-Bernanke’s Mortgage/Housing Bet—great summary of QE (Jody Shenn, Bloomberg)

-Housing Forecasts: Goldman, Merrill, Fannie, Wells, more (CalculatedRisk)

-A new duality of credit & zero-bound rate risk defines 2012 markets (Bill Gross, PIMCO)

-Profound & Pervasive Misconduct In Mortgage Servicing (Ritholtz on Raskin)

-Survey shows wide support for mortgage interest deduction (HousingWire)

-One Fed president explains how FOMC meetings work (Michael Derby, WSJ)

I explained why this strategy keeps rates low when they announced it in September. Read it here.

The Fed didn’t confirm rumors about QE3 focused on buying more mortgage bonds in Q12011.

Mortgage bonds (FNMA 3.5% coupon) were down as much as 23 basis points to start the day, but rebounded sharply and now up 34 basis points. Rates drop when bond prices rise like this, and vice versa.

The rally came after a very strong $21b auction of 10yr Notes which had the second highest ever bid-to-cover ratio (a measure of demand) of 3.53.

The week’s busy economic calendar continues with Import/Export prices tomorrow, and jobless claims, inflation and manufacturing data on Thursday and Friday.

December 13 Fed Statement (Last 2011 FOMC Meeting)

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

Mortgage bonds (FNMA 3.5% coupon) ended down 5 basis points today—pushing rates up slightly—following this afternoon’s Fed policy statement confirming their September 21 pledge to continue supporting low rates.

The Fed isn’t doing this with new quantitative easing. They’re reinvesting proceeds from existing mortgage holdings as a strategy to keep rates low.

Nevertheless, there are rumors that the Fed may do QE3 in 2012. At today’s post-Fed meeting press conference, Bernanke kept that door open in case of emergency, but I think their existing strategies will be sufficient medium-term—and barring any global economic emergencies.

In any case, borrowers must be ready to seize low rates as they come then go just as fast—this week and every week.

The way to capture rate lows is explained in this piece I wrote for Mortgage News Daily two weeks ago. If you’re a rate shopper and you read nothing else, read this piece: How To Shop For A Mortgage.

As for Papandreou’s move, EU leaders will hold emergency talks with him in Cannes, France tonight, ahead of tomorrow’s European Central Bank meeting—the first with new ECB head Mario Draghi—and also tomorrow/Friday’s G20 summit.

The drama and resulting market volatility will continue. Stay tuned.

Below I recap last week, then preview what’s coming. And please note: you can see if you qualify now for HARP II, the new refi plan for underwater homeowners, but loans won’t be made until November 15 at the earliest.

RECAP OCTOBER 24-28 MARKET WEEK
Home Prices: Case Shiller’s reported home prices rose 0.2% July to August, the fifth straight monthly gain but a tiny gain. Prices are down 3.8% since August 2010 and stuck at 2003 levels. So: Is owning a home smart?

GDP: The first of three 3Q2011 GDP readings showed the economy grew at 2.5%, compared to 1.3% for 2Q and 0.4% for 1Q.

Europe Debt Deal: Rates rose Thursday on news of the EU debt deal but reversed Friday as skepticism grows. Next week’s preview below.

Consumer inflation: The Fed’s preferred measure of consumer inflation, the Personal Consumption Expenditures Index (PCE), was within their 2% annual cap. They focus on ‘Core’ which excludes food and energy prices. From Sept 2010 to Sept 2011, all-inclusive PCE was 2.9% and Core was 1.6%. Inflation ok for now.

PREVIEW OCTOBER 31 – NOVEMBER 4 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Manufacturing: Tuesday is the Institute for Supply Management October manufacturing report. September was 51.6 with 50 as dividing line between expansion and contraction. Good news: 26th months of growth. Bad news: barely growing. Also, manufacturing is weak as measured by two other October surveys: Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. Empire State (NY) was -8.48, fifth straight monthly contraction. For PA/NY surveys, 0 is line between growth/contraction. ISM shouldn’t be a blowout number so rates even.

Fed AND European Central Bank Meetings: The Fed’s meets two days with a policy announcement Wednesday. Rates dropped after their September 21 meeting because they recommitted to mortgage bond buying (not QE!). The Fed is unlikely to surprise markets, but Thursday’s European Central Bank meeting is huge: the first with new ECB President Mario Draghi (bio). His stance on ECB policy and EU debt crisis is key. Rates even to down on Fed meeting. Rates are wild card for ECB meeting.

Jobs Report: Markets expect Friday’s jobs report to show 88k-100k new jobs created in October and unemployment to hold at 9.1%. The economy added 103k new jobs in September, plus August was revised from zero to 57,000 jobs created, and July was revised from 85k to 127k. I think this one will be close to consensus. If so, rates even.

Europe Debt Crisis: Besides Thursday’s ECB meeting, there’s a G20 Summit Thursday and Friday. Both may elaborate on last week’s debt deal, which helped stocks and hurt rates. Another wild card for rates.

Corporate Earnings: Another big earnings week including reports from Pfizer, Kraft, Nissan, Honda, Comcast, Clorox, Mastercard, AIG, Unilever, Credit Suisse, Anadarko, Time Warner, News Corp, Sony, LinkedIn.

Technical Trading Factors: Last Thursday, the S&P 500 broke clearly above it’s 200 day moving average of 1274 for the first time since August 2, and closed at 1285 Friday. Also Thursday, mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets—dropped clearly below the 50 day moving average they were hugging since October 7. Mortgage bonds regained much of Thursday’s sharp post-EU news losses Friday, but they’re still below the 50 day moving average.

Bottom Line For Rates: These technical factors suggest stocks and rates could start the week stable, but volatility will remain extreme as politicians and central banks hog center stage. Also the 10yr Note yield, a key benchmark for rate markets, has risen enough (now 2.32%) to create upside rate rate risk near-term. Long-term, a rate spike isn’t warranted by weak global economic conditions. But next week is key to determine whether rates rise near-term or hold this volatile-but-steady range we’ve been in since October 7, which is .25% above record lows.
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Rate Shopper Must-Read:
How To Shop For A Mortgage

But rates change in real time. Example: they rose and fell .25% last week as Eurozone optimism did the same and U.S. home prices, jobless claims, and GDP were first perceived positively then sentiment reversed. This extreme daily volatility won’t stop. So here’s how to shop for a mortgage.

Shop For Loan Agents, Not Rates
Every consumer shops for mortgages and they should. But this is the critical distinction: you should be shopping for the best mortgage advisor. If you have that, you’ll get the best rate.

Here’s what I see every week with shoppers focused only on rate: I quote a rate only after I’ve analyzed their entire financial profile and analyzed their home’s value and condition—also known as pre-approving them.

They’ll either tire of the pre-approval analytics or be unhappy with the rate and go somewhere else.

Then 80% of those cases come back to me because the competing rate quote was revealed to be incorrect when the other lender actually completed the client’s profile, or the home’s value/condition made the loan ineligible.

Mortgages are extremely competitive so rates and fees are generally the same with most (established, credible) lending firms.

What’s not the same lender to lender is the loan agent’s ability to advise properly, analyze borrower and property profiles, and close with no surprises.

So shop to find the lender and loan agent you feel most confident can perform on these three things.

Then work with that loan agent to pick a rate target you can’t or won’t go above, and give them a standing order to lock when they see it.

That’s for refinancers. For homebuyers, you can’t lock a rate until you’re in contract to buy a home. Once you’re in contract, the same approach applies.

Rate Targeting
Their are two reasons for the pre-approval and rate targeting tactics discussed above:

(1) A rate quote that flies through the air means nothing. If a loan agent doesn’t issue you written terms after obtaining a full profile on you and your home, then you haven’t received a quote you can count on.

(2) Rate lows are here and gone each trading day as mortgage bonds rise and fall on economic and technical trading signals. So rate targeting ensures you’ll obtain the best rate amidst all the volatility.

Your loan agent should also be able to brief you daily or weekly on the market outlook.

Rate Preview October 3-7
Here are next week’s economic calendar highlights with rate impacts:

ISM Manufacturing Index Monday: This is a national reading of manufacturing activity, and while the last two months barely crossed into positive territory in July and August (50.9 and 50.6 respectively. Above 50 is expansion, below 50 is contraction), the regional surveys out of New York, Philadelphia and Chicago haven’t shown any consistent strength in recent months. This may drop to 50 or below, and if so, rates would be even to down.

Jobs Reports Wednesday & Friday: Payroll provider reports their September jobs figures Wednesday, and the official Bureau of Labor Statistics September report comes Friday and markets are expecting to show 60k new payrolls created. This after the economy added zero non-farm payrolls in August. Plus July was cut to show 85k new payrolls instead of the previously reported 117k, and June was cut from 46k to 20k. If Friday’s report is below expectations, rates will fall.

Europe Debt Crisis: As the Economist explains this week, political paralysis in Europe is still the theme so rates will still rise and fall on each little development in Europe.

Also Ben Bernanke gives his economic outlook to Congress Tuesday, and the Fed’s Operation Twist—where they sell short-term Treasury debt and buy long-term debt—begins Monday. Bernanke will likely reiterate the Fed’s rather dismal outlook reported September 21, which is neutral to better for rates.

Bottom line: Rates are likely to remain even next week, along with some brief dips below current lows.
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Must-Read for mortgage shoppers:
Refi Roadmap: A Locked Rate Isn’t A Closed Loan

While digging up the Fed link, I also found something interesting on the Fed site. Here’s a good table of all forms of Fed lending. Good reference material.
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Further reference:
-Quantitative Easing: Rate Recap & Timeline

-QE 101, part 1: Timeline
-QE 101, part 2: Dollar Impact
-QE 101, part 3: Inflation Impact
-QE 101, part 4: Consumer Q&A

-NY Fed Quantitative Easing Overview

The idea that moving from short term debt to long term debt while not increasing the size of its balance sheet is somehow “stimulative” is comical. I suppose that it preserves the notion that the Fed has not given up and that somehow folks should be hopeful and spend and invest may be of psychological value but as policy this is nearly useless. To me it has little more effect that had Bernanke rearranged the pens on his desk.

The shape of the yield curve is not what’s stalling GDP growth.

The entire economy is lacking confidence. Businesses and investors are doing little innovative and the consumer is still afraid about his job, the value of his home and the amount of his debt.

Confidence in the ability of the government to help is near zero. I do not see the President, Congress or any of the Republican candidates as having any solutions. People lack confidence because no current leader engenders it in the way that Clinton or Reagan did.

Worse yet, business and banking are both behaving conservatively. Banks are afraid to lend and businesses are afraid to expand. Uncertainty abounds. Banks have decreased commercial and real estate lending and dramatically cut interbank lending. What asset classes have they increased? Treasury/Agency securities and cash – not exactly the formula for growth. In fact, an ideal formula for stagnation.

The Fed also announced that it would take the payments and payoffs on its mortgage portfolio and pump those dollars back into Fannie & Freddie mortgage bonds rather than Treasuries. This will provide more demand for agency paper and help keep mortgage rates low.

Operation Twist will create lower Treasury yields and mortgage rates but it will not do jack for the economy.

Below is an explanation of each strategy in simple terms.

Operation Twist is a Fed strategy where they shift their debt holdings to longer-term securities. Between now and June 30, 2012, the Fed will sell $400b of Treasury debt with durations of 3 years or less and reinvest the proceeds into durations of six to 30 years.

This helps lower rates on various forms of credit, including mortgage loans.

Lower rates cause more people to refinance mortgages and when a refi pays off an existing mortgage, a mortgage bondholder gets paid off.

The Fed is a huge mortgage bondholder—they bought $1.25 trillion of mortgage bonds from January 2009 through March 2010—so they collect principal balances as loans refinance, and they also get paid as homeowners make their mortgage payments.

The Fed also said today they’d use the money they collect from loan payoffs and payments to buy more mortgage bonds starting October 3. Previously this money was being use to buy Treasury securities.

This renewed Fed commitment to buy mortgage bonds caused a huge mortgage rally today (FNMA 30yr 3.5% coupon +134 basis points), and because yields (or rates) drop when bond prices rise, rates dropped to record lows.

Also today the 10yr Note hit a record low yield of 1.88%. Stocks closed down sharply: S&P 500 -35, Down -283.

This mortgage bond rally today is extreme. Mortgage bond prices were already hovering near record highs on U.S. weakness and the Eurozone debt crisis.

So if you’ve been rate shopping, be aware that today’s levels may correct in the coming days, and this is a very good time to lock.

But even if rates come up a bit as mortgage bond prices come off these nosebleed levels, the economic fundamentals noted/linked above still support very low rates.

The next FOMC meeting is November 1-2.

It should also be noted that Operation Twist isn’t quantitative easing because the latter means creating new money to buy bonds.

Operation Twist is just shifting from shorter to longer term debt, but today’s Fed statement indicated quantitative easing remains an option if needed.

Fed’s Operation Twist & Mortgage Buying Plan

Today’s Fed Statement

The speech focused on fiscal policies needed to fix the economy—take note Congressmen, and watch this video from Kansas City Fed president Thomas Hoenig, he’s always put his money where your big mouths are. Rates are modestly better this morning, but it’s more from a weaker 1% 2Q2011 GDP reading and than from anything Bernanke said.

Bernanke: Near & Long-Term Prospects For Economy (CreditWritedowns)