Mortgage Rate Update--



A better open today in the US bond and mortgage markets. Yesterday the 10 yr note ran to 2.40%, held and found a little support; last Oct. the 10 increased to 2.40% where it reversed and moved lower. As we have noted, the 10 yr from a technical perspective was oversold and due for a retracement. We don’t look for much of a rebound however, unlike last October when Europe’s debt crisis was boiling and the US economic outlook was murky at best this time the rate increases are driven by a different set of fundamentals.

The economic outlook has improved since last October, inflation fears have edged a little higher and the Fed is unlikely to increase the purchase of mortgage-backed securities (no additional QE is anticipated now). The Fed is however continuing to buy MBSs but not at an increased pace than what it is doing now. While Europe is still facing huge decisions within the EU to reduce spending in a number of countries in an effort to increase revenues and fend off defaults, at the moment markets have put Europe on the back burner. Presently the US bond market is adjusting to the better economic outlook, investors are bailing on low fixed rate investments, unwinding the huge safety trade that drove the 10 yr to lows not seen since prior to WW II. Interest rates are on the increase, although we continue to believe rates will not increase much. The definition of how much of an increase depends on what ones outlook is, but when seen in historical perspective rates will remain low.

Mortgage applications decreased 7.4% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 16, 2012. The Refinance Index decreased 9.3% from the previous week. The seasonally adjusted Purchase Index decreased 1.0% from one week earlier. The unadjusted Purchase Index was 1.9% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is down 2.79%. The four week moving average is up 3.25% for the Purchase Index, while this average is down 4.31% for the Refinance Index. The refinance share of mortgage activity decreased to 73.4% of total applications, the lowest since July 2011, from 75.1% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.6% from 5.8% of total applications from the previous week. The average loan size of all loans for home purchase in the US was $225,463 in February 2012, up from $216,888 in January. The average loan size for a refinance was $222,048, down from $227,563 in January. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.19% from 4.06%, with points increasing to 0.47 from 0.43 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) increased to 4.49% from 4.39%, with points decreasing to 0.38 from 0.39 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 3.93% from 3.82%, with points decreasing to 0.48 from 0.55 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 3.47% from 3.36%, with points increasing to 0.40 from 0.34 (including the origination fee) for 80% loans. The average contract interest rate for 5/1 ARMs increased to 2.90% from 2.81 percent, with points increasing to 0.44 from 0.37 (including the origination fee) for 80% loans.

At 9:30 the DJIA opened generally unchanged; the 10 yr note rate at 2.32% -4 bp and mortgage prices +8/32 (.25 bp).

The only data today at 10:00 Feb existing home sales were expected to be up 0.7% frm January. As reported sales declined 0.9% to 4.59 mil (annualized) frm 4.63 mil in Jan; January sales were revised higher, from +4.3% to +5.7%. Based on sales pace there is a 6.4 month supply, the median sales price was $156,000 +0.3% yr/yr. 34% of sales were distressed sales. No significant reaction to the report in either equity markets or the bond market.

Bernanke and Geithner are testifying at the House Oversight Committee on the European debt crisis. Bernanke saying that US banks are not exposed, Geithner saying there is a huge amount of work left to do. Likely no market reaction to their comments or testimony.

We are finally getting the rebound we have been expecting; after the 10 yr held at 2.40% yesterday the 10 yr has fallen to 2.31% at 10:05 this morning; mortgage prices at 10:05 +10/32 (.31 bp) +.06 bp frm 9:30. Use this improvement as an opportunity to lock in critical loans; there is the potential to take the 10 yr back to 2.25% but it will not change the overall direction in the rates, rate markets are bearish and will continue to be so.