2011 Rate Outlook, QE2 Comments From Mortgage Trenches

2011 Mortgage Rate Outlook
The Mortgage Bankers Association released their mortgage rate predictions yesterday. They expect rates on the 30-year fixed-rate mortgage will average 4.4% in the fourth quarter of 2010, increasing to a 4.7% average in the first quarter of 2011, and climbing to 5.1% by the end of next year. Most late-2009, early-2010 predictions were originally for rates to rise during 2010, and here we are with 30-yr rates near 4%. They say that economists are good at explaining why their previous predictions did not come true.

Housing Bust vs. Great Depression
Here is a very interesting spin on bold programs. During the Great Depression in the 1930’s, HOLC, another mortgage acronym that has been forgotten, was created to refinance housing debt. It did not eliminate all foreclosures, but certainly helped.

Quantitative Easing Comments From Mortgage Trenches
Here are some of the comments from yesterday’s write-up on quantitative easing, they’re always appreciated.

“I take serious exception with one of your lines: ‘As I mentioned recently, when the US government, who prints money, wants inflation, it is not a wise strategy to bet against them.’ I am not arguing against the point, but I think that it’s an extremely relevant fact that monetary policy and the printing of money is done by the Fed, a private corporation, owned by the TBTF banks and private members, and that the printing of money is not done by the government. I fundamentally believe that QEII, the printing of money is a disastrous idea. I know that my radical views won’t make your commentary…”

“One of the issues I have with the QE notion is that there already is a ton of excess money on the system. There are $1 trillion in excess bank reserves parked at the Fed. Lack of confidence on the part of business and consumers makes folks less willing to borrow (and spend). The effects of QE 2 will be a deflated dollar (and the ill-conceived notion that somehow the only effect will be to lower the trade gap) and perhaps inflation. One could make a case that the only this QE 2 is doing is monetizing debt since there is no apparent way to service it.”

“QEII is a euphemism for printing money out of thin air….i.e. inflation. But terms like “inflation” and “printing money out of thin air” aren’t politically palatable any longer, so creative semantics takes over and we get “quantitative easing”…..just vague and mystic enough for the public and financial press to defer to the Fed’s delicate genius and refrain from opposing such blatant intrusions on our economic liberties as Americans. I’m not sure what “adequate money supply” means exactly. Adequate to whom? I would think markets would best determine the money supply. Inflation is the increase in money supply, and rising prices are the consequence of the inflation that’s already happened. The money supply has already been inflated substantially, and rising prices have followed, and will follow. Commodities and many foreign currencies are at all-time highs against the dollar. QEII means a further erosion of US consumer purchasing power, and lower standards of living…and possible hyperinflation. Now Geithner is at the G20 lecturing the world’s healthier economies. I heard one commentator say that’s like having an F student lecture the straight-A student about how the A student shouldn’t study so much because they are making the F student look bad.”

Consumer Confidence Rose Slightly
Are you feeling more confident? Even if you’re not, whoever is surveyed by the Conference Board is – their Consumer Confidence Index rose slightly in October to 50.2 from 48.6, but remained at its second lowest level since February. The low level remains a concern for the spending outlook. Also recall that yesterday’s Case-Schiller home price index fell -0.3% in seasonally-adjusted terms in August, the second consecutive monthly decline. Nearly all 20 metropolitan regions of the country showed sequential declines in August-with the exceptions of New York and Washington, D.C. which were flat. On the “good news” side, housing affordability is extremely high according to NAR. And it may seem that commercial banks are easing lending standards for prime mortgage borrowers, per the August Senior Loan Officers’ Survey compiled by the Federal Reserve showing it’s first loosening in underwriting standards since 2006.

Durable Goods Orders Better Than Expected
Tuesday $3.5 billion in MBS’s were sold, and prices ended the day worse by .375-.50. The mortgage supply is certainly helping to push prices down and rates higher, and on the Treasury side the 10-year Treasury hit its highest yield in over a month. Always easily spooked, the markets seem to be focusing on the possibility that next week’s Fed announcement will be “disappointingly incremental”. We’ve had Durable Goods – +3.3% and revised higher last month, ex-defense +2.9%, pretty much better than expected. We still have a home sales number ahead of us, along with a $35 billion 5-yr auction. With all of this, the 10-yr yield has moved up to 2.69% and 30-yr mortgage prices are worse between .250-.375.

Impact of Loan Modifications On Mortgage Bonds
Should modified FHA or VA loans be put into a generic Ginnie Mae security with other, non-modified loans? Last year Ginnie Mae began collecting several new data elements on the “Schedule of Pooled Mortgages”, and although entering them then was not mandatory, it will be starting in February. “In order to improve the quality of data being disclosed, Ginnie Mae is changing its requirements for loan purpose, credit score, and loan-to-value ratio from “optional” fields to “required” fields. Failure to submit the required data elements at pooling will result in a failed pool. The loan purpose codes have been changed, with “purchase” and “refinance” remaining, but with the addition of “Loan Modification – HAMP” and “Loan Modification – Non-HAMP”. Perhaps the enhanced disclosure will calm investor concerns about modified loan prepayments, but the goal seems to be keeping modified loans TBA-eligible.