Mortgage Market Snapshot

Forwarded exclusively by:	Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com
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Wednesday, October 27, 2010
Interest rates continue to increase, the 6th day in succession that the rate markets have experienced selling. The bellwether 10 yr note is now back to the level it was trading when the FOMC statement called for another QE move. The mortgage market and treasury market rallied sending rates down as much as 40 basis points on the 10 yr and 20 basis points on mortgages. Now there is apparently a concern in the markets that whatever the Fed may do next Tuesday won't be enough shock-and-awe to drive rates lower. The Wall Street Journal reported this morning that the Fed is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, in contrast to the central bank's purchases of nearly $1.5 trillion worth of bonds during the financial crisis. The report said officials want to avoid the "shock-and-awe" approach used during the crisis in favor of an approach that allows them to adjust policy over time as the recovery unfolds. As the calendar ticks off closer to the easing move, designed to push long term rate lower, there is increasing skepticism that the amount of the easing move may not be what the original beliefs thought when the FOMC made that statement. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said Monday that more expansive monetary policy was a "bargain with the devil." While there is a serious debate within the Fed about another easing move, it is still likely to occur but as we noted in past comments, traders are withdrawing their bets that the amount of the Treasury buying will be less than originally believed. While speculators are covering their bullish bets that rates will decline substantially, the Fed will ease and at worse will keep rates from increasing. The issue now is by how much and on what time frame? How the bond market will trade on the easing next Wednesday is uncertain, but we believe the market is coming close to the end of its bull market that has taken interest rates to historic lows. At 8:30 Sept durable goods orders were expected to be up 1.7%, as reported orders were up 3.3%, but when the volatile transportation orders are removed orders declined 0.8%; the estimate was for an increase of 0.1%. A slight improvement in the rate markets but not much. Stock indexes dipped with the DJIA futures down 55 points ahead of the 9:30 open. Earlier this morning the weekly MBA mortgage applications; the Market Composite Index, a measure of mortgage loan application volume, increased 3.2%. The Refinance Index increased 3.0% from the previous week. The Purchase Index increased 3.9% from one week earlier. The unadjusted Purchase Index increased 3.5 percent compared with the previous week and was 30.3% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is up 1.4%, while this average is up 1.9% for the Refinance Index. The refinance share of mortgage activity decreased to 82.3% of total applications from 82.4% the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.25% from 4.34%, with points increasing to 1.0 from 0.81 (including the origination fee) for 80% loans. The 30-year contract rate matches the rate from the week ending October 1, 2010, which was the second lowest ever observed in this survey. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.67% from 3.74%, with points decreasing to 0.96 from 1.00 (including the origination fee) for 80% loans. The 15-year contract rate is the second lowest observed in this survey, with the lowest being 3.62% from two weeks ago. At 10:00 Sept new home sales, expected up 2.5%, jumped 6.6% to 307K annualized units. Prices fell 3.3% with an 8 month supply from 8.6 months last month. There are 204K units on the market, the lowest since July 1968. Treasuries and mortgages saw some selling on the report. Not much improvement in the equity markets. Later this afternoon (1:00 pm) Treasury will auction $35B of 5 yr notes; yesterday's 3 yr note auction was well bid but as borrowing moves out the curve the demand normally slides a little. Until the auctions two weeks ago the demand for US Treasury debt had held very strong, the auctions two weeks ago were a little weaker and now have dealers a little more concerned. That said, the demand will be strong even if not at the recent levels.
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