Mortgage Update

Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com


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Wednesday, December 08, 2010


More heavy selling this morning after rates continued to increase yesterday. Yesterday the 10 yr and mortgage rates jumped 20 basis points and mortgages up 15 basis points. Nothing directly new overnight; interest rates are increasing ion Europe, in Japan and China with the US leading the way higher. Some of the recent increases in rates is likely tied to year end adjustments by investors but the majority of it seems to have eluded analysts and economists. Very unusual that there seems to be no one stepping up to try and put some reasoning behind the spike in rates. It is as if it is happening with shock and awe, no consensus or any particular explanation.

The increase in rates recently, in our opinion, is a final capitulation that interest rates had declined to unsustainable levels. Driven now by attention turning to central banks and countries in Europe that are teetering on defaults. In the US markets see the Fed's $600B QE 2 as a waste of money; the Fed's rationale is and was totally wrong. The Fed's balance sheet has ballooned to over $2T and approaching $3T as Bernanke tries to help the economy grow; it hasn't worked and won't work. Bernanke appears to have made a huge mis-calculation that buying $600B of treasuries would lower interest rates, since Nov 4th when the QE was put in place the 10 yr note has increased 72 basis points and mortgage rates up about the same. Last week alone 30 yr mtg rates increased 10 basis points and are 100 basis points higher than the lows six weeks ago. The markets are saying enough.

The most recent blow to the bond markets; Obama and Republicans adding another $700B to the US budget deficit by planning to cut payroll taxes by 2.0% next year. On the surface it sounds good, more money in the pockets of consumers to spend and lift the economy out of its very anemic growth. No one wants the economy to stall but adding more to the deficit is telling the world the US is still not close to being serious in dealing with US budget deficits. The end of the line of giving the US a pass on exploding deficit spending appears to have arrived.

The MBA today released its Weekly Mortgage Applications Survey for the week ending December 3, 2010. The Market Composite Index, a measure of mortgage loan application volume, decreased 0.9% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 1.4% from the previous week. This is the fourth weekly decrease for the Refinance Index which reached its lowest level since June 2010. The seasonally adjusted Purchase Index increased 1.8% from one week earlier. This is the third weekly increase for the Purchase Index which reached its highest level since early May 2010. The four week moving average for the seasonally adjusted Market Index is down 8.0%. The four week moving average is up 2.8% for the seasonally adjusted Purchase Index, while this average is down 10.9% for the Refinance Index. The refinance share of mortgage activity increased to 75.2% of total applications from 74.9% the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.66% from 4.56%, with points decreasing to 0.95 from 0.96 (including the origination fee) for 80% loans. The average contract interest rate increased for the fourth consecutive week and is at the highest level since July 2010. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.98% from 3.91%, with points increasing to 0.97 from 0.88 (including the origination fee) for 80% loans. The average contract interest rate increased for the second week in a row and is at the highest level since early September 2010.

At 1:00 this afternoon Treasury will auction $21B of 10 yr notes; yesterday the 3 yr was considered OK overall but it didn't meet the demand that many were expecting, adding a little to the strong sell off yesterday on the 10 yr.