The Mortgage Manifesto

Technical Support Holds (for now)

Early morning trading today indicates that mortgage bonds will be in rally mode.  This is a great signal of building bullish strength after this week's flirting with mortgage bonds' 200 day moving average.

The next key technical level I am watching is how these bonds fare as they approach the recent highs of the past six months.  If they can break through that level we might finally see some traction for lower conforming mortgage rates ahead.  Jumbo mortgage rates are another story.  The market still has a lack of buyers for these securitized pools and that will keep rates on jumbo mortgages higher indefinitely.

www.BrettGrendahl.com

The 200 Day Moving Average is Showing It's Strength

Quick market update for you.

Mortgage bonds are grabbing some footholds in an attempt to get back above their 200 day moving average.  This all-important technical level has been showing its power as a "line in the sand" for mortgage bonds to get past.  After faltering below this level earlier this week today's trading action has us back above the moving average.

Let's see if this bullish momentum can hold.  While these might be some early good signs I still recommend locking versus floating for any new mortgag transaction until we see continued strength in mortgage bond trading.

You Will Love This Find!

A top official of one of the country's top rating agencies had this to say recently defending their analysis of the creditworthiness of subprime mortgage-backed securities, "....directionally we got it right.  What we missed was the magnitude adn the speed of the deterioration of mortgage product in 2006."

I love this excuse!

Next time a police officer pulls you ove for speeding you can use this too.  "Um, sir, I had the direction right is just didn't judge the magnitude I was applying to the gas pedal and the speed at which my vehicle would go."

:)

More Hard Core Data on Inflation

Okay, here are some interesting data points with clear-cut inflation.  What was the news headline that caught my attention during some early morning reading?

"Banking Fees Reach Record Highs"

Oh, how nice!

In research from BankRate, Inc. reported today, banking fees have reached all-time highs in several areas, including ATM surcharges ($1.78 up from $1.64), bounced check fees $28.32 up from $27.40), and monthly service fees on interest checking accounts ($11.72 up from $10.74).

Ask yourself this?  How do those price increases help your own saving and/or consumption?

That is the deleterious effect of inflation.  It not only allows you to save less and it also eats up money for you to spend (slows national consumption).

As you hear the media pundits chatter about whether or not inflation is rising just look around at what you spend money on every day, what the hard core data says, and the truth will be apparent.

www.BrettGrendahl.com

Mortgage Bonds Are Faltering

In this morning's trading mortgage bonds are moving lower after having dipped BELOW their 200 day moving average yesterday.

The 200 day moving average captures the moving average of the mortgage bond's price over the past year.  That is why it is such an important technical signal to assist us in determing the most likely direction mortgage bonds might be headed.

Mortgage 101:  When mortgage bonds are trading above their 200 day MA we expect to see lower mortgage rates ahead.  When they are below their 200 day MA, we expect to see higher mortgage rates ahead.

I expect mortgage bonds to remain stable until tomorrow's GDP report and the Core PCE (Personal Consumption Expenditure) report Friday.  The Federal Reserve has been watching the PCE report closely for a "tell" on what is happening with inflation.

For now, I maintain a general bias towards locking rates.

www.BrettGrendahl.com

A Historical Perspective

Hi everyone!

While doing my reading today I found this compilation of quotes from another strange time in American economic history; that of the late 1920's and early 1930's.

Read and see if you can pick out similar utterances in the media and from government officials these days.  By no means am I implying a depression is guaranteed in our near future.  However, I find this as a good exercise in the persistence of human folly.  No matter all of our advances, we do not CONTROL the world.  We are merely one moving part.

Enjoy!

**********

1. "We will not have any more crashes in our time."
- John Maynard Keynes in 1927

2. "I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future."
- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

"There will be no interruption of our permanent prosperity."
- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

3. "No Congress of the United States ever assembled, on surveying the state of the Union, has met with a more pleasing prospect than that which appears at the present time. In the domestic field there is tranquility and contentment...and the highest record of years of prosperity. In the foreign field there is peace, the goodwill which comes from mutual understanding."
- Calvin Coolidge December 4, 1928

4. "There may be a recession in stock prices, but not anything in the nature of a crash."
- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

5. "Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

"This crash is not going to have much effect on business."
- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

"There will be no repetition of the break of yesterday... I have no fear of another comparable decline."
- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929

"We feel that fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."
- Goodbody and Company market-letter quoted in The New York Times, Friday, October 25, 1929

6. "This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."
- R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929

"Buying of sound, seasoned issues now will not be regretted"
- E. A. Pearce market letter quoted in the New York Herald Tribune, October 30, 1929

"Some pretty intelligent people are now buying stocks... Unless we are to have a panic -- which no one seriously believes, stocks have hit bottom."
- R. W. McNeal, financial analyst in October 1929

7. "The decline is in paper values, not in tangible goods and services...America is now in the eighth year of prosperity as commercially defined. The former great periods of prosperity in America averaged eleven years. On this basis we now have three more years to go before the tailspin."
- Stuart Chase (American economist and author), NY Herald Tribune, November 1, 1929
"Hysteria has now disappeared from Wall Street."
- The Times of London, November 2, 1929

"The Wall Street crash doesn't mean that there will be any general or serious business depression... For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game... Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before."
- Business Week, November 2, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation..."
- Harvard Economic Society (HES), November 2, 1929

8. "... a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall."
- HES, November 10, 1929

"The end of the decline of the Stock Market will probably not be long, only a few more days at most."
- Irving Fisher, Professor of Economics at Yale University, November 14, 1929

"In most of the cities and towns of this country, this Wall Street panic will have no effect."
- Paul Block (President of the Block newspaper chain), editorial, November 15, 1929

"Financial storm definitely passed."
- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

9. "I see nothing in the present situation that is either menacing or warrants pessimism... I have every confidence that there will be a revival of activity in the spring, and that during this coming year the country will make steady progress."
- Andrew W. Mellon, U.S. Secretary of the Treasury December 31, 1929
"I am convinced that through these measures we have reestablished confidence."
- Herbert Hoover, December 1929

"[1930 will be] a splendid employment year."
- U.S. Dept. of Labor, New Year's Forecast, December 1929

10. "For the immediate future, at least, the outlook (stocks) is bright."
- Irving Fisher, Ph.D. in Economics, in early 1930

11. "...there are indications that the severest phase of the recession is over..."
- Harvard Economic Society (HES) Jan 18, 1930

12. "There is nothing in the situation to be disturbed about."
- Secretary of the Treasury Andrew Mellon, Feb 1930

13. "The spring of 1930 marks the end of a period of grave concern...American business is steadily coming back to a normal level of prosperity."
- Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930
"... the outlook continues favorable..."
- HES Mar 29, 1930

14 "... the outlook is favorable..."
- HES Apr 19, 1930

15. "While the crash only took place six months ago, I am convinced we have now passed through the worst -- and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us."
- Herbert Hoover, President of the United States, May 1, 1930
"...by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent..."
- HES May 17, 1930

"Gentleman, you have come sixty days too late. The depression is over."
- Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

16. "... irregular and conflicting movements of business should soon give way to a sustained recovery..."
- HES June 28, 1930

17. "... the present depression has about spent its force..."
- HES, Aug 30, 1930

18. "We are now near the end of the declining phase of the depression."
- HES Nov 15, 1930

19. "Stabilization at [present] levels is clearly possible."
- HES Oct 31, 1931

20. "All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S."
- President F.D. Roosevelt, 1933

Bond Traders Do NOT Like this Cut

Mortgage bonds continue to trade lower today and are now testing their 200 day moving average.  This is a significant technical level that they had just went back above earlier this month.  If this moving average cannot hold we will likely see stengthening pressure on mortgage rates, pushing them higher in the days ahead.

Why is this?  The action by the Fed indicates they do not care about maintaining the dollar's value and will let inflation pressures re-ignite.  Mortgage bond investor realize that rising inflation will reduce the value of their investments.

The next few days of trading in mortgage bonds are critical to what might happen to mortgage rates for the remainder of this year.  Check in often for the inside scoop.

The general advice is it is better to lock today than take on the risk of what tomorrow might bring.

Mortgage Rates Inching Higher

Quick post this morning. 

Mortgage bonds are falling lower in this morning's trading and that is pushing mortgage rates slightly higher.  This is an example of how mortgage rates and the Fed funds rate DO NOT move in lock-step with each other.  I see technical signs building that indicate mortgage rates are not likely to reach new lows for the year anytime soon.

This market can turn on a dime based on incoming news.  However, my bias is towards RATE LOCKING as risks outweigh opportunities in this market.

Bond Market Weakness

Quick update from the bond trading pits.

Mortgage bonds are showing several indications of technical weakness and inability to trade to new highs after the Fed cuts. 

Unless mortgage bonds can break up and past their earlier highs of the year those highs should remain in place and we should see mortgage rates drift higher in the days ahead.

DON'T use the Fed's actions and mistakenly assume lower mortgage rates are guaranteed.  That is a false pretense.  Your decisions should be made specific to your individual situation and longer-term plans.  These decisions should also be taking into account future risks as well as opportunities.  Currently, that scale is heavily tipped towards future risks.

Interest Rate 101

morHi gang,

You are reading this because you share the desire to peak into the future of mortgage rate direction and learn more about how mortgage rates are determined.

Yesterday's Fed meeting and the market's reaction to the rate cut and statement are great examples of how what happens to the Fed's Overnight Rate and long-term mortgage rates.

Let's delve in.

First, many people speak about "what the Fed did to rates" and it is important to clarify what they really did.  They cut the interest rate on their Overnight Rate and the Discount Rate.  These rates are the rates that the Fed charges big banks to borrow money.  In turn, the big banks use the Overnight Rate as a benchmark for where they set their Prime Rate.  The normal spread between the Overnight Rate and Prime Rate is 3 points.  So, currently the Overnight Rate stand at 4.75% and that puts Prime at 7.75%.

Second, any homeowner with a Home Equity Line of Credit (HELOC) has a variable interest rate with some margin above or below Prime.  This means that you will see immediate relief in lower interest being charged on any HELOC balances.

Third, and most importantly, what happens to long-term fixed mortgage rates (i.e. 15 year, 20 year, or 30 year terms) is dictated more by how the market thinks the Fed is managing INFLATION.  Inflation is the Enemy #1 to any bond investor, including mortgage bonds, as rising inflation eats away at their investment.  This is because a bond has a fixed interest payment schedule, returning interest to the investor at a fixed rate.  If the value of the dollar, and the value of each fixed payment, is declining then the investment (the bond) falls in value.  When bond values fall, yields rise.  In your day-to-day world the yield is the interest rate.

So, here's the deal.

When the Fed cut their rates on Tuesday the U.S. dollar fell against a basket of foreign currencies.  This means that it will take MORE U.S. dollars to purchase incoming goods produced in foreign lands.  That is inflation.  One of the big risks that the Fed exposes the economy to in easing (cutting rates) monetary policy is that they stoke up inflation.

This is the reason that we have not seen long-term mortgage rates improve dramatically on the Fed rate cuts.  Yes, we have seen them moderate a touch lower but they still have not returned to the lows of the year, reached back January and again last March.

Do not expect that Fed rate cuts will guarantee lower mortgage rates ahead.  Think about this, the Fed raised their Overnight Rate 17 consecutive times yet long-term mortgage rates barely budged.

Couple this knowledge with the knowledge of a very challenging real estate and mortgage underwriting marketplace and my general advice to everyone is to get your financing onto long-term fixed rates as soon as you can.  If inflation heats up you will benefit by fixing your payment now.  Those payments will become easier to make in the future.

www.BrettGrendahl.com