THE BASIS POINT

Outlook: Mortgage Activity Down 30% In 2011. Homeowners Paid Loan Down On 33% of 3Q Refis

 

MBA Outlook: Mortgage Activity Down 30% In 2011
The Mortgage Banker’s Association thinks loan production volume will drop almost 30% from about $1.4 trillion this year to about $1 trillion in 2011. Their rationale is a sluggish economy, tough credit guidelines, and expectations that rates will creep higher during 2011. Yesterday’s loan application data suggests perhaps some clouds on the horizon. Apps were up about 3%, but the refinance share is still above 82%. The data is a week old, but it’s not hard to see that if any company is barely scraping by while depending on refinances, any move up in rate can be debilitating.

Deutsche Bank Outlook: Steady Home Prices
Economists at Deutsche Bank “are not worried about further declines in home prices. Better housing affordability, easier lending standards, and modest jobs gains should keep home prices near current levels, if not ultimately begin to push prices higher over time, assuming of course the labor market gains more traction.” They even point to the American Institute of Architects (AIA), residential architectural billings – up sharply from its all-time low – highly correlated to housing starts with a lag time of 4 months. Earlier this week we learned that Existing Home Sales were up 10%, and yesterday’s New Home Sales were up over 6% – stronger than expected. But year over year, new-home sales in September were down by 21.5% and at the current sales pace it would take 8 months to sell the nation’s inventory of 204,000 new homes.

Homeowners Paid Loan Down On 33% of 3Q Refis
In Freddie Mac’s world, about 33% of homeowners who refinanced their mortgage terms in the third quarter lowered their principal balance by putting in additional cash. It was the second-highest total in 25 years. (During the 2nd quarter it was 23%.) With rates looking very attractive, the median interest-rate reduction was about 1%. Only 18% of the refi’s went to cash-out borrowers, or those that increased their loan balance by at least 5%, represented 18% of all refinanced loans — the lowest since Freddie began tracking. It is no surprise that the main causes of the decline in cash-out refinancing were lower home prices and tighter underwriting standards.

Rates Up As QE2 Announcement Approaches
Yesterday’s $35 billion 5-yr auction was “decent”, better than Tuesday’s but not as good as it could have been. But the Treasury market is under continued pressure and we have now seen rates back up by as much 35 basis points in 10s from the low yields three weeks ago. Mortgage selling was average at $2.3 billion but MBS prices finished worse between .250-.375.

Traders have lots of sayings. One is “Buy the rumor, sell the news”. That appears to be what is occurring now with rates. The Fed has made it clear that it is poised to restart quantitative easing (QE2) soon, but the markets have already reacted. Stock, bond and commodity prices have been improving for over a month, but now that conjecture is increasing that the stimulus is not what was expected, both stocks and bonds are languishing. The markets have bought the rumor (QE2 large stimulation signaled at the last FOMC) and are now selling the rumor (QE2 will be much less than expected).

Jobless Claims Down
The only economic news today was Weekly Jobless Claims, which dropped 21k to 434,000 from a revised 455,000. The moving average dropped 5,500. In general, the economy is gradually improving at best – wallowing might be a better term. But the press seems to have dropped the “double dip” headline talk. We also have a $29 billion 7-yr note auction today. We’re seeing a slight bounce in stocks and bonds, with the 10-yr yield down to 2.70% and mortgages better between .125-.250.

 

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