Everyday we get some type of lending change. They come in the form of an email with an effective date that has either already passed or only a few days away. We do our best to keep up with the current underwriting guidelines but we are at the mercy of the rule makers.
The frustrating part is the changes can come in the middle of your loan and there is nothing you can do about it. Borrowers are frustrated too but this is the world we live in now. Evolve or go extinct.
Tuesday, June 30, 2009
Thursday, June 25, 2009
Cap and Trade
06/25/2009
House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.
Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.
Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.
Associated Press
Henry Waxman
For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.
To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.
The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."
The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.
When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.
Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.
Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.
The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.
Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.
Printed in The Wall Street Journal, page A14
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.
Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.
Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.
Associated Press
Henry Waxman
For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.
To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.
The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."
The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.
When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.
Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.
Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.
The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.
Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.
Printed in The Wall Street Journal, page A14
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
Friday, June 19, 2009
Monday, June 15, 2009
Monday 6/15/2009
Mortgage Bonds are advancing higher so far today after two days of healthy gains.
The Bullish Engulfing Pattern, along with the Positive Stochastic Crossover,
accurately signaled this very welcomed rally. And the good news is that there
should be some more room to advance until we reach resistance at the 200-day
Moving Average, about 30bp higher. From there we will have to see if the rally has
the power to break above the ceiling. A stumble from stocks will be key - and
stocks continue to battle their own 200-day MA, now at 944 on the S&P 500.
As you know, we have been watching this level closely and stocks have, very
stubbornly, hung in for quite at while near this ceiling. It's no coincidence that both
stocks and bonds are doing battle with their 200-day MA's at the same time. It will
be interesting to watch.
A worse than expected New York State manufacturing index came in at -9.41,
weaker than estimates of -5.10. Readings below zero show contraction in
manufacturing.
This morning, the US Dollar is rebounding higher against global currencies. This is
causing a sell-off in oil and putting downward pressure on Stocks in shares energy,
mining and other natural resource companies.
There are no auctions this week other than the normal T-Bill offerings and the
absence of additional supply may provide Bonds some room for improvement. For
today, we can recommend a floating bias but stay tuned, as both stocks and bonds
"duke it out" near their respective 200-day Moving Averages.
The Bullish Engulfing Pattern, along with the Positive Stochastic Crossover,
accurately signaled this very welcomed rally. And the good news is that there
should be some more room to advance until we reach resistance at the 200-day
Moving Average, about 30bp higher. From there we will have to see if the rally has
the power to break above the ceiling. A stumble from stocks will be key - and
stocks continue to battle their own 200-day MA, now at 944 on the S&P 500.
As you know, we have been watching this level closely and stocks have, very
stubbornly, hung in for quite at while near this ceiling. It's no coincidence that both
stocks and bonds are doing battle with their 200-day MA's at the same time. It will
be interesting to watch.
A worse than expected New York State manufacturing index came in at -9.41,
weaker than estimates of -5.10. Readings below zero show contraction in
manufacturing.
This morning, the US Dollar is rebounding higher against global currencies. This is
causing a sell-off in oil and putting downward pressure on Stocks in shares energy,
mining and other natural resource companies.
There are no auctions this week other than the normal T-Bill offerings and the
absence of additional supply may provide Bonds some room for improvement. For
today, we can recommend a floating bias but stay tuned, as both stocks and bonds
"duke it out" near their respective 200-day Moving Averages.
Thursday, June 11, 2009
Mortgage-Bond Yields Climb to New High Since Fed’s Buying Plan
By Jody Shenn
June 10 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac mortgage securities rose, setting a new high since the Federal Reserve announced plans to buy the bonds to drive down interest rates on new home loans and further thwarting the effort.
Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds rose 0.09 percentage point to 5.06 percent as of 3 p.m. in New York, according to data compiled by Bloomberg. That’s the highest since Nov. 24, the day before the U.S. central bank announced its plans to buy home- loan bonds. The level is up from 3.94 percent on May 20.
Today, yields advanced largely in line with a climb in rates on benchmark 10-year Treasuries, as the government sold $19 billion of the securities and Russia said it may switch some of its reserves from U.S. debt. The “agency” mortgage-backed securities market has also been roiled by widening yield premiums relative to government notes.
“You know the Fed is going to be buying, so investors aren’t underweighting agency MBS per se, but they are taking off their overweights as spreads have tightened well beyond historical averages,” said Scott Buchta, a strategist at Guggenheim Capital Markets LLC in Chicago. “What you’re starting to see people look at is: What happens when the Fed stops buying?”
U.S. mortgage applications fell last week to the lowest level since February as a jump in borrowing costs discouraged refinancing and signaled that Fed Chairman Ben S. Bernanke’s bid to cap rates is stalling, according to Mortgage Bankers Association data released today.
The Fed’s Strategy
The Fed initially said on Nov. 25 that it would buy as much as $500 billion of mortgage securities, before announcing in March that it would expand the program to as much as $1.25 trillion, as well as buy $300 billion of Treasuries. The average rate on a typical 30-year mortgage rose to 5.56 percent as of early yesterday, from 4.85 percent on April 28, the lowest on record, according to Bankrate.com data.
“The homeowner can’t handle this,” said Scott Simon, the head of mortgage-bond investing at Pacific Investment Management Co., whose Newport Beach, California-based firm is the world’s largest fixed-income manager.
Higher rates are “really hurting the refi wave,” Buchta said in a telephone interview. “And rising rates are definitely going to hurt home prices. Consumers figure out the payment they can afford and from that figure out how much house they can buy.”
An increase of 0.5 percentage point in loan rates translates into about 5 percent “less buying power,” he said.
Fannie-Treasury Gap
The difference between yields on the Fannie Mae bonds and 10-year Treasuries rose 0.02 percentage point today to 1.13 percentage point, Bloomberg data show. The gap, which grew to as much as 2.38 percentage points last year, contracted to 0.7 percentage point on May 22, the lowest since 1992.
Yields on agency mortgage bonds are guiding rates on almost all new U.S. home lending following the collapse of the non- agency market in 2007 and a retreat by banks. The almost $5 trillion market includes securities guaranteed by government- controlled Fannie Mae and Freddie Mac and bonds of U.S.-insured, low-down-payment loans backed by federal agency Ginnie Mae.
The housing market faces challenges. Additional U.S. home foreclosures will probably total 6.4 million by mid-2011, about 2.5 million less than if mortgages weren’t being reworked to aid borrowers, according to JPMorgan Chase & Co. analysts.
The modification-adjusted number, from a starting point of March, will lessen home-price declines “only slightly,” the mortgage-bond analysts led by John Sim in New York wrote in a June 5 report. Instead of falling 41 percent from their peaks, U.S. prices will probably drop 39 percent on average, they said.
Completed foreclosures totaled 861,664 last year, up from 404,849 in 2007, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. In the first four months of this year, they totaled 276,526.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
Last Updated: June 10, 2009 16:03 EDT
June 10 (Bloomberg) -- Yields on Fannie Mae and Freddie Mac mortgage securities rose, setting a new high since the Federal Reserve announced plans to buy the bonds to drive down interest rates on new home loans and further thwarting the effort.
Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds rose 0.09 percentage point to 5.06 percent as of 3 p.m. in New York, according to data compiled by Bloomberg. That’s the highest since Nov. 24, the day before the U.S. central bank announced its plans to buy home- loan bonds. The level is up from 3.94 percent on May 20.
Today, yields advanced largely in line with a climb in rates on benchmark 10-year Treasuries, as the government sold $19 billion of the securities and Russia said it may switch some of its reserves from U.S. debt. The “agency” mortgage-backed securities market has also been roiled by widening yield premiums relative to government notes.
“You know the Fed is going to be buying, so investors aren’t underweighting agency MBS per se, but they are taking off their overweights as spreads have tightened well beyond historical averages,” said Scott Buchta, a strategist at Guggenheim Capital Markets LLC in Chicago. “What you’re starting to see people look at is: What happens when the Fed stops buying?”
U.S. mortgage applications fell last week to the lowest level since February as a jump in borrowing costs discouraged refinancing and signaled that Fed Chairman Ben S. Bernanke’s bid to cap rates is stalling, according to Mortgage Bankers Association data released today.
The Fed’s Strategy
The Fed initially said on Nov. 25 that it would buy as much as $500 billion of mortgage securities, before announcing in March that it would expand the program to as much as $1.25 trillion, as well as buy $300 billion of Treasuries. The average rate on a typical 30-year mortgage rose to 5.56 percent as of early yesterday, from 4.85 percent on April 28, the lowest on record, according to Bankrate.com data.
“The homeowner can’t handle this,” said Scott Simon, the head of mortgage-bond investing at Pacific Investment Management Co., whose Newport Beach, California-based firm is the world’s largest fixed-income manager.
Higher rates are “really hurting the refi wave,” Buchta said in a telephone interview. “And rising rates are definitely going to hurt home prices. Consumers figure out the payment they can afford and from that figure out how much house they can buy.”
An increase of 0.5 percentage point in loan rates translates into about 5 percent “less buying power,” he said.
Fannie-Treasury Gap
The difference between yields on the Fannie Mae bonds and 10-year Treasuries rose 0.02 percentage point today to 1.13 percentage point, Bloomberg data show. The gap, which grew to as much as 2.38 percentage points last year, contracted to 0.7 percentage point on May 22, the lowest since 1992.
Yields on agency mortgage bonds are guiding rates on almost all new U.S. home lending following the collapse of the non- agency market in 2007 and a retreat by banks. The almost $5 trillion market includes securities guaranteed by government- controlled Fannie Mae and Freddie Mac and bonds of U.S.-insured, low-down-payment loans backed by federal agency Ginnie Mae.
The housing market faces challenges. Additional U.S. home foreclosures will probably total 6.4 million by mid-2011, about 2.5 million less than if mortgages weren’t being reworked to aid borrowers, according to JPMorgan Chase & Co. analysts.
The modification-adjusted number, from a starting point of March, will lessen home-price declines “only slightly,” the mortgage-bond analysts led by John Sim in New York wrote in a June 5 report. Instead of falling 41 percent from their peaks, U.S. prices will probably drop 39 percent on average, they said.
Completed foreclosures totaled 861,664 last year, up from 404,849 in 2007, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. In the first four months of this year, they totaled 276,526.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net
Last Updated: June 10, 2009 16:03 EDT
Monday, June 1, 2009
Monday 6/1/2009
06/01/2009
On Friday, mortgage backed securities (MBS) aggressively rallied, recapturing about half the losses suffered on "Black Wednesday". The majority of lenders repriced for the better but many remained cautious and did not pass along gains to the extent that MBS coupons rallied, which is typical for a Friday.
So far this morning, we have given back half of Friday's gains after better than expected economic data. The week ahead is packed with economic reports to digest with the highest impacting report scheduled to be released on Friday: The Employment Situation Report.
Today brings us several relevant reports to discuss.
- Personal Income and Outlays report which provides us data on the dollar value of income received from all sources and consumer purchases of durable and non durable goods, and services. Last month, both income and spending declined from the prior month by -0.3% and -0.2% respectively. Economists surveyed are expecting continued declines with income and spending both expected to drop an additional -0.2%. Since consumer spending is the lifeline of our economy, it will be very difficult for our economy to recover until spending picks up. Personal income came in much higher than expected at a 0.5% increase but it did not lead to much more spending with the outlays coming in at a -0.1%. It appears that the sharp jump higher in income is being attributed to increased government social benefits including unemployment insurance. Consumer optimism is picking up, income is moving higher but spending is still lagging. Imbedded within this report is a measure on inflation with the Personal Consumption Expenditure index. The core PCE index came is higher than expectations at a month over month increase of 0.3% following last month’s 0.2% increase. This places year over year core PCE at 1.9%. With oil continuing its move higher, currently up more than a dollar to $67.50 a barrel, let’s hope that the inflation genie is not out of the bottle yet. The 1.9% year over year reading is within the Fed’s comfort zone but rising oil prices will continue to apply pressure on consumer goods to move higher in price. High unemployment should contain inflation for now but we do have a couple months in a row of higher than expected month over month increases in inflation. Following the release, MBS have moved considerably lower in price giving back half the gains from Friday.
- ISM Manufacturing index which gives us a measure of the strength of the manufacturing segment of our economy. This is a survey of more than 300 manufacturing firms on employment, production, new orders, supplier deliveries and inventories. Readings above 50 indicates growth in manufacturing, readings from 43 to 50 indicates that the economy is growing even though manufacturing is contracting and any level below 43 indicates the economy is in recession. Last months’ report came in much better than expected rising from 36.3 to 40.1 which helped to spark the optimism that the recession is nearing its end. Economists’ expectations are for continued improvement to a reading of 42.0 and the actual report came in at 42.8. Following the release of this better than expected data and the construction data, MBS have now given back all of Friday’s gains.
- Construction spending which is the dollar value of new construction activity on residential and non residential projects. Rising construction spending is a key indicator of a growing economy since businesses tend to only build new factories when they are confident that the economy is healthy enough to justify the expansion. Construction spending for March rebounded to a surprising 0.3% increase but expectations are for a sharp decline to -0.8% for April. The release has come in much higher than expected at a month over month increase of 0.8%.
Tuesday
- Pending Home Sales Index will be released by the National Association of Realtors. This index is a leading indicator of housing activity in the existing home sales market. A pending sale is one in which a contract has been placed on a home but the sale has yet to close. Strong housing demand is viewed as a huge positive for economic growth due to a person would have to feel very positive about their own financial position to buy a home. In addition, high housing demand usually leads to other purchases such as appliances, flooring, window treatments, etc… which leads to higher sales of goods and services.
Wednesday
- Weekly Mortgage Bankers’ Applications Index. This data set measures new applications at mortgage lenders. This report gives investors a gauge into demand for housing which has a big impact on economic momentum. Higher demand for housing usually leads to higher demand for many products to fill the home thus the stock market generally rallies with a improving number.
- Factory Orders which represents the dollar value of new orders for both durable and non durable goods. An increasing number suggests economic momentum and is seen as a positive for stocks and a negative for MBS. Last month’s report came in at a decline of -0.9% and economists’ surveyed are estimating a sharp rebound to an increase of 1.1%
- ISM Non-Manufacturing Index which gives us a measure of the strength of the non manufacturing segment of our economy. Last month this index rose to 43.7 and economists surveyed are expecting continued improvement with a 45.0 reading. This index is compiled by surveying 400 firms across the US.
Thursday
- Jobless Claims, expectations call for 620,000 filers for first time unemployment insurance following last week’s 623,000. The bigger concern is the continuing claims, which is the number of citizens who continue to file for unemployment insurance, which has set a record week after week and is currently over 6.6 million. A higher than expected number would be a positive for MBS and mortgage rates.
- Productivity and Costs measures the growth of labor efficiency and unit labor costs. An efficient labor force can help contain inflation by lowering unit labor costs. If a company can produce a higher amount of goods and services, with the same labor force, that helps to keep prices and inflation down.
- We also get an announcement from the Treasury Department regarding the total amount of Treasuries that will be auctioned at the next auction. The added supply of debt will apply pressure on treasury and MBS yields to rise. Currently the yield on the benchmark 10 year treasury note is at 3.65%. Our government needs to issue more treasuries to fund the ever increasing spending.
Friday
- Employment Situation which is the highest impacting economic report we receive on a monthly basis. Higher unemployment leads to less consumer spending and less pressure on wages so it is positive for MBS and lower rates when unemployment is high. Economists’ surveyed are expecting the number of jobs lost from last month to be at 530,000 following the April’s loss of 539,000. It is also expected that the unemployment rate will move from last month’s 8.9% to 9.2%. In a sign of optimism for our economy, March’s job loss total was 699,000 so we are seeing some improvement in the amount of jobs lost. If this report comes in better than expected, the stock market will probably continue to move higher as investors sell their fixed income investments to move their cash into higher yielding equities.
After the very welcomed rally we had on Friday, it is very disappointing to watch the sell off this morning. Early reports from fellow mortgage professionals are indicating better rates than we had at the end of last week but disappointing after the huge rally on Friday. Again, this just shows you how quickly things can and will change. Today’s par 30 year conventional rate mortgage is near 5.00% for the best qualified consumers. In order to secure this rate you will have to have a FICO credit score 740 or higher, a loan to value 80% or less and be willing to pay all closing costs associated with your refinance including 1 point loan origination/discount/broker fee.
On Friday, mortgage backed securities (MBS) aggressively rallied, recapturing about half the losses suffered on "Black Wednesday". The majority of lenders repriced for the better but many remained cautious and did not pass along gains to the extent that MBS coupons rallied, which is typical for a Friday.
So far this morning, we have given back half of Friday's gains after better than expected economic data. The week ahead is packed with economic reports to digest with the highest impacting report scheduled to be released on Friday: The Employment Situation Report.
Today brings us several relevant reports to discuss.
- Personal Income and Outlays report which provides us data on the dollar value of income received from all sources and consumer purchases of durable and non durable goods, and services. Last month, both income and spending declined from the prior month by -0.3% and -0.2% respectively. Economists surveyed are expecting continued declines with income and spending both expected to drop an additional -0.2%. Since consumer spending is the lifeline of our economy, it will be very difficult for our economy to recover until spending picks up. Personal income came in much higher than expected at a 0.5% increase but it did not lead to much more spending with the outlays coming in at a -0.1%. It appears that the sharp jump higher in income is being attributed to increased government social benefits including unemployment insurance. Consumer optimism is picking up, income is moving higher but spending is still lagging. Imbedded within this report is a measure on inflation with the Personal Consumption Expenditure index. The core PCE index came is higher than expectations at a month over month increase of 0.3% following last month’s 0.2% increase. This places year over year core PCE at 1.9%. With oil continuing its move higher, currently up more than a dollar to $67.50 a barrel, let’s hope that the inflation genie is not out of the bottle yet. The 1.9% year over year reading is within the Fed’s comfort zone but rising oil prices will continue to apply pressure on consumer goods to move higher in price. High unemployment should contain inflation for now but we do have a couple months in a row of higher than expected month over month increases in inflation. Following the release, MBS have moved considerably lower in price giving back half the gains from Friday.
- ISM Manufacturing index which gives us a measure of the strength of the manufacturing segment of our economy. This is a survey of more than 300 manufacturing firms on employment, production, new orders, supplier deliveries and inventories. Readings above 50 indicates growth in manufacturing, readings from 43 to 50 indicates that the economy is growing even though manufacturing is contracting and any level below 43 indicates the economy is in recession. Last months’ report came in much better than expected rising from 36.3 to 40.1 which helped to spark the optimism that the recession is nearing its end. Economists’ expectations are for continued improvement to a reading of 42.0 and the actual report came in at 42.8. Following the release of this better than expected data and the construction data, MBS have now given back all of Friday’s gains.
- Construction spending which is the dollar value of new construction activity on residential and non residential projects. Rising construction spending is a key indicator of a growing economy since businesses tend to only build new factories when they are confident that the economy is healthy enough to justify the expansion. Construction spending for March rebounded to a surprising 0.3% increase but expectations are for a sharp decline to -0.8% for April. The release has come in much higher than expected at a month over month increase of 0.8%.
Tuesday
- Pending Home Sales Index will be released by the National Association of Realtors. This index is a leading indicator of housing activity in the existing home sales market. A pending sale is one in which a contract has been placed on a home but the sale has yet to close. Strong housing demand is viewed as a huge positive for economic growth due to a person would have to feel very positive about their own financial position to buy a home. In addition, high housing demand usually leads to other purchases such as appliances, flooring, window treatments, etc… which leads to higher sales of goods and services.
Wednesday
- Weekly Mortgage Bankers’ Applications Index. This data set measures new applications at mortgage lenders. This report gives investors a gauge into demand for housing which has a big impact on economic momentum. Higher demand for housing usually leads to higher demand for many products to fill the home thus the stock market generally rallies with a improving number.
- Factory Orders which represents the dollar value of new orders for both durable and non durable goods. An increasing number suggests economic momentum and is seen as a positive for stocks and a negative for MBS. Last month’s report came in at a decline of -0.9% and economists’ surveyed are estimating a sharp rebound to an increase of 1.1%
- ISM Non-Manufacturing Index which gives us a measure of the strength of the non manufacturing segment of our economy. Last month this index rose to 43.7 and economists surveyed are expecting continued improvement with a 45.0 reading. This index is compiled by surveying 400 firms across the US.
Thursday
- Jobless Claims, expectations call for 620,000 filers for first time unemployment insurance following last week’s 623,000. The bigger concern is the continuing claims, which is the number of citizens who continue to file for unemployment insurance, which has set a record week after week and is currently over 6.6 million. A higher than expected number would be a positive for MBS and mortgage rates.
- Productivity and Costs measures the growth of labor efficiency and unit labor costs. An efficient labor force can help contain inflation by lowering unit labor costs. If a company can produce a higher amount of goods and services, with the same labor force, that helps to keep prices and inflation down.
- We also get an announcement from the Treasury Department regarding the total amount of Treasuries that will be auctioned at the next auction. The added supply of debt will apply pressure on treasury and MBS yields to rise. Currently the yield on the benchmark 10 year treasury note is at 3.65%. Our government needs to issue more treasuries to fund the ever increasing spending.
Friday
- Employment Situation which is the highest impacting economic report we receive on a monthly basis. Higher unemployment leads to less consumer spending and less pressure on wages so it is positive for MBS and lower rates when unemployment is high. Economists’ surveyed are expecting the number of jobs lost from last month to be at 530,000 following the April’s loss of 539,000. It is also expected that the unemployment rate will move from last month’s 8.9% to 9.2%. In a sign of optimism for our economy, March’s job loss total was 699,000 so we are seeing some improvement in the amount of jobs lost. If this report comes in better than expected, the stock market will probably continue to move higher as investors sell their fixed income investments to move their cash into higher yielding equities.
After the very welcomed rally we had on Friday, it is very disappointing to watch the sell off this morning. Early reports from fellow mortgage professionals are indicating better rates than we had at the end of last week but disappointing after the huge rally on Friday. Again, this just shows you how quickly things can and will change. Today’s par 30 year conventional rate mortgage is near 5.00% for the best qualified consumers. In order to secure this rate you will have to have a FICO credit score 740 or higher, a loan to value 80% or less and be willing to pay all closing costs associated with your refinance including 1 point loan origination/discount/broker fee.
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