Weekly Mortgage Rate Review--Economy Putting One Foot in Front of the Other, September 24, 2010

The US economy's movement can be described as "putting one foot in front of the other".  While it may not be pretty and may more closely resemble a sailor staggering back to the ship following a night of liberty, the direction is definitively forward.  There are continuing signs that markets are moving in a sustainable direction over the mid-to-longer term.  For stocks this means higher levels.  For mortgage-backed securities (MBS) this means lower levels.  Mortgage rates still appear headed higher. 

Federal Reserve purchasing of Treasury debt or MBS (quantitative easing) could reverse this trend however. There are other anecdotal signs appearing in the mortgage industry that point to the inevitability of higher rates, but broader consumer options.  I will highlight one of these signs following a review of mortgage rates for the week.

Week in Review

Mortgage rates improved on Monday despite a rally in stocks.  Anticipation of more quantitative easing from the Federal Reserve was likely the reason. Tuesday provided even better mortgage pricing as MBS raallied on the Fed's aanouncement that it was "prepared to provide additional accomodation" if the economy showed signs of further weakness or particularly, deflation.

With no economic data released on Wednesday, the markets took a pause to consider their next move.  Thursday provided a mixed bag of economic data with jobless claims worse than expected but leading economic indicators coming in better. Exisiting home sales increased from the previous month, yet still remained at a very low level.  Mortgage pricing started better but finished a tick worse than the previous day.

Friday saw a modest worsening in mortgage pricing despite a more than modest rally in stocks.  With a positive durable goods orders report and new home sales coming in as expected the stock market found momentum to push forward.  Is the rally sustainable?  Can mortgage rates improve despite a rsing stock market? Yes and Yes, in my opinion, if there is quantitative easing from the Fed.  Simply better economic data would tend to push stocks forward, but MBS performance would suffer unless artificially influenced from the outside.

Next week

Consumer confidence figures will be reported on Tuesday.  Thursday's final revision to 2nd quarter GDP will be watched closely. But once again Friday may be the key day, as reports on personal income, inflation, construction spending, manufacturing and consumer sentiment will all be released.  Expectations are for no significant changes to be reflected in these reports.  Lots of data, but no surprises could lead to other factors like merger activity or political news having directional impact on mortgage rates.

One Step at a Time

As the old song goes, "Just put one foot in front of the other, and soon you'll be walking across the floor. Just put one foot in front of the other, and soon you'll be walking out the door."  Our economy does seem to be moving in a positive direction, though not in a straight line, nor at a regular pace.  When working to overcome the most significant downturn sense the great depression, it is no wonder.  I often look for anecdotal evidence to point to longer term trends, when the data are so foggy, as to make perception of direction difficult.  This week I saw a story that provided evidence that the mortgage market is healing and preparing for its "new normal".

On Wednesday of this week, WL Ross company announced that it would invest "significant capital" in a Florida-based mortgage services firm CMC.  Two things are significant about this move...the investor and the purpose.  WL Ross has been a major player in the mortgage industry since the meltdown, purchasing mortgage portfolio's from defunct lenders at pennies on the dollar and managing those portfolio's profitably.  No firm appears more committed to taking advantage of current weaknesses in the industry to build for a better future.  The purpose of this investment is the key nugget for those of us that observe this industry and comment on it for consumer benefit.

CMC helps small, private lenders compete through group purchasing, liquidity facilities and the like.  This means they help smaller lenders compete with the big boys.  In the old mortgage industry, loans from many sources found their way into portfolio's that would then be securitized on Wall Street and sold (MBS and collateralized debt obligations-CDO).  While this model, when filled with "junk-mortgages" was a reason for the crash, it also provided tremendous liquidity for all lenders and enabled competition and innovation in products.

Our secondary market today is almost exclusively a Fannie Mae and Freddie Mac (GSEs-Government Sponsered Enterprise) world.  With changes coming to the GSEs over the next six months, WL Ross and CMC seem to be preparing for a time in which entities other than the GSEs will be bringing packages of mortgages to the debt markets.  Competition is a good sign for the consumer in the future--though as I have stated repeatedly, mortgage rates will be higher in a market without the same type of government mortgage guarantees we had in the past.