weakened state of the U.S. economy we will consider . including the use of the TARP program to prevent a collapse of troubled automakers." It looks like resolution of this problem will be successfully pushed out to sometime early next year. A massive "gut-punch" to the credit market appears to have been deflected at the last possible moment - and that's supportive of steady mortgage rates - at least for the time being. The morning's macro-economic data was completely overshadowed by the auto industry news. The November Producer Price Index, a measure of price pressure at the manufacturing level, fell more than expected last month on a record decline in gasoline costs. The core rate of inflation at the producer level, a value that excludes the more volatile food and energy components, rose by a very modest 0.1%. A separate report showed that while retail sales fell for the fifth consecutive month in November, posting an overall decline 1.8%. Excluding the auto component, sales were down 1.6%. The November retail sales decline was slightly less than most analysts had been anticipating. Looking ahead to next week, the Federal Open Market Committee meeting on Monday and Tuesday will dominate an otherwise sleepy economic calendar. The Fed is broadly expected to cut their benchmark fed fund rate by 50 basis-points on Tuesday. That event has been fully priced into the mortgage market for weeks -- and will therefore likely be anti-climatic in terms of its impact on the trend trajectory of mortgage interest rates. In my judgment, the Fed would need to "surprise" the credit market by pushing short-term interest rates to zero in order to produce much of a downward rate move in the mortgage market. The probability of such an event occurring on Tuesday remains small. http://www.winchesterlendinggroup.com/mortgage-news/article/215/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/216/ The mortgage market is benefiting from a round of "flight-to-quality" buying created by news that a proposal to bail out the big 3 U.S. automakers passed the House of Representatives - but faces stiff, and possibility fatal opposition in the Senate. The "so what" factor here is that a bankruptcy or failure of the Detroit Three would threaten billions of dollars of financial instruments. The problem here is the vast amount of debt issued over the years by GM, Ford and their related financing companies, GMAC and Ford Motor Credit. Over 10% of the junk bond market is tied to GM and Ford in one form or the other. Another layer of risk resides in the $250 billion of credit default swaps (a specific kind of agreement designed to transfer the credit exposure of fixed income products between one party and the other - think of a credit default swap as an unregulated insurance policy for financial instruments) written by the auto companies and their affiliates. An outright failure of the automakers carries the potential to send another major financial tsunami crashing through the world's credit markets. My bet is that this game of political brinksmanship will end before it produces an economic mushroom cloud. If my assessment is accurate, the strong move to lower prices the mortgage market enjoyed in today's early trading -- will likely fade before the end of the day. Earlier this morning the Labor Department reported new claims for weekly jobless benefits surged higher by 58,000 - touching a 26-year high. A spokesman said several factors could have contributed to last weeks big jump in the number of those filing unemployment claims; the week after Thanksgiving is traditionally the week with the biggest increase in first-time claims while another part of the increase could simply be administrative catch-up from the Thanksgiving week when most state unemployment offices were closed for two day. Even so, there is no denying that the labor market continues to deteriorate. I think it is worth noting that unemployment and jobless numbers will continue to rise even as the rest of the economy begins to climb out of the recessionary sludge. This phenomenon is created by the fact that businesses tend to be slow to hire - just as they tend to be slow to fire. Don't be surprised if weak employment data is increasingly discounted by mortgage investors over the course of the coming months http://www.winchesterlendinggroup.com/mortgage-news/article/216/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/217/ Wholesale inventories fell 1.1% in October - a much stronger drop that the 0.2% decline most analysts were anticipating. Sales dropped during the month by 4.1% -- the most since records began in 1992 -- causing businesses to scale back on the level of product on hand. This report is just one more piece of a mountain of data that indicates the economy is in the grip of one of the most severe recessions in decades. Speaking of recessions - I think it is worth noting there have been six major recessions since the Great Depression; three of them lasted a year and three of the lasted two years, start to finish. Recent macro-economic data indicates the current recession will likely last a couple of years. This recession officially began in December 2007, according to the government data wonks assigned to determine such things. If that projection is anywhere close to accurate, and assuming history will repeat itself, December 2008 should roughly approximate the darkest point of this recession. Considering the massive amount of stimulus that will be pouring into our economy shortly after January 20th (Inauguration Day) - not to mention the trillions of dollars the major industrialized nations will collectively be pouring into the global market place -- it is almost a "given" that our domestic economic picture will have brightened considerably by this time next year. The "so what" factor here is that the view is much brighter when you look to the future by standing in the bow of the boat - rather than standing in the stern, watching the wake - and attempting to plot a course to tomorrow. Look for improving economic conditions to elevate business confidence, which will in-turn lift consumer confidence which will ultimately lead to a notable surge in home demand at a point where property values and mortgage interest rates are at multi-year lows. If ever there was an absolutely perfect time to be in the mortgage origination business - I think we are within a few short months of being there. On a related subject - the Mortgage Bankers Association said it seasonally adjusted index of mortgage application fell 7.1% during the week ended December 5th. Refinance applications trickled 0.9% lower while home purchase applications slipped by 17.4%. http://www.winchesterlendinggroup.com/mortgage-news/article/217/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/218/ There is nothing in terms of economic indicators for investors to chew-on this morning -- so trading action in the stock market will likely be the biggest determinant of interest rate trend trajectory. Higher stock prices tend to drag mortgage interest rates higher -- while lower stock prices are generally supportive of steady to perhaps fractionally lower rates. The desire for cash amid a liquidity crunch has kept Treasury obligations so well bid, particularly on the shorter end of the yield curve, Treasury bill rates have fallen near zero, meaning investors are willing to lend the government cash for the mere privilege of knowing they will get paid back. The Treasury Department announced that it will sell $28 billion of three-year notes tomorrow and $16 billion of 10-year notes on Thursday. That's a larger combined auction than market participants were expecting. Most observers believe persistent year-end "flight-to-quality" bids, especially for tomorrow's three-year notes, should cause investors little heartburn as they are called upon to absorb this new supply. I don't argue the likelihood that the demand for the three-year notes will probably be solid, but from a technical perspective it appears Uncle Sam will likely be required to "sweeten the pot" with a little higher yield in order to attract the required capital at Thursday's 10-year note auction. If my assessment proves accurate, a higher yield on the 10-year note will likely draw mortgage interest rates fractionally higher as well. http://www.winchesterlendinggroup.com/mortgage-news/article/218/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/219/ There is nothing in terms of economic indicators for investors to chew-on this morning -- so trading action in the stock market will likely be the biggest determinant of interest rate trend trajectory. Higher stock prices tend to drag mortgage interest rates higher -- while lower stock prices are generally supportive of steady to perhaps fractionally lower rates. Stocks opened sharply higher in the day's early trading on hopes that President-elect Obama's plans for the biggest investment in the country's infrastructure (highways, schools, government buildings, alternative power facilities) since the 1950's will help avert a deeper slump in the economy. Optimism that automakers may receive an "11th hour" reprieve from Congress added to the positive tone in the stock market at the start of the day. The general sense starting to develop among investors, particularly stock investors, is that the people in charge are at least trying to do the right thing. A government with a plan in a crisis is almost always far preferable to a government in a crisis with no plan. I think it is worth noting that James Lockhart, the director of the Federal Housing Finance Agency, the government regulator for Fannie Mae and Freddie Mac, went out of his way in a interview on CNBC this morning to point out that while the government is taking concrete steps to shore up the housing market and reduce mortgage interest rates, there is no set target for how much borrowing costs should be. The "so what" factor here is that mortgage interest rates will move to levels market participants, those with actual "skin-in-the-game" believe appropriate - not to levels an unnamed "source" whispers into the ear of the media. I'm not suggesting it wasn't nice to have the media talking up the mortgage business for a change - I just think those that are expecting the government will target and achieve a given note rate (say 4.5%) under fair and open market conditions (not a market influenced by a special and specific government bond program) run a high risk of being disappointed. http://www.winchesterlendinggroup.com/mortgage-news/article/219/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/220/ The labor sector is hemorrhaging job losses - 533,000 in November after revised losses of 320,000 in October and 403,000 in September. The national jobless rate edged higher to 6.7% last month from the 6.5% level in October. Senator Charles Schumer, a New York Democrat, chairman of the congressional Joint Economic Committee succinctly summed up mortgage investor sentiment this morning when he said, "The jobs picture today is staggering, and it should be all the evidence Washington needs to act swiftly and decisively to shore up this economy." Mortgage investors could agree with Senator Schumer more. Market participants will continue to be very hesitant to push mortgage interest rates notably lower until they see clear signs that Uncle Sam is finally opening his checkbook in a meaningful way. Mortgage interest rates are currently tracing along the edge of levels our industry has ever seen. Without significant and sustained support from the government - private investors will be hesitant to add sizable portions of historically low yielding securities to their portfolio for fear of finding themselves ultimately holding the proverbial "financial bag" when economic conditions begin to improve. Today's news from the labor sector did "bake-into-the-cake" a 50 basis-point drop in the Fed's benchmark fed fund rate at their upcoming two day meeting (Dec. 16 -17). The mortgage market won't likely respond much to such a move since it has been priced into the mortgage market for weeks. The Fed will probably have to cut the fed fund rate by at least 75 basis-points to induce much of a mortgage market friendly reaction. Looking ahead to next week Friday's November Retail Sales figure will take center stage. Everybody expects disastrous retail sales numbers - so when they actually appear -- much of the market-moving "thunder" from the report will have already dissipated. With only minor data populating the balance of the calendar expect stock market trading action and news from Washington to dictate the trend trajectory of mortgage interest rates for most of the week. http://www.winchesterlendinggroup.com/mortgage-news/article/220/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/221/ I think most readers would agree there is a big difference between talking the talk - and actually walking the walk. The Wall Street Journal and Reuters News Service really got the rumor mills buzzing yesterday when they claimed their "sources" within the U.S. Treasury Department are whispering insider knowledge that indicates the government is considering reducing residential mortgage rates to 4.5% by upping investment in mortgage-backed securities. The plan would be for Fannie Mae and Freddie Mac to buy up more mortgage-backed securities to help drive borrowing costs roughly 1.0% lower than last week's U.S. average of 5.53% for a 30-year fixed mortgage. I certainly don't want to rain on anybody's parade here - but there are a couple of things I think you ought to consider in order to put this story into perspective. The Treasury Department already has authority to buy billions of dollars of mortgage-backed securities - it has yet to use that authority to any large degree. Does additional purchase authority suddenly create a storm of mortgage-backed security purchase activity that didn't exist before? How much additional buying power is necessary to push 30-year fixed-rate mortgage-backed securities down to 4.5%? The Federal Reserve announced plans to buy $500 billion of mortgage-backed securities from Fannie and Freddie on Monday - which did cause rates to spike lower - for a couple of hours - before mortgage interest rates finished flat to slightly higher through this morning. As I write, 30-year fixed rate mortgages in most of the country are trading at or near levels last experienced in June 2003 - when they touched 5.25%. It is unlikely any coordinated effort by the government to push 30-year mortgage interest rates to 4.5% or lower will occur until at least January 20th - there's probably too much "political hay" to be made by the majority party to make this event happen any earlier. Last but not lest, in my 30-years of managing mortgage market risk on a daily basis I've never seen mortgage interest rates sustain a dramatic move to lower levels when Uncle Sam is dumping huge amounts of supply into the credit markets. Current estimates indicate Uncle Sam has an immediate borrowing need that is multiples of his previous all-time record. So in a nutshell, we're talking about a program that doesn't even exist, that has no qualifying parameters, no timeline for implementation if it actually takes form and that will - at best - offer a note rate that is roughly 50 basis-points less than is immediately available in the market today. I hate these "two in the bush versus one in the hand" dilemmas - don't you? Shifting gears a little bit, I want to remind you that the economic "biggie" of the week is on tap tomorrow morning at 8:30 a.m. ET. The employment report is expected to show the economy shed 320,000 jobs in November, accelerating the labor market decline from the 240,000 jobs lost in October. In my judgment a dismal nonfarm payroll report is already priced into the mortgage market. As desensitized as mortgage investors have become to miserable macro-economic data it will likely take a November job loss figure greater than 350,000 and/or a national jobless rate higher than 6.9% to support a rally in the mortgage market. Numbers that match the consensus estimates for the November nonfarm payroll data will likely have little, if any significant impact on the near-term direction of mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/221/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/223/ Let's start with the really good news. Mortgage applications surged by the largest amount on record last week (according to the Mortgage Bankers Association) on news of a new Federal Reserve program that pushed interest rates down to their lowest level in more than three years. It is true that the MBA's data is only for submitted applications, not closed loans, but a least the ball is rolling. The Mortgage Bankers said their seasonally adjusted index of mortgage applications, which includes requests for both purchase and refinance loans, soared a record 112.1% higher during the week ended November 28th. Applications for purchase loans rose 38.0% while refinance applications rocketed 203.3% higher. There is a ton of dismal economic data already priced into the mortgage market. News this morning from the Institute of Supply Management that its service index, a measure of activity in the non-manufacturing sector of the economy, fell to a reading of 37.3, it lowest level since records began in 1997, would have normally sparked at least a modest rally to lower interest rates in the mortgage market. This time around the cheerless economic data drew nothing but a "yeah, I thought so" shoulder shrug from market participants. Most investors are booking profits and moving to the sidelines as the heavily discounted economic fundamentals make it harder to justify pushing interest rates notably lower right now. The overall mortgage market tone has improved a bit amid the news of planned Fed purchases of up to $500 billion of mortgage-backed securities - but the Fed has yet to buy anything - so most investors will likely remain cautious until the Fed actually puts their money in play. Friday's employment report is expected to show the economy shed 320,000 jobs in November, accelerating the labor market decline from the 240,000 jobs lost in October. In my judgment a dismal nonfarm payroll report is already priced into the mortgage market. As desensitized as mortgage investors have become to miserable macro-economic data it will likely take a November job loss figure greater than 350,000 and/or a national jobless rate higher than 6.9% to support a rally in the mortgage market. Numbers that match the consensus estimates for the November nonfarm payroll data will likely have little, if any significant impact on the near-term direction of mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/223/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/214/ With nothing of consequence remaining on this week's economic calendar until Friday's November nonfarm payroll report the trend trajectory of mortgage interest rates will likely be most influenced by trading action in the stock market. Higher stock prices will tend to drag mortgage interest rates higher, while lower stock prices will likely be supportive of steady to slightly lower mortgage interest rates. Friday's employment report is expected to show the economy shed 320,000 jobs in November, accelerating the labor market decline from the 240,000 jobs lost in October. In my judgment a dismal nonfarm payroll report is already priced into the mortgage market. As desensitized as mortgage investors have become to miserable macro-economic data it will likely take a November job loss figure greater than 350,000 and/or a national jobless rate higher than 6.9% to support a rally in the mortgage market. Numbers that match the consensus estimates for the November nonfarm payroll data will likely have little, if any significant impact on the near-term direction of mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/214/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/213/ U.S. factory activity fell in November to its lowest level since 1982, according to a report from the Institute of Supply Management. The Institute said its manufacturing index dropped to a reading of 36.2 in November from 38.9 in October. The financial crisis that began in the U.S. has now spiraled into a global economic downturn that has hurt sales here and aboard, forcing manufacturers around the world to reduce production. This morning's bleak news from the manufacturing sector has ignited another round of safe-haven buying that has pushed the yield on the 10-year Treasury note to 2.83% -- its lowest level in 50 years. Mortgage interest rates were more restrained - dribbling only a fraction lower so far in today's trading. As I mentioned in this week's edition of my weekly newsletter "Viewpoint" - Treasury yields may be running out of room to fall further, as a flagging global economy and a persistent credit crisis begins to feel the positive effects of the massive rescue effort being deployed by governments and central banks from every major industrialized nation. In my judgment it is not a question of "IF" these rescue efforts will be effective - but rather a question of "WHEN". I'll be watching closely for signs that massive amounts of capital are pouring into the economy from Uncle Sam -- because ironically that condition will probably mark the beginning of the end for the current trend to lower mortgage interest rates. Federal Reserve Chairman Ben Bernanke will be speaking on the economic outlook at 12:45 p.m. This is probably a non-event as far as the mortgage market is concerned. http://www.winchesterlendinggroup.com/mortgage-news/article/213/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/211/ In a surprise move, the Federal Reserve announced this morning that it will purchase as much as $600 billion in debt and mortgage-backed securities issued by the Fannie Mae, Freddie Mac and Ginnie Mae. $100 billion of the total will be spent on the direct debt of the three mortgage entities with the remaining $500 billion to be spent on the purchase of the companies' mortgage-backed securities. Direct debt (various maturing notes) purchases will begin next week through selected dealers. Purchases of mortgage-backed securities will be handled through authorized managers with the first transactions expected before the end of the year. In the their written statement the Fed said, "This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally." Separately, the Fed will lend up to $200 billion on newly and recently originated AAA securities backed by education, auto, credit card and Small Business Administration loans. The central bank is pulling-out-all-of-the-stops in their effort to re-ignite the engines of domestic economic growth. It will take several more months before we will know if these efforts are successful. Incoming data continues to indicate our economy is in a sharp downward spiral. The Commerce Department reported this morning that the U.S. economy shrank more severely during the third-quarter than first estimated as consumers cut spending at the steepest rate in 28 years. Third-quarter Gross Domestic Product, a measure of the total value of all goods and services produced in the country during the previous 90-day period, was revised to show a decline of 0.5% from the initially reported gain of 0.3%. Most analysts believe the United States has joined Europe in a recession, though it will take another quarter of negative domestic growth numbers to meet the widely used definition of a recession - two consecutive quarters of declining output. The third-quarter decline stands in stark contrast to the second-quarter's relatively brisk economic growth rate of 2.8%. The tremendous early rally in the mortgage market this morning was created by a large number of market participants getting caught in a "short-squeeze." In a market environment investors can sell assets they don't currently have - in anticipation of lower prices ahead. This strategy works out perfectly if the price of the asset does indeed fall, allowing the investor to purchase the asset at the lower price and deliver the asset at the higher price and happily pocket the difference as a profit on the overall transaction. A "short squeeze" develops when a large number of investors have sold assets they don't currently own with expectations the price of the assets is going to fall - only to have the price of the asset actually explode higher. In this scenario the investor is in a race with other short sellers to stop the financial bleeding by purchasing the asset as quickly as they can. Surging demand only pushes prices higher - compounding the financial pain for those market participants trying to over their "shorts." Ultimately all those market participants that desperately need to buy will be indentified and satisfied - allowing trading activity to settle back into a more normal pattern - just as we are currently seeing as the trading day advances. Uncle Sam will be in the credit market this afternoon looking to borrow a record setting $20 billion in the form of 5-year notes. Look for this event to have little, if any direct impact on the current trend trajectory of mortgage interest rates http://www.winchesterlendinggroup.com/mortgage-news/article/211/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/210/ The pace of existing homes sales fell a bit harder than most analysts expected in October - posting a drop of 3.1% on a month-over-month basis. The median home price dropped 11.3% to $183,300 on a year-over-year basis. The annual percentage drop was the largest since the National Association of Realtors began keeping records in 1968. Mortgage investors have become accustomed to puny numbers from the housing sector -- so today's batch of soft existing home sales data didn't cause much of a stir. Uncle Sam will be in the credit market this afternoon looking to borrow a record setting $36 billion in the form of 2-year notes. Persistent fears about the global economic downturn - should drive risk adverse investors to this offering. If so, look for this event to have little, if any direct impact on the trend trajectory of mortgage interest rates. Just as a reminder - don't forget we are working a holiday shortened week. Thursday's market closure for the Thanksgiving Holiday will be bracketed by an early close on Wednesday at 2:00 p.m. ET as well as an early close on Friday at 2:00 p.m. ET. It is not unusual for mortgage market volatility to spike wildly during thinly traded pre- and post-holiday trading sessions. http://www.winchesterlendinggroup.com/mortgage-news/article/210/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/212/ The credit markets are void of any new macro-economic data for investors to chew-on so position squaring prior to the upcoming holiday break will likely dictate trading action in the mortgage market today. The global investment community is so hyper risk-adverse that even this morning's strong early in the credit markets leaves the yield on the 10-year Treasury note tracing along the edge of its lowest level in five decades. Deeping concern about a world-wide recession and a major exodus from the global stock markets has created a massive bid for safe-have government securities. I have had a number of clients call to ask why mortgage interest rates have not been plunging along with the monumental decline in Treasury yields. Here in a nutshell, is the answer. As you may recall several weeks ago Federal Housing Finance Agency Director, James Lockhart, reminded the global market place that mortgage-backed securities issued by Fannie Mae and Freddie Mac were not and will not be backed by the full faith and credit of the United States government. Granted, there is a $100 billion federal back-stop in place to insure investors against the loss of principal if these securities were to fail to perform - but investors considering purchasing these assets were not to assume these securities contained additional federal guarantees. Without explicit government guarantees regarding the repayment of principal - the majority of risk intolerant investors simply piled into the asset class where they were absolutely sure they will get their money back - such as Treasury bills, notes and bonds. Risk aversion, while showing some preliminary signs of subsiding a bit, remains alarmingly high, and as long as that condition persists, it will be difficult, if not impossible for mortgage interest rates to make a sustained move to notably lower levels. Here's what's coming up next week; October Existing Home Sales will be released at 8:30 a.m. ET on Monday followed by the revised estimate of economic growth contained the third-quarter Gross Domestic Product report on Tuesday. October New Home Sales and the Fed's favorite measure of inflation at the consumer level, the personal consumption expenditure index, will both hit the news wires at 8:30 a.m. ET on Wednesday. The mortgage market will close early on Wednesday at 2:00 p.m. ET and will remain closed on Thursday for the Thanksgiving Holiday. Friday will be another shortened trading session with an early close scheduled for 2:00 p.m. ET. http://www.winchesterlendinggroup.com/mortgage-news/article/212/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/209/ The number of workers filing for first-time jobless benefits surged by 27,000 last week - to its highest level in 16 years. The report reinforces mortgage investors' expectations for another big 200,000+ drop in the headline November nonfarm payroll report scheduled for release at 8:30 a.m. ET, Friday, December 5th. The benign inflation picture painted by this week's producer and consumer price indexes together with lousy news from the labor sector virtually guarantee the Fed will slash their benchmark fed fund rate by 50 basis-points when central bankers huddle for a one-day meeting on December 16th. The impact all this mumbo-jumbo will exert on the current level of mortgage interest is very limited - since expectations for massive amounts of gloomy economic news and a Fed rate cut has been priced into the mortgage market for more than a week. As I mentioned yesterday -- expanding losses in the global stock markets due to roaring recession fears are fueling demand for dollar denominated long-term safe-haven investment vehicles like Treasury obligations and agency-eligible mortgage-backed securities. Investors all around the world are scrambling for low-risk investments that offer returns above inflation. For the time being this "flight-to-quality" buying spree is a godsend for the prospects of steady to perhaps fractionally lower mortgage interest rates. But don't loose sight of the fact that all of the current support for the mortgage market is filtering-in from investors only looking for a safe place to temporarily park their money - rather than from capital market participants making investment decisions for the long-haul. There is a massive difference between these two strategies. The current support for steady to perhaps lower mortgage interest rates can (and probably will) fade as quickly as a whisper in a blizzard. It is definitely worth noting that the yield on the 30-year bond fell to lows last seen in the 1960's this morning following news of the large surge in the latest jobless claims numbers. The big "so what" factor attached to this bit of news is that the dividend yield for the stock markets has now moved above the yield on the 10- and 30-year bond for the first time since 1958. On a risk-adjusted basis the "best-bang-for-the-buck" equation is swinging in favor of stocks - an event that is likely to threaten the prospects for notably lower mortgage interest rates ahead. http://www.winchesterlendinggroup.com/mortgage-news/article/209/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/208/ This morning's battery of macro-economic news showed that consumer prices dropped at the fastest rate on record last month while new home construction set a new low as well. The Labor Department said inflation pressure at the consumer level plummeted 1.0% last month - exceeding the consensus estimate for a drop of 0.7% and marking the single biggest monthly drop in this measure since the department began keeping records in 1947. Much of the plunge in the headline consumer price index was created by a massive 8.6% drop in energy prices during October - a mark that goes into the record books as the largest single monthly decline for this component since the Labor Department began keeping records in 1957. Core prices, which exclude the more volatile food and energy components, edged 0.1% lower - well below analysts' calls for a reading showing a gain 0.1%. October was a month for the record books. In a separate report the Commerce Department said new-home starts dropped by 4.5% while building permits - a signal of future building intentions -- nose-dived by 12.0%. Both components set new record monthly lows. Not surprising, the Mortgage Bankers Association of America said the composite index of mortgage application activity fell 6.2% during the week ended November 14th. The number of loan requests for purchase money mortgages fell 12.6% will refinance application inched 2.6% higher. Expanding losses in the global stock markets due to roaring recession fears are fueling demand for dollar denominated long-term safe-haven investment vehicles like Treasury obligations and agency-eligible mortgage-backed securities. Investors all around the world are scrambling for low-risk investments that offer returns above inflation. For the time being this "flight-to-quality" buying spree is a godsend for the prospects of steady to perhaps fractionally lower mortgage interest rates. But don't loose sight of the fact that all of the current support for the mortgage market is filtering-in from investors only looking for a safe place to temporarily park their money - rather than from capital market participants making investment decisions for the long-haul. There is a massive difference between these two strategies. The current support for steady to perhaps lower mortgage interest rates can (and probably will) fade as quickly as a whisper in a blizzard. Pay very close attention to price action over the next couple of days. http://www.winchesterlendinggroup.com/mortgage-news/article/208/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/207/ This morning's outsized drop in the October Producer Price Index did nothing more than add one more reason for mortgage investors to push inflation fears to the bottom of the stack of near-term concerns. U.S. Producer Prices fell a record 2.8% in October as energy prices plummeted while the core producer price index, a value that excludes the more volatile food and energy prices, moved surprisingly higher. Core producer prices rose by 0.4% versus expectations for a gain of 0.1%, and were up 4.4% over the last 12 months, the steepest increase since 1989. Analysts seem to be relatively unconcerned about the "hotter" than anticipated pace of core price inflation at the farm and factory gate. The general thought is that the core index is simply reflecting the pass-through effect of higher energy prices earlier in the year -- but the upward price pressure will likely fade rapidly since energy and commodity costs have fallen off of a cliff since mid-year. Next up is tomorrow's 8:30 a.m. ET release of the October Consumer Price Index figures. Mortgage investors don't anticipate any significant mortgage market unfriendly data to be contained in this data series. http://www.winchesterlendinggroup.com/mortgage-news/article/207/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/206/ Mortgage investors have already priced-in a boatload of weak economic news. News from the Federal Reserve this morning concerning Industrial Production levels last month is certainly no exception. The data from the manufacturing sector showed industrial production rebounded by 1.3% in October after a downwardly revised drop of 3.7% in September. The Fed said they had underestimated the effect Hurricane Gustav and Ike had on the chemical industry in September. Those Hurricane-affected facilities began to return to production in October, boosting the industrial output figures for last month. The strike at Boeing had a negative impact on the industrial production figures for both September and October. Excluding those two special factors, output fell about 0.7% last month - within shouting distance of most mortgage investors' expectations. Capacity Utilization rose to 76.4% in October from 75.5% in September - a bit stronger reading than anticipated -- but still well below typical usage rates for this time of year. It took you longer to read the last paragraph than the amount of time mortgage market participants took to consider the numbers. The biggest reaction the data obviously generated among either readers or traders was an unstifled yawn. Weak economic data doesn't carry the same mortgage market friendly "punch" it once did. Guard against expecting too much price improvement from your investors on weaker than anticipated economic data - their rate sheet pricing already reflects a very gloomy economic outlook. http://www.winchesterlendinggroup.com/mortgage-news/article/206/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/205/ Retailers experienced the worst month for overall sales in October since records were first kept in 1992. Sales slumped 2.8% last month compared with a revised 1.3% fall in September. Sales excluding autos also notched a record 2.2% drop in October. The turmoil in the credit and funding markets is now making itself felt in the consumer sector. Most analysts had been braced for a lousy October retail sales figure - but not one as puny as was reported this morning - the consensus estimate was calling for a 2.0% decline in the headline sales figure. Looking ahead, next week's schedule of economic reports will include the October Producer Price Index on Tuesday (8:30 a.m. ET) followed on Wednesday by the October Consumer Price Index (8:30 a.m. ET). Both measures of inflation pressure are expected to post benign readings http://www.winchesterlendinggroup.com/mortgage-news/article/205/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/204/ Uncle Sam is in the credit market this morning looking to borrow $10 billion in the form of 30-year bonds. This is the last leg of a three-part borrowing effort that was designed to raise $55 billion over the course of this week. We may see a little short-lived (in terms of hours rather than days) rally in the mortgage market once this last big Treasury auction for the quarter is officially over this afternoon at 1:00 p.m. ET. There is a "ton" of bad macro-economic news already priced into the mortgage market. Today's mortgage investor response to a much sharper than anticipated rise in the number of people filing first-time jobless benefits claims is a perfect example of this paradox. The Labor Department said this morning that initial jobless claims for the week ended November 8th rose by a whooping 32,000 - well above the consensus estimate for a gain of 1,000 new claims. Jobless claims have now reached a level last achieved during the weeks immediately following the September 11, 2001 attacks. Normally, a large upward adjustment to this weekly measure of activity in the labor sector would be supportive of steady to lower mortgage interest rates. Why? Most investors see news of declining job growth to a be a harbinger of slower economic growth ahead - which ultimately means the demand for capital will decline and interest rates will move lower. This time around mortgage investors have obviously come to expect forthcoming data will be weaker than forecast - so when these expectations are confirmed - mortgage interest rates either tread-water or they edge higher. Tomorrow's October Retail Sale figure (8:30 a.m. ET) has a strong chance of falling below the consensus estimate. Is so, investor reaction in the mortgage market will likely be muted - just as it was to today's outsized gain in the weekly initial jobless claims number. http://www.winchesterlendinggroup.com/mortgage-news/article/204/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/203/ Uncle Sam is in the credit market this morning looking to borrow $20 billion in the form of 10-year notes. This is the second leg of a three-part borrowing effort that is designed to raise $55 billion before the week is over. Uncle Sam is currently the beneficiary of a global investment community that has become almost completely risk-adverse. The massive "flight-to-quality" buying spree this condition has created among investors couldn't have come at a better time. Our government just happens to have huge deficits to finance as it tries to rescue the financial sector and stimulate the economy -- so it is enthusiastically meeting the surging demand for safe-haven assets with massive sales of Treasury obligations. At least that's the story for today. Sooner rather than later the law of supply and demand will once again prevail -- and Treasury yields will rise. Just last week the Treasury estimated it will need to borrow $550 billion this quarter, more than triple the amount of earlier estimates. Once the current demand is met - the overhang of massive amounts of new incoming supply will weight on the capital markets heavily. The mortgage market will not be immune to this phenomenon. The coming sharp decline in investor demand continues to suggest the prospects for notably lower mortgage interest rates yet this year continues to remain dim. http://www.winchesterlendinggroup.com/mortgage-news/article/203/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/202/ Uncle Sam is in the credit market this morning looking to borrow $25 billion in the form of 3-year notes, a debt instrument that has been revived after lying dormant for 18 months. This is only the first leg of a three-part borrowing effort that is designed to raise $55 billion before the week is over. The three-year note offering will likely be fairly well received by both domestic and foreign investors-- but yields on Wednesday's 10-year notes and Thursday's 30-year bonds will likely have to rise in order to attract the capital to meet the government's borrowing need. If my assessment proves accurate, it will be a difficult week for those looking for mortgage interest rates to move notably lower. The mortgage market will be closed tomorrow for the Veteran's Day Holiday. The remaining three days of the week will include two big Treasury auctions on Wednesday and Thursday (10-year notes first followed by 30-year bonds) with Retail Sales to be released on Friday. http://www.winchesterlendinggroup.com/mortgage-news/article/202/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/201/ Typically the gloomier the labor market outlook, the more likely mortgage interest rates will edge lower. This time around things appeared to work out differently. Mortgage participants had been braced for a horrendous October nonfarm payroll report. When the numbers showed job loss during the month was more along the lines of a simple mundane disaster - traders decided to take profits in front of the weekend -- causing mortgage prices to move lower. The Labor Department reported this morning that employers slashed payrolls by 240,000 jobs in October -- and the national jobless rate rose to 6.5%. The government "data wonks" also adjusted the numbers for the August and September figures down by a collective 179,000. Still, after all of that, the October employment figures weren't nearly as bad as many analysts had anticipated. Looking ahead to next week, expect mortgage investors to remain skittish which means notably lower mortgage interest rates will likely be hard to come by. The mortgage market is scheduled to close early on Monday at 2:00 p.m. ET and it will remain closed on Tuesday for the Veteran's Day Holiday. The remaining three days of the week will include two big Treasury auctions on Wednesday and Thursday (10-year notes first followed by 30-year bonds) with Retail Sales to be released on Friday. http://www.winchesterlendinggroup.com/mortgage-news/article/201/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/200/ The mortgage market was bounced around a little this morning by the Bank of England's stunning 150 basis-point cut in short-term rates, well in excess of the most aggressive forecasts calling for a cut of 50 basis-points. .Short-term interest rates in Britain are now at their lowest level in more than 50 years. The sudden swoon in mortgage prices this morning suggest that mortgage investors are beginning to believe that the massive effort by the world's central bankers will ultimately prove to be effective in jump starting the global economic engine. Rate cuts are viewed as leading to a greater demand for capital which in-turn ultimately leads to higher interest rates. Closer to home the Labor Department said initial jobless claims for the week ended November 1st fell by 4,000 drew nothing more than a passing glance from mortgage investors. In a separate report the Department said third-quarter Productivity grew at a very anemic 1.1% pace while unit labor costs climbed 3.6%. While the unit labor costs increase is a bit disconcerting, most analysts see virtually no reason to fear resurgence in wage driven inflation pressures. The media channels are full of text and talk regarding the recession - and some even talking about an extended recession. As usual these "talking heads" fail to provide much perspective in terms of the time this economic condition might prevail. I think it is worth noting that since the Great Depression, there have been six major recessions; the recession of 1953, 1957, the 1973 oil crisis recession, the 1980 recession following the Iranian Revolution, the 1990's recession and the early 2000 recession brought on by the collapse of the dot-com bubble. Three of these recessions lasted two years - and the other three lasted one year - start to finish. If, as many suggest, the current recession began in mid-2007 -- we should reach the point at which economic activity begins to show a notable and sustained improvement somewhere between March and June of 2009. I personally find it hard to believe that $10 trillion in stimulus provided by the world's central banks -- together with massive cuts in short-term interest rates -- will fail to have its intended effect of freeing the economic pendulum from the current recessionary mire. If may assumption is accurate, look for the economic pendulum to get a very healthy push in the direction of accelerating growth as the largest amount of cash and cash equivalents the world has ever seen that is presently sitting on the sidelines gets deployed. http://www.winchesterlendinggroup.com/mortgage-news/article/200/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/199/ Lost in all the post-election buzz the morning was an announcement from the Treasury Department that it will sell a record $20 billion of 10-year notes, $10 billion in 30-year bonds, and $25 billion in three-year notes next week. It seems market participants did not even notice that the Institute of Supply Management's Service Sector Index posted a much larger-than-expected decline, falling to a reading of 44.4 versus the consensus estimate for a figure near 48.0. Last but not lest, the Mortgage Bankers of America's mortgage application index was all by completely overshadowed. The aggregate index of mortgage applications fell by 20.3% last week as refis tumbled 27.8% lower and purchase applications slumped by 13.9%. That's the bad news. The good news is that we are getting a little follow-through from yesterday's "relief" rally in the mortgage market. Investors are relieved the uncertainty surrounding the political environment that will influence our domestic capital markets - and to a lesser degree the global markets - for the next four-years has been resolved. Market participants are always far more comfortable with a devil they know - rather than a devil yet to be defined. The likelihood of an Obama victory and a Democratic Congressional majority was largely priced into the mortgage market yesterday - and the price improvement we're seeing this morning probably represents the wind-down of that election-day relief rally. Our new leaders will certainly have their hands full when they officially take over the reins of government on January 20th. Current leadership has all ready committed trillions of dollars in an effort to avert a financial system meltdown. The ramped up borrowing need the rescue programs have generated is expected to push the national debt well above $11 trillion. The probabilities are high that our domestic budget deficit will exceed 7% of our gross domestic product next year, more than double this year's deficit, and if projections are accurate, the budget deficit next year will be the highest in the developed world. The "so what" factor behind all this mumbo-jumbo is that China and Japan are among the largest holders of U.S. debt - debt that they have suffered some rather significant losses on lately. I suspect as these two countries are asked to take a major stake in financing the largest American budget deficit in history -- they may be more than just a little wary of extending significant amounts of new funds too aggressively. If my assessment proves accurate, the probability that interest rates will rise as we finish out this year and move into next is considerably higher than the likelihood that interest rates are poised to move notably lower. http://www.winchesterlendinggroup.com/mortgage-news/article/199/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/198/ Trading activity in the mortgage market this morning is light as most investors have moved to the sidelines to await the results of today's general elections. As they wait, market participants will begin playing "what-if" games as they try to visualize what a Democratic or Republican victory might mean in terms of its impact on the direction of mortgage interest rates - and will probably discover that it really doesn't matter much. No matter the outcome of today's elections, Uncle Sam is staring at the prospects of needing to borrow a staggering $2.1 trillion in the current fiscal year to fund economic rescue programs. Yesterday the Treasury Department said it would need to borrow a record $550 billion in the October - December quarter alone. Since Uncle Sam has the unique power to tax and print money he is not particularly concerned about the interest rate he'll have to pay to acquire the capital he is looking for. For the rest of us, particularly those of us in the mortgage market, who compete with Uncle Sam to attract capital from essentially the same investor base -- rising rates on government debt obligations will almost certainly put upward pressure on our mortgage interest rates - no matter which party controls the White House and/or what the Congressional party balance happens to look like. http://www.winchesterlendinggroup.com/mortgage-news/article/198/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/197/ The mortgage market is holding on to some modest upside price gains this morning. In the convoluted world of bonds and mortgage-backed securities news of economic weakness tends to be supportive of steady to slightly lower mortgage interest rates. The "why" behind this phenomenon is pretty straightforward. Slumping economic activity leads to a reduction in the demand for capital -- which ultimately leads to lower short- and long-term interest rates. Earlier today the Institute of Supply Management said its index of national factory activity fell to a reading of 38.9 in October from 43.5 in September. No big surprise here really - since the credit squeeze in the short-term credit markets has made it virtually impossible for companies to acquire the capital necessary to cover manufacturers' costs. Credit market conditions are improving at a snail's pace - so mortgage investors are keenly aware that it will be months yet before activity levels in the manufacturing sector begin to improve significantly. The big events remaining on this week's calendar include Wednesday's market response to tomorrow's election results -- and Friday's October nonfarm payroll report. Market participants have largely discounted the outcome of the Presidential race - but will likely be "bummed" (at least temporarily) if complete voting control of Congress winds up in the hands of one party. Expectations for a really, really ugly nonfarm payroll number (-200,000+) on Friday are running high. The consensus outlook has been completely priced-into the current mortgage market. In the very unlikely event the headline number is stronger-than-expected (say a job loss of 150,000 or less) and/or the national jobless rate comes in at 6.1% or less - the mortgage market will be vulnerable to a sharp decline in price and an upward surge in rate. The probabilities strongly favor a number that closely approximates the consensus estimate - which means Friday's much anticipated employment report will likely be a non-event as far as its impact on the direction of mortgage interest rates is concerned. http://www.winchesterlendinggroup.com/mortgage-news/article/197/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/196/ This morning's September personal income and spending report confirmed what most analysts had been anticipating - spending during the month fell 0.3% -- the biggest month-over-month drop in four years and a capstone to the weakest spending performance by consumers on a quarterly basis in three decades. Also contained in the report but virtually unnoticed behind the data confirming consumers have "thrown-in-the-towel" on spending was news that personal incomes rose 0.2% after a 0.4% gain last month. A component of the report that measures price pressure at the consumer level (the personal consumption expenditure index) posted a modest 0.2% gain -- totally dispelling, at least for the time being, investors' fears concerning the inflation outlook. This round of data certainly leaves the door wide open for the Fed to cut short-term interest rates further. In today's early going, futures on the Chicago Board of Trade show traders think the chance of a 50 basis-point cut at the conclusion of the Fed's December 16th meeting is about 75% -- up from odds of 0% just last week. I think it is worth noting any time the Fed chooses to cut short-term rates - the action is taken with the expressed intention of stimulating economic growth. The "so what" factor here is that investors in the bond and mortgage-backed securities markets are keenly aware of the fact that accelerating economic growth ultimately leads to an increased demand for capital - which in-turn ultimately pushes mortgage interest rates up. As I'm sure you already know, mortgage interest rates have really been struggling to make any notable headway to lower levels of late. Part of the problem is that investors outside of the United States have pulled back significantly on their normal purchases as they watch the government take step after step and commit billions after billions of dollars to support banks and guarantee a wide range of various debt instruments. These market participants are astutely aware that the amount of debt the Treasury will need to pay-off within one year has jumped from $1.8 trillion at the end of July to $2.1 trillion at the end of September and is likely to reach almost $2.4 trillion by the end of November. In total, the government will have to borrow more than $3 trillion in the markets in the next twelve months to replace maturing debt and to fund new programs. No matter how you choose to "slice-and-dice-it" the record amount of borrowing to come from Uncle Sam has sent many prospective buyers of mortgage-backed securities - especially 30-year fixed rate mortgages - to the sidelines. Since early October foreign central banks have allowed investments in agency debt and mortgage-backed securities to drop more $60 billion. These market participants will likely remain largely on the sidelines until evidence of more aggressive buying by the Treasury, Fannie Mae, Freddie Mac and domestic money-center banks emerges. Until this gridlock is broken - the prospects for anything more than short-term rallies in the mortgage market remain limited. http://www.winchesterlendinggroup.com/mortgage-news/article/196/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/195/ Trading activity in the mortgage market is slow-w-w this morning. Mortgage investors have become pretty "thick-skinned" these days with respect to the macro-economic news. Traders certainly gave the Commerce Department's first estimate of third-quarter gross domestic product (a statistical measure of the value of all the goods and services produced within the economy over a given period of time) a cold shoulder. The Commerce Department said the 0.3% (annualized) contraction in third-quarter economic growth was the steepest such decline since the corresponding quarter in 2001. Most analysts had been anticipating a 0.5% decline in the quarterly figure. Mortgage investors might have been disinterested in the Q3 GDP figures - but futures trades were quick to pencil in a strong likelihood the Fed will lop another 25 basis-points off of their benchmark fed fund rate at the Federal Open Market Committee's last meeting of the year on Monday, December 15th. I think it is worth noting any time the Fed chooses to cut short-term rates - the action is taken with the expressed intention of stimulating economic growth. The "so what" factor here is that investors in the bond and mortgage-backed securities markets are keenly aware of the fact that accelerating economic growth ultimately leads to an increased demand for capital - which in-turn ultimately pushes mortgage interest rates up. In the world of mortgage interest rates, the benefit of a fed fund rate cut is simply a function of a reduction in mortgage investors' short-term cost of capital - i.e. warehouse lines of credit. A change in the overnight lending rate commercial banks charge each other for funds to meet their reserve requirements (fed funds) - and a 30-year fixed-rate mortgage - have little other direct correlation - as we've all witnessed over the course of the past month or so http://www.winchesterlendinggroup.com/mortgage-news/article/195/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/194/ The Federal Open Market Committee (FOMC), the policy-setting arm of the central bank, is expected to announce its monetary strategy for the next six weeks at 2:15 p.m. ET. Fed Chairman Bernanke and his fellow members of the committee are expected to vote unanimously for a 50 basis-point cut to their benchmark fed fund rate (the rate of interest banks pay to borrow overnight funds from each other). Mortgage investors have fully priced in expectations for a 50 basis-point cut from the Fed at today's meeting - probably rendering the actual event as nothing more than ceremonial in terms of its impact on the current level of mortgage interest rates. There are some who believe the Fed will take a more aggressive posture, and cut short-term interest rates by 75 basis-points, which would take the benchmark fed fund into territory not visited since 1958. In my judgment, such a move would likely accomplish little as it would simply get lost in the vast array of other lending and liquidity facilities the Fed has deployed in the last six weeks. A 25-basis point rate cut would probably look like nothing more that silly, meaningless tinkering and a stand-pat position would make the Fed appear to be out-of-touch with current market conditions. All reasonable outcomes considered -- the probabilities strongly favor a 50 basis-point short-term rate cut. The post-meeting statement that will follow the Fed's monetary policy decision will probably be a virtual duplicate of the statement following the Fed's 50-basis-point rate cut on October 8th. The message from the committee members will likely acknowledge the big crimp consumer spending will likely put on the coming quarters' economic growth and will clearly define the downgrade in the Fed's inflation concerns by giving a nod to falling commodity prices and mounting weakness through every sector of the economy. http://www.winchesterlendinggroup.com/mortgage-news/article/194/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/193/ Mortgage investors shrugged off news that indicated consumers are as "bummed" as they have ever been since the private Conference Boards polling results were first recorded in 1967. No big surprise there as the stock market is on the verge of posting its worse one-month loss in 70-years, home-equity levels continue to fall, employment prospects for many have deteriorated and the negative political campaign adds have reached a fever pitch. There are even some grossly misinformed "talking heads" out there hawking the idea that an economic depression is right around the corner. I see significant reason to believe forecasts for a global economic collapse may be significantly off-of-the-mark. There is an old market adage that suggests, "The majority of people are always wrong at major market turning points." And I happen to believe we are fast approaching another market turning point - particularly with respect to stock market price action. I am squarely in the camp of those analysts that expect our domestic stock markets will begin a powerful rally before the end-of-the-year that will carry the averages as much as 15 to 20% higher. In historical terms valuations are as good as they have been in quite a while and a large number of stocks are becoming increasingly attractive to even the most pessimistic fund managers. Bear-in-mind this is my opinion only and I am not presenting any of this data in an effort to encourage you to load up big on stocks - but rather I want you to be aware of what's happening near-term that may have an impact on your investor's rate sheets. The bad news here is that big buying rallies in the stock market will not be particularly supportive of a sustained move to notably lower mortgage interest rates. The good news part of this story is that the near-term stock market rally will probably fade sharply before the end of the first-quarter of 2009 (I personally think a near-term rally in stocks will probably run-out-of-steam by mid-January). If my assessment proves accurate, the flow of funds back into safe-haven instruments like Treasury obligations and current vintage mortgage-backed securities will likely be huge - certainly solid enough to lend support to the prospects for relatively steady mortgage interest rates at least into mid-year '09. Credit markets are just treading water this morning as market participants await what is expected to be a 50 basis-point rate cut from the members of the Federal Open Market Committee on Wednesday afternoon. Traders have priced in a 100% chance that Fed Chairman Bernanke and his fellow committee members will slash their benchmark fed fund rate to 1.0% in response to unprecedented turmoil in the financial markets. Normally, such prospects of easier money would lift investor sentiment -- but this time around 50 basis-points may not be enough as worries over the developing global recession temporarily trump otherwise "good" news from the Fed. http://www.winchesterlendinggroup.com/mortgage-news/article/193/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/192/ Sales of newly constructed single-family homes rose in September and standing inventory shrank as builders slashed prices to their lowest level in four years in an all-out effort to move properties. The annual sales pace was up 2.7% in September from the August figure. The median sales price of $218,400 was the lowest since the $211,600 level reached in September 2004 while inventories dropped to their lowest level since June of '04. The 7.3% decline in inventory from August was the sharpest month-over-month drop on record. Across the country sales strength varied widely with sales down 21.4% in the Northeast and 5.8% lower in the Mid-west -- while new home sales were up 22.7% in the West and higher by 0.7% in the South. Mortgage investors took a disinterested looked at the numbers since the tremendous amount of standing inventory yet to be worked off and current tight credit conditions suggest the bottom of the market in new home sales won't likely manifest itself until mid-2009 at the earliest. Credit markets are just treading water this morning as market participants await what is expected to be a 50 basis-point rate cut from the members of the Federal Open Market Committee on Wednesday afternoon. Traders have priced in a 100% chance that Fed Chairman Bernanke and his fellow committee members will slash their benchmark fed fund rate to 1.0% in response to unprecedented turmoil in the financial markets. Normally, such prospects of easier money would lift investor sentiment -- but this time around 50 basis-points may not be enough as worries over the developing global recession temporarily trump otherwise "good" news from the Fed. Like a child throwing a tantrum - the markets don't seem to be satisfied with anything at the moment. Rest assured there is a moment - somewhere before the end of the first quarter of 2009 in my opinion - that the $10 trillion dollars global central bankers have injected into the world economy will clearly have its intended effect. Improved business conditions and the attendant surge in employment will begin slowly before becoming readily apparent to even the most pessimistic observer. At this point in the cycle (first-quarter 2009) mortgage interest rates will probably be moving higher as the demand for capital to fuel resurrected economic growth accelerates. While the refinance boom that many hope to see may fall short of expectations - the flood of new purchase applications that will wash through the mortgage market as part of the budding economic recovery will likely more than offset the otherwise limited refinance opportunities. Granted, my crystal ball is pretty fuzzy looking that far out, but near-term indications presently support the longer-term view. http://www.winchesterlendinggroup.com/mortgage-news/article/192/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/191/ Let's start with the good news first. The pace of existing home sales in September jumped sharply higher, posting a gain of 5.5%. The September increase was the largest monthly rise in sales since a 5.6% increase reported for July 2003. The median price for these units dropped 9.0% to $191,600. The National Association of Realtors said foreclosure-related sales accounted for 35 - 40% of last month's total. Of those, about 80% were for primary residence, higher than the average of about 75%. Lawrence Yun, chief economists for the Realtors, views the gain in primary residence sales as an indication that private investors are not driving the surge in home purchases - a good sign for the prospects of improved sales in the month's to come. The supply of previously owned homes at the end of September represented about a 9.9 month supply at the current sales pace - the lowest level since February and a nice drop from last month's 10.6 month supply figure. While the data does not signal that the bottom in the housing market slump is upon us - it does suggest that the existing home sales trend leaves adequate room to anticipate a bottom to be defined before the end of the first-quarter of '09. Now for the surprising news. The yield on the 30-year bond drop to its lowest level since these securities were first issued in 1977, as widening fears of global recession drove stock investors of every nationality to flee to the relative safety of U.S. dollar denominated assets, particularly those assets backed by the "full-faith-and-credit" of the United States government. I mention this "full-faith-and-credit" thing because it is a critically important component of any discussion regarding the lagging performance of mortgage-backed securities in today's gargantuan movement of global capital into our credit markets. It appears fixed-income market participants are making a significant distinction between government guaranteed and government backed. More specifically, market participants are showing a high degree of sensitivity to the distinction James Lockhart, director of the Federal Housing Finance Agency (the agency that oversees Fannie Mae and Freddie Mac) made yesterday when he said the two government sponsored enterprises debt does not have a "full-faith-and-credit" guarantee from the government -- but rather these agencies debt instruments are "backstopped" by the government. On its face this word-play may seem to be nothing more than an exercise in splitting hairs - but players in the credit markets, especially international players, are so nervous and so hyper risk-adverse that any inkling that a investment instrument may not be quite as bulletproof as a direct Treasury obligation scares them off completely. Such is the case with mortgage-backed securities. This condition may change as the dynamics of the world financial crisis changes in the days to come - but for the time being -- it presents a major impediment to the probabilities for a notable move lower in the current level of mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/191/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/190/ Mortgage investors were not surprised when the Labor Department reported that initial claims for jobless benefits rose by 15,000 during the week ended October 18th. The broad expectation is that the labor sector will remain weak through at least the end of the first-quarter of '09. The weekly jobless claims data does little more than define the degree of dreariness in the labor sector. One bright spot in the news this morning is indications that the FDIC and the Treasury Department are working closely to create a loan guarantee program that would serve as an incentive for mortgage investors to modify existing home loans. Shelia Bair, the chairperson on the Federal Deposit Insurance Corporation told a Senate Banking Committee this morning that the government should establish standards for loan modifications and provide guarantees for loans meeting those standards. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term," Bair said. Bair's position represents the opinion I have heard from a number of my readers - more needs to be done to address the root problem of home foreclosures. A government loan modification program of some sort will likely be hammered out within the next two months and that will help hundreds of thousands of homeowners retain their properties - and by extension it will help reduce the downward pressure on the home values in many areas. http://www.winchesterlendinggroup.com/mortgage-news/article/190/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/189/ Investors the world over continue to flock to the dollar and dollar denominated assets (like mortgage-backed securities) as speculation mounts that central banks elsewhere will aggressively cut short-term interest rates in an attempt to stimulate growth in their respective economies in the near-term. The fear, overshadowing the progress being made in fighting financial collapse in the world's credit markets, is that the global economic climate is deteriorating at such a rapid pace that a drawn-out recession is inevitable. I think the jury is still out on that one - but it appears that stock investors are increasingly headed for the exits nonetheless - selling stocks and moving the proceeds into the relative safe-haven of the bond and mortgage-backed securities market. As long as this migration of capital out of world-wide stocks into dollar denominated assets continues - mortgage market conditions will tend to be supportive of steady to fractionally lower interest rates. In other news of the day the Mortgage Bankers of American announced that their seasonally adjusted index of mortgage applications slipped 16.6% lower last week. The purchase application component of the index fell 10.9% while refinance applications edged 23.5% lower. Worth noting was the fact that the national average 30-year fixed rate mortgage dropped 19 points to 6.28%. For comparison, according to Freddie Mac, the monthly average 30-year mortgage fixed-rate during the month of October was 6.38% in 2007 and 6.40% in 2006. Against this backdrop it is easier to see that the mortgage market is currently dealing more with a crisis of confidence on the part of prospective borrowers - as opposed to the ramifications of notably higher interest rates. Worth repeating: Research shows it tends to take a minimum of three months for market participants to begin to show even the faintest signs of overcoming a market shock. Such was the case in the major mortgage market swoon of 1987 and again in the big sell-off in 1998 following the fall of hedge fund Long Term Capital Management. Predicated on historical experience, if we assume the apex of the financial crisis in the mortgage market probably occurred in mid-September when the government seized control of Fannie Mae and Freddie Mac, the first sign of the return of "normal" trading conditions in the mortgage market won't likely start to manifest itself until sometime in January of '09. In the interim, I think it would be wise to bear-in-mind that while none of us can possibly control how much higher prices will go - we ought to focus on the market condition we can influence http://www.winchesterlendinggroup.com/mortgage-news/article/189/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/188/ The interbank cost of borrowing continues to fall this morning, strengthening the view that improving money market conditions suggest the worst of the financial crisis may now be behind us. The various measures from policymakers around the world to prop up banks, cut short-term interest rates, flood financial systems with cash and make it easier and cheaper for financial institutions to access capital seem to be working. The greatest financial crisis any of us have every seen will not be truly over until the prop of massive central bank and government intervention is actually removed and banks can lend to each other without outside assistance. Most believe that point is potentially a year or two away yet - which means by extension that it will take exactly the same period of time before financial markets can truly trade with any semblance of normality. Yesterday's massive rally in the mortgage market stands out as a shining example of this unusual dynamic. The government chose yesterday as the day to make large purchases in the mortgage-backed securities market - not because the price of the assets class was at a level that was just too tempting to pass up - not because the macro-economic data indicated that this was an opportune time to add fixed-income assets to the portfolio - but the huge buying appetite seems to have been created by the simple fact that it is was Monday -- and somebody within the government machine decided it was time to spend a little of the taxpayers money. Don't get me wrong - I'm certainly not bad mouthing a rally to lower mortgage interest rates - I'm just pointing out how unusual mortgage market conditions have become. Research shows it tends to take a minimum of three months for market participants begin to show even the faintest signs of overcoming a market shock. Such was the case in the major mortgage market swoon of 1987 and again in the big sell-off in 1998 following the fall of hedge fund Long Term Capital Management. Predicated on historical experience, if we assume the apex of the financial crisis in mortgage market probably occurred in mid-September when the government seized control of Fannie Mae and Freddie Mac, the first sign of the return of "normal" trading conditions in the mortgage market won't likely start to manifest itself until sometime in January of '09. http://www.winchesterlendinggroup.com/mortgage-news/article/188/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/186/ The interbank cost of borrowing fell dramatically this morning as banks appear to be growing more confident of lending rather than hoarding cash. The most pronounced indication of the thawing of the short-term credit facilities came in the bill sector - suggesting traders are shifting capital out of very short-term investment vehicles and moving that capital into higher yielding assets like stocks - and to a lesser degree - 30-year mortgage-backed securities. London interbank offered rates for overnight funds fell to a four-year low (near the Fed's target rate of 1.5%). One-week and three-month rates were active as well, falling by almost half a percentage point while the closely-watched three-month spreads slipped back below 300 basis points. At the height of the credit crisis earlier this year the spread was around 370 basis points. The "so what" factor behind all the preceding mumbo-jumbo is that it appears the credit crisis that threatened to plunge the world into a financial apocalypse is beginning to abate. The measures adopted by global financial authorities over the past couple of weeks are having the desired effect. Hope has returned that capital will soon start flowing again to corporations and consumers alike. It is expected improved consumer confidence will ultimately drive an increased demand for single-family home financing in the months to come. In other news of the day, Federal Reserve Chairman Bernanke was on Capitol Hill this morning testifying before the House Budget Committee on the economic outlook and financial market conditions. Mr. Bernanke told members of the Committee that economic growth will run below its potential for several quarters to come. He endorsed an idea swirling around on the Democratic side of the aisle that proposes another $150 billion stimulus package to jump-start economic activity early next year. This issue will be the subject of a storm of debate before it finally makes its way to the House floor for a vote. Lost in the dust generated in the credit markets this morning was the Conference Board's release of the September Leading Indicators. The index, designed to forecast turning points in the economy six to nine months ahead, posted a larger-than-expected gain of 0.3%. Mortgage investors were unimpressed -- and most believe the September figure was a one-month aberration in a long-term trend indicating slower growth ahead. http://www.winchesterlendinggroup.com/mortgage-news/article/186/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/187/ Construction starts on new single family residential homes fell to their lowest level in more than 17-years last month -- while filings for building permits hovered just above a 27-year low. The Commerce Department reported that starts on new homes fell 6.8% in September and building permits tumbled 8.3% lower. While the figures were weaker than most investors had been anticipating - the data didn't have much market "punch" since soft data expectations were already priced into the mortgage market. Looking ahead - the coming week will be slow in terms of economic data. Monday's September Leading Indicators (10:00 a.m. ET) will probably garner little more than a passing glance from mortgage investors, and the reception for the initial weekly claims data on Thursday (8:30 a.m. ET) is likely to be about the same. Traders will pay a little more attention to Friday's September Existing Home Sales numbers -- but only to get a feel for the degree of weakness remaining in the housing sector. The "wild-card" of the upcoming week will be Fed Chairman Bernanke's testimony on the economic outlook and financial markets at a House Budget Committee hearing on Monday (10:00 a.m. ET). It is highly unlikely his testimony will include anything mortgage market moving - but then again you never know until you know. Mortgage investors are continuing to pace the floor as they fret about the impact of a massive load of new government debt that will soon be hitting the capital markets as the rescue effort of our financial system moves into overdrive. Like other events in life, the waiting will likely prove more painful than the event itself - but until the process ramps up and the size of the government's debt appetite can be reasonably estimated - mortgage investors will likely be very hesitant to push rates noticeably lower. http://www.winchesterlendinggroup.com/mortgage-news/article/187/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/185/ Today's September Consumer Price Index, a statistical measure of the average price a typical (whoever they are) U.S. consumer pays for a market basket of goods and services, remained unchanged from the month earlier level. Even better news for most of us, energy costs declined 1.9% in September after a 3.1% drop in August. Energy services prices, which includes the costs for natural gas and electricity, tumbled by 3.2%, the biggest decline in the 61-year history of the data series. The short story here is that inflation threats have all but disappeared from investors' economic radar screens - and that's a condition that tends to be supportive of steady to fractionally lower mortgage rates. Watch for news headlines screaming that U.S. industrial production posted the biggest monthly decline since 1974 - and take it with the proverbial "grain-of-salt." While it is true that the September Industrial Production* posted an outsized drop of 2.8% -- the majority of the decline was created by hurricanes and a labor strike. Last month's Gulf Coast Hurricanes Gustav and Ike accounted for 2.25% of the decline while a strike at Boeing Co. accounted for most of the remaining slump. Capacity Utilization, a statistical measure of the portion of manufacturing and utility plants in use, fell to 76.4% in September from 78.7% in August. There is no doubt that the activity levels in the manufacturing sector are declining along with the overall economic growth rate - but the disaster scenario the media seems to be painting is considerably off the mark. Mortgage investors essentially shrugged off this morning's friendly economic data and remain consumed with worry over the depth of the credit crisis. They are pacing the floor and wringing their hands as they weigh the impact of a massive load of new government debt instruments hitting the capital market as the rescue effort of our financial system moves into overdrive. Like other events in life, the waiting will likely prove more painful than the event itself - but until the process ramps up and the size of the government's debt appetite can be reasonably estimated - mortgage investors will likely be very hesitant to push rates noticeably lower. http://www.winchesterlendinggroup.com/mortgage-news/article/185/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/184/ Cash is king - and investors are selling out of even their lowest-risk government debt to raise cash. Agency eligible mortgage-backed securities are one of the few places where investors can take profits to offset the massive losses in other segments of their investment portfolios. The current trading activity is definitely an anomaly. We're use to seeing selling pressure in the stock market produce "flight-to-quality" buying sprees in the Treasury and mortgage-backed securities markets that support lower rates and higher investor prices. This time around very short-term Treasury bills and money-market accounts are considered the "safe-haven" of choice -- as investors focus exclusively on the return OF their capital - at the expense of a return ON their capital. This strategy will be appealing for only so long before the pendulum swings back in favor of putting all this cash back to work in the market place. The day's economic news was essentially overlooked this morning as traders responded to the early heavy selling pressure in the mortgage market. Even so, the data is worth noting. The nation's retailers recorded their biggest monthly sales decline in more than three years last month, while the inflation news from the manufacturing sector was mixed. Retail sales fell 1.2% in September while the producer price index dropped 0.4%. The core producer price index (a value that excludes the more volatile food and energy components) was stronger than expected - posting a 0.4% gain. Predicated on the sharp fall in retail sales over the past two months most analysts are now cranking up their expectations that we'll see negative economic growth for the third-quarter. If so, the prospects for another 50 basis-point rate cut from the Fed at their early November meeting (Nov. 3rd and 4th.) will be high. http://www.winchesterlendinggroup.com/mortgage-news/article/184/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/183/ Cash is king - and investors are selling out of even their lowest-risk government debt to raise cash. Agency eligible mortgage-backed securities are one of the few places where investors can take profits to offset the massive losses in other segments of their investment portfolios. The current trading activity is definitely an anomaly. We're use to seeing selling pressure in the stock market produce "flight-to-quality" buying sprees in the Treasury and mortgage-backed securities markets that support lower rates and higher investor prices. This time around very short-term Treasury bills and money-market accounts are considered the "safe-haven" of choice -- as investors focus exclusively on the return OF their capital - at the expense of a return ON their capital. This strategy will be appealing for only so long before the pendulum swings back in favor of putting all this cash back to work in the market place. The process will be slow initially, but I see reason to believe the first attempt at moving off of a price bottom in the credit markets will be made by Halloween. Looking ahead to next week developments in the world's capital markets will probably easily overshadow upcoming macro-economic data which will include; Wednesday's September Retail Sales and Producer Price reports (8:30 a.m. ET), Thursday's Consumer Price index figures (8:30 a.m. ET) and Friday's (8:30 a.m. ET) September Housing Starts and Building Permit numbers. http://www.winchesterlendinggroup.com/mortgage-news/article/183/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/182/ The macro-economic news of the day did not create so much as ripple in the mortgage market. The Labor Department reported the number of workers filing first-time jobless claims fell 20,000 last week, a value that was essentially in-line with expectations. The Commerce Department chimed in with the broadly anticipated news that wholesale inventories rose sharply in August as sales dropped by the most in more than a year. Wholesale inventories were up 0.8% in August while July levels were revised to show an increase of 1.5%. The lion's share of the selling pressure in the mortgage market this morning is being created as fixed-income investors (banks, insurance companies, mutual funds, wealthy independent investors, foreign sovereign governments, etc) begin making adjustments in their portfolios in front of what they know will be a massive amount of new issuance from Uncle Sam. There is absolutely no doubt that the government will be flooding the credit markets with tons of new debt instruments as they look to finance the $700 billion financial rescue package approved by Congress last week. More supply = lower prices. As if that wasn't enough - my sources tell me they were seeing some rather large agency eligible mortgage-backed security sell orders coming in from domestic as well as foreign banks in today's early going. I guess that makes sense - agency eligible mortgage-backed securities are definitely a marketable liquid asset - so if you need to raise some cash quickly - offload an asset that is easiest to sell. If this is indeed the case - I bet the heavy selling pressure we've experienced this morning will lighten up a bit as the day progresses. http://www.winchesterlendinggroup.com/mortgage-news/article/182/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/181/ Central bankers around the globe put their money down and gave the financial roulette wheel another big spin this morning. In an unscheduled announcement made as investors were reaching their offices early this morning, the Federal Reserve announced it cut the benchmark fed funds rate by 50 basis-points to 1.5%. Central banks in China, Britain, Canada, Sweden, Switzerland as well as the European Central Bank also cut rates in a rare coordinated move. Fed Chairman Bernanke and his fellow central bankers unanimously approved the rate change. In the statement announced the monetary policy decision, the Fed indicated it is ready to move again whenever warranted by saying, "The committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and prices stability." The initial reaction in the world's stock markets to this "surprise" coordinated move by central bankers of some the largest industrialized countries was positive for a brief and shining moment - before selling pressures return and pushed market averages notably lower. Everything the Fed is doing will eventually have a positive effect - but it will all take some time. Stock holders are currently in no mood to be patient - not for one hour much less multiple months -- and so the selling pressure continues. On the other hand, fixed-income investors (those that buy and hold notes, bonds and mortgage-backed securities) live in the future - not in the present. The closest their radars focus is three to six months out. These market participants see a completely different picture - where massive amounts of liquidity in the banking system, fed fund rate cuts, government sponsored loan guarantee and buy-back programs of every description will ultimately lead to renewed confidence in the banking system. Once confidence in the banking system is restored resurgent business confidence will blossom, followed in short order by consumer confidence and a soaring demand for capital as everybody realizes that America is on sale - and opportunities to acquire assets of every kind at a discount abound. Completely overshadowed by news of the coordinated international short-term rate cuts the National Association of Realtors announced earlier today that pending sales of existing homes (based on contracts signed) unexpected jumped 7.4% in August - well above economists forecast for a drop of 1.8%. The August gain was the highest level this index has achieved in over a year. In tandem with this report the Mortgage Bankers of America said its seasonally adjusted index of mortgage application activity rose by 2.2% in the week ended October 3rd - after falling 23.0% in the prior week. Applications for loan refinancing rose 0.9% while requests for home purchases were up 4.3% during the period. http://www.winchesterlendinggroup.com/mortgage-news/article/181/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/180/ Fed Chairman Bernanke and his fellow central bankers, invoking special power during this period of "unusual and exigent (a fancy word for demanding or critical) circumstances," have created a new special-purpose lending facility in an all out effort to kick-start the sputtering short-term credit markets. The new operation will be known as CPFF - which cleverly stands for commercial paper funding facility. The central bank said it is acting because money-market mutual funds and other traditional investors have become increasingly reluctant to buy commercial paper, which is a short-term financing mechanism many companies reply on to finance their day-to-day operations, such as purchasing supplies and making payrolls. The $99.4 billion daily market for this crucial financing has virtually dried up - pushing many otherwise viable businesses to the brink of insolvency. The central bank's highly unusual move to buy debt that is not collateralized will hopefully prove powerful enough to thaw this vital source of funding so necessary for the ultimate recovery of the financial markets and the economy. The Fed expressed the hope that by eliminating risk about whether eligible corporate borrowers would be able to repay investors, the new facility would encourage resumption of normal short-term lending (measured in term of days or at most weeks) in the commercial paper market. The Fed plans to discontinue this program on April 30, 2009 unless circumstances require its extension. Also worth noting; Fed Chairman Bernanke, using new powers authorized under last week's Congressional financial rescue plan, has started paying interest on funds banks have on deposit in the Federal Reserve Bank system. This move has brought down the overnight lending rate banks charge each other to 1.25%. That's 75-basis-points below the 2.0% target set by the Federal Open Market Committee members at their last meeting in September. This new development does not necessarily preclude the 50-basis point rate cut many analysts and investors are expecting from the Fed at their end of the month meeting - but in my judgment - it sure reduces the likelihood of such a move. The "so what" factor behind all the preceding mumbo-jumbo is pretty straightforward - the Fed is mobilizing all the resources at its command to rekindle business confidence and economic growth. If the Fed's massive efforts prove successful, look for the stock market to rally while mortgage interest rates edge higher. http://www.winchesterlendinggroup.com/mortgage-news/article/180/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/179/ The passage of the financial rescue package on Friday did little to shore up confidence in global credit markets. It is becoming increasingly evident that while governments can shore up their banks balance sheets and return them to solvency - but governments can't make banks lend - even to each other. European central banks took a tentative and uncoordinated stab at breaking the short-term credit logjam that threatens to bring their respective economies to a grinding halt. These weekend efforts reflected a will to restore confidence in financial systems - but were woefully short anything even close to hard hitting, fast acting resolve. Rather than restoring investor confidence - these timid efforts created a panic of sorts - with global stock markets experiencing heavy selling in expectation of a "too little -too late" effort by European leaders. The recent combination of economic and credit worries has once again led to massive amounts of capital flowing into the money markets, Treasury obligations, and other instruments like mortgage-backed securities at the expense of stocks today. Until signs the massive amounts of capital being pumped into the global banking system by the central banks of industrial countries is beginning to meaningfully grease the wheels of commerce - stocks the world over will likely continue to experience heavy selling as capital flees into the relative safe-harbor of the fixed-income markets. For the present - that's definitely a positive for the prospects of lower rates and higher investor prices here at home. http://www.winchesterlendinggroup.com/mortgage-news/article/179/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/178/ Mortgage investors are just marking-time this morning - waiting to see if the "sweetened" financial rescue bill will attract enough votes this time around to send it on to the President for his signature. No one wants to take a position in front of this event - so buyers in the mortgage market are extremely hard to find in today's early going. The recent combination of economic and credit worries has led to massive amounts of capital flowing into the money markets, Treasury obligations, and other instruments like mortgage-backed securities at the expense of stocks. The measure now under consideration by members of the House of Representatives is designed to break credit market logjams -- freeing up the flow of capital to grease the wheels of commerce. Until this issue is resolved, it will continue to trump all incoming economic data. So far, mortgage investors have shrugged off earlier news that September nonfarm payrolls fell a sharper than expected 159,000 while the jobless rate remained at 6.1%. In the convoluted world of fixed-income securities, slumping employment is generally viewed as mortgage market friendly news (the idea here is that fewer borrowers tend to lead to less demand for capital which ultimately leads to lower interest rates). Next week's economic calendar offers nothing but featherweight reports - Thursday morning's initial weekly jobless claims figures and later in the same day, August Wholesale Inventories. That's probably just as well - since the majority of next week's trading action will likely be driven by the outcome of today's House vote. Passage of the measure will likely see a big reversal of "flight-to-safety" strategies -- with capital flowing back into the stock markets at the expense of Treasury obligations and mortgage-backed securities. If the measure goes down in flames a second time, or if it is sent back to the Senate with additional amendments, the stock markets will likely suffer while safe-haven vehicles like money markets, short-term Treasury obligations and to a lesser degree mortgage-backed securities - try to figure out what to do with all the extra money that is washing in waves into their market sector. I am closely monitoring the debate and pending vote in the House - as soon as a decision is reached I'll update this commentary. http://www.winchesterlendinggroup.com/mortgage-news/article/178/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/177/ The mortgage market continues to be at the mercy of gyrations in the stock prices, as investors pile in and out of safe-haven trades as the chance of a financial rescue package actually being ratified this week rises and falls. As I'm sure you know by now, last night the Senate voted 74 - 25 for the legislation after adding a $150 billion package of tax breaks for businesses and alternative energy development. The package also includes alternative minimum tax relief for some 24 million mostly middle class taxpayers. The Senate move has ruffled some House Democrats who had voted for the House version of the financial rescue plan. Rep. Charles Rangel, who heads the tax writing House Ways and Means Committee, said, "Senate leadership took an unprecedented gamble when they attached a package of tax extenders to the emergency financial legislation." Many see this latest round of political brinkmanship as packing the potential to drive away some conservative Democrats in the House who have long argued any tax cuts should be paid with other spending reductions or tax increases. The new tax breaks and added costs may be a breaking point - pushing some who initially voted for the financial rescue measure to become its opponents. Most observers believe the House will put the revised bill to a vote as early as noon on Friday. In order to pass, the measure will require the approval of a simple majority of the 435 members of the House of Representatives - 221 "yea" votes. If the House passes the bill with no changes it goes directly to President Bush for his signature into law. If the House makes any changes, the bill goes back to the Senate for approval. Until this issue is resolved, it will continue to trump all incoming economic data. So far, mortgage investors seem to have taken little notice of economic reports showing a sharp slowdown in growth. It appears tomorrow morning's 8:30 a.m. ET release of the September nonfarm payroll data will do little to shake them out of their stupor. Investors have fully priced in an expected 100,000 headcount decline for the nonfarm payroll figure as well as a national jobless rate hovering near 6.1%. It will likely take a nonfarm payroll number of 50,000 or less and/or a jobless rate reading of 5.9% or less to support a notable data driven rally in the mortgage market tomorrow. There are some pundits suggesting the Fed is poised to cut-short term interest rates (fed funds) by 50 basis-points at their upcoming meeting at the end of the month. I've heard a few "talking heads" opine that such a move by the Fed will go a long way toward pushing mortgage interest rates lower. At this juncture, even though I hate to rain on anybody's parade, I don't think such an outcome is very likely. The cut would only affect the cost of funds banks charge each other for overnight lending and it has little to do with what banks charge their borrowers for short-term loans - and even less on what they charge for 30-year mortgages. Should the rescue package actually be ratified and become law this week - it is highly likely that capital will pour out of the low yielding safety of Treasury obligations and mortgage-backed securities in search of the bigger "bang-for-the-buck" offered in the stock market. Passage of the bill will virtually guarantee that Uncle Sam will announce on November 5th a massive increase in his upcoming debt sales. In my judgment, no matter how you try to "water-it-down" with arguments about weak macro-economic supporting the prospects for lower mortgage interest rates - a gargantuan borrowing appetite from the government trumps all - and puts solid upward pressure on mortgage interest rates ahead. Hope that I am wrong - but be prepared in case I'm right. http://www.winchesterlendinggroup.com/mortgage-news/article/177/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/176/ Congressional leaders are pulling out all the stops to revive a financial rescue package for the nation's banking system - and by extension - the economy in general. The Senate is scheduled to vote on a revised government bailout package at 7:30 p.m. ET tonight. The revised bill includes provisions to increase FDIC insurance on bank deposits to $250,000 from the current limit of $100,000. Also included this time around is a two-year extension of tax breaks that will save individuals about $149 billion (spread out over the next 10-years). Both measures were not in the bill that went down in flames on Monday in the House, and many believe Republicans that opposed the first package may find the revised piece of legislation more palatable. There is another, much stronger force at work that adds significant weight to the probabilities both Chambers of Congress will approve the measure this time around. Capital Hill has been inundated by emails, phone calls and other forms of communication from people on Main Street urging immediate passage of this bill. Leading up to the vote on Monday - the majority of Americans vehemently opposed the financial rescue measure. The stock market nosedived to its sharpest one-day loss in history immediately after the measure was rejected by members of the House of Representatives - ripping to shreds the value of retirement and common 401(k) plans for millions of people. Not surprising, taxpayers are now the strongest of all proponents for the $700 billion financing package from the government - with more than 70% on the incoming communications to Texas Republican Joe Barton's office now heavily in favor of the bill. Other members of Congress are reporting equally heavy support from the voters in their districts. In the run-up to the November election - this sudden surge in popular support for the rescue package will undoubtedly carry a great deal of sway with members of Congress - especially those up for re-election. Economic data is just so much background noise as mortgage investors are glued to the game of political brinkmanship currently being played by the politicians in Washington. If a resurrected plan fails to get Congressional approval again, the stock market will likely sell off hard - temporarily producing support for steady to fractionally lower mortgage interest rates in the process. Without the plan, the economy will likely spin into a rather deep and protracted recession as credit disappears and the consumer is reduced to a "cash-and-carry" existence. Credit is the grease that keeps the gears of economic growth and employment running smoothly. If consumers access to credit is sharply curtailed .. well let's just say that is something none of us will benefit from. There are some pundits suggesting the Fed is poised to cut-short term interest rates (fed funds) by 50 basis-points at their upcoming meeting at the end of the month. I've heard a few "talking heads" opine that such a move by the Fed will go a long way toward pushing mortgage interest rates lower. At this juncture, even though I hate to rain on anybody's parade, I don't think such an outcome is very likely. The cut would only affect the cost of funds banks charge each other for overnight lending and it has little to do with what banks charge their borrowers for short-term loans - and even less on what they charge for 30-year mortgages. Should the rescue package actually be ratified and become law this week - it is highly likely that capital will pour out of the low yielding safety of Treasury obligations and mortgage-backed securities in search of the bigger "bang-for-the-buck" offered in the stock market. Passage of the bill will virtually guarantee that Uncle Sam will announce on November 5th a massive increase in his upcoming debt sales. In my judgment, no matter how you try to "water-it-down" with arguments about weak macro-economic supporting the prospects for lower mortgage interest rates - a gargantuan borrowing appetite from the government trumps all - and puts solid upward pressure on mortgage interest rates ahead. Hope that I am wrong - but be prepared in case I'm right. http://www.winchesterlendinggroup.com/mortgage-news/article/176/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/175/ Sometimes all it takes is a dozen kisses . or a dozen roses . or for that matter a dozen donuts to make things better. In the case of the turmoil currently engulfing the financial markets -- all it will take is a dozen votes to resurrect the government's financial bailout package. As I'm sure you know by now, the $700 billion federal package designed specifically to perform major triage on the nation's banking system failed to pass in the House of Representatives by a razor-thin margin of 228 votes against -- and 205 in favor. Most observers and analysts believe reversing Monday's decision is a simple matter of targeting wavering "no" votes and pointing out a few facts -- such as how the stock market erased $1.7 trillion dollars of shareholders wealth as a direct result of House legislators failure to respond to a national crisis with anything more than petty partisan political in-fighting. Yesterday's stock market loss would have paid every penny of the cost of the proposed rescue package -- twice - with more than just a little "pocket-change" to spare. In any case, the issue will not be revisited until Congress returns to work full-force on Thursday, following a brief adjournment for the Jewish New Year. The top lobbyist for the Mortgage Bankers of America, Francis Creighton, believes the legislation will have to be tweaked - probably not by much -- before lawmakers will take another stab at getting the measure passed by the members of the House. Creighton believes a small incremental change - maybe more Congressional oversight - would be enough to pull in another fifteen or twenty votes - more than enough "yea" ballots to get the measure through the House and sent on its way to the Senate for consideration. The top Democrat in the Senate, Majority Leader Harry Reid, and the top Republican in the Senate, Minority Leader Mitch McConnell have promised that the measure will be swiftly passed in their Chamber and will be on its way to the President for his signature, perhaps before the market close on Friday. McConnell told reporters today, "We will get the job done. We'll get it done this week." Should the rescue package actually be ratified and become law this week - it is highly likely that capital will pour out of the low yielding safety of Treasury obligations and mortgage-backed securities in search of the bigger "bang-for-the-buck" offered in the stock market. If my assessment proves accurate, mortgage interest rates will creep marginally higher while your investors push rate sheet prices lower. http://www.winchesterlendinggroup.com/mortgage-news/article/175/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/174/ As I write, the capital markets are holding their collective breath awaiting the outcome of a vote in the House of Representatives for a financial markets rescue plan. The formal vote is expected sometime after 1:00 p.m. ET - and is expected to be close. If the measure passes the House, it will be sent to the Senate for a vote that is expected by Wednesday where it will likely pass by a much wider margin than in the House. The legislation would then go to President Bush for his signature and the whole thing may be "wrapped-up" by Friday, October 3rd. Once the plan becomes law, the Treasury will have to establish the process by which will buy troubled loans that has brought the nation's banking system to its knees. Concerns that Congress will bog down in partisan bickering and fail to ratify the rescue package has caused capital to flee the stock markets for the relative safe-haven of Treasury notes, bonds, and mortgage-backed securities. Once the rescue package is ratified and becomes law this "flight-to-quality" effect will probably reverse fairly quickly- with capital leaving the low yielding safety of Treasury obligations and mortgage-backed securities in search of a bigger "bang-for-buck" offered in the stock market. Keep your fingers crossed that calmer, cooler heads soon prevail. The sooner the "clean-up" of the financial tsunami that has laid waste to large portions of our national banking system begins in earnest -- the sooner a recovery to modestly lower mortgage interest rates will likely develop. http://www.winchesterlendinggroup.com/mortgage-news/article/174/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/173/ The dominant factor influencing trading activity in the mortgage market today is the partisan Congressional bickering and posturing surrounding the prospects of a government bailout of the U.S. financial markets. The plan, at least in most general terms, is designed to authorize $700 billion to buy up distressed debts from financial firms, starting with $250 billion immediately, $100 billion when the president certifies the emergency and $350 billion more in May. As I have mentioned before, the government entity to be created would be similar to the Resolution Trust Corporation (RTC) which proved useful in helping resolve the savings and loans crisis of the 1980s. Rather than hold and sell the assets of failed banks as the RTC did, the new entity would purchase toxic loans at a steep discount from solvent financial institutions -- and then eventually sell back those repackaged loans into the market through an auction. This is not an all bad idea - especially if the majority of these loans are collateralized by an asset such as a single-family residence. Unfortunately for all of us, this is a presidential election year, so both congressional parties having temporarily (let's hope) lost sight of the bigger picture and have devolved into a round of partisan posturing in an attempt to capture the most political "hay" from ratifying this plan. Keep your fingers crossed that calmer, cooler heads soon prevail. The sooner the "clean-up" of the financial tsunami that has laid waste to large portions of our national banking system begins in earnest -- the sooner a recovery to modestly lower mortgage interest rates will develop. http://www.winchesterlendinggroup.com/mortgage-news/article/173/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/172/ Like trauma room doctors - Treasury Secretary Paulson, Fed Chairman Bernanke together with support from most members of Congress are scrambling to revive the critically ill global financial system. It looks like one of the treatment regimes being considered will strongly resemble a critical care technique from a bygone era. Treasury Secretary Paulson is finding growing support for the development of a government entity similar to the Resolution Trust Corporation (RTC) which proved useful in helping resolve the savings and loans crisis of the 1980s. Rather than hold and sell the assets of failed banks as the RTC did, the new entity would purchase toxic loans at a steep discount from solvent financial institutions -- and then eventually sell back those repackaged loans into the market through an auction. This is not an all bad idea - especially if the majority of these loans are collateralized by an asset such as a single-family residence. Here's a look at the general idea. Because the original loan from the bank to borrower was not paid back - the bank must write the loan off as a complete loss - at least until the underlying collateral is sold and the true dimension of the loss can be calculated. For instance, a $100,000 loan secured by the "sticks-and-bricks" of a single family home goes bad - and the bank is forced to take a gross $100,000 ding to its balance sheet. Just because the bank took the write-down it certainly doesn't mean the value of the home has fallen to zero. If someone would simply buy the foreclosed home from the bank at $100,000 - the bank would generally be out nothing more than legal and administrative fees. No big deal. The proverbial "rub" here is that many lenders have suffered more losses in their loan portfolio than their cash position can support - rendering many lenders insolvent and leaving many more hanging on the edge of financial disaster. The quick sale of the collateral (the homes) is too slow to stave off possible collapse and the short-term credit markets have frozen-up - cutting off any opportunity these institutions might have to borrow themselves out of trouble. Treasury Secretary Paulson is proposing the government create a new entity, funded with hundreds of billions of dollars of taxpayer money, which will buy these troubled loans from still solvent institutions at a discounted price, and then eventually sell them back into the market through an auction process. The lenders off-load bad loans from their balance sheets for cash, immediately improving their financial viability. If the bank sells a $100,000 loan to the government for, say -- $45,000 - the lender's actual loss on the original transaction is now only $55,000. The new government entity will ultimately auction bundles of these troubled loans they bought from the banks and other institutions. In this example, the government stands a good chance of getting its money-back under this structure - especially if auction participants (investors) believe the value of the underlying collateral- the residential properties themselves - are undervalued in terms of their then current fair-market value. The strong rally in the stock market is a solid indication that capital market participants around the world believe this plan has a good chance of sharply diminishing -- if not resolving -- the massive credit crunch that has held the global banking system hostage over the past 18 months. This structure will take time to develop, and it will require a mammoth bi-partisan effort on the part of Congress to enact. In the interim, mortgage interest rates will likely continue to swing wildly as all of the resources of the government are focused on stopping the seizures in the global banking systems --before focusing specifically on the current level of mortgage interest rates. Looking ahead to next week, headline news events and trading action in the stock market will exert far more influence over the direction of mortgage interest rates than will the upcoming release of the August Existing Home Sales (Wednesday, 9/24) and August New Home Sales (Thursday, 9/25) sales figures. http://www.winchesterlendinggroup.com/mortgage-news/article/172/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/171/ As if anybody cared right now - the Labor Department reported the number of workers filing first-time jobless claims rose by 10,000 during the week ended September 13th. Today's stats include the first wave of job losses created by Hurricane Gustav -- but it will be another week or two before the employment impact of Hurricane Ike begins to show up in the report. No matter how you slice and dice it - the data continues to point to further erosion in the labor sector - a condition that is already priced into the mortgage market and is therefore considered "old" news by most investors. Just like yesterday -- I look for the direction of mortgage interest rates to be driven primarily by trading action in the stock market. Lower stock prices will tend to be supportive of steady to fractionally lower mortgage rates while higher stock prices will likely drag mortgage interest rates higher. http://www.winchesterlendinggroup.com/mortgage-news/article/171/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/170/ The Commerce Department reported this morning that the nation's homebuilders frantically cut production of new homes in August by 6.2% in an effort to eliminate the debilitating overhang of inventory on the market. Building permits, a harbinger of new home construction to come, plunged 8.9% to a 26-year low. And believe or not - that's all a good thing for the mortgage industry - longer term. The more builders cut production the sooner the single-family residential market can begin to recover. The tilting point will occur when the total number of starts falls below the monthly new home sales pace for at least three months. We are not there yet, but the new home starts number is certainly headed in the right direction. In a separate report the Mortgage Bankers of America announced that their seasonally adjusted index of mortgage applications, a value that includes both purchase and refinance loan requests, increased 33.4% during the week ended September 12th. The purchase application component of the index was up 2.4% while refinance requests soared 88.1%. One week of data certainly does not make a trend - but it does offer a glimmer of hope that the worst of the historical swoon in the housing sector may soon be behind us. http://www.winchesterlendinggroup.com/mortgage-news/article/170/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/169/ Will they, or won't they? The Federal Open Market Committee began their monetary policy deliberations this morning at 8:30 a.m. ET. The Committee is expected to announce its decision with respect to the appropriate level for short-term interest rates and they will present their assessment of current economic and credit market conditions in their post-meeting statement to be released at 2:15 p.m. ET. In the interim, market participants are vigorously debating the likelihood of a short-term rate cut. As I write, the credit markets have already priced-in a 25 basis-point cut in the fed fund rate together with a post-meeting statement that makes it abundantly clear the Fed is prepared to reduce interest rates even further as the one-year old credit crisis deepens. There are those that argue the central bankers will take an aggressive approach to alleviating the credit squeeze in the banking sector -- by cutting their benchmark fed fund rate by a minimum of 50 basis-points. On the other side of the argument are those that believe a fed fund rate cut now would likely do more harm than good. Artificially pushing interest rates lower only delays painful but necessary market corrections. Cutting rates now may do nothing more than undermine the confidence the Fed is trying to instill that the markets can work out Wall Street's problems with minimal interference from the government. A cut, particularly a big cut in the fed fund rate, in the middle of this crisis, will not likely inspire long-term confidence in the effectiveness of Fed monetary policy. If the Fed looses its credibility -- the negative consequences of this outcome longer-term will almost certainly outweigh the near-term benefits of a short-term rate cut. For what it is worth, I happen to be in the camp that hopes the Fed "keeps-its- powder-dry" and avoids the temptation to dramatically slash short-term interest rates. By all measures it appears the current challenge is to avoid a liquidity crisis in for the nation's banks. At this juncture lower interest rates in the banking system will not likely inspire significant economic growth. As if to highlight that point -- yesterday the Fed and other central bankers around the world injected a total of $115 billion in cash into the global banking system. Chairman Bernanke authorized the injection of $50 billion in cash into our banking system. (Mechanically the way this works is that the Fed buys Treasury obligations, mortgage-backed securities and other debt from its network of 19 primary dealers. The investment banks get the cash and the Fed holds the collateral. At the end of a set period, in this case 28 days, the investment banks return the cash and the Fed returns the collateral.) This strategy is effective in making sure that cash is readily available in the banking system during periods of high transactions - like when stock investors are selling so hard they push the DOW down more than 500 points in a single day. The mortgage market has already priced in a 25 basis-point rate cut from the Fed - so if that event occurs - look for little if any additional improvement for rates or prices. If the Fed chooses to slash their benchmark fed fund rate by 50 basis points or more -- expect investors to nudge note rates a bit lower while simultaneously pushing prices higher. If the Fed "sets-the-table" for a rate cut later this year but takes no action today - investors will likely be bummed and will register their disappointment by pushing rates higher and prices lower. It's a close call - a very close call - but as I mentioned earlier I'm pulling for the members of the Committee to leave short-term rates unchanged. The near-term impact on your rate sheets probably won't be very pleasant -- but the longer-term benefits will likely be worth it. I'll update this commentary as soon as possible following the conclusion of today's meeting. http://www.winchesterlendinggroup.com/mortgage-news/article/169/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/168/ As I am sure you are aware by now, Lehman Brothers and Merrill Lynch, two major Wall Street brokerage firms, have suddenly faded into history. The 158-year old Lehman Brothers filed for bankruptcy last night and Bank of America orchestrated a buyout of Merrill Lynch over the weekend. The global market place is reeling as three of the top five largest investment banks in America have disappeared this year (Bear Sterns collapsed into the arms of JPMorgan back in March). Capital is fleeing the uncertainly of the equity markets for the relative safety of Treasury obligations and mortgage-backed securities. On its face, this morning's "flight-to-quality" buying spree created by the news events of the weekend should be a good thing for the prospects of lower mortgage interest rates. And it is - for now. I am concerned that the underlying story does not support the headlines. As I write, mortgage prices are rallying hard but the yield spreads on Fannie Mae and Freddie Mac mortgage-backed securities over the 10-year Treasury yield (the implied riskless rate of return) have widened to 190 basis points - completely erasing the gains made after the government took over the companies a week ago. The "so what" factor here is that it appears the demand for mortgage-backed securities today is not being created by the long-term buyers sweeping up bargains in expectation of higher prices (lower interest rates) yet to come in the days and months ahead - but rather by the desire of panicked stock jocks wanting to do nothing more than get the most "bang-for-their-buck" with the least amount of risk for the next couple of days. I think there is some escalating anxiety among mortgage investors that a significant amount of supply will soon begin to enter the market as Lehman, Merrill, and other financially destitute institutions scramble to raise capital by selling assets. As the credit crisis resurfaces - only the highest quality assets will draw buying interest - which means significant amounts of Treasury obligations and agency eligible mortgage-backed securities will be on the auction block in the next couple of weeks. As supply increases - prices decline. In our business that smacks of potentially higher rates ahead. http://www.winchesterlendinggroup.com/mortgage-news/article/168/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/167/ The mortgage market is suffering through a bout of profit-taking as investors choose to cash-in-their-chips before the weekend. This morning's battery of macro-news lacked the firepower to keep the weeklong rally to lower interest rates afloat. The government reported total sales for American retailers fell for a second month in a row - posting a 0.3% drop in August after a sharp downward 0.5% revision to the original July figure. Excluding the incentive driven 1.9% gain in auto sales - retail sales posted a decline of 0.7% last month after a government stimulus check driven gain of 0.3% in July. In a separate report the Labor Department announced that prices at the producer level fell by a larger-than-expected 0.9% in August - driven primarily by a dramatic decline in energy prices. Core prices, which strip out volatile food and energy costs, rose 0.2% as expected after a 0.7% surge in July. On a year-over-year basis core producer prices are up 3.6% -- a level that marks their biggest annual gain since May 1991. Looking ahead to next week the members of the Federal Open Market Committee will meet on Tuesday (September 16th) to talk about interest-rate policy. Although market participants broadly believe the Fed will leave short-term interest rates unchanged, everybody will be listening intently to what the Committee has to say about an economy that is continuing to weaken while bedlam still rages in the banking sector. Any hint of a possible rate cut before the end of the year will tend to support steady to lower mortgage interest rates while an insinuation that inflation threats are the focus of central bankers' current thinking will likely push mortgage interest rates higher. I personally look for the Fed to give a nod to inflation pressure while simultaneously setting the stage for a possible short-term rate-cut before the end of the year by talking up slumping employment and deteriorating economic growth. If my assessment proves accurate, all that fancy footwork by Fed Chairman Bernanke and company should serve to largely curtail the threat of a heavy sell-off in the mortgage market. http://www.winchesterlendinggroup.com/mortgage-news/article/167/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/166/ Uncle Sam will be splashing around this afternoon in the credit markets looking to borrow $12 billion in the form of 10-year notes. This event is weighing on global investors unsure of the financial impact the bailout of Fannie Mae and Freddie Mac will ultimately have on the sovereign creditworthiness of American debt. If today's Treasury auction goes well -- look for mortgage rates and prices to finish the day little changed. On the other hand, if Uncle Sam finds that he has to "sweeten-the-pot" by offering a higher-yield on this 10-year note offering - mortgage interest rates are almost certain to finish the day higher. My personal expectation is that the mortgage market will experience modest selling pressure until the auction book is closed at 1:00 p.m. ET this afternoon - before finishing the day about where it started - just inside the lower limits of my recommended "Float Zone." In terms of the day's economic news the Labor Department reported the number of workers filing new claims for jobless benefits fell by 6,000 during the week ended September 6th. That bit of good news for job seekers was sharply offset by other details in the Labor Department bulletin indicating the number of people remaining on jobless benefit rolls after drawing an initial week of aid - shot up by 122,000 during the week ended August 30th, the latest period for which data is available. A department spokesperson said the latest weekly numbers from the job market were not affected by severe weather that hit the Southeastern states during the reporting period though weather related distortions should be expected in subsequent reports. All the preceding mumbo-jumbo does nothing more than confirm what traders already know - the nation's employment sector is in such shabby shape that the Fed may need to consider cutting short-term interest rates sooner-rather-than-later to help stimulate labor demand. A Fed on the sideline, or in rate cutting mode, tends to be friendly for the prospect of steady to fractionally lower mortgage interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/166/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/165/ Economic data is sparse again today. The Mortgage Bankers of America reported this morning that their seasonally adjusted index of total mortgage applications rose 9.5% last week. Refinance applications were up 15.4% and the number of requests for home purchase financing rose by 6.4%. These figures were derived from data that predated this week's big rally in the mortgage market. The analysts at JPMorgan are projecting almost one-third of the mortgage universe will have a financial incentive to refinance if the current 30-year fixed rate continues to hover very near 6.0%. Should the current 30-year fixed-rate move 50 basis-points lower the JPMorgan analysts are forecasting at least 60% of the mortgage universe will be refinanceable. For the balance of the day I look for the mortgage market to take its directional cue from trading action in the stock market. Higher stock prices will tend to produce steady to fractionally higher mortgage rates while lower stock prices will probably support steady to slightly lower rates. http://www.winchesterlendinggroup.com/mortgage-news/article/165/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/164/ Economic data is sparse today. The Commerce Department reported this morning that July inventories at U.S. wholesalers rose 1.4%, twice what most analysts had been anticipating. Sales were down 0.3% for the month but sales currently stand 16.5% higher than year-ago levels. This tidbit of "old" news was completely overshadowed by the "follow-through effect" from the government takeover of Fannie Mae and Freddie Mac on Sunday. There is no doubt that the collective efforts of the Federal Housing Finance Agency, the Treasury Department, and the Federal Reserve will lead to some near-term stabilization in the housing and financial markets. That's the good news. As I mentioned yesterday, the aggregate cost of the support programs that will be put in place by the government before the end of the year is unknowable at this time. As the dust begins to settle, global investors will be carefully evaluating how much additional debt Uncle Sam will need to issue to make good on his promise to underpin the dream of American homeownership. Current optimistic views put that sum at $25 billion - an uncomfortable but manageable sum. There are some who believe within months it will become abundantly apparent that the total tab for the rescue of the housing sector will approach $300 billion or more. As of this morning, credit default spreads on Treasury obligations, (credit default spreads are a type of financial insurance designed to protect bondholders against default should a company or country fail to make good on its debt repayment obligations) have risen to a record high. That's not good. The surge in the cost of credit default spreads on Treasury debt instruments indicates deterioration in the perception of credit quality - which means global capital market participants are growing increasingly concerned about the magnitude of the liabilities the U.S. government maybe exposed to in their rescue of Fannie Mae and Freddie Mac. A big bailout ticket will almost certainly push Treasury yields notably higher - a condition, should it develop, that will undoubtedly drag mortgage interest rates sharply higher as well. Only time will tell the detailed story here . but right now it appears global capital market investors are preparing for the worst . and hoping for the best. http://www.winchesterlendinggroup.com/mortgage-news/article/164/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/163/ Treasury Secretary Paulson, under authority granted to him under legislation signed into law earlier this year, has placed Fannie Mae and Freddie Mac into the conservatorship of their regulator, the Federal Housing Finance Agency (no relation to the better known Federal Housing Administration a.k.a FHA). The move puts the full-faith-and-credit of the United States government behind all the debt instruments of the two companies - a move that so far this morning has produced a handsome 100 basis-point rally in the price of their respective mortgage-backed securities. For the near-term the bailout of the two government-sponsored enterprises (Fannie Mae and Freddie Mac) has boosted confidence in global financial markets, eased worries about an extended credit market crunch -- which by extension encouraged some bolder investors to move capital from the relative safety of Treasury obligation back into the riskier stock market as anticipation of better economic conditions ahead. There is no doubt that the collective efforts of the Federal Housing Finance Agency, the Treasury Department, and the Federal Reserve will lead to some near-term stabilization in the housing and financial markets. The aggregate cost of the support programs that will be put in place before the end of the year is unknowable at this time. As the dust begins to settle, global investors will be carefully evaluating how much additional debt Uncle Sam will need to issue to make good on his promise to underpin the dream of American homeownership. Current optimistic views put that sum at $25 billion - an uncomfortable but manageable sum. There are some who believe within months it will become abundantly apparent that the total tab for the rescue of the housing sector will approach $300 billion or more. I'll be monitoring this discovery phase closely. A big bailout ticket will almost certainly push Treasury yields notably higher - a condition, should it develop, that will undoubtedly drag mortgage interest rates sharply higher as well. I certainly don't mean to rain on anybody's parade here -- I just want you to be keenly aware that there is a potential dark side to this morning's bright mortgage bailout story. It is worth mentioning that the delivery month for most mortgage-backed securities will "roll" to October on Tuesday, September 9th. This is a standard monthly administrative function of the mortgage market. The impact of this event is already reflected on most of your investors' rate sheets. (The extended risk associated with the new delivery period expiring in 30-days will lop roughly 25 basis-points (8 ticks) off of current prices on your Market Alert screens before the end of the day on Tuesday. Don't hesitate to call if you have questions regarding this event.) http://www.winchesterlendinggroup.com/mortgage-news/article/163/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/162/ As I'm sure you know by now, the labor market hit the skids this summer. Nonfarm payrolls shrank by 84,000 in August while the national jobless rate mushroomed to a reading of 6.1%. Job loss in both July and June were revised higher by a total of 58,000. Mortgage investors evidently set-up well for weaker-than-expected news from the labor sector - because the impact of this morning's report on the trend trajectory of mortgage interest rates produced a short-lived little dip to lower levels - before rates began a slow plod back to the unchanged to fractionally higher levels as I write. It appears market participants may be reaching a saturation point -- where so much "bad" economic news has already been priced into the mortgage market - that actual data confirming expectations gets shrugged off. If this assessment proves accurate, it may be difficult for mortgage interest rates to move noticeably lower from current levels. The upcoming week doesn't offer much in the way of meaningful economic news until Friday when the August Retail Sales figures and the Producer Price Index statistics will be released. Retailers have already hinted August sales levels will be flat to lower while the sharp drop in energy costs is expected to have contributed to an impressive drop in price pressures for manufacturers. It is worth mentioning that the delivery month for most mortgage-backed securities will "roll" to October on Tuesday, September 9th. This is a standard monthly administrative function of the mortgage market. The impact of this event is already reflected on most of your investors' rate sheets. (The extended risk associated with the new delivery period expiring in 30-days will lop roughly 25 basis-points (8 ticks) off of current prices on your Market Alert screens before the end of the day on Tuesday. Don't hesitate to call if you have questions regarding this event. http://www.winchesterlendinggroup.com/mortgage-news/article/162/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/161/ Mortgage interest rates edged fractionally lower this morning as data showing a surprise jump in weekly jobless claims and a sizable drop in second-quarter unit labor costs reinforced expectations for a mortgage market friendly August nonfarm payroll report tomorrow morning (8:30 a.m. ET scheduled release). Even though the weekly initial jobless claims survey period fell outside the data collection time frame for the August nonfarm payroll report, the surprising 15,000 surge in claims for unemployment benefits during the week ended August 30th clearly underscores a deteriorating job market which threatens to further erode economic growth in coming months. As if to highlight that last point - the Labor Department made the final revision to their second-quarter Productivity and Unit Labor Costs figures. Productivity, a measure of employee output per hour, rose at a very solid 4.3% annualized pace over the past three months while unit labor costs registered a 0.5% decline for the same period. In a separate report, the Institute of Supply Management said its Service Sector index, which is designed to measure activity levels for roughly 90% of the economy, increased to a reading of 50.6 from 49.5 in July. Analysts were quick to point-out that most of the month-over-month gain in the service sector index came as businesses scrambled to maintain market share by cutting prices. Also noteworthy, the component of the index that measures employment levels marked its fourth consecutive monthly decline - dropping to a reading of 45.4 in August from 47.1 the prior month. Muted inflation pressures, a puny labor sector and no sign of a potential short-term rate hike from the Fed are all generally the "stuff" that steady to lower mortgage interest rates are made of. http://www.winchesterlendinggroup.com/mortgage-news/article/161/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/160/ As I write this morning trading activity in the mortgage market is thin and sporadic. Mortgage interest rates continue to benefit from a little bout of "flight-to-quality" buying created by capital leaving the stock markets as concerns about the deteriorating health of the global economy begin taking a toll on the forward looking perspective for corporate profits. Mortgage investors shrugged off this morning's news that July Factory Orders rose a stronger-than-expected 1.3% -- while the June data was revised higher to reflect a gain of 2.1% -- up solidly form the originally reported 1.7% increase. The July number represents the fifth consecutive month for improvement in the factory order data series. In a separate report the Mortgage Bankers of America reported that mortgage applications rose 7.5% during the week ended August 29th. Refinance applications were up 2.1% while purchase applications climbed by 10.5%. Indexes measuring applications for FHA and VA loan programs jumped 11.7% higher - reaching a level more than double the year-ago mark. Trading action in the mortgage market will likely be listless into the second-half of the day as investors await the release of the Fed's Beige Book this afternoon at 2:00 p.m. ET. Named for the color of its cover, this publication is a compilation of reports concerning economic conditions in the nation's 12 Federal Reserve Districts. If the Beige Book contains a preponderance of economic "doom and gloom" stories together with convincing evidence of stable to weak inflationary pressure across a broad swath of the country - look for mortgage interest rates to remain steady to fractionally lower into today's market close. The market has already priced-in expectation for weak economic news so if it gets what it was looking for - the overall impact will likely be minimal. The risk here is that the collective data contained in the Beige Book proves not to be as puny as expected. Should this scenario develop -- look for stocks to rally sharply higher at the expense of an afternoon adjustment from your investors featuring higher mortgage interest rates and lower prices. I'll provide an update on the overall story contained in the Beige Book as soon as possible following its release this afternoon http://www.winchesterlendinggroup.com/mortgage-news/article/160/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/159/ The prospect for yet lower mortgage interest rates is running into modest resistance this morning. Overnight, crude oil prices fell sharply as Hurricane Gustav proved to be far less a threat to oil facilities in the Gulf of Mexico than market participants had initially anticipated. There are those that argue continued declines in energy prices should alleviate a substantial amount of current inflation pressures -- and therefore falling energy prices should be a positive for the chances of lower mortgage interest rates ahead. While certainly true to a degree, the other side of the same coin supports the idea that falling oil prices will lift the cost-of-living pressure on consumers, re-energizing the major driving force behind two-thirds of all U.S. economic activity. The potential for a solid near-term ramp-up in consumerism tends to temp investors back into riskier assets, such as stocks, which in-turn tends to push mortgage interest rates higher and rate sheet prices lower. The major catalysts behind the trend trajectory of mortgage interest rates this week will be Friday's August nonfarm payroll report (scheduled for release at 8:30 a.m. ET). The latest snapshot of the labor market is expected to show a contraction of 75,000 jobs and a national jobless rate of 5.7%. These values are already priced into the mortgage market and therefore should have a very limited impact on the current level of mortgage interest rates. It will likely take a headline job loss of 80,000 or more and a jobless rate of 5.8% or higher to revive a strong desire among investors to push note rates lower and prices higher. In my judgment, it is certainly worth noting that recent economic data is actually indicating that the economy is more resilient than most observers had anticipated. The risk on Friday will be that the headline payroll number posts a surprising decline of 60,000 or less and/or a national jobless rate of 5.6% or less. While the probability of a stronger-than-expected employment report is not particularly high - it is still within the range of viable possibilities - and therefore deserves consideration as your build you pipeline risk management strategies for the week. There has been so much "on the one hand - but then on the other hand" noise in the macro-economic data of late that I strongly suggest you look to actual trading action to guide your "float/lock" decision making. The pipeline strategies provided above will likely prove to be a very useful navigation aid for the week ahead. http://www.winchesterlendinggroup.com/mortgage-news/article/159/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/158/ The economy expanded at a stronger-than-expected 3.3% annual rate in the second quarter, carried higher on the strength of exports, government stimulus checks and a weaker dollar. Second-quarter Gross Domestic Product (GDP) was initially estimated at 1.9%. Most economists anticipated the number would be revised higher to an annualized rate of growth of 2.7%. Mortgage investors are not particularly concerned about this mid-year sign of accelerating economic growth. The popular opinion among market participants is that exports and consumer spending will taper off in the second-half of the year as spending supported by government stimulus checks dries up and weakening global growth together with a stronger dollar sharply crimps exports. In a separate report the Labor Department said the number of initial claims for jobless benefits dropped by 10,000 during the week ended August 23rd. The weekly decline in the number of people standing in line for the first time at employment offices was below the figure most investors expected to see - but not enough to change their view that the labor sector remains weak. Uncle Sam will be back in the credit market today looking to borrow $22 billion in the form of 5-year notes. He'll wrap this effort up at 1:00 p.m. ET. Yesterday's record $32 billion 2-year note offering drew lukewarm demand and today's offering is not expected to perform much better - especially considering the very thin trading conditions that prevail today. Once this afternoon's auction is over - there is a chance that the Treasury market will experience a brief little relief rally - but it won't likely be enough to dramatically effect mortgage interest rate levels. http://www.winchesterlendinggroup.com/mortgage-news/article/158/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/157/ Mortgage investors seemed to have quickly shrugged-off the July Durable Goods report, which was much stronger across the board than most economists had anticipated. The government said orders for durable goods (items meant to last three years or more) jumped 1.3% higher in July after an upwardly revised 1.3% gain in June. The consensus estimate among analysts was that July Durable Goods Orders would likely post a very modest 0.1% improvement. A barometer of business spending contained within the report posted a very solid gain of 2.6% -- well ahead of most economists' projection for a 0.1% decline. Business spending swept to its best overall showing since April. Granted, the durable goods report is highly volatile and subject to rather larger month-over-month revisions -- but no one is arguing with the fact that it's one more number in a growing body of numbers suggesting that even though the financial sector has had a very rough first half of the year - the rest of the economy appears to be performing better than expected. From this point forward through the conclusion of tomorrow afternoon's $22 billion 5-year note auction the direction of mortgage interest rates will probably take their directional cues from the Treasury market. Uncle Sam will wrap up the haggling over how much he'll have to pay on the record setting $32 billion of 2-year notes he is auctioning off today at 1:00 p.m. CT. If foreign investors, especially foreign central banks, show up with a healthy appetite for these two-year notes -- mortgage interest rates will likely remain little changed from current levels. On the other hand, if foreign investors are tight-fisted with their investment capital over the next two days - Uncle Sam will have to push up the yields on the 2- and 5-year notes in order to attract the required capital - and in the process other interest rates (including mortgage rates) will move higher as well. FYI: The Mortgage Bankers of America reported this morning that their seasonally adjusted index of mortgage applications, a value which includes both purchase and refinance applications, rose 0.5% during the week ended August 22nd. The purchase application component of the index rose 0.6% while refinance applications were up 0.3%. http://www.winchesterlendinggroup.com/mortgage-news/article/157/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/156/ As I write it is so quiet in the mortgage market this morning that it might be possible to hear a hummingbird sipping nectar outside the window of most secondary marketing departments. Traders continued to idly twiddle their thumbs as the July New Home Sales data crossed the newswires -- showing a stronger-than-expected gain of 2.4%. Their nonchalant response was due to the notable 5.1% downward revision the Commerce Department made to their June sales figure while the government data wonks also said they found it necessary to revise May new home sales figure to show a decline of 5.2% from the originally reported drop of 1.7%. The Commerce Department claims a large part of the margin-of-error in the revisions was created by contract cancellations. If the numbers are going to be so skewed - why not just wait sixty days or so and report far more accurate data when it becomes available? (Oh well . what's a couple of hundred percentage point miss between friends . right?) In a separate report the private Conference Board said their index of consumer confidence in August rose to 56.9 - from a July reading of 51.9. Most of the improvement in this measure of consumer attitudes is attributed to falling energy prices during the reporting period. It really didn't matter much anyway - mortgage investors are almost always far more interested in what consumers are actually doing -- rather than how they say they are feeling. The minutes of the Federal Open Market Committee meeting that was held on August 4th and 5th will be released this afternoon at 2:00 p.m. ET. This document will likely do little more that reinforce the popular notion among mortgage investors that the Fed will not make any change to short-term interest rates for the balance of the year. I continue to believe that Wednesday and Thursday's 2- and 5-year note auction will be the "big" story of this holiday shortened week. Uncle Sam will be looking to borrow a record $32 billion in the form of 2-year notes on Wednesday (concludes at 1:00 p.m. ET) and will add an additional $22 billion to the total in the form of 5-year notes on Thursday (concludes at 1:00 p.m. ET). That's a ton of supply that will be landing in the middle of a very thinly traded pre-holiday market - so volatility will likely be high. Until these two auctions are out of the way, it will likely be very difficult for mortgage interest rates to make a notable move to lower levels http://www.winchesterlendinggroup.com/mortgage-news/article/156/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/155/ July Existing Home Sales rose by 3.1% -- well above the consensus forecast for a gain of 0.8% -- and mortgage investors didn't flinch. Normally, a sharply stronger-than-expected existing home sales number would be cause for investors to consider nudging mortgage interest rates higher. A solid performance in the housing sector is deemed by many to be a harbinger of improving performance across the broad spectrum of the economy - a condition viewed as ultimately leading to an increased demand for capital. This time around the uptick in existing sales appears to have been created by heavy price discounting by sellers -- that became literally irresistible for bargain-shoppers. Even though sales were up, the prices paid dropped by 7.0% on a year-over-year basis -- as holders of foreclosed and distressed properties jumped-through hoops to move these units off of their books. The strong July sales pace wasn't potent enough to keep up with the growing number of units coming on the market. At the current sales pace, there is 11.2 months supply of existing homes available for purchase. Most analysts view an inventory level of six- to eight-months as indicating a healthy market. I continue to believe that Wednesday and Thursday's 2- and 5-year note auction will be the "big" story of this holiday shortened week. Uncle Sam will be looking to borrow a record $32 billion in the form of 2-year notes on Wednesday (concludes at 1:00 p.m. ET) and will add an additional $22 billion to the total in the form of 5-year notes on Thursday (concludes at 1:00 p.m. ET). That's a ton of supply that will be landing in the middle of a very thinly traded pre-holiday market - so volatility will likely be high. Until these two auctions are out of the way, it will likely be very difficult for mortgage interest rates to make a notable move to lower levels. http://www.winchesterlendinggroup.com/mortgage-news/article/155/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/153/ Back to the Future: Fannie Mae was created in 1938 as part of Franklin Roosevelt's New Deal economic recovery program following the Great Depression. Back then -- with eerie similarities to our current situation - the national housing market had collapsed and private lenders were very hesitant to make loans for the purchase of single-family homes. Fannie Mae was established in order to provide local banks with federal money to finance home mortgages as part of the effort to raise home ownership across the country. For the next thirty-years Fannie Mae had a monopoly on the mortgage market - borrowing money at super-cheap rates because of the direct guarantee of the government - and using the debt proceeds to lend at a higher rate to borrowers purchasing single-family homes -- and pocketing the difference between the interest rates as profit. In 1968, due to budget pressures created by the Vietnam War, President Lyndon Johnson privatized Fannie Mae in order to get it off of the federal dole. Not much changed for Fannie Mae - other than they started generating profits for stockholders rather than Uncle Sam. The company still enjoyed the benefits of exemption from state or federal tax as well as its exemption from Securities and Exchange Commission registration requirements and fees. Fannie Mae had authorization to borrow up to $2.25 billion from the Treasury and the company was allowed to use the Federal Reserve as their bank. The result of all this special treatment was that Fannie Mae's debt obligations carried a triple A credit rating - a ranking that guaranteed the company could borrow money at the very lowest interest rates. Talk about a sweet deal - especially for the stockholders. Fannie Mae was viewed as a virtual bullet-proof investment and its special treatment made it impossible for any other company to try to compete with it.In order to avoid the complete monopolization of the secondary mortgage market by Fannie Mae, Congress created a second company known as Freddie Mac in 1970 with all the features and benefits that Fannie Mae enjoyed. Wow - there's some enlightened government thinking for you - who was the "bright light" that concluded an oligopoly was going to be better for the citizenry than just your everyday standard run-of-the-mill monopoly. (For those not familiar with the word - an oligopoly is a market dominated by a small number of participants who are able to collectively exert control over supply and market prices.) Oh well -- for better or worse - Fannie Mae now had a worthy competitor (ahem). Since 1970 Fannie Mae and Freddie Mac have become the largest buyers of home loans in the nation. They buy home loans from lenders, package them into bonds - known as mortgage-backed securities - and hold these assets in their own portfolios -- or they sell them through Wall Street to end investors like insurance companies, pension funds, mutual funds, commercial banks, foreign governments and any number of other buyers. One of the most important things these two companies do is to guarantee the timely payment of principal and interest to all the holders of their mortgage-backed securities. It is this guarantee that makes Fannie Mae and Freddie Mac mortgage-backed securities so appealing to such a broad array of investors in the global marketplace. As I mentioned earlier, Fannie Mae and Freddie Mac's mortgage-backed securities carry the same credit quality rating of "AAA" as an obligation of the United States government. Any holder of a Fannie Mae or Freddie Mac security knows that they will receive the timely remittance of principal and interest on their investment - even if the homeowner defaults on his/her monthly mortgage payment obligation. As we finish out the last few days of August, 2008 -- Fannie and Freddie are guaranteeing trillions of dollars worth of home loans. And here lies the problem. The current assets of these two companies combine for a total that is about 45% more than that of the nation's largest bank. That's the good news. The bad news is that their combined debt is roughly equal to 46% of the current national debt. As long as borrowers were making their payments, these spooky big numbers generated handsome returns for the companies and their shareholders. The more money the companies earned the more risk they were willing to take on. Since 2005 these two companies have piled on risky loan programs after risky loan programs with little capital set aside to make guaranteed payments to investors if these loans went bad. Of course, now homeowners are defaulting and being foreclosed on at unprecedented rates, so Fannie and Freddie are being forced to make good on those guarantees to investors with borrowed capital - since initial loss reserves over the past two years have proven to be woefully inadequate. The two companies have already generated combined losses of $11 billion, and investors are concerned that there's much more to come. According to the Wall Street Journal (8/20/08), the most recent estimate of the balance sheet and earnings problems for the two agencies suggest combined they will likely have to raise something in the neighborhood $223 billion by September 30th. So far, investors in the capital markets have been willing to buy the debt offerings of the two companies - though at considerably higher interest rates than before. But as long as capital continues to flow-in into the company coffers in quantities large-enough for Fannie and Freddie to meet their operating requirements -- and to make good on their guaranteed loans - all will be well. So far, even though both companies have reported losses for the past four quarters, and mortgage delinquency rates are rising, chewing away at the companies assets and their capital - believe it or not - both are currently meeting their regulatory capital requirements and are successfully rolling over their debt on a regular schedule, negating the need for any intervention whatsoever by the government. If the capital markets tap for one or both of these companies runs dry . The government will be prepared with a bailout plan. The majority of analysts believe the most likely option the government will purse is to take an equity stake in the companies. Uncle Sam will likely purchase enough preferred or senior preferred shares to assure voting control of the company/companies. With full voting control -- the government would likely choose to operate the company with leadership from industry experts -- and to make every effort to create as little as possible change in terms of loan programs and other operational issues. The ultimate objective would be to sell the company back to private enterprise at the earliest possible opportunity. Should it become necessary for the government to bailout one or both companies -- the structure of the actual rescue strategy will likely match or closely resemble the option just described. The downside of any intervention strategy is that it will likely wipe out the value of the company's common shares. I have heard a number of pundits say, "so what, let 'em burn." An issue to consider here is that a number of mid- and smaller-sized banks hold a substantial common stock position in Fannie Mae -- because in the 70's and early 80's institutions were required to buy stock in order to get approved as a Fannie Mae Seller/Servicer. The complete write-off of this asset may have very negative consequences in terms of the lending capacity of some institutions -- and perhaps the financial viability of others. Opposing Opinion: I've heard a number of people suggest the "quick and easy" fix should simply be for the Treasury Department to become a big buyer of the mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Their reasoning is this option leaves stockholders stakes in place, provides a conduit for a flow of funds back to the companies, and assures readily available funding with very attractive rates for borrowers - at least initially. The proverbial "rub" surrounding this idea is that money to fund mortgages doesn't bumble-up out of the ground somewhere -- and ultimately the strain on the Treasury will require the government to borrow massive amounts of new capital in the global market place. At some point the explosive surge in our national budget deficit this option will create can be expected to negatively influence the perceived creditworthiness of a broad array of U.S. debt instruments - a condition that will undoubtedly push all interest rates notably higher. If this scenario were to play out in its "worst-case" form -- the impact will be painful and far reaching for all of us -- with drastic reductions in government services and entitlement programs and sharply higher taxes across all levels of business and society almost certain. My personal bet is that this "quick and easy" solution will never see the light of day.The current challenge. Under a 1992 law, Fannie and Freddie could be put into conservatorship by the government only if their top regulator found that either one is "critically undercapitalized." As of the end of the second quarter Fannie Mae has an estimated $9.4 billion dollar cushion (after reserves for credit losses) between their statutory minimum capital reserves while their cousin, Freddie Mac, reported at the end of the second quarter they have a $8.4 billion buffer above their statutory capital reserve requirement. At this juncture neither company appears to be "critically undercapitalized" - though continued high rates of foreclosures and generally poor performance in their respective mortgage portfolio could ultimately tip the scales. So far, James Lockhart, Director of the Office of Housing Enterprise Oversight, the regulator who oversees the two companies, has repeatedly issued statements that his agency is carefully watching the company's credit and capital positions - and finds them adequate to get through the current turmoil. Conclusion: As Bill Seidman, former chairman of the Federal Deposit Insurance Corporation, so succinctly put it, the government is "half in, and half out" of Fannie Mae and Freddie Mac, which is greatly contributing to market uncertainty. He went on to say, "The process needs to be more overt, rather than covert, so that market participants know what the rules are." I know I agree wholeheartedly with that idea . and I strongly suspect you do too. Until more clarification and data becomes available, here's a summary of what is generally known and largely accepted as fact:(1) Time and events in both the real estate and capital markets will dictate whether any change in structure and ownership of Fannie Mae or Freddie Mac actually occurs. Both companies are currently operating well above "critical capital" levels. Holders of the securities and debt instruments backed by Fannie and Freddie are absolutely not exposed to any risk of default on these investments. (2) Uncle Sam is prepared to do whatever is necessary to make sure a default on any debt obligation of Fannie or Freddie does not occur - simply because the global financial ramifications of a credit failure would be so severe.(3) If government intervention does ultimately prove to be necessary - there is no doubt that every effort will be made to sustain the adequate availability of capital for the financing of single-family housing. A modest increase in mortgage interest rates should be anticipated. Rates might run 25- to 37.5 basis-points higher than they normally would for the first year or two following government intervention.(4) The availability of jumbo mortgages will continue to be limited for at least the balance of the year. Investors, those who actually buy and hold mortgages in their portfolio, will remain hyper-sensitive to loan risk that does not carry significant credit quality and repayment guarantees.(5) As long as the dream of America homeownership does not die - the mortgage industry, in one form or the other, will not only survive - it will thrive. http://www.winchesterlendinggroup.com/mortgage-news/article/153/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/154/ The strong rally in the stock market this morning is putting a little upward pressure on mortgage interest rates. Trading activity in the mortgage market remains exceptionally light.For the balance of the day look for the trend trajectory of mortgage interest rates to be most influenced by trading action in the stock markets. Higher stock prices will tend to drag mortgage interest rates fractionally higher, while lower stock prices will tend to be supportive of steady to fractionally lower mortgage interest rates. Looking ahead to the coming holiday shortened week - mortgage investors have already priced in expectations that July Existing Home Sales (10:00 a.m. ET release, Monday, August 25th) and July New Home Sales figures (10:00 a.m. ET, Tuesday, August 26th) will show demand improved ever so slightly compared to June levels. Tuesday's August Consumer Confidence number (10:00 a.m. ET) probably improved a little as energy prices declined sharply during the month. The Consumer Confidence data is expected to exert little, if any directional influence on mortgage interest rates. Wednesday's (8:30 a.m. ET) July Durable Goods reports will likely be a snoozer. Market participants are prepared for a strong upward revision to second-quarter Gross Domestic Product data (8:30 a.m. ET) - so as long as the headline number doesn't exceed 2.6% -- it won't be much of factor in terms of the trend trajectory of mortgage rates. The few traders that are still hanging around on Friday will likely be at their desks only long enough to get a look at the personal consumption expenditure component of the July Personal Income and Spending report (8:30 a.m. ET). Traders have already priced-in the likelihood the personal consumption index will show a gain in inflation pressure at the consumer level of 0.3%. As long as the actual PCE index doesn't post a stronger number - traders will leave in droves to get an early start on the last three-day holiday of the summer. In the off-chance the personal consumption expenditure index posts a gain of 0.4% or higher look for market participants to spend the balance of the holiday-shortened day pushing mortgage interest rates higher. No matter how the PCE number lands -- the mortgage market will close early at 2:00 p.m. ET on Friday and will remain closed on Monday, September 1st for the Labor Day Holiday. http://www.winchesterlendinggroup.com/mortgage-news/article/154/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/152/ Better-than-expected news from the labor sector, rising oil prices and a falling dollar have combined to create some modest upward pressure on mortgage interest rates this morning. Crude oil prices bounced more than $3.00 higher as tensions between the U.S. and Russia grew over placement of a missile defense shield in Poland -- while closer-to-home escalating fears of another major credit crisis flare-up on Wall Street is taking a toll on the value of the dollar on global currency exchanges. That's the collective bad news of the day. Now for the good news - at least as it is perceived in the convoluted world of the mortgage market. Anxiety over the health of the financial sector, particularly Fannie Mae and Freddie Mac, has unleashed a flood of safe-haven buying of Treasury notes and bonds - a condition that to a notable degree is muting the impact of the "bad news" events of the day. The number of Americans standing in line to file claims for first-time jobless benefits fell by 13,000 during the week ended August 16th. That's a much better performance than the 7,000 claim decline most analysts had been anticipating. But compared against year-ago figures - the number of workers seeking unemployment benefits are currently up 39% -- an obvious signal that the labor sector remains weak -- even in the face of two-weeks of better-than-expected news related to employment conditions. The mortgage market has also been supported this morning by news from the private Conference Board that its index of Leading Economic Indicators, a composite statistical value intended to project economic activity over the next three to six months, fell by 0.7% -- dramatically eclipsing the 0.2% drop most economists had been anticipating. The accuracy of this index is not very high. Even so, investors don't discount it totally. Softer economic growth reduces the demand for capital - which, as the reasoning goes, ultimately leads to a reduction in interest rates. http://www.winchesterlendinggroup.com/mortgage-news/article/152/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/151/ Another day... same old story. With nothing in the way of economic data scheduled for release -- the mortgage market is very thinly traded as I write. The few transactions that are occurring are pedestrian in nature - more oriented to portfolio maintenance issues by some investors rather than significant position building. The trend trajectory of mortgage interest rates for the balance of the day will likely be most influenced by moves in other markets. Caution over the state of U.S. financial companies, particularly Fannie Mae and Freddie Mac, have motivated some investors to liquidate their stock positions and move the proceeds into the perceived lower risk of Treasury obligations and mortgage-backed securities. FYI: The Mortgage Bankers of America released their index of mortgage loan application activity for the week ended August 15th earlier this morning. The Association said its index of refinance applications dropped 3.7% while loan requests for home purchases slipped a modest 0.4% lower. The overall index was 1.5% lower for the week as 30-year fixed mortgage rates edge down to 6.47% nationally from 6.57% during the prior period. http://www.winchesterlendinggroup.com/mortgage-news/article/151/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/150/ The mortgage interest rates are being supported at unchanged levels in this morning's early going by some "flight-to-quality" buying created by a sell-off in the stock markets -- and some serious head-scratching by mortgage investors over the real meaning of today's sharply higher inflation numbers form the wholesale sector. The Labor Department's producer price index, a measure of prices at the factory door, surged 1.2% higher in July after posting a 1.8% gain in June. The core producer price index, a value that excludes the more volatile food and energy components, posted an increase of 0.7% -- its largest monthly gain since November 2006. The core rate value was 300% higher than most economists' forecast for a July gain of 0.2%. The outsized gains reported in the July producer price index pounded the stock markets with a round of heavy selling - but remarkably - mortgage investors and other fixed-income market participants barely blinked. From everything I can gather from what I've read and picked up in telephone conversations with other reliable and experienced market sources - it appears that a growing number of traders believe the worst of the price pressures at both the producer and consumer level are over. Oil prices have fallen more than 20% from their July highs with other commodities like copper (down 15%) and corn (down 14%) helping to ease inflation concerns. Many market participants are beginning to think that July was the peak for raw and intermediate goods prices and the probabilities are growing that we will now begin a snail's pace deceleration of inflationary pressures that will pick up speed into the mid-part of 2009. I personally think it is far too early to deem the inflation threat to be yesterday's story - and those that have already begun to dance in the street because the wicked witch is dead -- may find their party coming to an abrupt and financially painful halt. In a separate report the Commerce Department reported housing starts fell 11% in July to their lowest annual rate in more than 17 years, while building permits, an indicator of future construction activity, slumped by 17.7%. The big decline in July was largely payback from a surge in June construction driven by builders' scrambling to beat the July 1st enforcement date for a new building code in New York City. The decrease in housing starts was lead by a 30% decline in the Northeast while construction fell by 8.2% in the South and the West and gained 10.0% in the Midwest. As usual the Commerce Department reminded everybody that it's monthly housing data is volatile and subject to large sampling and other statistical errors. In most months, the government says it can't be really sure whether starts actually increased or decreased. I don't know about you - but I've often wondered why the Commerce Department just doesn't wait until they have solid, statistically valid numbers before they say anything to anybody at all. Hmm, I guess that idea would make too much sense - a condition I'm assuming which must immediately invalidate its usefulness to anyone at the governmental level. http://www.winchesterlendinggroup.com/mortgage-news/article/150/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/149/ Trading activity in the mortgage market is very limited this morning. There is little in the way of major economic data on the agenda this week and next so it appears many market participants have decided to take some time-off through the end of the month. Be aware that thin trading conditions can produce extremely volatile price action. Tomorrow morning's 8:30 a.m. ET release of the July Producer Price Index will draw the attention of the traders still at their desk. The headline measure of price pressure at the wholesale level will likely be discounted heavily due to the fact that oil prices have declined roughly 23.0% since reaching a high of $147.27 on July 11th, 2008. Attention will be primarily focused on the core producer price index, a value that excludes the more volatile food and energy components. A core producer price index reading of 0.2% will probably generate nothing more than a sigh of relief from investors while a July core PPI gain of 0.3% or more - will likely create a major "Maalox moment" for many investors - who will respond to the longer-term implications of rising core wholesale inflation pressure by choosing to defensively nudge mortgage interest rates higher. My personal editorial opinion is that skyrocketing energy prices during the first-half of the year will have bled into core wholesale inflation - pushing the July number 0.3% or more higher. If my assessment is accurate, mortgage interest rates will be vulnerable to a short-term trend reversal to fractionally higher levels. http://www.winchesterlendinggroup.com/mortgage-news/article/149/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/148/ It only took mortgage investors a minute or two to fully discount today's stronger-than-expected July Consumer Price Index data. The Labor Department said the Consumer Price Index, considered a key gauge of inflation pressure, rose 0.8% in July after posting a 1.1% gain in June. The core consumer price index, a statistical value that excludes the more volatile food and energy components rose 0.3% last month. It was absolutely no surprise to anyone that the majority of the surge in July consumer prices was directly related to record setting energy prices during the month. Detail in the report showed that energy prices rose 4.0% in July after climbing 6.6% in June. On a year-over-year basis energy prices were up a whopping 29.3%. With a dismissive flick of the wrist investors waved off this morning's otherwise uncomfortably "hot" headline consumer inflation data. Evidently the broad based thinking among market participants is that July represents a peak in terms of energy prices - and if so - the upcoming August and September Consumer Price Index figures will fall sharply. (Regular gasoline reached a record high of $4.11 a gallon on July 17th and has since fallen to the $3.86 per gallon neighborhood today.) Investors seem to be reading and rereading the post-meeting statement from the August 5th Open Market Committee and focusing heavily on the sentence that reads, "the Committee expects inflation to moderate later this year and next." As long as incoming data does not create significant doubt with regard to the Fed's long-term forecast - look for mortgage interest rates to remain steady to fractionally lower as compared to current levels. In a separate report the Labor Department said first-time applications for unemployment benefits dropped by 10,000 during the week ended August 9th. Mortgage investors discounted this report heavily because a new temporary federal program that extends the benefit period for many workers has skewed the numbers to the point they are currently of little use to analysts. It really doesn't matter much any way - other more accurate data continues to indicate the inflation threat from the employment sector is currently nonexistent. http://www.winchesterlendinggroup.com/mortgage-news/article/148/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/147/ Concerns about sagging global economic growth has contributed to another surge in the value of the dollar on the world's currency exchanges. The dollar index, which tracks the value of the dollar against the currencies of most industrialized nations, rose to its highest level since February this morning - marking its eight straight day of gains. The rising dollar prompted more selling of key commodities like gold and oil. Crude oil fell about $1.00 per barrel despite concerns over supply disruptions created by the Russia-Georgia conflict. The "so what" factor in all of this from a mortgage market perspective is that one of the biggest headwinds facing the prospect for lower mortgage interest rates - commodity stoked inflation pressures - may start to fade to nothing more than a modest breeze in coming months. The firming dollar and a increasing expectation among investors that the Federal Reserve will not likely hike short-term interest rates this year will likely benefit stocks more than bonds - as capital seeks the highest possible return in relation to accepted risk tolerances. The longer-term good news for the prospect of steady to fractionally lower mortgage interest rates is that the developing fundamental shift in the global economy will likely do nothing but increase the attractiveness of dollar-denominated assets like notes, bonds and mortgage-backed securities for foreign investors. Foreign capital resources in our domestic credit markets have essentially been relegated to the sidelines over the past three-years as the value of the dollar suffered a major tailspin. In my judgment, the value of the dollar is very vulnerable to additional near-term floundering at lower levels -- before a sustained uptrend begins in earnest. With little else in the way of other significant economic news for the balance of the day -- the trend trajectory of mortgage interest rates will likely be most influenced by stock and oil price action. Higher stock/oil prices will probably drag mortgage interest rates higher while lower stock/oil prices will tend to be supportive of steady to fractionally lower rates. http://www.winchesterlendinggroup.com/mortgage-news/article/147/ Mortgage News http://www.winchesterlendinggroup.com/mortgage-news/article/146/ Wednesday?s July Retail Sales report and the inflation data contained in Thursday morning?s consumer price index figures will be the biggest macro-economic news of the week. Both data sets are expected to be fairly well behaved and therefore should exert little if any meaningful influence on the direction of mortgage interest rates. In my opinion, the trend trajectory of mortgage interest rates this week will likely be most influenced by the performance of the dollar on the global currency exchanges. The dollar has surged in value over the past four week?s when compared to the currency of other major industrialized nations ? hitting a six month high earlier this morning. A stronger dollar boosts the appeal of U.S. assets, such as stocks, bonds and mortgage-backed securities relative to alternative asset classes ? while helping to pull dollar denominated prices for commodities like oil lower. If the value of the dollar continues to show strength this week -- look for the price of crude oil to extend its $30 slide from its high of $147.27 per barrel just four-weeks ago. (So far the armed conflict between Russia and Georgia, a major player in the pipeline flow of oil to the Caspian Sea, seems to be heavily discounted by investors with oil prices showing only a minor upward blip even as the conflict escalates). The ?so what? factor from a mortgage interest rate perspective is pretty big here ? and is perhaps not what you might expect. There is a growing likelihood that a rising dollar and falling oil prices will soon induce increasing amounts of capital to leave the relative safety of notes, bonds and mortgage-backed securities for the prospect of higher returns in the stock markets. Should my assessment prove accurate -- and unwinding of earlier ?flight-to-quality? positions begin in earnest ? look for Treasury yields to rise ? dragging mortgage interest rates higher along with them as they go. With little else in the way of other significant economic news for the balance of the day -- the trend trajectory of mortgage interest rates will likely be most influenced by stock and oil price action. Higher stock/oil prices will probably drag mortgage interest rates higher while lower stock/oil prices will tend to be supportive of steady to fractionally lower rates. http://www.winchesterlendinggroup.com/mortgage-news/article/146/