Mortgage Market Review - 8/17/09

Good morning. I hope you had a nice weekend. Last week was a grim week in mortgage lending. First, Taylor, Bean and Whitaker ceased operations. They are a very large conventional and government lender. They had offices nationwide and many, many people lost their jobs. Then more banks failed on Friday, lead by Colonial BancGroup being taken over by BB&T. Community Bank of Las Vegas, Dwelling House Savings and Loan Association in Pittsburgh, Union Bank and Community Bank both in Arizona were taken over by MidFirst Bank of Oklahoma City. The total number of bank failures this year is now at 77. These failures are more blows for small non-bank lenders that rely on lenders for warehouse funds and keep the major banks competitive in the marketplace. There is hope that other lenders will come into the market to take their place. In the meantime…keep watching.

This Morning…Monday, August 17, 2009:
A global sell-off in stock markets overnight has fed into the US markets this morning. As long as stocks are being hit the bond and mortgage markets will find support. Safe haven moves out of stocks will help lower mortgage rates as long as stocks fall; as the key indexes slip expect an increase of negative economic sentiment although not much has or will change for the more bullish outlook. First up for the DJIA will likely be a test of the 9K level. The rest of the day has nothing but the stock market to watch.

Last Week:
Continued market volatility; the mortgage market regained the losses from the week before as interest rate markets swing wildly from one economic report to the next. Last week three auctions went generally OK, evidence that investors are still willing to step up at these low interest rates. The Fed left rates unchanged and continued to purchase billions of dollars worth of mortgage-backed securities in an effort to keep rates relatively low. July retail sales were much worse than market expectations and the consumer price index came in unchanged and the core, which excludes volatile food and energy prices, rose as expected. As is the case these days however, the equity markets swept the obvious under the rug and kept going; although the DJIA did end the week lower for the first time in a month.

This Week:
No Treasury borrowing to concern traders, so this week, as summer vacation season continues, we’ll see the usual rash of economic releases. Today we have the Empire State Manufacturing number, tomorrow New Residential Construction and the Producer Price index, nada on Wednesday, on Thursday the usual Jobless Claims and the Philly Fed, and then on Friday we wrap up with Existing Home Sales. This week will likely see continued intraday and interday volatility that have characterized the markets for the past two months.

EconomicIndicator
Producer Price Index
Tuesday, Aug. 18,8:30 am, et
Down 0.2%,Core up 0.1%
Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates.
Housing Starts
Tuesday, Aug. 18,8:30 am, et
Up 2.7%
Important. A measure of housing sector strength. Weakness may lead to lower rates.
Leading Economic Indicators
Thursday, Aug. 20,10:00 am, et
Up 0.6%
Important. An indication of future economic activity. A smaller increase may lead to lower rates.
Philadelphia Fed Survey
Thursday, Aug. 20,10:00 am, et
Down 2.0
Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
Existing Home Sales
Friday, Aug. 21,10:00 am, et
Up 2.2%
Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.

Market Forecast:
The producer price index Tuesday will be the most important release this week setting the tone for trading ahead. If signs of inflation emerge at the producer level rates will likely suffer. Housing starts and leading economic indicators data may also move the market.

As you can imagine, the greatest difficultly in a volatile market is its analysis. As you can imagine, I am constantly asked “what do you think will happen with rates?” “Will they get lower?” “Is now the right time?”

The two traditional approaches to market forecasting are fundamental and technical analysis. Fundamental analysis is an attempt to predict future price movements based on the most current economic data. In contrast, technical analysis is an attempt to predict future market movements based on past price movement patterns. Another important factor is market sentiment. Market sentiment measures the emotions and expectations of investors in the market. Sentiment, like most emotions, change often in a short span of time and is impossible to predict accurately.

The inability of anyone to accurately predict the future makes a cautious approach necessary to protect against market volatility. The fact remains that mortgage interest rate are historically favorable. It is difficult to justify the risk in floating when the low rates currently available are a sure thing. Timing is one of the most important factors in success. Unfortunately, knowing the perfect time to lock in a loan is impossible until after the fact. While analysts constantly try to predict the future, the bottom line is they continually fall short in terms of accuracy. The good news is that the Fed has done a relatively good job of keeping rates favorable, but not without some serious spikes here and there. Without the Fed pouring billions into mortgage bonds, rates would surely be higher.

In other words…Nobody Knows!

Some Humor:
Three brothers married wives from different states. The first brother married a girl from Illinois. He told her that she was to do the dishes and house cleaning. It took a couple of days, but on the third day, he came home to see a clean house and dishes washed and put away.

The second brother married a girl from Florida. He gave his wife orders that she was to do all the cleaning, dishes and the cooking. The first day he didn't see any results, but the next day he saw it was better. By the third day, he saw his house was clean, the dishes were done and there was a huge dinner on the table.

The third brother married a lady from Washington. He ordered her to keep the house cleaned, dishes washed, lawn mowed, laundry washed, and hot meals on the table for every meal. He said the first day he didn't see anything, the second day he didn't see anything but by the third day, some of the swelling had gone down and he could see a little out of his left eye, and his arm was healed enough that he could fix himself a sandwich and load the dishwasher.


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