Daily Commentary by Larry Baer 2.28.2011

Commentary: The big news of the day comes from the January Income and Spending report released earlier this morning by the Commerce Department.

According to the government - consumers took advantage of the largest increase in their personal incomes in more than 18 months to rebuild their savings. Consumer spending, which accounts for about 70% of all economic activity in the country, edged up a very modest 0.2% last month while incomes climbed a solid 1.0%. The sharp increase in the income component of the report was largely the result of the reduction in workers contribution to Social Security authorized by Congress late last year. Excluding the tax cut effect, incomes rose a much more modest 0.3%. Adjusted for inflation, personal spending actually fell 0.1% last month, marking the first decline in this particular component of the report in a year.

Mortgage investors essentially shrugged off the pluses and minuses in the January Personal Income and Spending data - since the Fed's preferred measure of consumer inflation - the core personal consumption expenditure price index component of the larger report showed a very modest increase of 0.1% -- after an unchanged reading in December. Over the past year, core inflation has risen 0.8% -- and that is news that tends to be very supportive for the prospects of steady to perhaps fractionally lower mortgage interest rates.

Looking ahead to the balance of the week - February's nonfarm payroll report will cast a long shadow over the remaining four trading days. Between now and the time the employment data hits the news wires at 8:30 a.m. ET on Friday -- market participants will get a look at the pace of economic activity in both the manufacturing and service sectors of the economy as measured by tomorrow's February Institute of Supply Management's Manufacturing Index and the Institute's Service Sector Index on Thursday. The collective data is likely to support the view that the pace of economic growth is beginning to accelerate. If my assessment proves accurate, the upward pressure on mortgage interest rates will probably ramp-up before the week is over.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

This Week In Review by Lou Barnes

Mortgage rates are back in the fours, taken there by the 10-year T-note’s drop to 3.42%, which has wiped out the whole early-February spike. We have Libya, oil, stocks, housing, and the economy to thank, but how those pieces interact is not obvious.

Arriving economic data is obscured by incessant “recovery” cheerleading among business media. Some news is pretty good: both consumer-confidence surveys found three-year highs, which may indicate some hiring. New claims for unemployment insurance are holding down near 400,000. Every measure of manufacturing is doing well, although barely 15% of our economy.

The wait-a-minutes are led by today’s downward revision in supposedly corner-turning 4th Quarter 2010 GDP (3.2% to 2.8%). Wal-Mart’s sales in the last 90-days fell 1.8%. Orders for durable goods in January (ex super-volatile transportation and defense) tanked 6.9%. The Chicago Fed’s January national index rolled to a minus sign. Growth, sure; self-sustaining, accelerating... uh-uh.

If you’re in doubt, consider housing. New home sales dumped 12.6% in January. But, the National Association of Realtors says sales of existing homes rose 2.7%. Hmmm. A story cooking for months: NAR has over-reported those sales for 10 years or more, high by perhaps a half-million each year versus CoreLogic (its parent a title company using real data), and since 2008 about 1.5 million imaginary sales each year.

Nothing intentional, of course. I first joined NAR in 1978 and quickly learned not to trust it to count to ten on its toes and get the same answer twice in a row. If existing-home sales are running below four million annually instead of above five million, then we have rather more trouble with distressed-inventory absorption than we thought. And market buyers and sellers have left the field or been elbowed from it.

And on that subject, NAR said only 37% of January sales were distressed (“only”... sheesh). www.CampbellSurveys.com says the distressed fraction was 44% in November, and shot up to 49.6% in January (CA 66%, FL 63%, AZ-NV 72%).


Now two things not to worry about: inflation and the Middle East.

Inflation comes in a few well-defined forms. The deadly one is the wage-price spiral, which plagued us in the 1970s and can be stopped only by recession. The US today is impervious to such a spiral because we have near-zero wage growth.
In fact, rising oil prices will slow this economy by crowding out other spending. Note that commodity prices have fallen, not following oil, instead anticipating slowdown. Same for stocks.

Other inflation forms include the classic money-printing of Zimbabwe and Weimar. The Fed’s QE does print monetary electrons, but they cannot make it into wallets because the credit system is still broken. No credit, no money.

The last form, cost-pushed inflation, is temporary, not a structural ramp-up in general prices. That’s what this is. Oil is driven by speculators, just like 2008, and all should be reassured that this spike has stopped far short of that run t
o $150/bbl.

Middle East... it takes some serious chutzpah to be relaxed about the place. But, concept number one: they need to sell oil worse than we need to buy it, no matter who is in charge over there. Non-oil economies in the Middle East have never developed, and ten-fold growth in population has made ‘70s-style embargoes impossible today.

Two. Despite US bejabbers about radical Islam, these brave Tunisians, Egyptians, and Libyans are in their streets waving their national flags, not pictures of Osama.

Three. Post-revolutionary peoples’ governments, no matter how they may roil and rock are steadier by far than rotten autocracies, especially in dealings with neighbors. Some go sour (Iran), some are in doubt (Iraq), but dictatorships breed anger and extremism, and dictators need to pick external fights with pretend enemies. Re-founded nations, even while struggling to establish representative government, have stabilizing advantages. The greatest of these: pride at self-liberation won hard.

We live in one of those places.



by: Lou Barnes

Daily Commentary by Larry Baer 2.25.2011

Commentary: Don't be fooled.

The Commerce Department reported this morning that they have taken a second-look at the fourth-quarter 2010 economic data - and determined the economy only grew at a 2.8% annualized pace -- rather than the 3.2% pace the data wonks suggested back on January 28^th. Grave sounding media sources are pointing to a decline in government spending as well as a drop in consumer spending from the 4.4% pace originally reported - to 4.1% this time around as the primary cause of the decline in Q4 economic growth.

What is really worth noting here is that even with today's downward revision the pace of economic growth is running along at its best level since the first three-months of 2006 -- and the revised fourth-quarter growth rate shows a remarkable acceleration from the third-quarter 2010 2.4% pace. The "so what" factor here as it applies to the trend trajectory of mortgage interest rates is straightforward - a faster pace of economic growth increases the aggregate demand for capital - which in-turn pushes up overall interest rates - including the ones your investors fire over to you everyday.

In the past several days I have talked with a number of you regarding the impact of rising fuel costs on the likely direction of mortgage interest rates. From my perspective here are a couple of things to bear-in-mind. While it is true that global oil prices have surged by roughly 15% to the $100 per barrel range since the antigovernment protests erupted in Tunisia, Egypt, Bahrain and Libya - you have lived and prospered through much worse. During the spike in the summer of 2008, oil prices topped $145 per barrel. In October of 2008 the national average price for a gallon of gasoline was $3.80 and the national average rate on a 30-year fixed-rate mortgage was 6.2% -- and people were busy buying houses and refinancing mortgages.

I'm not suggesting a sustained surge in energy prices does not have the potential to ratchet up inflation pressures and/or tilt the country back into another recession. I'm just saying current chatter along those lines is almost certainly premature. For now, the flight-to-quality buying spree that is single-handedly supporting the rally in the mortgage market is based more on anxiety than on any real evidence that the spike in oil prices is hurting the U.S. economy specifically - and the global economy in general. A couple of months of sharply higher oil prices would likely have a major impact - but a couple of weeks are not likely going to generate a noticeable decline in economic growth. When a large enough number of market participants come to this same realization - the current "flight-to-quality" buying spree will likely come to a screeching halt.

Looking ahead to next week -- Monday's Personal Income and Spending report will serve as one bookend - and Friday's February nonfarm payroll report will serve as the other. In between, market participants will get a look at the pace of economic activity in both the manufacturing and service sectors of the economy. The collective data is likely to support the view that the pace of economic growth and the attendant inflation pressures are beginning to accelerate. If my assessment proves accurate, the upward pressure on mortgage interest rates will probably ramp-up before the week is over.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.24.2011

Commentary: Uncle Sam will be in the credit market today looking to sell $29 billion of 7-year Treasury notes. The auction will conclude at 1:00 p.m. ET and I'll provide results on my website as soon as possible following the conclusion of this event.

If the bidding at this afternoon's auction is aggressive by both domestic and foreign investors - look for mortgage interest rates to move sideways to fractionally lower as the afternoon progresses. Lackluster bidding at today's Treasury event will almost certainly cause mortgage rates to edge higher into the close of trading today. Judging by current trading activity for the 7-year Treasury note - the probabilities do not favor a strong, mortgage market friendly result at today's auction.

In other news of the day the Labor Department reported the number of Americans filling for first-time claims for unemployment benefits fell more than expected, indicating slow improvement in the labor sector. Claims fell by 22,000 last week to 391,000 - pushing the monthly average to the lowest level since July 2008. Over the past three months the economy has averaged net job gains of 83,000 -- certainly a step in the right direction -- but still off the estimated 125,000 pace necessary simply to keep up with the natural growth rate of the labor force. Even so, I'm seeing early estimates for next week Friday's much more important February nonfarm payroll report suggesting the economy created 175,000 net new jobs while the jobless rate ticked fractionally higher to 9.1% from January's 9.0% mark. If this forecast proves anywhere close to accurate - expect mortgage investors to feel compelled to push mortgage interest rates fractionally higher.

The Commerce Department said orders for durable goods rebounded a sharp 2.7% in January - but the outsized gain was largely the result of stronger demand for aircraft. Excluding the big jump in the transportation sector, orders were actually down 3.6% last month, the weakest showing since January 2009.

In a separate report the Commerce Department said New Home Sales for January slumped 12.6% -- a fact that came as no big surprise to mortgage investors since most were keenly aware the December number was "jacked-up" by homebuyers in California rushing to take advantage of a tax break that expired at the end of 2010.

All of today's macro-economic mumbo-jumbo was shrugged off by mortgage investors with flight-to-quality buying driven by Middle East headlines continue to be the only thing supporting mortgage interest rates at current levels.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Wednesday Market Update Video 2.23.2011

Mortgage interest rates have improved this last week and should continue to improve for several weeks. Click here to watch your Wednesday Market Update video.

Daily Commentary by Larry Baer 2.23.2011

Commentary: Uncle Sam will be in the credit market today looking to sell $35 billion of 5-year Treasury notes. The auction will conclude at 1:00 p.m. ET and I'll provide results on my website as soon as possible following the conclusion of this event.

Today's sale comes after yields moved significantly lower yesterday driven by "flight-to-quality" buying as anti-government demonstrations in Libya continued to be met with violence. If the bidding at the Treasury auction is aggressive by both domestic and foreign investors - resulting in higher prices and lower yields for the 5-year note -- look for mortgage interest rates to move sideways to fractionally lower as the afternoon progresses. A poorly bid Treasury auction will almost certainly cause mortgage rates to edge higher into the close of trading today. Judging by current trading activity in the 5-year Treasury note futures contract - the probabilities do not favor a strong, mortgage market friendly result at today's auction.

In other news of the day the National Association of Realtors reported a 2.7% increase in the pace of January Existing Home Sales. Mortgage investors yawned. The lion's share of the sales pace improvement came from a surge in distressed sales - with investors and cash buyers snapping up properties at fire sale prices. Until/unless the pace of existing sales shows sustainable demand on the part of Joe Consumer this data set will likely be heavily discounted by credit market participants.

As they do every Wednesday the Mortgage Bankers of America have released their Mortgage Application Survey figures for the week ended February 18^th. Overall loan demand increased 13.2% during the period with purchase and refinance applications increasing 5.1% and 17.8% respectively. The average national contract rate for 30-year fixed rate mortgages finished at 5.00%, down by 12 basis-points from the prior week, up by 20 basis-points from four-weeks ago, and down by 4 basis-points from the year ago mark. Refinance applications accounted for 65.7% of all applications taken during the week and represent 62.8% of all prospective loan volume.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.22.2011

Commentary: Mortgage interest rates are edging fractionally lower this morning - nudged along by mounting political turmoil in the Middle East. Oil prices have climbed to a 2 ½ year high on views that violence in Libya and other countries in the region could cut oil output.

Mortgage investors currently see the rise in oil prices as a "double-edged sword." On the one hand rising oil prices will certainly stoke inflation concerns - a negative for the prospect of notably lower mortgage interest rates. On the other hand, rising oil prices tend to limit economic growth as the consumer is forced to reduce discretionary spending to pay their rising fuel costs. If this condition lasts long enough -- the economy will slow, the demand for capital will soften, and mortgage interest rates will creep fractionally lower. It is too early to gauge which of these two scenarios will likely prevail - but you can bet mortgage investors are keenly monitoring this developing story.

The Conference Board, a private non-profit economic forecasting firm, said their index of consumer sentiment increase to a reading of 70.4 in January from 64.8 the prior month. It is the highest mark for this index since February 2008. Even though you may hear media sources excitedly referring to the improvement in this measure of consumer confidence - I think it is important to put today's report into perspective. The Consumer Confidence index averaged 97 in the six years leading up to the Great Recession that began in December 2007 and ended in June 2009. While January's increase is certainly a step in the right direction - there is still a long way to go before consumer confidence gets back to levels once taken for granted. Mortgage investors gave this report nothing more than a passing glance.

Uncle Sam will be in the credit markets today looking to sell $35 billion of 2-year Treasury notes. The auction will conclude at 1:00 p.m. ET and I'll provide results on my website as soon as possible following the conclusion of this event. Some market players see a growing likelihood the Treasury will soon be forced to cut the supply of bills and notes it sells to avoid hitting the legislatively mandated debt ceiling. Whether such an event actually occurs doesn't really matter much at this juncture - the mere idea market participants are thinking about the possibility should contribute to the expected strong demand for today's 2-year note offering. If this assessment proves correct, a solid Treasury auction this afternoon will tend to support the near-term prospects for steady to perhaps lower mortgage interest rates.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Is inflation rising? by Bill Fisher

One of the more confusing aspects of the current economy can be summed up by the deviously complex question, “Is inflation rising?”

The Fed continues to assure us that inflation is, at most, a restrained force at the moment. Wall Street investors—unless they’re watching their investments in commodities gain steadily in value—would probably agree. The inflation numbers still seem light, though food costs worldwide have been increasing at a rapid pace and the cost of gasoline has probably been rising as fast at your local pump as it has at mine.

These, many economists argue, are temporary twists and bends in the usual course of price changes on the open market. Gasoline costs a lot more today, they note, because of fears about the market’s continuing ability to ship oil through potentially endangered places like the Suez Canal. Rising prices, therefore, are primarily the result of political problems, not the result of problems inherent to the fuels markets. People aren’t buying more or less oil, in other words; they’re just deeply worried about whether it will continue to make its way to market.

The same may be said for food, except the rising prices here are blamed on crop-diminishing weather problems and increasing import demand from the Far East and Middle East. It’s those Japanese, some argue, who have developed a taste for beef, ballooning the import of meats—among other things.

Economists note that these forces, which now push prices higher, could fade very quickly. They are neither permanent nor exactly inherent to the markets. Still, several facts need to be acknowledged:

1. It is currently costing people all over the world a good deal more to feed themselves. (But we drop the food price date from computations of core inflation because it is so unpredictably volatile.)

2. Shipping and costs of production have been jacked up by higher fuel prices (also left out of core inflation figures).

3. However, economists argue, labor markets are far from tight, and without the pressure of rising wages, inflation—as the economists understand it—is unlikely to really take hold.

4. Still, however we dance on philosophical pinheads here, the fact is that the basic costs of living ARE more expensive throughout the world, including right here in our hometowns. So, we may not agree that inflation has actually risen, but we have to agree that the costs of life have inflated in the past year. Hmmm.

5. Meanwhile, we all wait for the real estate market to recover…however that may end up looking. And here, the issues are muddied by the fact that real estate finance is only beginning to undergo complex and comprehensive changes. (Think, for example, of the likely demise of Fannie and Freddie, the rise in required down payments, higher mortgage rates, etc., etc.)

Until a few years ago, the threat of rising costs of living was muted by our confidence that we could cover our financial needs with our rising home values. If we got in trouble, we could just dip into our home’s equity.

Today, it ain’t necessarily so. Indeed, perhaps the majority of homeowners are still living with a negative equity. This being so, we would do well to treat rising inflation for what it is, the powerful enemy of our ability to pay the basic expenses of our lives. We can’t ignore these rising prices as we used to.

Further, it is politics and public pressures that are running the markets at this moment, not the usual market forces. Ignore these pressures at your peril.

BTW—Interest rates, some of which eased slightly last week, are likely to hold to their current levels for a few weeks, at the least. It may be a window of opportunity for those who want to take advantage of lower rates before they are gone.

by: Bill Fisher

From the Desk of David H Stevens (Assistant Secretary for HUD) 2.18.2011

On February 14, I announced a new premium structure for FHA single-family mortgages, increasing the annual mortgage insurance premium (MIP) by a quarter of a percentage point (.25) on all 30-year and 15-year loans.

It is important for everyone in the industry to understand the reason for this action.

After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster our capital reserves and to help private capital return to the housing market. As many of you are aware, FHA has a Congressionally-mandated obligation to maintain a two percent capital reserve ratio in its Mutual Mortgage Insurance (MMI) fund, and to take swift and necessary actions if the reserves fall below that level.

The MMI fund has been below the two percent threshold in our last two annual actuarial reports to Congress. The FY 2010 actuarial report, submitted in November, projected that in the base case we would not get above two percent again until 2015. FHA has suffered greatly from poorly performing loans originated in years 2006 - 2008, especially seller-funded loans.

Raising the annual premium will enable FHA to increase revenues and have a positive effect on the ongoing stability of the MMI fund, which had capital reserves of approximately $3.6 billion at the end of FY 2010. Based on current volume projections, the annual MIP increase would generate an additional $2.5 - $3 billion annually.

We must balance this premium adjustment with the need to support the overall housing recovery. This quarter point increase in the annual MIP is a responsible step towards meeting the two percent threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.

The changes we have implemented since I became Commissioner in July 2009 have, so far, helped shelter FHA from any external intervention which could have a negative impact on the business. Though there has been talk by some of eliminating all Government guarantees, I believe that responsible management of FHA will eliminate the need for intervention.

I recommended this increase based on FHA’s obligation to get the capital reserves back to the two percent level. And I understand the concerns of HUD.gov/fha HUD press releases
those in the industry about this increase. While I do not expect all to agree, we have made these moves to protect FHA so that it can continue its vital mission.

The monthly payment for an average loan in the FHA portfolio will increase by approximately $30 due to the increase in the annual MIP. The change impacts new loans insured by FHA on or after April 18, 2011. The upfront MIP will remain unchanged at one percent. HECM loans are not impacted by the pricing change. For more details, read Mortgagee Letter 11-10.

Daily Commentary by Larry Baer 2.18.2011

Commentary: There is nothing in the way of economic data for mortgage investors to chew on this morning and trading volumes are thin in front of the Presidents Day Holiday on Monday.

Looking ahead to next week Uncle Sam with be in the credit markets looking to sell $99 billion worth of 2-, 5- and 7-year notes. The Treasury note auctions will run from Tuesday through Thursday. Each auction will conclude at 1:00 p.m. ET. The housing story will dominate the economic calendar. The National Association of Realtors is set to release its January Existing Home Sales number at 10:00 a.m. on Wednesday which will be followed by the Commerce Department's January New Home Sales stats at 10:00 a.m. ET on Thursday. Both reports are expected to show the pace of sales slumped in January as chronic labor market weakness and rising mortgage interest rates took a toll on demand.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.17.2011

Commentary: This morning's much anticipated January Consumer Price Index data showed that prices rose at their quickest pace in more than a year last month. Contrary to my expectations - the mortgage market rallied on the news.

The government said the core rate of inflation at the consumer level, (a value that excludes the more volatile food and energy costs) increased 0.2% -- posting its largest month-over-month gain since October 2009. Overall inflation at the consumer level was up 0.4% in January - climbing at the same pace as registered in December.

At this juncture it appears credit market participants are taking the position that since wages and job growth are stagnant -- higher prices for basic necessities will keep a damper on overall economic growth by limiting household discretionary spending -- which in-turn limits economic expansion and job creation. I can see where this argument can reasonably be justified - right up to the point job creation begins to accelerate - which will be the exact point at which the sleeping inflation beast will awake from its long nap and once again begin to wreak havoc on the cost of everything from ice cream cones to mortgage interest rates.

For the moment, the good news is that the labor market story remains dismal. More Americans that projected filed first-time claims for unemployment insurance during the week ended February 12^th. Applications for jobless benefits rose by 25,000 to 410,000 during the period. The number of net new jobs created over the past three months has averaged 83,000 - far less than the number required to absorb the natural growth in the working population. But that may soon change.

There is a small but growing camp of analysts that are projecting hiring will soon improve and by the end of the year job creation will be running at over 200,000 jobs per month. If these "tea-leaf readers" prove anywhere close to accurate the pace of acceleration in the job market together with the already rising inflation pressures at the consumer level will make it very difficult - if not impossible - for mortgage interest rates to make any sustained move to notably lower levels. But all is not lost here. The affordability index for prospective home buyers is expected to be near its best level in decades even as mortgage interest rates begin to inch higher in the face of rising employment. Believe it or not - such an outcome will probably spawn one of the most active periods of mortgage originations we have seen in years.

It wasn't raining when Noah began to build his ark.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Wednesday Market Update Video 2.16.2011

Mortgage interest rates have improved this week. I expect them to continue to improve for the next few weeks. I believe that on a longer term basis we will see rates increasing. Click here to view your Wednesday Market Update Video.

Daily Commentary by Larry Baer 2.16.2011

Commentary: The Labor Department reported this morning that inflation pressures at the wholesale level shot up again in January as energy and food costs continued to rise. The seasonally adjusted 0.8% gain in January follows a 0.9% gain in December and marks the seventh consecutive monthly increase in raw material prices for manufacturers. Even more of a concern than the surge in the headline producer price index, at least from a mortgage investor's perspective, is the fact that the core producer price index, a value which excludes the volatile food and energy costs, spiked 0.5% higher last, marking the largest month-over-month gain for this component since October 2008.

Up to this point in the recovery from the Great Recession producers have not had the pricing-power necessary to push through much, if any, of the increases in their raw material costs to the consumer. That story could change quickly. Investors will scrutinize the details of tomorrow morning's January consumer price index (8:30 a.m. ET) for any sign that inflation pressures on Main Street are ramping up.

As I write, most analysts believe the core rate of the consumer price index (a value excluding the more volatile food and energy costs) for January will not post a gain of more than 0.1%. If so, look for mortgage interest rates to move sideways to perhaps slightly lower - but be ready - a core consumer price index of 0.2% or higher will likely send mortgage interest rates sharply higher before the day is over. And here is the "kicker" - even if tomorrow's core rate of inflation posts a reading of 0.1% -- fixed-income investors will likely begin to anticipate an upward trajectory for next month's core consumer price index value. In my judgment mortgage investors are not likely to offer you much in the way of a reward if you choose to "float" a loan or two into tomorrow morning's report.

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey data for the week ended February 11^th. The overall index fell 9.5% for the week with purchase applications down by 5.9% and refinance requests lower by 11.4%. The average national contract rate for 30-year fixed-rate mortgages finished at 5.12%, down by 2 basis points from the prior week, up by 35 basis points from four weeks ago, and up by 17 basis points from the year ago mark. Six out of every ten applications taken last week were refinance loan requests.

Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

HUD just announced that FHA monthly MI premiums are going up again!

HUD (The Department of Housing and Urban Development) just announced that the monthly mortgage insurance premium for FHA loans is going up from .90% to .115% for FHA case numbers requested on or after 4.4.2011. For a $163,000 purchase the monthly mortgage insurance premium will go up from $118 to $151. That is a $33 increase.

Daily Commentary by Larry Baer 2.15.2011

Commentary: Mortgage investors largely shrugged off this morning's January Retail Sales report from the Commerce Department. The data showed overall retail sales posted a lower than anticipated gain of 0.3% -- both on an overall basis and excluding the more volatile auto sales component. The majority of credit market participants seemed to feel the data was heavily distorted by a major winter storm that buffeted much of the country during the reporting period.

As I mentioned in this week's edition of ViewPoint - the near-term trend trajectory for mortgage interest rates hinges on the current pace of inflation - both at the factory gate and on Main Street.

As I write market participants expect tomorrow's Producer Price Index (released at 8:30 a.m. ET) to show an overall gain of 0.8% driven by higher food and energy prices -- while Thursday's Consumer Price Index (released at 8:30 a.m. ET) is projected to show a composite gain of a more modest 0.3%. As long as the actual values for these two big inflation reports match or fall below their respective forecast mortgage interest rates will likely move sideways to perhaps fractionally lower. That's the good news. The bad news is that if one, or both, of these reports exceed the consensus estimate -- mortgage investors will almost certainly be quick to push mortgage interest rates higher.

In my opinion this is not the time to aggressively take mortgage market risk. Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Life Gets a Bit Scary by Bill Fisher

Life Gets a bit Scary

Watch out. In spite of the recent good news about Egypt and about our economy, we need to be mindful of the landmines spread beneath our feet. This is truly a difficult time that, if we don’t stay awake to the problems, could cause each of us many problems—or, equally, create many opportunities. (I hate to discuss potentially bad news, hate to be the messenger some readers may want to shoot—but I am committed to keeping us all as aware of potential crises as we can be.)

Exhibit #1. Though there is a great temptation to join the dancing in the street and declare that democracy won against the police state in Egypt, the jury is still out and the problems are still vicious. The symbol of despotism has been removed. The people have effectively declared their wishes. But the reality is that the army is still very much in control.

Consider a few things: Many of the richest men in Egypt are high officials in the army. They will hold on to their villas and their power with the same kind of tenacity that Mubarak demonstrated in trying to hold on to his position and pride. Already, the military has announced that it’s not going to help create a democracy unless and until elections move the country in that direction. (And it’s impossible not to worry about how the military maintains its power even after an election pushes the nation further in the direction of democracy.)

Another problem: There isn’t much wealth to go around in Egypt at this point. Accumulating wealth and power could once again become the primary political game there. The country no longer has an oil trade now that it is a net importer; it is the world’s largest importer of wheat; it imports about 40% of its food; its water sources are few; its raw materials aren’t very inspiring. What does it have? It has the largest Arab population of any nation; it has an important geographical and political location; and it has a history (but tourists have been busy crossing Egypt off their lists). Even without the potential chaos of trying to bring a new form of government to this ancient land, making economic progress would be hugely difficult.

We cannot, therefore, assume that the future will be bright in Egypt. The potential effects on the price of oil and myriad other goods are very sobering, indeed.

Exhibit #2. And while we are sobering up, consider this quotation from Daniel Mudd, the former chief executive of Fannie Mae. “The cost of mortgages is probably going to go up, and homeownership is going to go down. Both of those things arguably could be a good thing.”

Oh? Good for whom?

The sorry truth is that Fannie and Freddie are, as you doubtless know, being propped up at taxpayer expense, and this can’t continue very much longer. Here, as articulated by Matt Phillips in The Wall Street Journal, is the key problem that must be addressed: “There just ain’t enough cash in the U.S. banking system to keep the mortgage market as big as it has been.” We have reached the point where there is more money in mortgages than there is money in banks. For this reason, former mortgage officials are starting to make dismal, defeatist utterances.

Change is ahead. There is a powerful movement to phase Fannie and Freddie out of the business and, in the process, to greatly reduce the government’s role in the writing and backing of mortgages. (Then there are the calls for eliminating the mortgage interest deduction, and other significant potential changes. We’ll look at these another day.)

I believe there will be remarkable opportunities for those who remain as aware as possible of what is coming. But this is not at all a good head-in-sand moment, whether the sand is in northern Africa or Southern California.

by: Bill Fisher

Daily Commentary by Larry Baer 2.14.2011

Commentary: As I mentioned in this week's edition of ViewPoint - the near-term trend trajectory for mortgage interest rates hinges on the current pace of inflation - both at the factory gate and on Main Street.

As I write market participants expect Wednesday's Producer Price Index (released at 8:30 a.m. ET) to show an overall gain of 0.8% driven by higher food and energy prices -- while Thursday's Consumer Price Index (released at 8:30 a.m. ET) is projected to show a composite gain of a more modest 0.3%. As long as the actual values for these two big inflation reports match or fall below their respective forecast mortgage interest rates will likely move sideways to perhaps fractionally lower. That's the good news. The bad news is that if one, or both, of these reports exceed the consensus estimate -- mortgage investors will almost certainly be quick to push mortgage interest rates higher.

In my opinion this is not the time to aggressively take mortgage market risk - especially for loans you plan to "lock" within the next five trading days. Be patient - be disciplined - and play it by the numbers.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

This Week In Review by Lou Barnes

Economic optimists remain firmly in charge of markets and the media, and the search for data to support their view.

--- Wait! A Not-News flash! The administration has at last released its Fannie-Freddie study, which contains three plans that will not be enacted. Nor will any until housing and the financial system recover, which they may or may not given current underwriting. Home mortgages total more than the national debt, and we don’t know what to do with that, either. Bi-partisan criticism of the GSEs will continue, as Fannie and Freddie are no longer sources of campaign cash. Back to actual news ---

The optimists found some supporting evidence, but too close to the broad baseline of wobbles to confirm a self-sustaining recovery. Consumer credit card balances at last rose in December, for the first time since August 2008. New claims for unemployment insurance likewise broke to a three-year-low 383,000 last week, but a slowdown in layoffs is not the same as hiring.

The National Federation of Independent Business small-company survey (www.nfib.com) is critical because small firms have been absent from this “recovery” and are the heart of US job-creation. The overall survey reached a three-year high, but to a level similar to the worst of the two prior recessions. Earnings have nudged up (makes sense, firms cut to gristle), as have plans to increase inventories (ditto), and although sales expectations are the best since 2007, actual sales are still sliding. Current employment has stabilized from negative, but plans to hire are flat.


The finger-drumming and toe-tapping wait for recovery, or not, would be unbearable without comic relief from Rupert Murdock’s newly dumbed-down Wall Street Journal page-one headlines. This week brought a new standard in the mindless hunt for positive news: in 48-point type, “Cash Buyers Lift Housing.”

It is true that cash purchases soared in 2010, oddly enough in places like Phoenix’ 42%, Miami’s 54%, and Las Vegas’ 45% (data from the always-questionable Zillow), and nationally from 14% in 2008 to 28% in 2010 (NAR). However, these transactions are not lifting anything -- these are the bone-picking, cripple-shooting take-downs of foreclosures. Cash is required. Just try asking the Public Trustee to take a pre-qual letter, and wait a month for your appraiser and clear-to-close from underwriting.

Next week: “Lens Caps Found To Cause Photo Underexposure.”

On Monday, Mr. Obama told a US Chamber of Commerce audience to “get in the game” and use retained earnings to hire people. More than one attendee expressed puzzlement at hiring people they did not need, and found it improbable that doing so would add to their sales.

In genuine good news, the oil-drilling rig count in the US has jumped to the highest number in 23 years, as gas-fracking technology is suddenly working the same miracle in oil-bearing strata. Domestic production will pick up one million barrels per day in the next four years, 20% of total US output. Some will object: the global warming fearful (who have had a frustrating winter), and the “Gasland” mob convinced that fracking causes fiery tap water. Back to lens caps, above: if you drill a well for water into gas-bearing strata, you’ll get gas with your water (see Colorado Division of Natural Resources investigation of the “Gasland” well).

Serious business... The Treasury borrowed $72 billion in new cash this week, selling long-term bonds at auction. These are the same bonds the Fed is buying at a $100 billion per-month clip, and post-auction is always our best shot at a reversal of a sustained rise in rates. Not this time: the 10-year T-note crept down to 3.60% from 3.74%, mortgages down a hair from 5.25%, but that’s been it. If the Fed cannot control long-term rates, they are out of all control.

Housing will have to deal with rising rates so long as recovery optimism holds, and the optimists will have to deal with the contradiction.

by: Lou Barnes

Daily Commentary by Larry Baer 2.11.2011

Commentary: The credit markets are breathing a sigh of relief that this week's $72 billion of Treasury debt supply is out of the way. Investors will likely spend the balance of the day unwinding hedges they had previously set in place to limit their downside price risk during the government's borrowing spree. If so, the mechanics of this process should allow mortgage interest rates to edge fractionally lower into the close today.

Looking ahead to next week, the economic calendar shows mortgage investors will be busy digesting some important data. January Retail Sales will hit the wires at 8:30 a.m. ET on Tuesday and will be followed by the January Housing Starts, Producer Price Index, and Industrial Production numbers on Wednesday. The week will round-out with Thursday morning's January Consumer Price Index and initial weekly jobless claims stats.

The upcoming battery of macro-economic mumbo-jumbo is expected to do little more than confirm what mortgage investors largely already know - the economy is continuing to experience a slow, uneven recovery from the depths of the Great Recession. If this assessment proves accurate, the stage will be set for mortgage interest rates to move sideways to slightly lower into the President's Day Holiday scheduled for Monday, February 21^st.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.10.2011

Commentary: Mortgage investors gave this morning's news that initial weekly jobless claims declined by 36,000 little more than a passing glance. The near-term direction for mortgage interest rates hangs on the results of today's 30-year Treasury bond auction.

A well-bid 30-year bond auction today following yesterday's very strong demand for 10-year Treasury notes could prove to be "just-the-thing" to put an end to the roughly two-week long surge in mortgage interest rates. The key will be whether investors (particularly foreign investors) will be willing to bid as aggressively for today's longer-dated securities. Yesterday foreign central banks and large money managers set a new bidding record at Uncle Sam's 10-year note auction.

If investors are as aggressive at this afternoon's 30-year bond sale -- most of the pressure that has propelled benchmark yields on most government debt instruments to nine-month highs will be largely reversed. That would certainly be welcome news for the prospects of steady to fractionally lower mortgage interest rates. On the other hand, you can essentially "take-it-to-the bank" that a poorly bid 30-year bond sale will shove mortgage interest rates rudely higher before the day is over.

Be very disciplined here. Do not initiate new "floating" loan positions until/unless the price of the Fannie Mae 4.0% 30-year mortgage-backed security can muster the momentum to close above 96.781.

I'll provide the auction details on my website as soon as possible once the final gavel falls at 1:00 p.m. ET.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

A Third of Homes in Seattle are Underwater

Third of homes in Seattle metro area worth less than mortgage

The owners of one-third of the houses in the Seattle metro area now owe more on their mortgages than their homes are worth, Zillow.com estimates. That's up from less than 23 percent a year ago.

By Eric Pryne Seattle Times business reporter

The owners of one-third of the houses in the Seattle metro area now owe more on their mortgages than their homes are worth, Zillow.com estimates.

That's up from less than 23 percent a year ago, the online real-estate database and marketplace said in an analysis released Wednesday.

At the end of 2010, 34.3 percent of all single-family homeowners in King, Snohomish and Pierce counties were "underwater" on their homes, Seattle-based Zillow said. That was higher than the national figure, 27 percent.

This region's rate of increase over the past year — and especially over the last quarter — also topped the national increase.

"Negative equity" is rising faster now in the Seattle area largely "because of where we are in the housing cycle," said Stan Humphries, Zillow's chief economist.

Home values in this market kept rising for a year after values began falling in most of the rest of the country, Humphries said. Now Seattle is seeing steeper drops — leaving more homeowners upside down — as price declines in many other metropolitan areas are moderating.

"We're kind of where L.A. was in early 2009," Humphries said.

Negative equity can have a significant impact on both the housing market and the broader economy, especially if the gap between the home's value and the loan balance is large, said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

It increases the likelihood that owners will default — even if they still can manage the payments, he said.

After that, they probably wouldn't be able to buy another house anytime soon, he added, "and that would hold the housing market back."

A "strategic default" — choosing to default on a mortgage — also damages owners' ability to obtain credit for other purchases, further curtailing economic activity, Crellin said.

Underwater homeowners who don't default also may behave in ways that harm the economy, some researchers suggest. They may be less likely to move — even for a better job — and less inclined to spend money on home improvements.

Zillow determines whether a house is underwater by comparing publicly available loan information with the company's proprietary estimate of the home's value. Those estimates, too, are extrapolated from public records.

While the percentage of houses with negative equity in the Seattle area is climbing, it still doesn't compare with Sun Belt markets that have become poster children for the housing bust.

About 82 percent of all houses in Las Vegas, 70 percent in Phoenix and 62 percent in Orlando, Fla., are underwater, Zillow estimates.

Using public records, Zillow also estimates that more than 28 percent of all houses and condos that sold in the Seattle metropolitan area in December sold for a loss. That's up from 20 percent in December 2009.

Snohomish County was hardest hit.

The sellers of nearly 42 percent of all homes sold in that county in December got less than what they had paid.

The number of sales at a loss will continue to increase as long as prices keep dropping, Humphries said.

By Zillow's calculation, homes in King, Snohomish and Pierce counties now are worth about the same on average as in summer 2004.

"Anyone who's bought their home since then probably paid a higher price than they could get now," Humphries said.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com

Wednesday Market Update Video 2.9.2011

Mortgage backed securities have fallen steadily over the past week which means that interest rates are higher this week then last week. Click Here to view your Wednesday Market Update Video.

Daily Commentary by Larry Baer 2.9.2011

Commentary: Yesterday's weak 3-year note auction sent the credit markets into a selling tailspin that has yet to show meaningful signs of ending.

Uncle Sam is set to add fuel to the fire as he sets up to sell $24 billion of 10-year notes at auction this afternoon to be followed by the sale of $16 billion of 30-year bonds tomorrow. In the face of this oncoming supply -- the prospect for a move to fractionally lower mortgage interest rates remains dim.

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey figures for the week ended February 4^th. During the reporting period overall requests for mortgage loans declined 5.5% from the prior week, with purchase applications falling by 1.4% while refinance requests were 7.7% lower. The national average contract rate for 30-year fixed rate mortgages finished at 5.13%, up by 32 basis points from a week earlier, up by 35 basis points from the month ago mark, and up by 19 basis points from the year ago level. Refinance applications accounted for 6 out of every 10 loan applications taken during the week.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.8.2011

Commentary: The credit markets are bracing for this afternoon's $32 billion 3-year note sale. Nervousness over rising commodity prices, worries that the Fed may be acting too slow to curb inflation pressures and the compounding effects of $10 to $15 billion of higher yielding corporate bonds on the auction block this week are all serving to push mortgage interest rates fractionally higher in the day's early going. That's the bad news.

The good news is that the relatively short duration of these three-year notes together with a yield at its highest level in six months should combine to draw a reasonably strong bid from investors. If so, this event will likely prove to be supportive of steady mortgage interest rates. In order to push mortgage interest rates fractionally lower today -- the three-year note auction will need to draw blockbuster demand. While such an outcome is certainly possible - it is not very probable. I'll provide today's auction result on my website as soon as bidding concludes at 1:00 p.m. ET.

Uncle Sam will be back in the credit markets tomorrow looking to borrow $24 billion of 10-year notes and will conclude this week's borrowing spree with the sale of $16 billion of 30-year bonds on Thursday. Macro-economic news will be limited to Thursday's 8:30 a.m. ET initial weekly jobless claims report and the December Wholesale Inventory data at 10:00 a.m. ET the same day. In my judgment yields across the whole spectrum of the credit markets have risen to high enough levels that these three offerings should draw decent demand. If so, look for mortgage interest rates to move sideways -- with a slight potential to creep fractionally lower should bidding at the auctions prove stronger-than-expected.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Weekly Update by Bill Fisher

“Don't follow leaders / Watch the parking meters”

Ah, the weather. In theory, it was largely to blame for the fact that far fewer of the unemployed in America put on their jackets and sought employment recently. Thus, our economy only produced 36,000 new jobs last month.

Further, when the people doing the unemployment phone survey called folks and asked if they were employed, more of those who said, “No,” also said they weren’t actually looking for a job at the moment. (Thus, by the logic of this survey, they don’t count. They got snowed out, it seems—or maybe they were already just plain discouraged.)

Meanwhile, the weather has been used to help explain weak housing starts and declining construction spending. The weather can even (perhaps) be blamed, in part, for a good thing—the 42,000 decline in the number of applications for unemployment (to 415,000) in the week ending January 29.

Maybe we can no longer deny it: Economic reports are now slightly less reliable than weather reports.

What cannot be denied is this: Difficult weather has driven the entire world into a terrible food shortage problem. I mentioned last week that Egypt imports 60% of the wheat it consumes. In all, it imports about 40% of its total food needs and, where that was paid for in the past largely by the income from the oil it produced (that is, for oil the country didn’t itself need), geologists are now talking about “peak oil” in Egypt, a term indicating that the country’s oil consumption just surpassed its oil production. Egypt is now a net importer of oil, too. And it no longer has oil money to cover the difference in the cost of the food it must import to feed its hungry population.

The same is true—though the oil component differs from country to country—throughout a great deal of the Middle East. Plainly, food costs are rising (and yes, part of this phenomenon can be attributed to the weather). The people can no longer afford to feed themselves well. They are angry. It isn’t just a laudable idealistic urge toward democracy that is motivating the protestors into the streets of many of the Middle East’s nations.

An official report: “Global food prices rose for the seventh month in a row to a historic record in January, the United Nations said Thursday. The U.N.'s Food and Agriculture Organization's Food Price Index—a commodity basket that tracks monthly changes in food prices around the world—surged 3.4% from December, the highest since FAO started measuring food prices in 1990….. ‘The new figures clearly show that the upward pressure on world food prices is not abating,’ said Abdolreza Abbassian, an FAO economist and grains expert. ‘These high prices are likely to persist in the months to come. High food prices are of major concern especially for low-income food deficit countries that may face problems in financing food imports and for poor households which spend a large share of their income on food,’ he added.”

One of the most obvious concerns here—especially when we also consider how metals and other commodities have been gaining in price—is inflation. Food prices in Egypt have already climbed by 21% this year. The rate of inflation has been rising nearly everywhere. Oddly, much of the investment world remains blind to this. U.S. Treasury secretary Geithner recently commented that inflation is “not high on the list of concerns” of his staff. Increasingly, though, it should be very high on my list and yours, as interest rates continue their gradual and steady march north.

Watch for rates to climb this week by another small bunch of basis points. And so it is likely to go until someone trips the panic wire and 4%-4.25% mortgages quickly fade into the distant corners of our memories. As Bob Dylan wrote years ago, “You don't need a weatherman to know which way the wind blows.”

by: Bill Fisher

Daily Commentary by Larry Baer 2.7.2011

Commentary: There is nothing in the way of economic news for mortgage investors to consider today as they brace for this week's upcoming barrage of Treasury auctions.

Uncle Sam will be in the credit markets looking to borrow $72 billion in the form of $32 billion of 3-year notes on Tuesday, $24 billion of 10-year notes on Wednesday, and $16 billion of 30-year bonds on Thursday. Macro-economic news will be limited to Thursday's 8:30 a.m. ET initial weekly jobless claims report and the December Wholesale Inventory data at 10:00 a.m. ET the same day. In my judgment yields across the whole spectrum of the credit market have risen to high enough levels that these three offerings should draw decent demand. If so, look for mortgage interest rates to move sideways with a slight potential to creep fractionally lower should bidding at the auctions prove stronger-than-expected.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.4.2010

Commentary: You better cut the pizza in four pieces because I'm not hungry enough to eat six. Yogi Berra

Evidently the great catcher with the New York Yankees baseball franchise is now doing some part-time number-crunching consulting work with the Labor Department. The government reported earlier this morning that headline employment grew by a meager 36,000 in January, far less than the 145,000 gain than was expected - yet the national jobless rate plunged to 9.0% from December's 9.4% level. The national jobless rate now stands at its lowest level since April 2009.

The data wonks at the Labor Department also revised November and December payrolls to show 40,000 more jobs than they previously had estimated were created during the two prior months. Oh yeah, these same statisticians finalized their annual benchmark revisions to the headline payroll figures, and said the level of employment from April 2009 to March 2010 was overstated by a 378,000 jobs.

According to Labor Department officials, the January employment story was multiple times better than it appeared on its face, and was simply distorted by severe winter weather that prevented 916,000 workers from doing their job during the period. If that rationale is indeed correct -- then it seems weather conditions must have also created a massive decline in the size of labor force -- which should also be considered when considering the stunning drop in the national jobless rate. Oh, my bad, I slipped into a little rational thinking there - and that's seems to be something government data wonks and media "talking heads" avoid at all times.

When confusion reigns, investors in general, and mortgage investors in particular, tend to take a "safe-rather-than-sorry" approach to their risk management strategies by selling any open positions and moving to the sidelines. Such is certainly the case today. The reality of a shockingly weak headline payroll number creating a surprisingly strong decline in the national jobless rate which in-turn produces sharply higher mortgage interest rates quite frankly falls outside of my ability to lucidly "connect-the-dots." Irrational events are.

Looking ahead to next week, Uncle Sam will be in the credit markets looking to borrow $72 billion in the form of $32 billion of 3-year notes on Tuesday, $24 billion of 10-year notes on Wednesday, and $16 billion of 30-year bonds on Thursday. Macro-economic news will be limited to Thursday's 8:30 a.m. ET initial weekly jobless claims report and the December Wholesale Inventory data at 10:00 a.m. ET the same day. In my judgment yields across the whole spectrum of the credit market have risen to high enough levels that the coming week's battery of Treasury debt auctions should draw decent demand. If so, these three events will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.3.2010

Commentary: The number of Americans filing for first-time unemployment benefits fell by 42,000 to 415,000 - a decline largely attributed as payback for last week's weather-driven surge. Mortgage investors noticed the drop but weren't particularly concerned about it. Weekly jobless claims haven't yet fallen to levels that indicate a healthy labor market. Most analysts believe weekly application for first-time jobless benefits will have to fall below 400,000 for a sustained period before the national employment picture will brighten appreciably. Today's claims data will have no impact on tomorrow's much more important January nonfarm payroll statistics because the weekly canvassing of government unemployment offices fell outside of the survey period for the monthly jobs number.

In a separate report the Labor Department said productivity, a measure of hourly output per worker, increased at a stronger-than-expected annualize pace of 2.6% in the fourth-quarter of 2010. The productivity gain was well above most economists' forecasts and bodes well for company profits - while simultaneously strongly suggesting the current anemic pace of improvement in the labor sector will probably continue. The solid growth in productivity indicates companies are extracting more output from their existing workforce. Hours worked in the fourth-quarter increased at a1.8% pace after a 1.4% increase in during the third-quarter of 2010. The component of the report that measures unit costs fell at 0.6% rate after dipping at a 0.1% pace in the July-September period last year. This is certainly not the type of news that suggests "now hiring" signs will be exploding on the American business scene anytime soon.

Last but certainly not lest, the Institute of Supply Management's Service Sector Index, a measure which covers about 90% of all the country's economic activity, hit a new record high for the recovery in January, rising 2.3 points to 59.4%. The key activity and new orders components also hit new highs, pointing to further strengthening in the overall economy.

The stage is now set for tomorrow morning's 8:30 a.m. ET release of the January nonfarm payroll report. As I write most investors anticipate the economy created 145,000 more jobs in January than were lost -- while the national jobless rate is expected to tick up to 9.5% from December's 9.4%. Numbers that match or fall below these projections will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the unlikely case the actual numbers are stronger than currently projected -- look for your investors to push mortgage rates higher.

As I mentioned in this space yesterday, payrolls are harder to judge this time around given the incessant weather disruptions that have blanketed the nation. Raymond Stone, managing director and economists at Stone & McCarthy Research Associates points out that over the past seven years, the initial print on January payrolls has come in consistently below market expectations. In addition, December payrolls have been revised down 23 times over the past 31 years (75% of the time), with the average revision amounting to about 36,000 jobs. The "so what" factor attached to all this statistical mumbo jumbo is that while it is possible Friday's nonfarm payroll data will prove strong enough to push mortgage interest rates rudely higher from current levels - it is not a very probable outcome. With that said, I personally believe it will be a mistake to "float" loans into Friday's 8:30 a.m. ET release of the January jobs data unless the price of the Fannie Mae 4.0% 30-year mortgage-backed security can first muster the momentum to close above 98.500. Be patient and remained disciplined here. There is virtually nothing to be gained by jumping the gun now.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Wednesday Market Update Video 2.2.2011

Mortgage interest rates are up slightly this morning. Click here to view this weeks Wednesday Market Update video.

Daily Commentary by Larry Baer 2.2.2011

Commentary: Trading activity in the mortgage market is light this morning as inclement weather -- together with limited risk taking in front of Friday's much anticipated January nonfarm payroll data -- kept most investors on the sidelines. The selling pressure in today's early going is not so much a story about large numbers of traders looking to off-load mortgage-backed securities as it is about a shortage of buyers willing to stick their financial neck-out before a big event like the upcoming jobs number.

A report shortly after the market open by payroll processor ADP Employer Services suggesting the private sector added a stronger-than-expected 187,000 last month was largely discounted by most investors. The one consistent thing about this data set is that it substantially under- or over-shoots the more important numbers from the government.

The key question on the minds of all credit market participants is whether anything but weak hiring will be evident in Friday's nonfarm payroll report. As I write most investors anticipate the economy created 150,000 more jobs in January than were lost -- while the national jobless rate is expected to tick up to 9.5% from December's 9.4%. Numbers that match or fall below these projections will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the unlikely case the actual numbers are stronger than currently projected -- look for your investors to push mortgage rates higher.

Payrolls are harder to judge this time around given the incessant weather disruptions that have blanketed the nation. Raymond Stone, managing director and economists at Stone & McCarthy Research Associates points out that over the past seven years, the initial print on January payrolls has come in consistently below market expectations. In addition, December payrolls have been revised down 23 times over the past 31 years (75% of the time), with the average revision amounting to about 36,000 jobs. The "so what" factor attached to all this statistical mumbo jumbo is that while it is possible Friday's nonfarm payroll data will prove strong enough to push mortgage interest rates rudely higher from current levels - it is not a very probable outcome. With that said, I personally believe it will be a mistake to "float" loans into Friday's 8:30 a.m. ET release of the January jobs data unless the price of the Fannie Mae 4.0% 30-year mortgage-backed security can first muster the momentum to close above 98.968.

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey figures for the week ended January 25^th. The MBA said mortgage applications were up a collective 11.3% during the period - with refinance demand up by 11.7% and purchase loan requests up 9.5%. The average contract rate for 30-year fixed-rate mortgages finished up at 4.81%, up by 1 basis point from the prior week, down by 1 basis point from the month-ago mark and down 19 basis points from the year-ago level. Seven out of every ten loan applications taken last week were refinance requests.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.1.2011

Commentary: The "flight-to-quality" buying of Treasury debt obligations and mortgage-backed securities that supported the prospects of steady to fractionally lower mortgage rates since last week Thursday has now been completely unwound.

Investor concerns the Egyptian political turmoil and civil unrest would spread to other countries in the oil-rich Middle East have largely subsided - which means global capital is once again flowing in the direction of riskier but higher yielding assets. Unless/until civil unrest in the Middle East escalates to the point of war global investors will likely largely ignore the political convulsions currently engulfing Egypt. If my assessment proves accurate, the prospects for steady to fractionally lower mortgage interest rates supported by global capital participating in a major "flight-to-quality" buying spree of dollar denominated assets will remain dim.

The Institute of Supply Management's January Manufacturing Index added to the upward pressure on mortgage interest rates this morning. The ISM reported that manufacturing activity posted strong gains last month as the index moved to 60.8% -- well above the December level of 58.5%. The data provides strong evidence that the recovery in the manufacturing sector of the economy continues to accelerate. The details were solid, new orders rose 5.8% while the employment index gained 2.8%. The report did show that price pressures are beginning to build at the factory gate -- but so far it looks as though those cost increases are going to eat into manufacturers' profits rather than be passed-through to the consumer as pricing power remains weak for retailers.

Yet to come this week - Thursday's Institute of Supply Management's Service Sector report to be followed by the release of the January nonfarm payroll figures on Friday morning. The ISM service sector index is expected to post a very modest 0.1% month-over-month gain. Is so, it won't be a factor in terms of influencing the direction of mortgage interest rates and will easily be overshadowed by the jobs number on Friday. As I write most investors anticipate the economy created 150,000 more jobs in January than were lost -- while the national jobless rate is expected to tick up to 9.5% from December's 9.4%. Numbers that match or fall below these projections will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates. In the unlikely case the actual numbers are stronger than currently projected -- look for your investors to push mortgage rates higher.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME