Archive for January, 2008

Market Update – January 361, 2008

David Kosmecki | January 31, 2008 in Uncategorized | Comments (0)

Risks favor: Cautiously Floating

Current Price of FNMA 5.5% Bond: $101.41, +25bp

Mortgage Bonds are currently trading higher in this very volatile environment, but we need to keep a close watch on this as Bonds have already given up some ground after touching the ceiling of resistance located at the upper trend line. Yesterday, the Fed did indeed drop the Fed Funds Rate by 50bp, bringing it down to 3%. Within the statement, the Fed said “downside risks to growth remain” and the Fed would “act in a timely manner to address those risks” – meaning the door is open to more Fed cuts if necessary. After yesterday’s Fed decision, Stocks shot higher and Bonds moved sharply lower – but things changed very quickly at around 3:30pm ET when it was reported that Bond rating agency, Fitch, cut their credit rating on MGIC Corporation and it’s financial guaranty insurance subsidiaries. This news sparked a selloff in Stocks with the financial sector taking the brunt of the losses. This trading action helped Bonds improve from their worst levels of the day.

This morning, the bad news continued for Stocks, and there is a developing situation that could have serious repercussions for the financial system. On the heels of yesterday’s surprise downgrade, Bond insurer MBIA Inc just reported a $2.3 Billion loss for its fourth quarter earnings due to heavy losses from the sub-prime mortgage assets it guarantees. This has investors extremely concerned about possible further downgrades for the bond insurance companies from credit agencies. And new downgrades to bond insurers like MBIA could cause a cascading effect where downgrades and lower ratings applied to existing mortgage investments could trigger another round of mortgage-related losses and write-downs for the large financial institutions totaling an estimated $265 Billion.

Why are the Bond insurers, also called mono-line insurers, so important? Imagine that you own a home and heaven forbid, suffer a major loss that you turn to your insurance company to cover. But what if your insurance company themselves have become financially weak or insolvent, and are unable to really help mitigate your loss, due to their own financial problems? This is exactly the issue at hand.

In today's economic headlines, the highly anticipated Core Personal Consumption Expenditure Price Index (PCE) for December matched consensus estimates of 0.2%, resulting in a 2.2% year-over-year Core rate. This is still above the Fed’s desired target zone of 1 – 2%, but the good news is that it did not increase from last months year-over-year Core reading. Personal Income and Spending rates for December were slightly higher than forecast with Income rising by 0.5% with Spending rising by 0.2%.

Adding selling pressure to Stocks was this morning’s Initial Jobless Claims which were reported at a whopping 375,000, which was well above expectations of 320,000 and the highest weekly increase since September 2005. The four-week moving average climbed to 326,000 claims. The weak data may need to be taken with a grain of salt as the Labor Department cited data gathering difficulties due to the Martin Luther King Holiday.

The Chicago Purchasing Managers Index (PMI) for January was reported at 51.5 which met expectations.

Making English Out Of Fed-Speak (January 2008 Edition)

David Kosmecki | in Uncategorized | Comments (0)

The Fed lowered the Fed Funds Rate by 0.500% to 3.000% yesterday. The move was widely anticipated and so Wall Street’s reaction was muted.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.500% yesterday. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.

In the statement above — as explained by The Wall Street Journal — the Fed expresses concern about the housing and jobs markets, while noting that inflation is less of a worry. This leaves the possibility of future Fed Funds Rate cuts open.

Parsing the Fed Statement
The Wall Street Journal Online
January 30, 2008

Market Update January 30, 2008

David Kosmecki | January 30, 2008 in Uncategorized | Comments (0)

Risks favor: Carefully Floating into Fed Announcement

Current Price of FNMA 5.5% Bond: $101.22, Unchanged

It’s Fed Day afternoon…and one of the most highly anticipated and hotly debated Fed Decisions will be released at 2:15pm ET. It’s interesting to see the parade of fools come on the air, who earlier this morning said that a Fed cut of 50bp would immediately cause home loan rates to drop by 50bp as well. Scary. Let’s first get to the news – then we’ll talk about what the Fed might do, likely market reaction, and what we should be saying to our clients.

The ADP Employment Report was released this morning, suggesting that Friday’s official jobs number should come in around 150,000 new jobs – which is more than double current consensus estimates. While this shows employment growth in the economy, the problem with the jobs numbers is in the inevitable revisions to follow, in that the tabulation includes previous averages – as opposed to actual numbers. It’s kind of like a meter reading on your home utility…sometimes you get an actual reading, sometimes you get an estimate based on previous usage. In times of economic growth, the average understates the amount of new jobs, because it’s based on lower levels. Conversely, and as we find ourselves today, in times of economic slowdown, averages are predicated upon higher levels, therefore overstating actual job creations.

But the ADP Report – while interesting – took a back seat to the more reliable and much weaker than expected 4th Quarter GDP Report. Fourth quarter GDP showed a 0.6% annual growth rate, almost half the 1.1% growth rate expected by economists and far below the 4.9% rate recorded during the third quarter. Overall, GDP grew by only 2.2% during 2007, the slowest growth rate since the economy was coming out of a brief recession in 2002.

So what will the Fed do? The Fed Funds Futures contracts is pricing in an 80% chance of a 50bp cut, and a 20% chance of a 25bp cut. We think a 50bp cut is likely – but should we get a 25bp cut, the statement will probably contain language that the Fed will cut further if necessary. Neither of these is very good for the long term future of mortgage rates, due to the eventual inflationary pressures the cuts will create. And Bond Traders will eventually be smart enough to figure that out.

We feel a 50bp cut is in the cards, which will take the Fed Funds Rate down to 3.0%.

This would be a big help for business loans, consumer loans, Home Equity Lines of Credit and Adjustable Rate Mortgages. But how will this affect your fixed rate sheet today?

As we have said for years, Fed Rate cuts do not have a direct impact on fixed mortgage rates. In fact, they often serve to push them in the opposite direction, by fanning fears of inflation when they cut – or by fighting inflation when they hike. Fixed mortgage rates are directly affected by inflation, because a fixed rate mortgage provides the investor with a fixed rate of return for a long period of time. As inflation increases, the buying power of that fixed return is eroded, because it costs more dollars to buy the same amount of goods and services. So if inflation is on the rise – investors will demand a higher fixed rate of return to compensate them for the more rapid erosion of buying power on their return.

The last time the Fed had a long cutting cycle was back in 2001. The Fed cut eleven times in eleven months, and eight of those cuts were by 50bp, for a total of a 4.75% drop in the Fed Funds Rate. But mortgage rates were actually higher throughout this drastic cutting cycle, because inflation ticked higher. Let’s look at more recent history, and as we have pointed to previously: the Fed cut by 50bp on September 18, 2007, and after prices enjoyed a move higher that afternoon, Mortgage Bonds lost 94bp over the next two days. On October 31st, the Fed lowered by 25bp…and over the next five trading days, Mortgage Bonds lost 78bp. On December 11th, the Fed lowered by another 25bp, and over the next two days, Mortgage Bonds lost 64bp. Most recently – the surprise 75bp cut by the Fed cost us about 150bp on our rate sheets over the next two days.

History Is A Teacher: Cuts To The Fed Funds Rate Lead To Mortgage Rate Hikes

David Kosmecki | in Uncategorized | Comments (0)

When the Fed cuts the Fed Funds Rate, mortgage rates tend to rise

When the Federal Open Market Committee adjourns from its two-day meeting today, it is widely expected to lower the Fed Funds Rate.

This does not mean that mortgage rates will fall.

In fact, using history as an indicator, we should expect mortgage rates to rise if the Fed Funds Rate falls.

Remember: The Fed Funds Rate is an overnight interest rate between banks; mortgage rates are long-term rates based on the bond market. These are two very different animals.

The FOMC’s press release hits the wires at 2:15 P.M. ET.

Homeowners Rejoice! New Homes Sales Data Is Weak.

David Kosmecki | January 29, 2008 in Uncategorized | Comments (0)

If you only read headlines this past week, you may have missed two very important points.

The first story relates to Housing Starts. Housing Starts measure the number of new homes entering the construction phase. The headline blared “Housing starts plunge to 16-year low“.

If you are a homeowner, this is terrific news.

Because home values are governed by Supply and Demand, fewer homes built means that home demand has a chance to rebalance against home supply.

This places upward pressure on home prices nationwide.

When Housing Starts drop, it says more about weakness in builder sentiment that it does about the state of the housing nationwide. Housing Starts are at all-time lows because builders want to sell the product they have before putting more product on the market.

The second story was yesterday’s New Home Sales figures.

The headline read that “US new-home sales slide in record plunge” but, again, let’s look a little deeper.

New Home Sales are defined as homes that are newly built. Stated differently, it specifically counts the number of homes sold that were once classified as “Housing Starts”.

If Housing Starts falls, therefore, we can expect New Home Sales to fall, too. The two data points count the same housing inventory at two different points along a timeline.

These two stories are related but neither should be construed as bad news. As builders cut back on the supply of homes, it should create an increase in relative demand.

For homeowners, this is a positive development.

Market Update – January 28, 2008

David Kosmecki | January 28, 2008 in Uncategorized | Comments (0)

Risks favor: Cautiously Floating

Current Price of FNMA 5.5% Bond: $101.44, +9bp

Brace yourself for another wild ride. This week’s economic calendar is steaming with volatile reports stacked every day. The reports include, Wednesday’s Fed rate announcement, Thursday's Core Personal Consumption Expenditure (PCE) Index and Friday's Jobs Report. That’s a huuuuge list. And how about the movements we saw last week. Every trading day had interest rate moves of at least a quarter percent…again, that’s in rate!

Kicking off the week was the New Home Sales Report for December, which came in at 604,000, below expectations of 645,000. The supply of new unsold homes rose to 9.6 months from November’s reading of 9.3 months.

At the height of last week's stock market panic sell-off, Fed Funds Futures traders were pricing in another 50bp rate cut by the Fed for when they meet this Wednesday. Now, however, the Fed Funds Futures have cooled and are pricing in just a 25bp rate cut. This has caused some uncertainty in the markets as to which way the Fed will go. With inflation still a real and present concern, it is very difficult to handicap this. And predictions from highly regarded economists range from no cut at all to a 75bp cut.

Speaking of the stock sell-off, was “rogue trader” Jerome Kerviel really solely responsible for costing French Bank Societe Generale $7.1 Billion Dollars…and for helping to trigger last week’s massive decline in the global Stock markets? Or is the junior trader being played a fool, becoming the scapegoat to cover up financial mismanagement by the bank itself? Supposedly – the French Bank had just uncovered massive losing positions caused by Kerviel, and decided to start selling off or “unwinding” these losing positions last Monday. Initially the loss was estimated at about 1.2 Billion British Pounds, but the decision to unwind the positions in a less liquid market, because our US markets were closed on Monday in observance of Martin Luther King Day, turned the loss into 3.7 Billion British Pounds or $7.1 Billion US Dollars. The media didn’t understand what happened and said the cause was that the global markets suddenly realized that the US was likely headed towards recession. But we accurately reported what really happened in MMG Weekly.

The Week In Review (January 28, 2008) : What To Watch For

David Kosmecki | in Uncategorized | Comments (0)

Mortgage rates change from day-to-day, but last week’s volatility was a record-breaker.

After drooping through Tuesday and then skyrocketing Wednesday and Thursday, mortgage rates retreated slightly on Friday.

By weeks’ end, rates were at their same levels from mid-December.

This is in contrast to Tuesday, just after the Fed’s rate cut and before the stock market rally. Mortgage rates had been touching near four-year lows for some home loan products.

This week could be equally hectic because heavy economic data it hitting the wires, and because the Federal Open Market Committee is meeting.

The major activity gets started Tuesday with the Consumer Confidence report.

Markets care about this survey because recessions tend to be self-fulfilling prophecies — if people believe it will happen, it generally does. Therefore, if average Americans are feeling worse about the economy, it may cause stocks to sell-off to the benefit of mortgage rates.

Notice from the graph above how confidence plunged through the second half of last year.

On Wednesday, the FOMC adjourns from its two-day meeting.

What the Fed does will not be as important as what the Fed says. Markets will dissect the FOMC’s press release for clues about our economy’s strength. If the statement cautions about dramatic weakness in the economy, expect mortgage rates to fall on the absence of inflation.

Then, on Thursday, markets get treated to the Personal Consumption Expenditures report. The PCE is a Cost of Living index and is the Federal Reserve’s favored inflationary report. If “normal living expenses” are increasing, it should create upward pressure on mortgage rates.

And lastly, on Friday, the Bureau of Labor Statistics releases the jobs report for January.

Markets are expecting an improvement on December’s figure and if that adjustment is greater than expected, mortgage rates will rise on the belief that the economy is not as weak as previously reported.

It will be a busy week like last week so it pays to think in terms of “payment” instead of “rate”. If you’re in the market for a mortgage and your proposed payment is within budget, consider locking in advance of this data-laden week.

Market Update – January 25, 2008

David Kosmecki | January 25, 2008 in Uncategorized | Comments (0)

Risks favor: Very Carefully Floating

Current Price of FNMA 5.5% Bond: $100.81, -3bp

Prices are slightly lower adding to the loss of 144bp in just the last 2 days! Unfortunately, technical signals suggest that prices will likely erode further to touch support at the 25-day Moving Average. Additionally, the stochastic indicator is bearish, as it shows a negative crossover from overbought levels. We will start out floating, but in tip-toe fashion because a further move lower in prices later today is very possible, especially if stocks gain upside momentum.

The 'Maestro', former Fed Chair Alan Greenspan, is back on the soapbox - but this time with a more positive tone. While he still thinks the chance of a recession (2 consecutive quarters of negative GDP growth) is 50/50, he said that if the US economy did enter one, it would be short and shallow. Moreover, he thinks 2008 could be the bottom in housing. We are glad to see he is thinking the same way we have been. And consider this - if the housing market had a large affordability gapperhaps as much as 30%…the excess will have been reduced quite a bit by the end of this year. Prices declined by 5%-10% in 2007. Add another 5% drop this year and half the excess in affordability is gone. Now think about incomes rising a modest 2.5% per year. Since we qualify at a front ratio of 33% or less, the 2.5% increase in income translates to about 7.5% increase in price. Two years of that wipes out the remaining 15% gap in affordability. There is still a lot of inventory to soak up, so prices won't rocket higher next year, but we should see stabilization and modest price appreciation.

Real Estate Term : Negative Amortization Home Loan

David Kosmecki | in Uncategorized | Comments (0)

Negative amortization is the process by which a loan's principal balance increases on a month-over-month basis.

(Pronounced: NEGH-ah-tive am-ohr-tih-ZAY-shun)

Negative amortization is the process by which a loan’s principal balance increases on a month-over-month basis.

This is in contrast to a “typical” amortization schedule in which the principal balance decreases.

Negative amortization is an optional feature on some home loans.

These mortgages are usually referred to by the brand names “Option ARM”, “Pick-a-Payment”, or “Payment Option ARM”.

Many industry veterans collectively call refer to these types of mortgages as “Neg-Am” loans.

When a Neg-Am mortgage statement arrives each month, the homeowner can choose his preferred payment structure.

  1. Pay the minimum balance due only
  2. Pay the interest due only
  3. Pay the principal + interest payment on a 30-year amortization schedule
  4. Pay the principal + interest payment on a 15-year amortization schedule

Choice #1 is like making a “minimum payment” on a credit card. It is the only option that adds to the principal balance so, therefore, it is the only negative amortization option of the four payment choices.

In this sense, negative amortization is a choice and not a certainty.

In the early 2000s, Neg-Am loans grew popular as home affordability products. Many homeowners made the minimum payment each month and found that their mortgage balance had swelled.

Some of these homeowners lost their homes.

Because of their complex structure and potentially devasting consequences, NegAm home loans have been dubbed “nightmares” by several media publications.

However, many sophisticated homeowners have successfully applied NegAm loans to help meet their financial goals.

Like all home loans, NegAm products are a better fit for some homeowners than others. Some likely candidates include:

  • 100%-commissioned salesperson who want better control over tax deductions
  • Owners of multiple investment properties who want better control over cash flow
  • Investors who seek leverage in real estate and who clearly understand market risk

Homeowners with questions about negative amortization loans should seek counsel from a qualified mortgage professional.

Market Update – January 24, 2008

David Kosmecki | January 24, 2008 in Uncategorized | Comments (0)

Risks favor: Locking

Current Price of FNMA 5.5% Bond: $101.22, -12bp

History has a way of repeating itself. On Tuesday afternoon when Mortgage Bonds were trading 53bp higher, our alert to float also discussed what happened back on September 18th, the last time the Fed surprisingly cut rates by .50%. On the day of the cut, Mortgage Bonds had traded nicely higher, but on the next day, and after a higher open, Bonds went tumbling lower. This is exactly what happened again yesterday as Mortgage Bonds opened 38bp higher and then suddenly reversed 94bp lower on the dramatic recovery in the Stock market. Take a look at the chart below and be sure to share this with the clients and relationship partners you protected over the past two days.

In this morning's economic news, Initial Jobless Claims were reported at 301,000, which was below expectations of 320,000 and represented it’s fourth consecutive weekly decline. Meanwhile, the widely watched four-week moving average of Initial Jobless Claims also declined with 14,000 fewer claims to a level of 314,750. The better than expected results added some more selling pressure to the Bond market.

Existing Homes Sales for December were reported at 4.89 Million, which was just slightly below expectations of 4.95 Million. The monthly inventory of unsold homes fell to a 9.6 month reading from November’s reading of 10.1. For all of 2007, existing home prices fell 1.8% and represented the first nationwide decline in houses since the Realtors started tracking this data over 40 years ago. But think of this, we have experienced historic gains of over 100% in the past several years in many parts of the country, so how bad is a 1.8% year over year decline. If the Stock market doubled in the past three years and the market then declined 1.8% – would it even make the headlines? Think about this and be sure to share it with your clients and relationship partners the great opportunity upon us. We are seeing a buyers real estate market along with mortgage rates at three year lows.