Weekly Mortgage Rate Review, July 23, 2010

Mortgage Rates Survive the Stress

This week has presented the markets with a unique challenge: a bevy of US Company earnings, economic reports and a major international economic event.  With this much information to digest the markets could have swung wildly in an either positive or negative direction.  Yet, while the markets and mortgage pricing did swing, it was largely within a relatively narrow range.  The big unknown for the week was the outcome of the European bank "stress" tests which were released midday today.  Analysts will continue to review the tests and speculate regarding their impact, but initially mortgage rates have survived the stress and remained at near record levels, though higher than last week.

The week in review

Monday was relatively calm as the markets seemed to waiting for the earnings reports, economic data and news from Europe.  The stock market ended up modestly and mortgage-backed securities (MBS) ended down modestly.  Mortgage pricing was up slightly for the day. Tuesday was very volatile as the US stock market was down big early but rallied to close up. Mortgage pricing stayed in a very tight range on Tuesday and finished the day essentially unchanged.

Wednesday was a roller-caoster ride in the markets. Continued good earnings reports caused early increases in stocks and losses in bonds including MBS.  It appeared the upward trend in mortgage rates was going to continue...until Fed Chairman Ben Bernanke used the words "unusual uncertainty" to describe the US economic outlook. Stock markets despise uncertainty and responded with sell-off erasing Tuesday's gains.  Mortgage pricing improved significantly for the day.

Thursday provided a great deal of economic news on jobless claims, existing home sales and leading economic indicators.  While the news was negative across the board, there were no surprises and even some glimmers of hope such as existing home sales that were "less bad" than expected.  In the absence of surprising bad news, the stock market rallied significantly.  Mortgage pricing increased modestly as well.

Today was the day most analysts and traders were pointing to as the day that a big move could occur.  If the results of the European bank stress tests showed that many banks were at risk if economic conditions worsened, it could have produced a big sell-off in stocks and improved mortgage rates.  The actual results were somewhat anti-climatic, as only 7 of 91 banks were found to be at risk, yet analysts complained about how stringent the tests actually were.  The US stock market took the seemingly good news to heart and finised well into positive territory.  Mortgage-backed securities finished the day essentially neutral.

For the week mortgage pricing finished essentially flat. This is good news, as rates are continuing to remain at record low levels.

Next week

Next week will give us a lot of economic data to chew on including new home sales, consumer confidence, durable goods orders, economic outlook from the 12 Federal Reserve regions, jobless claims, gross domestic product and the Chicago Purchasing Manager's Index.

What will the impact of financial regulatory reform be on mortgage borrowers?

My analysis of the financial reform legislation signed this week by President Obama suggests that three changes are likely to have the biggest impact on borrowers. First, underwriting standards are likely to get even more stringent, particularly for higher loan amounts due to a requirement that the securitizers and the originating lenders retain 5% of the credit risk.  Secondly, smaller loans might be more difficult to obtain given a new limit on closing costs.  Lenders will have a hard time making any money on smaller loan amounts (less than $150,000 according to the Mortgage Banker's Association).  Finally, I believe more transparency related to the total compensation of originators and lenders will result from the restrictions on compensation to originators. 

The devil will be in the details of the actual rules that will be written by the newly created Consumer Financial Protection Bureau. Mortgage bankers and brokers have and will continue to gripe about the changes but, I believe they will all adapt and provide better, more fairly compenated services. Don't be surprised to see new types of lenders come into the market including flat fee lenders.  Unfortunately, I also believe that the changes favor the bigger lenders and therefore are likely to further reduce competition and result in higher fees.  Rates are likely to become more uniform, but the variances in lender service will increase.