THE BASIS POINT

Refis Are 81% Of Mortgage Apps, Rates Drop As Post-Fed MBS Rally Continues

Refis Are 81% Of Mortgage Apps
This morning we learned, thanks to the MBA, what lock desks already knew: mortgage applications in the U.S. declined last week for a third consecutive time. The weekly index fell 1.4% to the lowest level in six weeks, with purchases down 3.3% and refinancing down .9% percent. (Refi’s are more than 81% of applications.) Aside from that, we have no news coming out, and we find the 10-yr back down to 2.53% and mortgages better by about .125.

And Then There Was Geithner
Larry Summers quit as economic advisor in the Obama Administration – the third high-level member of Obama’s economic team to leave in recent months (after budget director Peter Orszag and Christina Romer, head of the Council of Economic Advisers) This leaves Treasury Secretary Geithner would be the only one of Obama’s top-tier economic advisers to remain in the fox hole—he looked like the least likely to retain his position when the administration took office. Markets don’t like uncertainty, but so far this news has had no direct impact on mortgage rates.

Mortgages Better Again Today On Fed’s Low Rate Stance
Rates, and stocks to some extent, both had a good day Tuesday. Things were pretty quiet up to and soon after the FOMC’s announcement. Overnight rates were left unchanged (and besides, there is little correlation between overnight rates and 30-yr Treasury, or mortgage, rates), but the Fed’s statement was viewed as “dovish” as it talked about its mandates and reminded us that inflation is under target – it’s too low for economic growth. The Fed is “prepared to provide additional accommodation if needed”. The verbiage took some uncertainty out of the market – and few markets like uncertainty. This statement leaves no doubt that further easing is on the table; however, it still may take some time for the Committee to debate the details and hash out a compromise. Some analysts expect that by January, the FOMC will be ready to announce a plan for a sizable purchase of longer-dated Treasuries. (There was nothing about buying more mortgages.) It is worthwhile to note that Chairman Bernanke, a scholar of the Great Depression, has observed that wholesale prices had good predictive value during the Depression. Therefore a sustained downturn in producer prices is likely to make him pretty nervous.

Folks who analyze the markets believe that the odds are very slim of any kind of Fed tightening in 2011. Of course, lower rates lead to more prepayments, which in turn lead to more runoff from the Fed’s MBS portfolio, which in turn currently leads to more Fed buying of intermediate Treasuries! A second round of quantitative easing (“QE2”) may happen if the economy falters going forward. But for now, yesterday’s rally brought mortgage rates back to where they were last Tuesday, which was the best day to lock last week, and MBS’s closed the day better by about .5 in price. Only $1 billion in mortgages crossed the MBS tape – about half of normal.