Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com The benchmark FNMA 3.5% August coupon lost -11BPS from Friday's close. We had a fairly quiet day...perhaps the "calm before the storm" this week. Pending Home Sales were better than expected (-0.4% vs -1.0%) and this is during the period where mortgage rates where near their highest of 2013. But MBS were not materially impacted by this report. From a technical perspective, MBS traded in a very tight range that was only 24BPS wide from our highs to our lows. Once again appetite for MBS decreased at the top of our trading channel which is our ceiling of resistance. However, the rest of the week is packed with highly influential economic data and other events that can significantly impact mortgage rates movement. There are seven economic reports that may affect mortgage pricing in addition to another FOMC meeting that certainly has the potential to cause chaos in the financial and mortgage markets. There is important economic data scheduled for release each of the remaining four days, so there is a strong likelihood of seeing noticeable mortgage rate movement several days, with more than including an intra-day revision. Overall, I am expecting to see an extremely active week for the financial markets and mortgage rates. I think that the most important day is either going to be Wednesday due to the GDP release and FOMC adjournment or Friday with July’s employment numbers being posted.

Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com Mortgage backed securities (MBS) lost -49 basis points from last Friday's close which caused 30 year fixed rates to move higher. This ended the bond rally that had lasted for the two weeks prior to last week. We had a spread of 124 basis points between our highs and lows of the week. As we have discussed, MBS sell off when there is positive economic news. We certainly could have sold off even more given last week's data with Durable Goods Orders much stronger than expected (4.2 vs 0.5) and the Consumer Sentiment Index rising from 84.1 to 85.1. Existing Home Sales missed the market expectations but was still robust. New Home Sales enjoyed some nice gains in terms of unit sales and price increases. Demand for our 7 year Treasury auction saw some decent demand but our 5 year and 2 year auctions saw decreased demand. MBS would have lost more ground (even higher rates for you) if it weren't for a WSJ article that speculated that the Fed would change their language at this week's FOMC meeting to calm the markets that they would not be increasing their rates for a long time. We agree. They will certainly leave their Fed Funds rate alone but they will eventually have to start to pull back on bond purchases and those bond purchases are what impacts your mortgage rates...not their Fed Fund rate.

Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com Mortgage backed securities (MBS) lost -53 basis points from Tuesday's close which caused 30 year fixed rates to move higher. The benchmark FNMA coupon has now lost -88BPS from Monday's highs. MBS were under pressure right from the first trade as they tanked -34BPS right out of the gate.Traders have been selling off of their positions as they no longer believe that the benchmark FNMA 3.5% August coupon can sustain their lofty levels of Monday's intra-day high. New Home Sales hit a five year high as they rose 8.3% in June. The seasonally adjusted annualized rate of 497K units is still a very small piece of the housing picture and so this report doesn't have the impact on pricing that it once did. But still it was positive economic news and did provide a light amount of pressure on pricing. The sell off of MBS was accelerated in response to the Flash Eurozone PMI rose to 50.4 (an 18th month high). A reading above 50 shows economic expansion. U.S. based bonds such as MBS have been a huge beneficiary of European weakness - so when European data surprises to the upside, U.S. bonds sell off. Which is what happened here. We had a 5 year Treasury note auction and the results were released at 1:05EDT. Results: $35 billion at 1.41% with a bid-to-cover ratio of 2.46 which is weaker demand than the 2.57 ratio of the last 10 year note auction. This also pressured MBS and drove us to our worst pricing levels of the day at 1:46EDT which was -82BPS from yesterday's close. But there was some good news - we did find a new temporary bottom and did get a nice bounce of that support level as MBS rallied from -82 BPS to -54BPS by 3:00EDT. That is a +28BPS improvement in pricing from our worst levels of the day.

Mortgage Rates

Mortgage Rates Bounce Modestly Higher Mortgage rates bounced slightly higher today, bringing them almost perfectly back in line with Friday's levels. Trading conditions in the underlying 'mortgage-backed-securities' and US Treasuries markets were underwhelming at best. Just as there hasn't been much by way of conviction as rates have been falling, today's bounce higher was similarly incidental. The day to day movements in rate continue to be much smaller than recent averages (or perhaps it's better to say they've been more "normal" whereas recent averages have been extreme from May through early July). Whatever the case, prevailing rate quotes remain in the same situation as yesterday where the average may be 4.375, but the adjacent rates of 4.5 and 4.25 will make more sense in terms of best-execution. So far, this week has adhered to the notion that markets will be far more interested in next week's events. Today was one of the two more likely days to be slow and uneventful. Although tomorrow offers slightly more in terms of market moving potential, we could be waiting until Thursday or Friday to see what the ultimate impact will be. As I noted last week, the recent run of good luck for rates looked more like a 'leveling off' process than the creation of new momentum toward lower levels. That makes yesterday's lows like the floor marking the bottom of that process. If we remain above it tomorrow, it's that much more likely to remain solid until next week's heavier events have a chance to break it. To be perfectly clear though, those heavy events can also reinforce the floor (there's nothing to know about them ahead of time beyond the fact that they have lots of potential energy).

Mortgage Rates

Mortgage Rates Hit July Lows After Weak Housing Data Mortgage rates were lower again to begin the week as weaker-than-expected economic data helped rates improve slightly in the morning. The overall level of activity in bond markets that underpin mortgage and Treasury rates remained subdued, but the trading levels were strong enough for a few lenders to offer a mid-day rate-sheet improvement on top of the already stronger rate sheets this morning. The result is an average top-tier rate (best-execution) that's now closer to 4.375% compared to last week's 4.5%. But the reason for that is more complicated than it seems at face value. The reason has to do with the two key components of mortgage rates. The obvious component is the rate itself. This is the interest rate that would appear on a Good-Faith Estimate or on closing documents--also known as the "note rate." For most mortgage rate watchers, this is simply "the rate." It's the singular answer most people expect when they ask "where are rates" or "what's the 30yr fixed rate today?" But it's not the interest rate. The actual rate of interest paid on a mortgage will be a factor of the note rate and the upfront costs. Most upfront costs are what they are based on the state in which the transaction is taking place, the time of month you close, and the entities involved. Most of them can't be changed based on how you choose to structure your loan. The "discount" component (or "points"), however, usually can be changed, provided it's early enough in the process. The concept behind points is actually not complicated. They provide an opportunity to compensate the lender providing the money for your loan in lieu of some of the monthly interest that would also be compensating the lender. Pay more now or more later. Your choice. In an environment where rates were generally falling for the past several years, it didn't make as much sense to most borrowers to pay out of pocket costs to refinance if they'd likely have the opportunity to refinance again in the not-too-distant future. Now that rates are rising (or at least no longer assumed to be falling indefinitely), paying more closing costs up front may make sense. But some rates make more sense than others. For MOST lenders, 4.5% and 4.25% make more sense than 4.375%. 4.5% would result in no origination fees and no discount points for most top tier borrowers. 4.25%--though likely adding more upfront cost to the picture--brings the monthly payment down enough that the cost would be recouped in less than 5 years. It takes at least another year to recoup costs associated with moving to 4.375% only. In other words, for borrowers with the means to pay more upfront, 4.25% may look like the best bet, while others will be better suited by the lowest possible upfront costs and a 4.5% rate. Again, this isn't the way the numbers will tumble at every lender, and if your scenario isn't perfect, the 3 rates in the example might half a point higher. The same dynamic between the three rates closest to your current quote may or may not exist, but your lender will be able to tell you if moving up or down in rates/points is possible and how the numbers would tumble. Just divide the extra cost by the monthly payment savings to determine the time it takes to break even.

Mortgage Rates

Mortgage Rates What happened last week? Mortgage backed securities (MBS) gained +131 basis points from last Friday's close which caused 30 year fixed rates to move lower. This marks the second straight week of over +100 BPS gains in the benchmark mortgage backed security and therefor, lower mortgage rates. We started the week off with a rally as MBS climbed off of their lows after Retail Sales came in much lower than market expectations. Bonds generally rally (better rates for you) on weaker economic data. But it was another week that focused on Fed Chairman Ben Bernanke. Bernanke testified before the House and Senate last week as part of his semi-annual monetary policy report. As we have been discussing for some time, traders are very focused on the timing of when the Federal Reserve will begin to reduce the amount of monthly Treasury and MBS bond purchases. MBS rallied as traders speculated that Bernanke's most recent comments pointed to the Fed waiting longer to "taper" their monthly purchases. The prior speculation was that this tapering would begin in September. The change in trader sentiment is due to Bernanke's comments that tapering will occur once the economic data (with particular focus on the labor market) shows enough of an improvement and traders currently do not perceive that there is enough economic improvement yet and so, their projections on the timing of the tapering is shifting for later down the road. Of course, this sentiment among traders could change next week. MBS also received renewed interest from foreign investors as concerns mounted about Italy and Greece being able to meet their latest round of bailout requirements. From a technical perspective, we closed above the 25 day moving average on Friday for the first time since April. What is on the agenda for this week? Date Time (ET) Economic Release Actual Market Expects Prior 22-Jul 10:00 AM Existing Home Sales - 5.28M 5.18M 23-Jul 9:00 AM FHFA Housing Price Index - NA 0.70% 24-Jul 7:00 AM MBA Mortgage Index - NA NA 24-Jul 10:00 AM New Home Sales - 481K 476K 24-Jul 10:30 AM Crude Inventories - NA -6.902M 25-Jul 8:30 AM Initial Claims - 328K 334K 25-Jul 8:30 AM Continuing Claims - 2990K 3114K 25-Jul 8:30 AM Durable Orders - 1.50% 3.70% 25-Jul 8:30 AM Durable Goods -ex transportation - 0.40% 0.50% 25-Jul 10:30 AM Natural Gas Inventories - NA 58 bcf 26-Jul 9:55 AM Michigan Sentiment - Final - 84.2 83.9 A week without Bernanke? What will we ever do? The bond market will get a breather from all-Bernanke-all-the-time. The biggest reports of the week will be Initial Jobless Claims and Durable Goods Orders. Last month, MBS sold off sharply (worse rates for you) in direct reaction to a very strong reading in Durable Goods. So, a variance from market expectations can really move your pricing. We do have three U.S. Treasury auctions this week: 07/23 - 2 year note 07/24 - 5 year note 07/25 - 7 year note - most important of the three

Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com Bernanke’s prepared text was out at 8:30 this morning (way early) before his 10:00 appointment at the House Financial Services Committee. He is saying that the central bank’s asset purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant. “If the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.” If the economy improved faster than expected, and inflation rose “decisively” back toward the central bank’s 2% target, “the pace of asset purchases could be reduced somewhat more quickly,” he said. The Fed “will be holding its stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities,” Bernanke said. The strategy “will continue to put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” On the text release the 10 yr note declined to its first key chart resistance at 2.50%, the 20 day moving average. MBS prices were generally unchanged prior to 8:30 but by 9:00 up 31 bps frm yesterday’s close. He didn’t say the Fed would continue top purchases, nor did he say the Fed was about to begin tapering. As it has always been it is data dependent and after his gaffe in May he has re-trenched to the bunker with Greenspan-like statements; keeping all options open and successfully stabilized the bond and mortgage markets. The Q&A frm the Committee will be critical pending how the questions are asked and how he responds; likely starting about 10:00 this morning. The release of the prepared text was in itself a surprise being so early. At 8:30 June housing starts were quite weak compared to forecasts. Starts were expected to up about 4.0%, as reported starts fell 9.9% to just 836K units annualized. The headline looks bad but most of the decline came in multi-family starts down 26.2%; single family starts were down 0.8% to 591K. June building permits were expected to be up about 3.0%, permits fell 7.5% t 911K units. Some of the decline in starts may have been due to very wet weather in June but that isn’t the real picture; the recent increase in interest rates is more likely slowing starts. A counter data point frm yesterday’s NAHB July housing market index that increased to the best level since Jan 2006. Weaker starts and permits is adding to the early improvement this morning. The weekly MBA mortgage applications were a little better last week as interest rates stabilized and declined a little. The overall applications index down 2.6% but purchases increased 1.0% for the first time in four weeks. The re-finance index fell 4.0% as rates moved higher and closed out those that sat there waiting for lower rates. The early release of Bernanke’s prepared text bolstered the bond and mortgage markets and drove the 10 yr note down to 2.47% at 9:30. The DJIA opened +21, NASDAQ +8, S&P +3. 30 yr MBSs +43 basis points. Finally, at least at the moment, the 10 yr and MBSs have broken their respective moving averages. Looks good for now but there is still concern that the Fed will begin tapering this year. Until this morning the general consensus was that the Fed would begin tapering by Sept. , for the moment that consensus is lessening in terms of the timing. Will House Committee members drive him to a more specific time frame? Likely they will try but Bernanke will keep the guessing going. The 10 at 2.47% is right where it traded when the June employment report was released; after climbing to 2.65% then backing to 2.47% the June employment report sent the 10 to 2.73%. Now back to that key 2.47% but slightly below its 20 da average. The 10 yr and 4.0 August FNMA coupon both now at very significant levels.