Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com US stocks following Europe’s markets, lower this morning. Treasuries and MBSs are not rallying much, but are slightly better than yesterday’s closes. European stocks fell for the first time in five days, the European Union summit failed to discuss further financial assistance for Spain. European leaders committed to their goal of creating a regional bank supervisor by year-end. The European Union will seek to agree on a framework that makes the European Central Bank the main bank supervisor by Jan. 1, according to conclusions of the summit meeting released early today. Yields on benchmark 10-year German bunds dropped three basis points to 1.60%, the US 10 yr also slipped 3 bp to 1.80% at 9:00 am. The global economic outlook has improved in the last few weeks with most measurements better than forecasts. Data this week showed China’s industrial production, retail sales and fixed-asset investment accelerated in September, U.S. housing starts jumped to a four-year high and an index of American leading economic indicators rose in September by the most in seven months. The October Philly Fed business index climbed back above zero, the pivot for expansion and contraction, to+5.7; not a lot above the zero level but forecasts were for +0.5 frm -1.9 in Sept. Today is the 25th anniversary of the 1987 stock market crash. For those of us that were involved I it, it brings back memories---some good but mostly bad. Managing mortgage interest rate risk was a new thing for mortgage bankers; hard to understand and wasn’t being used much by The Street. Interest rates were increasing prior to the crash, we were heavily short the bond market in a cross hedge against long mortgage positions, as rates increased the short side of the hedge worked well, profits from short bond futures were offset by losses in the MBS market. The key was managing the spread between movement in the MBS market and treasuries; we adjusted the levels of the hedges based on the basis change. For the previous few years it worked well, removing the risk of changing market conditions. Then the crash; as I recall it we saw a change coming the previous few days before the actual crash and began unwinding the hedges somewhat, but not all of them were lifted. When the equity market finally crashed losing about 40% of value, I was caught short in three days of limit up moves in the bond market---could not get out. Clients were panicking with daily margin calls of as much as $500K a day; it took two weeks to work out of it but in the end we were able to work it out with no losses to clients but the experience cost me a lot of clients, the kitchen became too hot. I took a few days off and checked into an asylum. The problem with hedging in the futures markets is that margin calls must be met with cash immediately each day while the value that was increasing on the other side took as much as two months to get; the MBSs had to be packaged and delivered before the gains were put in the bank. At 9:30 the DJIA opened -60, NASDAQ -16, S&P -6. 10 yr note at 1.81% -2 bp; 30 yr MBSs +13 bp frm yesterday’s closes. Within 15 minutes the DJIA was off 100 points. No running back to the bond market however, the 10 yr note has not changed much even with the equity market being pummeled early today; in a sense confirming the bearishness that is now embedded in fixed income markets. At 10:00 Sept existing home sales were expected down 1.5% to 4.75 mil units. As reported sales were down 1.7% but at 4.75 mil as expected; sales up 11% yr/yr, the 15 month the yr/yr has been better. The median sales price at $183,900 +11.3% yr/yr. Inventory to sale ratio under 6 months’ supply. 3.32 mil units -20% yr/yr. Foreclosed properties in the hands of the banks distort the sales price average and inventory levels. Overall the report didn’t generate any initial interest in the markets.