THE BASIS POINT

How Europe’s Woes Help U.S. Rates

Face it: there is no quick fix for the problems in Europe, or in this country. The situation in Europe is worsening, and the fear that sovereign debt would spread has done just that: French, German, and Spanish banks are now viewed as vulnerable since they hold a good amount of poor European debt from Greece, Italy, Spain, Portugal, and Ireland. Germany and Holland can’t save the rest of Europe. German Chancellor Angela Merkel and French President Nicolas Sarkozy said they will encourage euro-zone nations to more closely integrate their economies, proposing stricter oversight and deficit rules to tackle the sovereign-debt crisis. The leaders rejected the idea of expanding the region’s rescue fund or introducing Eurobonds.

Do the problems over there influence our mortgage rates? Well, to be concise and simplistic, European concerns have not pushed our rates higher, and in fact, in a roundabout way, have helped to push US Treasury debt rates lower, and mortgages along with them. But analysts are quick to point out that the trouble there is likely to spread to other economies, especially if austerity measures are implemented. And great rates are only part of the lending picture – the borrower and the property still have to qualify.

And the problems there certainly, in the long run, overshadow “small” economic news releases here, although measures of our economy certainly move rates in the short run. Yesterday we had some import & export price numbers, along with housing starts and building permits, and then Industrial Production (+.9% in July, the quickest pace in seven months) and Capacity Utilization (which rose to 77.5% from a revised 76.9% in June). But stocks dropped on disappointment in the results of Merkel-Sarkozy talks, and bonds rallied.

In mortgages, traders reported “a big migration” in MBS investors as they sold higher coupon securities and bought lower coupon bonds. Selling from originators totaled around $1.7 billion and consisted of 75% in 4% coupons and 25% in 3.5%’s. (And there are now actually prices on 30-yr 3% coupons, containing 3.25-3.625% 30-yr mortgages!) MBS prices improved by roughly .5 on current-coupon production, resulting in some intra-day price changes from lenders. But it is a big concern for lenders to close the loans that are locked in their pipelines, and following market price changes does not seem to be paramount.

This morning we learned from the MBA that last week’s applications were almost 79% refi’s – not a shock. Overall apps were up about 4%, but while refi’s were up 8% purchase apps dropped over 9%. Much of the slicing and dicing done by mortgage research firms suggest that while supply and prepay risk is increasing, it looks to be “contained”, unless the government comes up with some program to stimulate the housing market which odds are deemed very low of this occurring. We also had slightly hotter PPI numbers, but currently the 10-yr sitting around 2.24% and MBS prices worse by about .125.

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