Market Analysis

Iron Harbor Mortgage - Market Analysis 01/28/2008
January 28th, 2008 10:45 AM
Current market rates are already "pricing in" a 100% chance of a .25 point cut by the Fed in their Funds Rate on Wednesday and a 70% chance of a 50 point cut.  Though it sounds odd, the probabilities for lower rates probably lie more in the Fed choosing the .25 cut because it may not be as much as equity investors wanted and they may send the stock market lower on that news.  Funds leaving the stock market would go to the bond market potentially driving the price of bonds up and the yields/rates lower.  If the Fed cuts .50 we will most likely see a robust stock market response which will attract funds currently "parked" in US Treasurys and Fannie/Freddie Mortgage Backed Securities which may drive long term rates up.
Posted by Matthew Breston on January 28th, 2008 10:45 AMPost a Comment (0)

Iron Harbor Mortgage - Market Analysis 01/31/08
January 31st, 2008 5:36 PM
For a day following a major Fed rate cut not much really changed in the rate picture.  The mortgage market improved in the morning, lost steam mid day and then finished the day improved from yesterday (bond prices higher and yields lower).  Today both the stock market and bond market for US Treasury's and mortgages backed by Fannie Mae and Freddie Mac ended up.  What happened?  At the beginning of the day there was an large "flight to quality" with funds flowing into the bond market as the market worried about losses at the large bond insurer MBIA and a Standard & Poor's forecast that mortgage securities losses could total more than $265 billion.  By the end of the day though the CEO of MBIA held a news conference that somewhat soothed investors worries.  The reason that the stock market is so concerned about the major bond insurers is that bond insurance is what allows corporations and municipalities to lower their borrowing costs (and, in the case of corporations, increase their profits).  More specifically, there are many institutional investors such as mutual funds or insurance companies whose charters only allow them to invest in bonds with a strong rating.  Once these bonds are downgraded these investors would need to liquidate their portfolios, essentially creating havoc not just in the market for corporate and municipal finance but also creating an additional liquidity crises for a wide array of debt offerings ranging from pools of auto loans, consumer durable loans, credit card pools etc..  With the economy already reeling from the problems in the real estate market there is great fear that if these problems create a crisis in the market for other debt instruments that we could truly have a calamity on our hands.  All of this in backdrop of an upcoming election cycle.  So, what to make of all this?  Are rates going lower or higher?  If you are looking to the market to predict which way things are going to go it is interesting to note that the shares of stocks you would think would be some of the most troublesome have been rallying (homebuilders and banks).  If the bottom has truly formed in the stock market and  investors decide that now is the time to get on the train for returns they expect later in 2008 or into 2009, then all the bad news we hear now won't really matter much as the flow of money from bonds to stocks will cause long term rates to rise.  Additionally it is hard to conceptualize there not being some form of "bailout" if the major bond insurers do truly hit the wall which would be very stock market friendly.  Finally, it is important to remember that the stock market is still pricing in future easing by the Fed, which is expected to further stimulate the economy.  If the stock market doesn't take a nose dive on news from S&P that mortgage losses could total $265 billion, maybe investors are becoming numb to the bad news?  Where the rubber will meet the road is in 5 major areas:  corporate profit reporting and corporate guidance to analysts about future performance, the strength or weakness of employment figures, inflation measures, the strength or weakness of other global economies as it relates to global demand for US goods and services which are now on a firesale given that the value of the dollar is so weak, and, the wild card, which is a disruptive geopolitical event like a terrorist attack (which could really send the stock market into a tailspin with those funds going into bonds thereby moving bond prices up and yields/rates lower).  In the background though, you have a Fed that is cutting rates, a Congress that is highly motivated to get a stimulus package out and is already contriving other "bail out" type packages, and a relatively resilient consumer, who, as long as they don't lose their job, keeps spending everything they make.  With all these cross currents it is really probably better to lock when you know you are within 30 to 45 days of closing and then use our one-time renegotiation tool if rates do move lower. 
Posted by Matthew Breston on January 31st, 2008 5:36 PMPost a Comment (0)

Iron Harbor Mortgage Market Analysis 01/30/2008
January 30th, 2008 5:57 PM
The Fed decreased both their funds rate by .50% and their discount rate by .50%.  The stock market initially reacted as expected by rallying and the bond market worsened (rates increasing).  By the end of the day, though, the stock market gave up its gains and the bond market ended relatively flat.   Be very careful with your floating loan positions as it could be that this is the calm before the storm.  There is a ton of money on the sidelines waiting to jump into the stock market.  Discussion of overvalued Treasuries (prices too high and yields too low) are now common in the financial press.  To play the opposite card, there are those who think that the US economy is on a track towards continued slowing growth or recession for the foreseeable future given national problems with the real estate market and its impact on consumer's pocketbooks because they can no longer tap into ever increasing lines of credit to support their spending habits.  The 4th quarter's weak GDP #s, if not revised upward, does point to a significant slowdown.   If ADP's report today projecting very strong January employment growth proves incorrect and non farm payroll growth is weaker than expected in January and, if inflation can remain tame, there may be room for lower rates. 
Posted by Matthew Breston on January 30th, 2008 5:57 PMPost a Comment (0)

Market Update 01/25/2008
January 25th, 2008 5:52 PM
The bond market rallied this afternoon (rates improved) due to profit taking (selling) of stocks and a temporary parking of money in the bond market.  It is important to note that volume was very light on the stock market and this could simply be a "head fake" while investors reload their guns to find good deals early next week in the stock market.  Next week will be action packed with economic data and with a Fed meeting.  The market has fully priced in a .25 rate cut by the Fed at the conclusion of the meeting next Thursday the 30th.   Please note that  it is not a foregone conclusion that if the Fed cuts rates by .25% that the long term bonds would rally (rates decrease). It is probably more likely that the stock market would surge and all the money that has been parked in the bond market would shift towards equities which would also produce upward pressure on rates.  In this environment we believe that if you have a strong appetite for risk, you may see some improvement next week.  If you are conservative and don't like the uncertainty associated with playing the market it is safer to lock than float.  We have discussed our renegotiation policy in prior updates. If rates improve, we can renegotiate to within .375 points (points, not  rate)of the improved rates.  Thus if the market improves to 5.125% with 0 points, we can get 5.125% with .375 points. Locking provides the benefit of protecting against the market worsening with the ability to still getting within .375 points of an improved market.
Posted by Matthew Breston on January 25th, 2008 5:52 PMPost a Comment (0)

Market Analysis - 01/24/08
January 24th, 2008 11:37 AM
The bond market continues to suffer woes this morning.  I know it is confusing when the headlines in the press are just now that mortgage rates are at 4 year lows and that all eyes are on the Fed for another Funds Rate cut on Jan 30th of .25 to .50 points.   It is important to note that Fed Funds rate cuts are designed to lower rates on short term debt and can sometimes have an adverse effect on long term rates.   The best way I know to describe it is this:  knowing that the Fed is cutting rates aggressively to stimulate the economy, that a stimulous package is all but finalized and that all of this has a strong chance of jump-starting the economy and re-fueling inflation concerns that will cause rates 1 year from now to be higher, would you buy a 10,000, 10 year CD today paying 3.6% that had an additional risk of being worth only $9,000 when you try to sell it in 1 year?  That is what is going through the minds of long term bond investors.   Much of the movement lower we have seen in long term rates has been driven lately by short term investors temporarily "parking" their money in US Treasury debt and mortgage backed securities backed by Fannie Mae and Freddie Mac while they waited for the stock market to find its bottom.  These investors can just as quickly decide to move their money back to equities if they perceive that their downside risk (of a stock market collapse) is becoming minimal and that they may be missing the train on a stock market that is about to start moving up again.
Posted by Matthew Breston on January 24th, 2008 11:37 AMPost a Comment (0)

Market Update - 01/23/08
January 23rd, 2008 8:43 PM
Market notes:   What a swing.  We started the morning with the 10 yr Treasury up 31/32 and rates at all time lows (the rate sheet that could never get published due to volatility that took over the market had a 30 year fixed with a loan size of $240,000 at 4.875% with .125 points and 5.0% with a .375 rebate).  We ended the day with the 10 yr Treasury down 51/32 (a swing of 82/32 from am to pm) and rate sheets about where we were yesterday, but with a bias towards opening worse tomorrow  unless something good happens early tomorrow.  Wells Fargo's afternoon rate sheet is the most aggressive (lowest rates) of the investors we track.  So, what happened?  Most people point to the good news surrounding the bond insurers Ambac and MBIA.  New York state regulators appear to be working with large banks to assist these bond insurers to raise capital to shore up their credit ratings.  Additionally, the market had a day to digest the Fed rate cut and its impact on the economy.  The financial sector and home builders rallied on speculation that they have been "oversold" particularly in light of the aggressive move by the Fed.  The reality is that the "fear" that has plagued the holders of equities took hold of the holders of bonds today.  This is a market to watch closely.  If the momentum turns, it will be sudden and most likely do damage over the course of the next several days rather than weeks.
Posted by Matthew Breston on January 23rd, 2008 8:43 PMPost a Comment (0)

Market Update 01/22/08
January 23rd, 2008 8:43 PM
Market notes:   As most of you know by now, the Federal Reserve cut is Funds Rate by .75% this morning.  In previous rate updates we discussed that the mortgage market had already priced in .75% of cuts.  What is a surprise is that the cuts came in one shot, rather than over 2 months, and in a pre-meeting announcement.  Mortgage rates did inch about 1/8th point lower, but not nearly what one might expect from such a large Fed move.   The real question now is whether there are additional rate cuts coming and, if so, how many.  To the extent that the market prices in additional rate cuts (currently the market is pricing in approximately a 60% chance of another .25% rate cut on Jan 30) we may see rates inch lower.  However, if an additional .25% rate cut does not materialize at the next Fed meeting or if the market begins to discount the likelihood of an additional rate cut we will see the gains from today evaporate.  We continue to be in an environment where the upside potential of better rates (in terms of actual % movement) is far less dramatic than the downside risk (the % movement higher that will occur when we see a correction).  Today's relatively minor improvement is evidence of that.   For those of you wondering what happens if you lock now and rates move down further, we do have a renegotiation policy.  We can renegotiate the rate once to get within .125% of current rates.  For example if rates move to 5.0% with 0 points, we can renegotiate to 5.125% with 0 points.   Our rates are typically at least .125% lower than most of our competitors, so essentially renegotiation enables borrowers to participate in all of the improvement they would have received from another lender even without the "hit" for renegotiating.  Please feel free to email me if you have questions on this policy.
Posted by Matthew Breston on January 23rd, 2008 8:43 PMPost a Comment (0)

Market Update 01/21/2008
January 21st, 2008 8:22 PM
The mortgage market was closed today. This week will be very light on economic reports. Interest rates will be far more influenced by activity in the stock market and any major developments announced surrounding an economic stimulous package. A weak stock market should support steady to possibly slightly lower rates. News of an agreement on a stimulous package probably will probably cause long term mortgage rates to increase. There is also the possibility of improvement in mortgage rates due to further downgrades of mortgage insurers Ambac and MBIA who are major players in the municipal and corporate bond markets. Ratings downgrades for either of these bond insurers will cause funds to flow from municipal and corporate bonds into the mortgage bonds issued by Fannie Mae and Freddie Mac. It is important to remember that current market rates are already pricing in .75 points of Fed Rate cuts from Jan to March and already reflect a significant movement of capital from the stock market to the bond market. While it is definately possible that rates could move lower, we continue to recommend to our clients a defensive strategy of locking if you are within 45 days of closing. A bird in the hand is worth two in the bush. When the market turns towards higher rates it will be sudden, with the majority of the damage occurring in a one to three day period. What we have seen in the past is that after the first day of such a correction, borrowers hold out in the hopes that the one day of worsening was a fluke. By the end of the second day of a market correction rates can easily be .375% higher. Again, this is not to say that rates may not move lower. However, if rates do move significantly lower, we can still renegotiate the rate once to get within .125% of lower rates. For example if rates move to 5.0% with 0 points, we can renegotiate to 5.125% with 0 points.
Posted by Matthew Breston on January 21st, 2008 8:22 PMPost a Comment (0)

Market Update - 01/18/2008
January 20th, 2008 11:18 AM
Market notes: Improvement yesterday afternoon was offset by deterioration this morning in the bond market and it all netted out to almost no change in our rate sheets. Below is commentary from Larry Baer with Market Alert:
The mortgage market is struggling to hold on to its trend to lower rates and higher prices. Yesterday during Congressional testimony Fed Chairman Bernanke hinted at a near term rise in core inflation and warned market participants not to loose respect for the Fed's commitment to control inflation. Those comments have tempered trader chatter about the prospects for a inter-meeting 25 basis-point fed fund rate cut from policymakers followed by an additional 50-basis point short-term rate cut on January 30th.

Fed Chairman Bernanke told members of the House Budget Committee that if the government plans to develop a fiscal stimulus package to boost economic growth - they need to get with it. Evidently, that is exactly what is going to happen. It appears that there is a bipartisan economic rescue plan taking shape as I write. Details remain vague but preliminary estimates suggest the package will total about $150 billion - part tax break for families and companies and part government spending programs designed to benefit low-income people. While there is always a chance this stimulus package could get bogged down by political bickering, most investors are currently assigning a high probability to the likelihood that a meaningful economic rescue plan will be hammered out well before the first-quarter of the year comes to an end.

As I mentioned in my commentary yesterday, the "so what" factor here is pretty straightforward from a mortgage interest rate perspective. Fixed-income investors (those that actually buy and hold bonds, notes and mortgage-backed securities) live in the future, not in the present. If and/or when a fiscal stimulus program is approved by Congress and signed by the President - the prospects for higher interest rates within the next 90 days of the announcement date will grow exponentially. Here's why. Fed rate cuts and government stimulus packages are specifically designed to sharply increase economic activity - which in turn sharply increases the demand for capital - which in turn ultimately pushes up both short- and long-term interest rates.
Posted by Matthew Breston on January 20th, 2008 11:18 AMPost a Comment (0)
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