It is just amazing how one strong NFP number has changed the tone of the financial markets. It seems like only yesterday (actually Friday morning @ 8:29) that the financial markets were preparing for the end of the Fed’s involvement, higher bond yields and a Dow that was on a trajectory to 15k. The world was all good and the financial markets were going to jump on board the bandwagon singing Kumbaya as we were on our way to great financial expansion. Well this was not meant to be just yet and what was an unimaginable thought back then of a sub 2.00% 10yr became a reality yesterday as we touched 1.96%. We are opening down from yesterday’s close as we sit @ 2.03% which is not all that bad.

It definitely has been an interesting last few days as we are clearly in the midst of a possible market correction in bonds and equities. The most recent highs of the Dow was 13,252. Yesterday we got to a low of 12,652 so that would translate to a 4.5% correction. Obviously this is right in-line with the drop in bond yields. What we are seeing this morning is some buying in equities which is pushing money out of bonds. This validates just how bad and unexpected the NFP number actually was. This is in contrast to what has been a ho-hum number the last few months which was quickly forgotten by about 8:45.

Where we go from here will be interesting because you get the feel that the NFP number has now ran its course with today’s shift back into equities. My guess is that we need some more economic numbers with some teeth to push us towards a direction. We do have PPI and CPI on Thursday and Friday respectively. If those numbers are below expectations and show that inflation is in check then we may get another push down in bond yields. I would not expect that to be the case but I am also the same guy who thought a sub 2.00% 10yr was unlikely barring something unraveling in Europe so what the hell do I know.

Last but not least it is Wednesday so we got the results of the MBA Weekly Application Survey. Remember that rates were higher for the reporting period for the week ending 4/6. Here are the highlights:

• Applications decreased 2.4%
• Refinance Index decreased 3.1%
• Purchase index decreased .5%
• The refinance share decreased for the 8^th consecutive week to 70.5% which is the lowest since 7/29/11
• The average 30yr conforming rate was 4.10% w/.43pts
• The average 30yr FHA rate was 3.87% w/.55pts
• The average 15yr conventional was 3.37% w/.37pts
• The average 5/1 ARM was 2.89% w/.38pts

The bond markets are opening pretty much unchanged to slightly improved from last night’s close. For the most part we have been seeing a slow grind of improved mortgage prices and lower bond yields so there really is very little to complain about. The trading range has been tight but as mentioned yesterday we expect some price volatility starting with the ADP report on Wednesday leading up to Friday’s NFP release.

I came across 2 very interesting articles/stories that I want to pass along to the masses. The first one is a political story that would annoy anyone who was brought up to work hard and be responsible for your obligations. There has been a lot of criticism from the Obama administration against Edward DeMarco who is the acting director of the Federal Housing Finance Agency which currently “oversees” FNMA and FHLMC. The Obama camp wants the agencies to write-down principle for some heavily indebted homeowners while DeMarco has resisted the pressure because he simply does not think it is a good idea. DeMarco is leaning on the “it would cost too much” reason but many think he just does not believe this is a good precedent. I for one totally agree.

So the Obama administration has decided to turn up the heat on this guy who is trying to do what is right for the taxpayers and the moral fabric of our society by now telling him that the U.S. Treasury will offer to split the cost of any principal write-downs. Where will the Treasury get the money? It will come from unspent housing-aid funds which in turn came from the $700 billion bank rescue that Congress passed back in 2008. So yes this is tax-payer money. Who will qualify for the principal write-downs? Underwater borrowers owing at least 125% of the value of their property AND who are behind on their mortgage payments. So if you are busting your tail to make your mortgage payments on-time by working 2 jobs because that is just what you do and that is your inner make-up then you do not qualify. However if you are a bon-bon eating, Oprah-watching, unemployment collecting (but very capable) slacker who cashed-out on the equity of your home back in 2007 so you can buy a new BMW to keep up with the Joneses then you get the free money. I understand that there are good people out there that had a string of bad luck but unfortunately you just know that in the majority of these cases the money will go to the wrong people. This does nothing to reward the hard work that responsible underwater home owners who keep up with their mortgage payments  also deserve.

Now this is not official but it does appear that DeMarco might lose his battle. Maybe responsible heads will prevail and there will be some way to do this correctly. I have a novel idea…eliminate those that did cash-out refinances and just limit this to purchase transactions where the borrower never extracted a penny from their past home equity. Also give the money based upon a certain % drop in your property value even if you did the unthinkable and kept up with your mortgage payments. I guess that just makes too much sense.

The other story worth passing on is a survey that was taken by the 21 primary dealers who are basically involved in all if not most bond trading activity. They were asked where they see the yield on the 10yr by the end of 2012. Keep in mind that we are currently at 2.17% and got as high as 2.40%  and as low as 1.80% so far this year. They were asked this at the beginning of the year and at the end of the 1^st quarter. The results were interesting:

• When asked at the beginning of the year the average was 2.43% with the low being 2.0% and the high being 3.0%.
• When asked at the end of the first quarter the average increased slightly to 2.49% with the low/high still 2.0% & 3.0%.

This kind of stuff is always pretty interesting because it answers the question on where those that are involved believe interest rates are going. I think we as originators can live with this range and it does allow for a healthy origination environment. We will all take the 2.0% but I also think the average of 2.49% and even the high of 3.0% will allow the mortgage market to offer rates that will still entice new production. Food for thought…

We are starting off the week with a slightly improved bond market with the 10yr sitting at 2.19%. We have been a little quiet on the Market Updates because quite frankly there has been very little to write about because the markets have been pretty quiet. We have been trading in a tight trading range and the markets seem eager to cling onto something that will provide a definitive direction.

In the mist of the tranquility, we did have a blindsided sell-off on Friday afternoon which is never welcomed headed into a weekend. The funny thing is that the reasons for the sell-off are a little murky. I called around when it happened and after reading several market commentaries on Friday afternoon and this morning, I still do not have a unanimous reason for it. The good news is that we are not seeing any follow-thru of this questionable price action this morning so let’s just call it a little bump in the road.

We do have a heavy economic calendar this week that will be capped off by the Non-Farm Payroll number on Friday morning. It will be an interesting day because the bond markets will have an early close(noon) for the Easter holiday. Therefore we will probably see some highly concentrated price movement for a few hours that will come to a screeching halt at around 11:30 as traders close their books for the weekend. The current consensus is a gain of 201k with a tight range of 180k-239k.

Given the relatively tight range if we get an outlier number things could get interesting in the consolidated trading day. Of course leading up to Friday’s number is the ADP report which will be released on Wednesday morning. The consensus there is a gain of 208k.

We are opening up a little bit down this morning with the 10yr trading at 2.19%. However as a lot of you know this is on the heels of what has been a very impressive turnaround in the bond market sentiment. The fact that we have not seen another leg of selling in the bond markets has certainly changed the tone of the market and the thought of the inevitable higher bond yields appears to be in the rear-view mirror at this time. I do think we have established a new trading range but it is still originator-friendly.

What helped prompt the change? Besides a little bit of market re-evaluation after a big sell-off, the bond markets have good old Ben Bernanke to thank for putting out the fire for the cry for higher bond yields. In a speech given this week the Federal Reserve Chairman said the central bank’s easy-money policies(low bond yields) are still needed to confront deep problems in the labor market. This helped to reinforce his plan to keep interest rates low until at least the end of 2014. His comments, at a conference near Washington of the National Association for Business Economics, were striking after several months of improvement in the jobs market. The comments also ran counter to a view that has emerged in financial markets recently that the Fed could back away from its low-interest-rate policies by next year.

The jump in bond yields a few weeks ago was in large part due to the feeling that the Fed had gotten this whole thing wrong in saying that the US economy would be under severe pressure over the next few years as we cope with unemployment and instability in Europe. The market, perhaps rightfully so (time will tell), may have jumped the gun with all the strong domestic data coupled with what appears to be a path of resolution in Europe. That is what Bernanke reiterated this week by stating that he is still very concerned about our economic recovery and warned everyone to keep the champagne on ice. He also reminded everyone that the Fed will take whatever measures necessary that it sees fit to promote economic growth. So as of now the Fed seems to be prevailing. At this point every loan originator should have a picture of Big Ben as the wallpaper on their cell phones.

We also had the weekly release of the MBA Application Survey and as one would expect is was not a good report because it captures the time period where the 10yr jumped to almost 2.40%. Here are the highlights or in this case the lowlights:

• Applications decreased 2.7%
• The Refinance Index decreased 4.8%
• The Refinance Index has decreased for 6 consecutive weeks falling to the lowest level since December and is 24.2% lower than it 2012 peak back in February
• The decline in the Refinance Index was driven by a 12.0% drop in FHA refinance activity with conventional “only” dropping by 3.4%
• The Purchase Index increased 3.3%
• The Refinance Index share decreased to 71.9% which is the lowest since July 2011
• The average 30yr conventional rate increased to 4.23% w/.45pt which is the highest since Nov 2011
• The average 30yr FHA increased to 3.96% w/.52pt
• The average 15yr conventional increased to 3.50% w/.42pt which is the highest since Dec 2011
• The average 5/1 ARM increased to 3.00% w/.42pt which is the highest since Dec 2011

I expect a nice turnaround to this report next week.

We are starting off the week on a good note as the bond markets are marginally up but given the price movement last week I think we would all take a marginal improvement over the carnage of last week’s event.

Now wishful thinking tells me that the worst is behind us and that last week was just one big bad dream and that we will grind higher (lower in yields) this week and all will be perfect by the end of the week. Well, while that can happen, I am not betting the house on it. This is a very light week on the economic front so the price action this week will be dictated by the unknown news headlines and some good old fashion market positioning.

The fact that we are starting the week without any further increase in bond yields is certainly a good sign so we do have some hope to hang on to. Let’s cross our figures but any thoughts of a dramatic bond rally needs to be held at bay.

After a little further look into the numbers of what one can expect if yields continue to rise I noticed something worth sharing. Keep in mind this is just 1 mans opinion and does not mean this will happen and for that matter I hope it does not. However, being informed is much better than being ignorant.

When looking at the next meaningful level in the 10yr, I noted on Friday’s update 2.50% because of the .25% incremental rule. While I do believe that is an important level and will come with some support it may not have as much support as I previously thought. It turns out that a key level to keep an eye on is 2.40%. If we break that level then I hate to say that we might not find any meaningful support until 3.00%. Now this is what the chart is telling us and is in no way a guarantee of what will happen in the future. However, the chart is pretty convincing.

Now we all know that the Fed will do everything in their power to prevent this from happening but if the overwhelming majority of market participants want higher yields than higher yields they will get. Last night on one of those nature shows I saw a pack of 200lb wolves take down a 2000lb bison. It took a while but the wolves at some point simply overwhelmed the bison. Life mirrors nature.

A little HAMP 2 update…the 1 major investor that I wrote about did a 180 and decided that buying other major servicers underwater mortgages might not have been such a great idea after all. They capped the program like all other lenders have to date which is at 105% ltv. I will repeat…this is a work in progress and we will have something shortly as the facts develop and secondary market options are certain.