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

If you opened up your window @ 8:30 this morning you might have heard a big cheer that could be heard all the way from Washington, DC. That would have been President Obama cheering what was an extremely strong payroll report. Aside from pulling a 7 and a 3 in the White House Super Bowl pool, this will be the best numbers he gets all day. If you took the time to read yesterdays update you know that the consensus for the NFP report was a gain of 135k with a range of 100k-189k.

Well these brilliant Ivy-league educated economists were a little off because the number came in at +243k. We will highlight the report but this has caused the bond and mortgage markets to react negatively and are down pretty big on the day especially when you consider what has been a seemingly endless rally. The 10yr has jumped to 1.93% and is leaving many to wonder why we are not @ 2.00% or higher. That may happen by the end of day or in the days ahead but when you consider the strength of this report I guess one can look to the fact that it is not as good a sign for those who want rates to remain low. Here are the highlights of the report:

• Jan job gains were +243k again the consensus was +135k
• Jobless rate dropped to 8.3%. This will get a lot of mainstream attention
• Private payrolls rose 220k with Gov’t jobs down 14k. This is a great sign of “real” job growth when the private sector is creating jobs and not Gov’t.
• Total revision of +60k from the Dec & Nov numbers. Another great sign that jog growth is strong.
• Average hourly earnings +.2%. More people working and those people are making more which spurns the economy through consumer spending.
• Average hourly earnings are up a total of 1.9% from last year. Look for this to be mentioned once or twice by Obama in the coming days.

All-in-all this is as close to a grand slam of a report as it gets. We now have multiple reports of real job growth and a strong argument can be made that we are on track for an economic rebound. The housing market is still in disarray but job growth and having people working is the foundation for that rebound. The big issue in housing is the massive inventory of foreclosures and there is no silver bullet refinance program that Obama can devise that will solve that problem. The only thing that will fix this problem is time. We live in a microwave society but investors need to absorb that unwanted inventory. Those who can need to make sure they can flip the properties for a profit. When people are working there are more buyers and the investors will invest but again this will take time.

One last thing… we have had some recent surprises by what Secondary is charging for some extension fees. For those of you that read our updates regularly then you are not surprised because you know all about the mandated 10bps g-fee increase that the mortgage industry was force fed because of the extension(no pun intended) in the payroll tax. We mentioned it several times but I know there are many who may not read the profound information that we provide. Therefore I will add this excerpt that we wrote in the 1/23 update for those who may have missed it…..

“I also want to encourage everyone to make sure that you not only honor your locks but that you honor your lock expiration date. With the mandated 10bps increase in the G-fee it has caused pricing to deteriorate by about .5pt. over the last few weeks. Therefore if you happen to lock a loan for a shorter lock term that was not affected by this increase, any future lock extension will result in a greater extension fee then you traditionally have received in the past. Please keep this in mind and stay on top of your locked pipeline. Also if and when an extension is required remember not to shoot the messenger but call your local Congressman or Senator to complain.”

(Image courtesy of WhiteHouse.gov)

The markets are quiet today as we lead into tomorrow’s big Nonfarm Payroll (NFP) report (yes, we are still trading at the 1.83% level on the 10yr…1.84% to be exact). Remember that the NFP comes out @ 8:30 and the latest consensus is +135k with a range of 110k-189k. It will move the markets but I really do not see how any number short of a mind-blowing increase (+300k) will change the tone of this market.

President Obama released the details of his latest attempt of a Refinance Plan. Here are the highlights:

• Includes borrowers not backed by Fannie & Freddie;
• These loans which were securitized by private-label securities without any federal backing would be allowed to refinance into FHA-backed loans;
• Eligible borrowers would have to have made their mortgage payments over the last 6 months without a delinquency;
• Loan cannot exceed the FHA loan limit for the area;
• If the borrowers have a ltv >140%, the lender has to agree to reduce the loan balance;
• Borrowers would not have to submit a full file of paperwork for the refi as long as they can verify their employment;
• Enables borrowers who still have equity in their home, up to 20%, to participate;
• The program would be paid by charging a fee to the country’s largest banks so that the plan will not add to the deficit;
• Includes a Bill of Rights for home owners.

All this will require the Republican-controlled Congress to pass. The response to all this yesterday was unanimous…good luck! Even if you are the ultimate optimist and still believe in Santa Claus, this will not take effect for months. However, if you are a realist then this is just another political angle for the President to use as a campaign cry of how he tried to do more for the “good hard working borrowers that played by the rules” but the Republican-controlled Congress did not pass his plan. Either way it is something that originators need to be informed about because consumers will ask questions as this makes it to the mainstream media. If you want to read more about this then click on the link below which was issued by the White House…

The treasury and mortgage markets are opening a little down from yesterday’s closing as we stay perched at the low end of the 3 month range on the 10yr treasury @ 1.83%. Beyond what we mentioned the other day about this range story, we are starting to see some slight weakness in the mortgage market as mortgage spreads (spread vs. the treasury yield curve) have widened over the last couple of days. I do not view this as a big story but worth noting because mortgages have performed very well for the past several weeks and this a small sign that they might just be peaking out. They will continue to trade directionally to treasuries but they might go up less than treasuries or go down as much as treasuries. This is a  very general explanation of mortgage spread widening.

We have a lot of “stuff” going on so let’s go thru them…

First the MBA Weekly Application Survey came out this morning and here are the highlights:

• Mortgage applications are down 2.9%
• The Refinance Index decreased 3.6%
• The Purchase Index decreased 1.7%
• The refinance share decreased to 80.0% from 81.3%
• The ARM share rose to 5.6% from 5.3% (check out those FHA 5/1 ARMs)
• 30yr fixed conforming rate decreased to 4.09% w/.41pts
• 30yr fixed FHA rate decreased to 3.96% w/.61pts
• 15yr fixed conforming decreased to 3.36% w/.41pts
• In Dec 2011 Connecticut refi activity increased 80.1% from Nov 2011 (I thought that was interesting)
• In Dec 2011 Maine saw a 30.8% increase in purchase activity from Nov 2011 (another interesting fact)

I do think this report is a bit interesting because the rates improved be it slightly but the application activity was down. Signs of burnout? Perhaps.

We also got the release of the ADP report which came in slightly worse than consensus @ +170k. The consensus grew to 182K going into this morning. What added to this being a weak number was that there was a downward revision of 32k from December. Obviously the markets do not focus on this number all that much because, fundamentally speaking, this would have caused the bond markets to be up on that news because it signifies a greater weakness in the economy. However job growth is job growth and that trumps any below consensus concerns so that explains it. Also worth noting is that there were gains in small and medium size firms. This is a good sign because many economist believe that it will be these size firms that fuels true economic growth.

Last but not least, President Obama will announce the details of his latest mortgage plan @ 11:00. This follows his general overview that he made at his State of the Union address last week. It is expected that he will want to include non-agency mortgages into this refi plan. These loans in turn will be refinanced thru FHA loans. However, before we all lick our chops, I want to sprinkle a little bit of reality juice on this by stating that this will not get passed by the Republican controlled Congress and is just another form of political grandstanding. Unfortunately, originators have to answer calls from uninformed consumers about this so keep an eye out for the details with the understanding that what he says today is unlikely to happen or if it does is a long way from implementation.

(Image courtesy of nikcname/Flickr)

Alright…we are starting off the week on a good note with the treasury rally still showing some steam as we trade at the 1.83% level on the 10yr. This level is very pivotal when you consider what has happened in the market for the last 3 months. Over this time we have been in a very tight range which those of you that read this all the time know because I have regularly mentioned it. However, this is what you will see when looking over the trading range on the 10yr since 11/01/12. The peak and valley levels have been 2.11 and 1.82, respectively. I will also note that we have been in an even tighter range of 2.07 and 1.88 under most circumstances where with the exception of a handful of trading days where we broke that range. So who cares, right?? Well this is important because it tells you a lot about where the market will go from here. Or, I should say, where the market is expected to go from here.

When markets trade in a trading range it takes an unexpected event to break the range. Therefore you have to look at what is currently going on and decide if the news that is known is anything different from what has caused the market activity over the range period. In my opinion the answer is no unless you view the Fed’s announcement about keeping rates low through the end of 2014 as one of those unexpected events. I think it was surprising but not Earth shaking. Therefore as an originator looking to advise borrowers on when to lock knowing this is stuff is pretty useful. With the 10yr currently @ 1.83% you can make an educated guess (which all this stuff really is) that rates will not improve from here because every time the 10yr got to this level since 11/01 we backed-up.

At the very least you can make the assumption that if rates do improve they should not improve much more. This is all part of the risk/reward debate. We do not like to use this market update to tell borrowers when to lock loans. We just try to present information and let people decide what is best for them. In this case I found the data over the last 3 months very telling and wanted to pass it along.

This is also a big week because the markets will be setting up for the Non-Farm Payroll (NFP) report on Friday. The consensus is for a gain of +170k. You also want to keep an eye out for the ADP report which, as always, is the Wednesday before the NFP report. The consensus on this report is a gain of +175k. So they are pretty much in-line. Whatever does happen with ADP will set the tone of what to expect on Friday.

(Image courtesy of WoodleyWonderworks)