Mortgage Market Review - 8/10/09

Good morning. I hope you had a nice weekend. As you know, there has been a substantial amount of legislation that has impacted the mortgage industry. The president of Sterling Financial in Southern California said this weekend, “With the new rules, I have to liken the mortgage industry to a seriously ill patient being diagnosed by a multitude of doctors - none of whom are talking to each other, and some are still interns. The doctors are all prescribing medicines to fix the problem with no consideration given to how their drugs may interact with the drugs being given to the patient by the other doctors. The end result of this is usually is not good…” I totally agree with him. Much of the new legislation though well intended, is cumbersome and in many cases adds expense, time and stress for the borrower. It is seemingly “closing that barn door after the farm animals have escaped.” Most of the villains who created, originated and profited from the bad loans have long ago left the business, leaving us to sweep up the mess. OK, I feel better now… Let me know if you have any questions and thanks for taking the time to look this over. I hope you find it informative.

This Morning…Monday, August 10, 2009:
This morning, stocks are weak which brings a little support for the bond and mortgage markets. No economic data today so watching stocks will be the focus. We are not looking for anything substantive for either market through the day. This morning mortgage prices are slightly better than Friday afternoon.

Last Week:
Mortgage bond prices fell last week pushing mortgage interest rates higher. Stronger than expected data and positive stock movements pressured rates. The Institute for Supply Management (ISM), factory orders, weekly jobless claims, and employment report all came in stronger than expected (the unemployment rate, expected to be up to. 9.7% fell to 9.4%). Combined, they were blows to the gut for the rate markets, and manna for the stock market. The personal income and outlays data was the only release that was even near expectations. Signs of recovery in the economy with continued record debt had many traders concerned about inflation implications. Inflation erodes the value of fixed income securities. Throughout the week interest rates rose almost every day.

This Week:
This week the markets will be seeking more directional hints, especially with $75 billion of securities to auction off. There is no news of substance today or tomorrow, but on the 12th we have the Trade Balance figures. On Thursday we’ll see Import and Export Prices, Jobless Claims, and Retail Sales. Friday we have a slew of data with the Consumer Price Index, Industrial Production and Capacity Utilization, and the University of Michigan Consumer Sentiment Survey.

EconomicIndicator
Preliminary Q2 Productivity
Tuesday, Aug. 11,8:30 am, et
Up 4.9%
Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
3-year Treasury Note Auction
Tuesday, Aug. 11,1:30 pm, et
None
Important. $37 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Trade Data
Wednesday, Aug. 12,8:30 am, et
$28.5 billion deficit
Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
10-year Treasury Note Auction
Wednesday, Aug. 12,1:30 pm, et
None
Important. $23 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
Fed Meeting Adjourns
Wednesday, Aug. 12,2:15 pm, et
No change
Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
Retail Sales
Thursday, Aug. 13,8:30 am, et
Up 0.3%
Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
30-year Treasury Bond Auction
Thursday, Aug. 13,1:30 pm, et
None
Important. $15 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
Consumer Price Index
Friday, Aug. 14,8:30 am, et
Unchanged,Core up 0.2%
Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates.
Industrial Production
Friday, Aug. 14,9:15 am, et
68.1%
Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Capacity Utilization
Friday, Aug. 14,9:15 am, et
Up 0.1%
Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.

Market Forecast:
The record debt auctions will continue to pressure mortgage interest rates. If foreign demand does not falter then mortgage interest rates will likely stay neutral or improve. However, weak foreign demand would likely have the opposite effect.
Down the line however, we are likely to see a strong rally in the rate markets when the stock market cracks and flips in a major correction. The difficulty is anticipating when it will occur, but make no mistake it will. When it does we can expect a big safe haven run to treasuries and in turn a drop in mortgage rates. It will not last long however, so to take advantage of it will require discipline and timing. The long term macro view doesn't look good for interest rates as the economic decline ends, inflation concerns increase, and deficits increasing forcing Treasury to continue borrowing at record amounts.

Some Humor:
A REDNECK LOVE POEM

SUSIE LEE DONE FELL IN LOVE, SHE PLANNED TO MARRY JOE.
SHE WAS SO HAPPY 'BOUT IT ALL, SHE TOLD HER PAPPY SO.

PAPPY TOLD HER, SUSIE GAL, YOU'LL HAVE TO FIND ANOTHER.
I'D JUST AS SOON YO' MA DON'T KNOW, BUT JOE IS YO' HALF BROTHER.

SO SUSIE PUT ASIDE HER JOE AND PLANNED TO MARRY WILL.
BUT AFTER TELLING PAPPY THIS, HE SAID, 'THERE'S TROUBLE STILL.'

YOU CAN'T MARRY WILL, MY GAL, AND PLEASE DON'T TELL YO' MOTHER.
BUT WILL AND JOE, AND SEVERAL MO', I KNOW IS YO' HALF BROTHER.

BUT MAMA KNEW AND SAID, MY CHILD, JUST DO WHAT MAKES YO' HAPPY.
MARRY WILL OR MARRY JOE; YOU AIN'T NO KIN TO PAPPY.


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