March 26, 2010 — Mortgage market armageddon, or non-event? In just three business days, we’ll start to find out, as the Federal Reserve ends its program of purchasing mortgage-backed securities to keep interest rates low.
As we’ve detailed in our latest Two-Month Forecast and over the past couple of weeks in our weekly Market Trends, we don’t expect there to be a huge change in mortgage interest rates. However, at least some firming should be expected as we move away from the safe, steady arms of the Fed and into the wilds of (at least partially) privately-driven markets, where demand for yield and concerns about fiscal policy and inflation inform investment decisions.
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Just as some of those concerns caused a flare in rates last year, they will likely do so again. Underlying interest rates did move higher this week (no doubt influenced by the slow but steady rally in equity prices), but with muted effect on mortgage prices, at least so far.
The overall average 30-year fixed-rate mortgages (FRM) tracked by HSH.com’s FRMI added three basis points (.03%) to last week’s average, landing at 5.35%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The FRMI’s 5/1 Hybrid ARM counterpart eased back by the barest possible amount (.01%) to close the survey at 4.48% At 5.09%, Conforming 30-year FRMs rose by 0.04% for the week and remain in very comfortable territory.
Daily FRMI rates are available on HSH.com.
Check out our weekly Statistical Release here (and archives here).
Some of the rise in rates this week might be as a result of the signing of the landmark health care reform bill, whose profound effects on the economy in years to come will produce huge (though not yet known) amounts of spending and taxation. Promises of ultimate savings from the program are as unknowable as the total cost of the new entitlement program, and investors are rightly concerned about high debt levels and budget deficits as far as the eye can see — and that’s without considering the coming Social Security crisis. At present, risks are such around the world that US-issued debt is still considered the safest, but endless commitments to debt service in the coming years (and the effects of those on economic growth) and worries about inflating our way out of debt are surely at the forefront of investor concerns at the moment.
For mortgage investments, the waters get ever muddier. At one time, an investor who wanted to buy a mortgage expected three possible outcomes: 1) the loan would be paid off over the term; 2) the loan would be paid off early (i.e., refinanced or closed) or 3) the loan would fail, and the recovery of the committed monies would occur through the process of foreclosure and disposal of the property. All three outcomes could be hedged and insured, and losses mitigated or prevented altogether, and a reasonably knowable or predictable return on the investment could be proscribed.
Not so anymore. Loan modification programs, like the HAMP program (which saw a slew of brand-new changes this week, have created a murky limbo for investors. A loan might fail, with the investor receiving no payments — but now, a known recovery process no longer exists. A loan might fail, have its terms lengthened, or changed altogether; the loan’s interest rate might be reduced on a partial or permanent basis to some new level; even the amount of the loan which was extended might be subject to a ‘haircut’ — industry speak for “reduced with no hope of recovery.” What sort of return might be expected for this investment, and how can one consider, hedge and insure against loss? You can be sure that investors will want answers before risking their money. If they don’t like the answers, the outcome might well be detrimental to the economic recovery.
While we expect some demand for mortgage backed securities to occur as investors search for yield, we can’t help but wonder: Given the worsening American fiscal situation, the increasingly-unknowable return and behavior of a mortgage investment, and that a new financial market regulatory regime looms large, why would anyone want to make sizable commitments to invest in mortgages unless the terms under which they were written were very strict (tight underwriting standards), or the presence of some form of loss guarantee (FHA-backed loans)?
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
|ARM indexes, APOR rates, Libor, usury ceilings, & more — all available from ARMindexes.com.
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Sources: FRB, OTS, HSH Associates.
This is a question we’ll all surely be pondering in the days, weeks and months ahead.
If home sales are any indication, there probably won’t be too many new securities being produced anytime soon. New Home Sales for February came in at a record (1963) low of 308,000 (annualized) homes sold. Inventory levels relative to demand increased again, and the actual number of units completed and on the market nudged up to 236,000 for the month. Over the past few months, the long drawdown of completed stock from the mid-500K range to present-day levels has come to a halt, possibly indicating that both demand and the desirability of what remains are both quite low. Buyers don’t want what there is, and builders won’t or can’t build stuff they might on spec, so here we sit.
Existing Home Sales continue to wander around the five million (annualized) mark. In February we got back up to a rate of 5.02 million, matching January’s figure. Given a near-10% unemployment rate, this is actually a pretty reasonable pace, and probably enhanced by tax credits and low interest rates to a fair degree. As with new homes, inventory levels moved slightly higher, but there are concerns that a spate of short sales from failing loan mods will hit the market as 2010 continues, further depressing home prices. At latest count, around 50% of loan mods are failing, and the new HAFA program will require that they follow a short sale to deed-in-lieu to foreclosure path, so short sales are expect to be a sizable market feature this year.
The economy may have cooled somewhat from the final 5.6% pace for GDP we saw in the fourth quarter of 2009. The Chicago Federal Reserve’s National Activity Indicator (a combined expression of some 85 economic indicators) declined to -0.64 for February, its lowest value since last October. With zero as a breakeven point, these readings indicate how closely the economy is growing to its ‘potential’ somewhere around a 2.8% rate of growth, and these near-zero values suggest that we are still growing, just more slowly than the month prior, at least for the moment.
Orders for Durable Goods moved 0.5% higher during February, with the core measure of business-related spending firming nicely. This probably led to the fair reports for regional looks at economic activity during March in the Richmond and Kansas City Federal Reserve districts. The Richmond Fed reported a rise in its indicator to 6 from 2 in February, while the KC Fed saw their barometer move to 18 from 19 over the same period. Both figures have been mildly negative at times over the past few months, but are holding pretty firm as the production-led recovery continues.
While March’s big employment report comes at the end of next week, the number of new claims for unemployment benefits has once again cracked the 450,000 mark and seems to be heading in the right direction. The 442,000 new applications for benefits filed during the week ending March 20 was the lowest since holiday-distorted figures early this year, and may just be a hopeful sign that we are starting to turn the corner for labor markets. With Census hiring kicking in, we are likely to see some improvement (if temporary) in hiring over the next couple of months. However, the recovery won’t feel real to most folks until private job growth starts to happen.
Optimism is pretty flat at the moment. The weekly ABC News/Washington Post poll of Consumer Comfort dipped back a lone tick to minus-44 during the week ending March 21, while the final March reading for Consumer Sentiment from the University of Michigan Survey was unchanged from February’s level.
Mortgage rates seem likely to firm somewhat next week. As mentioned above, underlying rates have moved higher and are nearing year-beginning levels when conforming rates rose to about 5.25%. Spreads have narrowed of late, cushioning the rise to some degree, but there are limits on how much further they can compress. The end of the Fed program, a fresh job report, and a pile of other significant economic data leave us to expect a rise in rates next week of perhaps 6-10 basis points in rates, leaving them at only fantastic (instead of unbelievable) levels.
For a longer view, don’t forget to check out the brand-new Two-Month Forecast.
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