by: Tim McLaughlin

Over the past week, we have continued to see significant volatility on mortgage interest rates. In addition to the reasons for the uptick in rates noted over the past few weeks (GOP dissention, un-unison Fed commentary, US sovereign debt rating concerns, G-20 backlash, corporate year-end profit taking, China inflation concerns), we have seen a couple of new drivers this past week keep the directional uptick flowing:

• After Europe made strides in “resolving” its debt situation, investors left the security of U.S. Treasury debt causing bond yields to rise and mortgage rates to increase along with them
• President Obama’s announced agreement to extend tax cuts are very positive for the economy, which in turn are good for Equities and bad for Fixed Income

In addition to all these drivers, economists and traders are observing that it is hard to decide whether investors are selling Fixed Income securities (thus driving rates higher) because they expect US stimulus to boost growth in 2011, or whether they are bothered by the amount of debt, now and anticipated. Most admit that growth would be far, far more preferable than seeing yields rising due to people thinking that America’s fiscal situation being unsustainable.

So is this a glass half full or glass half empty scenario? Let’s analyze:

• Today, the monthly P&I payment on a $300K mortgage would be $1,520.06 *
• At the end of both 2008 and 2009, the monthly P&I payment on a $300K mortgage was $1,703.37 **

Dissecting this analysis, even though the market has felt extraordinarily volatile the past 4 weeks, the monthly payment on a static 30 year mortgage is ~$183 cheaper than is was 12-24 months ago.
With home prices as affordable as ever, and many existing mortgage holders still in the 5+% to 6+% range, it is still not too late to affordably purchase that home of your dreams, or refinance into a more affordable payment. Let your Weichert Financial Gold Services Manager help and make your holidays a little bit brighter!

by: Tim McLaughlin

Holiday parties are great…the biggest stress, other than finding a babysitter if you have younger children, is what to bring as a gift (you don’t want to arrive empty handed). What should you bring? Tired of bringing/regifting the same old bottle of wine? While it’s relatively easy to come up with a housewarming gift for a friend or family member who has just moved into a new home, it’s sometimes difficult to think of special gifts that will impress your host who has lived in their home for several years. Here are some thoughts to take one less stressful chore out of the holiday season:

• If your host likes photography or treasures photos of the family, a silver plated frame will do the trick. If you have a photo of the family, insert it into one of the frames to add a more personal touch. A gift that will be appreciated year round and gives the receiver free reign to interchange the photos that mean the most.

• You can put together a basket with a couple of holiday hand towels, a bag of potpourri and hand soaps with festive scents. When hosting a gathering, the bathroom is frequently used by guests, yet is often the most neglected room when trying to make the house cozy. Your host will be able to use these to impress guests by infusing holiday décor throughout the home.

• While everyone else is bringing that same old bottle of wine, kick it up a notch by including a set of glassware or an electric wine chiller. Add an even more personal touch by creating photo coasters with some of their favorite snapshots of friends and family.

• A cookbook is a terrific idea, especially if they follow a specific chef on TV. Does their favorite chef have a line of cooking products? Pair the book with their signature sauce or spice to take the gift up a notch.

• Candles always make a nice gift, and, literally, brighten up the room. Be sure to find candles with two or more wicks so the candle will burn evenly and last longer.

• In addition to all these nice gifts, the gift of knowledge is an invaluable gift your host may treasure move than any other. “Did you know that it is still not too late to refinance if you haven’t already?” “Did you know you can still get a 30 year mortgage in the 4’s, a 15 year in the 3’s, and a 5/1 ARM at 2.99%?” “Sure, rates have gone up lately, but it is not too late”.

• Another great gift is a referral. If you meet that host or party goer at the parties who hasn’t refinanced yet, let us know….we can help!

by: Tim McLaughlin

In last week’s Market Monitor, we talked about a couple
of the forces that negatively impacted the Fixed Income
markets (the backlash from the G-20 summit, investors
pulling back on their purchases of US Government Debt,
etc). This week, we saw the slide continue as more factors
contributed to the downturn:

* GOP leaning economists and lawmakers planned on
launching a campaign to “potentially rescind QE2”. In
reality, the odds of this happening seem slim, but it
nonetheless delivers a negative message to the global
communities that there is a divide within the upper
reaches of the US Government, and that we are not
even on the same page (does QEII make sense or not?)

* Richmond Fed President Lacker suggested that the Fed
may need to raise rates instead of keeping them low, in
order to curtail inflation (which is non-existent at this
point). Also, this calls into question the validity of QEII by
a member of the FOMC who is sitting at the decision
table and opining on what policy we should implement.
Again, not good for continuity or global confidence.

* There was a news report citing a warning from Moody’s
that permanent tax cuts could potentially have adverse
effects on the US sovereign debt credit rating. If the
sovereign rating goes down, it would stand to reason
that either: a) foreign investors may purchase less debt
and/or b) US debt issuance will be more expensive
(looking for a higher yield on “riskier”, lower rated debt).
Both a and b would contribute to higher interest yields.

* Additionally, we haven’t even touched on the issue of
China’s inflation concerns (and what they will do to
control inflation), Ireland’s banking issues, and the fact
that it appears that some institutions who were big block
buyers of MBS debt earlier in the year are now selling
their positions and taking the profits by fiscal year end.

Takeaway: QEII is still in place: a slow, methodical
purchase plan. That will help the market, but Fixed Income
will really be driven by supply and demand, and supply
significantly laps demand at this point in time. Expecting
volatility through the rest of the month (short week next
week); December’s direction is TBD at this point.

by: Tim McLaughlin

We expected a lot of news, and a great deal of market
uncertainty this week, and that’s what we got. Here is a
recap from the most action packed market week of the year:
Election Tuesday: Pretty much went as projected.
Republicans took back the House, Democrats held on the
Senate by the narrowest of margins, and President Obama
publically took responsibility for the “shellacking” Democrats
endured on Election Day.

With the election behind us, what does this mean for the
future? Republican’s will take a look at redoing/undoing
Dodd/Frank, Health Care, Consumer Protection oversight,
however, it is long shot that they will be able to make a
significant dent in any of these. Wall Street is happier, but
we will see if that translates into anything positive in the
mortgage space. I am sure the volume around the future of
Fannie Mae/Freddie Mac becomes louder in congressional
chambers over the next six months. Election, as a whole,
was good for moral and the markets, which is good for rates
and housing, but Wednesday was really the key…
Bernanke Wednesday: Did and said all the right things.
The FOMC came out with a package that, for the most part,
met the expectations of the marketplace. $600B in new
Treasury purchases targeted ($100B more than projected),
but over a longer timeframe (by the end of Q2 as opposed to
the end of Q1), thus an artificial cap of $75B a month as
opposed to the projected cap of $100B per month.
From a market perspective, all sectors liked/loved the
news. No real knee jerk reaction on Wednesday afternoon
post announcement, so, initially, there were thoughts that
the market had potentially fully priced the whole
announcement into various asset classes in advance, but
Thursday saw rallies in all sectors (Equities, Fixed Income,
Commodities), so, obviously, there is still some room for the
market to capitalize on this.

The game plan related to the FOMC’s moves are simple:
by driving down the dollar, reducing interest rates, and
hopefully create just enough (but not too much) inflation, that
should positively impact investments, exports, consumer
goods, and the economy as a whole, which, in turn, also
helps job creation and employment. The goal of the stimulus
plan (QEII) is straightforward: to not let existing roadblocks
continue to encumber the economic recovery. While the
initial response (from the market) regarding the
announcement is good, we will have to trend the results over
the next few months to come.

by: Tim McLaughlin 

The focus for next week is undoubtedly the FOMC meeting on Tuesday/Wednesday, and what the Fed chooses (or chooses not) to unveil. Many traders/economists are of the opinion that what the Fed may do is already priced into the current stock and bond market levels, to some degree.

When the US government, who prints money, wants inflation, it is not a wise strategy to bet against them. The QE II that the press is consumed with is a form of government monetary policy used to increase the money supply, when necessary, by buying government securities or other securities from the market. This, in turn, increases the money supply by giving financial institutions with capital an opportunity to promote increased lending and liquidity. Quantitative easing appears when the banks interest rates (overnight Fed Funds, discount rates, etc.) have already been lowered to near 0% levels and have failed to produce the desired effect.

The major risk of quantitative easing is that although more money is floating around, there is still a fixed amount of goods for sale. With more cash and the same amount of goods, inflation usually increases, which in turn pushes rates (like mortgage rates) higher. And the end game for the Fed at this point is to increase inflation (and therefore jolt the economy, as detailed last week).

On the downside, if the FOMC does nothing, or not as much as the market would like or expects, that could adversely impact the markets, with equities probably being more negatively impacted then bonds. Weds afternoon will undoubtedly be an important time in the marketplace.

by: Tim McLaughlin

As we near the end of 2010, all eyes are focused on how the markets will finish out the year, and how the rumored effects of “QE2” will further jumpstart the economy.

“QE2”, in this case, is not the Queen Elizabeth II, the cruise ship, but, rather, “Quantitative Easing, Part II”, the Treasury and Fed’s collaborative efforts to fuel the recovery, improve the economy, aide employment, and help push inflation rates up a touch. If you remember in part one, the Fed and Treasury purchased over billions (actually, over a trillion) in Mortgage Backed Securities and Treasuries combine to drive interest rates down. Let’s explore what the government is hoping to accomplish in part two:

QE2 should help growth via three main channels. First, lower long term interest rates should stimulate various forms of credit sensitive spending such as housing, other consumer goods, capital goods, and state and local construction, as well as further help households reduce interest expense via refinancing. Secondly, higher equity prices should boost consumer spending via the wealth effect and capital spending via a lower cost of equity capital. And third/last, a lower dollar should help narrow the trade deficit.

While most of these channels have open questions about their effectiveness in the current situation, they are apt to have a positive net effect. In summary, Goldman Sachs has estimated that QE2 would boost real GDP growth by 0.5 percentage point per $1 trillion of Treasury security purchases.

Lower long-term real rates should stimulate:

More housing demand

More consumer demand for durable goods

Improved employment picture

More capital spending

More construction by state and local governments

Further refinancing of mortgage

A lower cost of equity capital

Higher equity prices, which helps economic activity in two ways:

o A positive wealth effect

o A lower cost of equity capital

Certainly, a lot to digest. From a mortgage and housing standpoint, we can see many benefits high level and by digging deeper: more housing demand, more refinancing, improvement in employment which makes borrowers more apt to purchase, higher equity prices = positive wealth = more confidence by real estate consumers. “QE2” is something to watch closely as it evolves in Q4 and 1Q11.

by: Tim McLaughlin

 Interesting takeaways from the Fed minutes last Tuesday regarding “what do we do next”:

At the last FOMC meeting, it was clear that Fed officials considered making bond purchases and taking other steps to avoid falling prices, as a way to ignite the economy. Minutes from the last meeting (Sept. 21) showed officials remained divided; however, most thinking new measures to jump start growth would be needed, given that inflation is too low and unemployment too high.

Over the course of the last few weeks, many investors have been focusing on what the Fed’s new bond purchase program may look like (an anticipated tool in their revival strategy). All expectations are that the Treasury will purchase additional longer term Treasury securities to bolster the economy beginning in 1Q11.

But the minutes showed Fed officials were also looking at several strategies for inflation. The Fed is analyzing the best steps to increase inflation (yes, increase). Higher inflation, in theory, will force consumers to purchase more now to avoid higher prices later, thus further fueling the economy. Due to the economy’s weakness, inflation is currently running at 1.4% (below the Fed’s informal target of between 1.7% and 2.0%, according to Fed officials). Fed officials would like it higher than 2% (closer to 3%) for the short term to prompt spending.

Ways to artificially increase inflation:

o Reduce the Fed Funds rate (accomplished)

o Decrease personal income taxes (more disposable income; would need the help of Congress)

o Infuse additional capital into the monetary system

o Continued Bond/Treasury purchases

The most interesting statement, in my opinion -> “Participants noted a number of possible strategies for affecting short term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its mandate…as a general matter, participants felt that any needed policy accommodation would be most effective if enacted within a framework that was clearly communicated to the public. The minutes of FOMC meetings were seen as an important channel for communicating participants’ views about monetary policy.” The takeaway: look for the Fed to clearly layout what their strategy is, in simple terms, to promote inflation in future Fed releases in the months to come.

by: Tim McLaughlin

The FOMC meeting was held earlier this week, and it could not have been more of a non-event. On a high level, there was really no news; business as usual. From a macro level, there were three (minor) changes to the statement: First, the inflation paragraph is much more passive with the addition of a statement on inflation being below the level consistent with the mandate on price stability (no inflation = low rates). Second, the final paragraph explicitly states that they (the Fed) will react with more accommodation if needed (we will do what we need to do to support the market). Third, the opening paragraph is more negative on business spending (spending down = recession concerns = low rates).

What is also interesting is there is more talk of another round of Fed Treasury purchases (no talk on MBS) come the beginning of the year. It remains to be seen if/how that will impact interest rates in the near term.

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Customers, loan officers, and realtors often wonder what goes into the price (and value) of a mortgage. There are a great many components that make up the pricing of the mortgage rate/points; one of the components being the servicing value (the cash flow value of owning servicing, receiving the monthly payments, and collecting both a fee and the “float” on the loan). Lately the implied value (and actual price paid) of servicing has been dropping in the investment community, and that is being driven by end investors -> many are backed up with massive volume and are looking to slow production by paying less for the value of the servicing. While others, realizing that aggregators are doing this, are reducing their bid as well (supply/demand).

This is valuable knowledge on a couple of fronts. It is important to remember that while MBS prices are one (and probably the most dominant) component of rate/points, many other components (servicing valuations being one) also impact all-in rate/points. Important to keep in mind when rate/points don’t seem to correlate to MBS at a given spot in time.

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Interesting fact: 54% of individuals eligible to refi have enough equity in their home to structure a refinance where they don’t have to pay one penny out of pocket at the closing table to do so (they can roll it all back into the loan amount). 59% of borrowers think it is too expensive to refi and that they can’t afford it. Sounds like an education opportunity!

by: Tim McLaughlin

This coming week, Federal Reserve officials will wrestle
with a perplexing question: how weak does the economy
have to get, and for how long, to justify taking new steps to
enhance growth? Last week, the latest data from the
government was mildly encouraging: Retail Sales increased
0.4% in August (and 0.3% the month before) -> a sign that
consumer spending is growing at a sustainable clip.
Weak consumer spending and high unemployment have
impeded the recovery, and prompted fears in some camps
that the US could slip back toward a recession. But those
fears have eased recently as the US has notched a few
better than expected economic reports. And because Fed
officials don’t agree on what threshold the slowdown would
have to hit to prompt further action, the Fed is unlikely to
launch a new big bond buying program next week.
The central bank continues to consider whether to restart
the bond buying program it undertook last year and early this
year to drive down long term interest rates and encourage
more private borrowing and, thus, economic growth. It has
already pushed short term interest rates to near zero, but
growth remains stubbornly slow, unemployment high and
inflation lower than the Fed wants.
Right now the Fed is holding its bond portfolio at a
constant level. Fed Chairman Bernanke has avoided laying
out specifically what would prompt him to grow that portfolio
by restarting the bond buying program. Other members of
the policy setting Federal Open Market Committee have
differing views.
“If the growth numbers come in about where the
consensus forecast is, and we continue to get inflation
between 1% and 2%, I don’t believe I would see a need for
further stimulus,” says Jeffrey Lacker, president of the
Federal Reserve Bank of Richmond. He is part of a vocal
camp of Fed officials who are reluctant to expand the Fed’s
$2 plus trillion portfolio of securities and loans. The group,
which includes the presidents of the Kansas City and
Philadelphia Fed banks (Thomas Hoenig and Charles
Plosser), doubts new purchases would help growth and
fears they could cause inflation later. Mr. Lacker says it
would take a real risk of broadly falling consumer prices,
known as deflation, to justify more action.
If impact of the release remains to be seen, but the
market will analyze the language with a watchful eye.