Affordable Financial Services’ Mortgage Market Report

Mortgage Backed Securities are mixed today but still in positive territory.  RATES are ON FIRE today.  Take a look and take advantage of them while you can.  We’re still right at resistance and the market can go either way and fast.  The FOMC announcement is in 60 minutes.

Earlier this morning the Commerce Department reported that newly built single-family homes fell by a larger-than-expected 7.6% in December.  Bad weather may have played a role in the December new home sales data.  Last month was the 14th coldest December and 11th wettest in 115 years of record keeping according to the National Climatic Data Center.  Bad weather or good — the housing market recovery is showing some signs of fatigue after a mid-year surge in sales as first-time homebuyers rushed to take advantage of a popular tax credit, which had been scheduled to expire in November.  As most readers of this commentary are well aware, the original homebuyer tax credit program has been expanded and extended until June this year.  Most analysts expect home sales to pick up as a result, though most don’t expect the pace to be quite as strong as it was under the initial program.  Mortgage investors essentially shrugged this data off this morning and remained far more focused on the upcoming Treasury auctions, Fed meeting, and the last minute political wrangling surrounding the likely reappointment of Fed Chairman Bernanke.

Next up for mortgage investors is this afternoon’s $42 billion 5-year note auction (concludes at 1:00 p.m. ET) followed within an hour or so by the release of the much anticipated post-meeting statement from the Federal Open Market Committee.

Yesterday’s $44 billion two-year note auction attracted solid demand, with the total number of bids strongly higher than the average for the 12 auctions of two-year debt that took place last year.  It’s a decent start to this week’s three-part Treasury auction and let’s hope the momentum is sustained.  Aggressive bidding and solid foreign investor participation at today’s 5-year note auction will tend to be supportive of the prospects for steady to slightly lower mortgage interest rates.  In the unlikely event today’s 5-year note sale is a bust – look for mortgage interest rates to finish the day higher.

It is Wednesday morning which means the Mortgage Bankers of America have released their mortgage application survey for the previous week.  During the week ended January 22nd the MBA said overall mortgage loan demand dropped 10.9% from the previous week.  The purchase index fell 3.3% while the requests for refinance loans fell 15.1%.  Refinance applications accounted for 67.6% of all applications – down slightly from last week, when they were 71.1% of the total.

Flat early this morning; the 10 yr note unchanged at 7:00 and remained unchanged through 9:00; mortgage prices also essentially unchanged. At 9:00 the DJIA futures -12 points. At 9:30 the DJIA opened -36, the 10 yr note gaining ground, +7/32 at 3.60% and mortgages at 9:30 +3/32 (.09 bp) frm the close yesterday.

The MBA applications survey for the week ending January 22, 2010 out at 7:00.  The Market Composite Index decreased 10.9% from one week earlier. The refinance Index decreased 15.1% from the previous week. The purchase Index increased 2.8% compared with the previous week and was 4.5% lower than the same week one year ago. The four week moving average for the market Index is up 2.6%. The refinance share of mortgage activity decreased to 67.6% of total applications from 71.7% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 4.7% from 4.1% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.02% from 5.00%, with points decreasing to 1 from 1.05 (including the origination fee) for 80% loan-to-value loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.34% from 4.33%, with points decreasing to 1.14 from 1.19 (including the origination fee) for 80% loans. The average contract interest rate for one-year ARMs increased to 6.84% from 6.72%, with points increasing to 0.33 from 0.31 (including the origination fee) for 80% loans.

At 10:00 Dec new home sales, expected to be up 3.5%, were down 7.6% to 342K units frm 370K units annualized in Nov. Nov sales were revised from -11.3% to -9.3%. The median sales price $221,300.00 and down 3.6% from Dec 2008. The initial reaction rallied interest rates and turned equities lower.

At 1:00 this afternoon, the Treasury will conduct the second of three auctions this week with $42B of 5 yr notes. Yesterday’s 2 yr note auction was just OK with the rate slightly higher than what traders were expecting. The 5 yr may be a little more sticky as the term moves out the curve; however, markets continue to expect decent demand for treasuries. With equity markets teetering on a major decline treasuries will continue to see increased demand on safety moves.

At 2:15, the FOMC will release their policy statement. Unlikely there will be anything in it that will roil markets, but talk is cheap and traders are always suspicious of anything coming from the Fed these days. The Fed will continue to talk of improvement in the economy but slowly, and will keep rate low on the FF rate for the foreseeable future. Recent comments from Fed officials that suggest the Fed is considering any tightening by increasing the rate on excess bank reserves held at the Fed, thus continuing to drain reserves that essentially would increase rates on loans and restrict unreasonable lending may lessen the focus on the the FF rate as the key to tightening when the time comes.

Finally today; the State of the Union speech this evening. After the recent election re-buffs the Pres is doing a major reversal. More consideration to the people instead of trying to ram rod the health care mess through Congress. Taxpayers sent a strong message that the big government is out of control; Obama will make a strong case he is back in the game and “concerned” that there is little progress in improving the economy. Yes; GDP will be up 4.5% in Q4 but it has little to do with consumers, housing, and unemployment.

Should be choppy today with not much change, at least until 2:15 when the FOMC statement hits. If nothing new there markets are likely stay close to unchanged with the State of the Union speech this evening. Still however, its the stock market that is moving the rate markets. Equity markets are increasingly suspect to a major decline; more belief that stocks are over-valued and that while the economy has improved consumers are still reeling. Consumer credit has collapsed in the past eight months; not in the game of spending and banks unwilling to pass out credit cards to anyone breathing. How many times in the past year has anyone heard the mantra that dominated until the banking crisis, that consumers account for 70% of GDP growth? Hardly anyone wants to face that reality, especially those on The Street that want us to believe we can have a consumer less recovery —a true oxymoron in a world presently awash in oxymorons.