Rates Up On Fed Minutes and $126b Treasury Auctions, Refis 69% of All Loans, Quote From Mortgage Trenches

Impact of Treasuries on Rates
“Suppose They Gave a War and Nobody Came” was a 1970 movie with Ernest Borgnine and Tony Curtis (both of whom are still with us). What if the Treasury gave an auction and nobody bid, aside from Primary Dealers who must bid? That is one of the fears that drove prices down and rates up yesterday, especially with the news that China fell behind Japan to become the second-biggest holder of US Treasuries. That is not a good thing, and is an indication that the Chinese have been acting on recent complaints about US policy by unloading US debt. China was a net seller of Treasuries by $34 billion, bringing its total holdings down to $755 billion from $790 billion in November. Money talks.

Also this morning Treasury announced $126b in Treasury security auctions next week which break down as follows: $8b in 30yr TIPS Tuesday, $44b in 2yr notes Tuesday, $42b in 5yr notes Wednesday, $32b in 7yr notes Thursday. This is leading to a second day of negative MBS trading which has caused rates to rise .25% to .375%.

Impact of Fed Minutes on Rates
Treasury prices went south yesterday after this China news came out, the positive data on the housing market, and the apparent progress on Grecian debt (Treasuries don’t need to be the “safe haven”.) . More important than numbers reflecting last month’s economic climate, however, were the Fed minutes. “A few suggested that the pace of asset sales, and potentially of purchases, could be adjusted over time in response to developments in the economy and the evolution of the economic outlook”. Does this mean that the Federal Open Market Committee will adjust asset sales and purchases rather than the overnight Fed Funds rate? Perhaps!

Traders saw a higher-than-recently-normal amount of selling from originators Wednesday, which made mortgage rates move a little more than Treasury rates toward the downside. The minutes from the late-January meeting revealed that members debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, but obviously there is concern about upsetting the stability of the markets.

PPI Above Expectations, Jobless Claims 31k
Today we have another large amount of economic news to grapple with. We have already had the Producer Price Index and Jobless Claims; still ahead are the Philly Fed and Leading Economic Indicators. The PPI showed that inflation picked up more than expected: +1.4%, with the core rate +.3%. Year-over-year the PPI was +4.6% and the core rate was +1.0%, roughly as expected. Jobless Claims rose 31k to 473,000. On this news stocks moved down, and rates improved somewhat: the yield on the 10-yr is chopping around 3.71% and mortgage prices are a tad better.

Refis Still 69% of Mortgage Volume
Generally speaking locks desks around the nation were a little slower last week. Yesterday the MBAA reported that applications from last week were down about 2%, with purchases down 4% and refi’s down about 1%. Refi’s are still amounting to about 69% of the mortgage activity (what would your volumes look like if refi’s went below 50%?), and ARM loans are still less than 5%. Yesterday morning, after the Starts & Permits number, we learned that in January Industrial Production was +.9% and Capacity Utilization went from 71.9% to 72.6%, both relatively strong numbers.

Loan Agent Quote From The Trenches
Real words from a real agent:

“I have been originating residential loans for 26 years, and originating a loan has never been so time consuming and labor intensive. I work three times as hard for one-third the income, literally. The mortgage companies and banks now expect the originator to originate the loan (I like this part the best and spend the least amount of my day doing it) set up the loan (open escrow, order credit and appraisal, input loan (completely- error free) into the loan origination software, process the loan (complete the disclosures, collect signatures on disclosures, collect income and asset documentation from the borrower, underwrite the file manually and electronically [using Fannie’s auto engine DU or Freddie’s auto engine LP], and close the loan (follow up on additional conditions created by an “underwriter”). Of course the “underwriter” takes out his/her checklist and finds fault with something we have or haven’t done (real or imagined) to justify their existence by conditioning for additional pieces of paper that do nothing for anyone (they blame it on the investor). There is really no such thing as an underwriter anymore. If DU or LP say no, it’s a no. I find it almost laughable that the set up department doesn’t set up (they police the disclosures) and processing department doesn’t process (they submit the completed package to the underwriter) and the underwriters don’t underwrite. There is no fun left in the business for originators. It’s sad but true. The parts of the business I truly love and excel at – figuring out how to market/originate loans and helping people realize the “American Dream”- are the parts I spend the least amount of my day doing.”

Daily Humor
The meaning of “potentially” and “realistically”:

A young boy went up to his father and asked him, “Dad, what is the difference between ‘potentially’ and ‘realistically’?”
The father thought for a moment, then answered, “Go ask your mother if she would sleep with Brad Pitt for a million dollars. Then ask your sister if she would sleep with Brad Pitt for a million dollars, and then ask your brother if he’d sleep with Brad Pitt for a million dollars. Come back and tell me what you learn from that.”

So the boy went to his mother and asked, “Would you sleep with Brad Pitt for a million dollars?”

The mother replied, “Of course, I would! We could really use that money to fix up the house and send you kids to a great university!”

The boy then went to his sister and asked, “Would you sleep with Brad Pitt for a million dollars?”

The girl replied, “Oh, good heavens! I LOVE Brad Pitt and I would sleep with him in a heartbeat. Are you nuts?”

The boy then went to his brother and asked, “Would you sleep with Brad Pitt for a million dollars?”

“Of course,” the brother replied. “Do you know how much a million bucks would buy?”

The boy pondered the answers for a few days and then went back to his dad.

His father asked him, “Did you find out the difference between ‘potentially’ and ‘realistically’?”

The boy replied, “Yes, ‘Potentially’, you and I are sitting on three million dollars, but ‘realistically’, we’re living with two ‘tramps’ and a future congressman.”