(Image courtesy of Chip Somodevilla/Chicago Tribune)

The markets are opening down as the ADP report came out a bit higher than expected. It showed a 163k increase when the consensus was 120k. For those that read this regularly know that I downplay the ADP number because it tends to have little in common with the succeeding NFP report.

However, what is does do is create expectations and now the expectation for Friday’s number is that it is higher than the 100k consensus. So even if the actual number is on the nose @ 100k the markets would probably view this as a weak number which would result in a negative reaction in stocks and positive one for bonds. Also what this higher than expected ADP number does is create a sense that the Fed could wait to roll out QE3. I will say that is a bit of a stretch because in a few hours we will find out soon enough what the Fed thinks with the release of the FOMC minutes @ 2:15. However, this is what traders grab on to in order to give themselves a chance to be one step ahead and make a few bucks.

Something worth mentioning happened yesterday which was the official release by Edward DeMarco who is the Acting Director of the Federal Housing Finance Agency(FHFA) on Obama’s proposed Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA). You may recall from some older Market Updates when we reported on the Obama Administration putting pressure on DeMarco to approve some aggressive (some may say Socialist) measures to have the FHFA allow FNMA/FHLMC to implement Obama’s HAMP PRA.

The HAMP PRA plan by Obama would give FNMA/FHLMC the ability to give borrowers a principal pay-down which in the opinion of the Obama administration would help stem foreclosures. DeMarco strongly disagreed with this and in essence termed the program as a moral hazard. However he agreed to do a complete analysis on the cost/rewards of this politically driven program funded by the taxpayers. So his report came out yesterday and said, “ Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”

This was not met with much acceptance from the Obama Administration as Treasury Secretary Geithner called for DeMarco to reconsider. Some interesting political theater that does affect our business. Also I am impressed with DeMarco for having the grapefruits to stick up for what he strongly believes in even if it does eventually cost him his job. If we had more people like him in Washington then maybe this country would get its financial house in order.

Finally the Weekly MBA Application Survey came out this morning. Here are the highlights:

• Mortgage applications increased .2%
• The Refinance Index increased .8%
• The Purchase Index decreased 2.0%
• The refinance share was 81% which is the highest since 1/20/12
• The average 30yr conventional rate was 3.75% w/.51pts
• The average 30yr FHA was 3.52% w/.55pts
• The average 15yr was 3.09% w/.49pts
• The average 5/1 ARM was 2.73% w/.41pts

The bond markets are opening slightly up to unchanged from yesterday’s close. We see the 10yr hanging firm below 2.00% at 1.98%. There is no meaningful economic indicators that have or will come out today that should have much impact on market direction so trader flow will dictate where the market moves today. Like we mentioned yesterday, I would not expect much volatility but financial markets have a way of catching you off guard. We do have a full plate of economic indicators coming out tomorrow highlighted by Initial Jobless Claims (8:30), Existing Home Sales (10:00) and Leading Indicators (10:00).

While the economic calendar might be a little light today there is some of the usual political buzz regarding the housing market coming out of Washington. The “get rid of FNMA & FHLMC” campaign is starting to re-emerge.  A report came out today that “U.S. Treasury officials are leaning toward recommending that Fannie Mae and Freddie Mac be replaced with a government safety net for the mortgage finance system and continued federal backing for loans to lower-income homebuyers, according to three people briefed on the discussions.”

The report also points to statements that Treasury Secretary Geithner has said in recent public appearances that “an agency recommendation for winding down the two taxpayer-owned mortgage companies could be released in coming weeks. It hasn’t yet been determined whether the plan, likely to be a broad outline rather than a detailed prescription for legislation, will be released that soon”. So what does all this mean for the mortgage market today and in the future?

Today: I will keep this short and sweet…nothing.

Future: Well this is very debatable. The housing market which is supported by the mortgage market which is supported by investors of mortgage back securities which is reliant on the imbedded government guarantee is, as you can see, a very tangled web. Therefore it will take a lot of very smart people with a common non-political goal of working together to create a functional plan that will stand the test of time (how has that worked recently for the Euro?) and manage to not cause any disruption to what is currently a pretty efficient system aside from the fact that it is reliant on government support. Oh yeah and on top of that we need the very significant infusion of private capital which this current administration has been accused of alienating. This all seems very easy…right?? Can it be done? Anything is possible but I do not see it happening anytime soon to the point where it will impact any of us within the next 5 years which is a lifetime in this business. Personally I think any significant changes if they happen at all will be well beyond 5 years from now.

Last but not least we have the weekly release of the MBA Weekly Application Survey. There is a few interesting highlights in this week’s report giving the market rally and the changes in the FHA insurance premiums. Here are the highlights:

• Applications increased 6.9%
• The Refi Index was up 13.5%
• The Purchase index was down 11.2%
• The % of refinances increased to 75.2% from 70.5%
• There was a 23% drop in FHA purchase loans. This drop follows big increases in the demand the previous weeks in anticipation of the insurance premium increases. This was the largest weekly drop in the FHA purchase index since the expiration of the 1^st time homebuyer tax credit in May 2010.
• The average conventional 30yr was 4.05% w/.45pts
• The average 30yr FHA was 3.83% w/.61pts
• The average conventional 15yr was 3.33% w/.41pts
• The average 5/1 ARM was 2.83% w/.35pts

Yesterday we saw a pretty big market sell-off. While one never knows when it is going to happen, as we have been saying recently, it was expected because bond yields simply got too low.

There was no meaningful reason (key word being meaningful) for the 10yr to get in the 1.80% neighborhood and for that matter there was no meaningful reason for yesterday’s bond market sell-off and the rally in the stock market. Yes there was a stronger than expected housing starts number for November reported by the Commerce Department but that number alone should not have caused yesterday’s price action. Simply put – bond yields just got too damn low (I am stealing the line from that strange guy who ran for office on the Rent is too Damn High party…I forgot his name).

Anyway the housing starts number had some interesting points of interest for us originators:

• The 9.3% increase was well above the .3% forecast (I guess these economist were a little off their game on this one)
• While the increase was impressive the overall number of 685k is still far below the historical trend of 1.5mm
• Housing starts for +5 story building increased 32% and is up 24.3% year-to-date
• Single family increased only 2.3% but is down 1.5% year-to-date

All this points to the obvious signal of a shift in demand from homeownership to renting. Makes sense given what has happen over the last 3yrs.

The other important news that affects all of us personally as well as our business is the fact that the Republican controlled congress rejected the 2 month payroll tax cut passed by the Democratic controlled Senate. The reason being is that the House Republicans want to renegotiate with the Senate but they will not do so until the 2 month bill is passed which puts us in the usual stalemate position by our brilliant lawmakers. The payroll tax cuts will, amongst other things, keep this year’s Social Security tax at 4.2% instead of raising back to the old 6.2%.

This is the part that affects all of us personally but before you want to send your Republican Congressman hate letters you may want to understand how this savings is going to be paid for. The bill is being paid for by increasing home loan guarantee fees charged to mortgage lenders by Fannie Mae, Freddie Mac and the FHA by 1/10th of 1% point. The fee is passed on to home buyers and will apply to many new purchases and refinancing starting Jan 1st. So what our leaders in Washington want to do is take from Peter to pay Paul. They want to increase the cost of homeownership and make refinancing less attractive but they want to take less taxes from our paychecks.

Very interesting…I guess these folks slap their son in the rear when their daughter does something bad.

One last bit of news that was just released is that mortgage applications were down 2.6% last week. I guess the low rates were not enough to redirect consumers interest away from the holidays.

On 31-st of July president Obama and Republican congressional leaders reached an agreement to raise the debt ceiling in exchange for more than $2 trillion in long-term spending cuts. $1 trillion in cuts will begin immediately. This emergency legislation was needed to avoid a first-ever government default.

So what does this agreement mean for mortgage rates and real-estate industry?

(image via Rapid City Journal/Flickr)

The raising of the debt ceiling is a “make or break” deal for this struggling economy.  ”The deal can remove the uncertainty and lift business confidence,” some economists say. Others argue that government cuts can mean reducing jobs and growth further weaken the fragile economy.

Interestingly, none of the bills proposed for the debt ceiling agreement contained cuts for Fannie Mae or Freddie Mac, the mortgage finance giants that were nationalized in 2008 during the financial crisis. This eases up the rules for refinancing mortgages owned by Fannie and Freddie, which, as a result, lowers the mortgage rates, which frees up some cash for other expenses or providing a chance to pay off your mortgage early.

Looking at the market, the number of mortgage applications increased 7.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending July 29, 2011.

“Treasury rates plummeted more than 20 basis points last week as all eyes were focused on the debt ceiling negotiations in Washington, and economic data depicted much slower than anticipated economic growth,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “Mortgage rates fell, with the rate on 15-year mortgages reaching a new low in our survey. Refinance application volume increased, but even though 30-year mortgage rates are back below 4.5 percent, the refinance index is still almost 30 percent below last year’s level. Factors such as negative equity and a weak job market continue to constrain borrowers. Purchase activity increased off of a low base, returning to levels of one month ago, but remains weak by historical standards.”

With the debt ceiling agreement and lowering the mortgage rates, the housing market is attracting attention again. With rates so low, this may be a good time to buy a house.

Want to make a good use of these low rates? Call Shah!