There was a lot expected of this week and it turns out that the build-up was far more exciting than the results. As mentioned on Wednesday afternoon, the Fed announcement and subsequent press conference did very little to provide traders with any new insight into future Fed action.

One thing that the Fed did do was make it clear to not expect anything definitive from them. They are doing just what everyone else should be doing which is look to the economic data to determine the future of interest rates. However, the game here is to see what the Fed will be doing regarding their open market operations so traders can front run the Fed. That is what bond trading is about now-a-days as opposed to trading based upon fundamental or technical philosophies.

So where do we go from here? In my opinion not very far in either direction until the NFP number next Friday. We are currently sitting at a 1.95% on the 10yr and I give the range a +/- 8bps from here. Of course there could always be some headline news out of Europe that could rattle the cage but those headlines have been pretty quiet. When something has happened over there like the recent downgrade of Spain, it was met with little reaction. So all eyes will be on next week’s report to see if there is any follow-thru from the last poor report. If it is another weak number then I could see us having a nice rally that might not test the 1.71% low on the 10yr but I could see 1.80% pretty easily.

However, if we get a strong number then we could see getting right back to about 2.25% which is where we were before the last number. Now I believe the best scenario would be a number that is non-eventful and in-line with the consensus which should keep things status quo. I like this more for many reasons one of which is that it just continues the low rate sentiment in the market without any disruptions in the trading range.

Well the day is finally here for what I know the markets have been looking to ever since the weak NFP back on 4/6. That is the Federal Reserve Open Market Committee (FOMC) statement on Fed monetary policy. The calendar looks like this:

• 12:30- Release of the FOMC statement
• 2:00- Release of the FOMC Summary of Economic Projections
• 2:15- Fed Chairman Bernanke’s press conference

So we will have a wave of newsflashes that have the potential to significantly move the markets. Wall Street economists will be dissecting every letter, word and sentence of the statement like an invasive mother-in-law. The Fed has been sending mixed signals over the last few months so this is their chance to set the record straight and provide a clear understanding of where they stand on monetary policy. One point that the markets will be looking to is that their view of the state of the economy is consistent with their end of 2014 stance on keeping rates unchanged. There has been a disconnect between what they have been saying regarding the strength of the economy vs. the justification in keeping rates at current low levels all the way thru the end of 2014.

Since the strong close on Monday the bond markets have cooled down a bit leading up to today’s announcement. The 10yr closed @ 1.93% on Monday but we have grinded lower since with it currently sitting at 2.00%. Considering that it closed @ 2.05% on 4/6 after the weak NFP number, we should be pleased that we not only sustained the lower yields but were able to go even lower. Remember we were @ 2.23% seconds before the release of the NFP number.

As those who read this consistently know Wednesday is also the release of the MBA Weekly Application Survey. I am pleased to say that FFF outperformed the survey because the index showed that applications were down but our submissions were up. Anyway here are the highlights:

• Applications decreased 3.8%
• Refinance Index was down 5.6%
• Purchase Index was up 2.7%
• Within the Refinance Index conventional refi’s were down 6.1% and FHA refi’s were down 2.1%
• Within the Refinance Index 58.8% were fixed-rate 30yr, 23.1% for 15-year fixed , 5.2% for ARM’s and 12.8% other (10yr, 20yr, 25yr or 40yr)
• The refinance share decreased to 73.4%
• The average 30yr conventional rate was 3.81% w/.40pts
• The average 30yr FHA rate was 3.81% w/.52pts
• The average 15yr rate was 3.32% w/.41pts
• The average 5/1 ARM rate was 2.81% w/.37pts

(Image courtesy of MarketWatch)

We are starting off the week on a good note (unless of course you locked your pipeline on Friday) as the bond market is up a little bit with the 10yr trading outside the recent tight range at 1.92%. I would certainly not call this a breakout of the range but it is a nice break in our favor so we should be happy with it and take it. The economic calendar is very light today so this is the result of just some good old buying that appears to be coming at the expense of the stock market which is down about 1.0%.

All eyes are on the FOMC announcement on Wednesday @ 12:30. So while we are getting a little rally today I would not expect it to go up much more from here as traders are waiting in the wings for Wednesday before they lay their bets. We do have a full slate tomorrow of economic data highlighted by consumer confidence (10:00). However, like I said, I am not expecting any major market swings until Wednesday which does have the makings of a volatile afternoon.

There was a interesting but brief article from CNNMoney that states mortgage payments are at the lowest level in decades. It goes on to state that in 98 of the top 100 metro areas it is now cheaper to buy than to rent based upon putting down 20%. Of course news like this will not go unnoticed by the mortgage community as well as the real estate community. We all know that eventually the refinance wave will come to a screeching halt at some point so news like this reminds us that if we fail to prepare for the future then we prepare to fail. Therefore it may make sense to spend some time dusting off those real estate contacts and see what they are up to. If you don’t then I will bet that someone else will.

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

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…