Confucius says: “This is how the market finds balance”.

Is the party over? Anyone who has been in this business for any length of time has seen this before. Every now and again, rates drastically shoot up and down within the span of a few days. Yesterday, Mortgage Bonds had their worst single day performance since October of last, losing an astounding 206bp and rounding out the week to a grand total of 363bp.

So, what the hell happened and more importantly, what's next?

The main culprit for yesterday's sell off was supply. Remember Econ 101? The Treasury has literally had the money printers working nonstop to pay for the massive bailout. These hundreds of billions of dollars need to be absorbed by the market. The addition literally weighs on the entire market and drags bond prices lower. Now, also consider the impact of the high volume of refinance transactions. All those loans have been bundled, packaged, and subsequently sold on Wall Street. As those closed loans are now getting turned around and sold, this supply must also be absorbed. While the Fed has been a buyer, they simply can't buy enough to balance all the selling. It's Econ 101, “anytime supply exceeds demand, prices will move lower”. This is how the market finds balance.

Personally (DISCLAIMER: I’ve been wrong before), I think that the lowest rates are unfortunately now behind us. The US Government keeps borrowing (supply), and there are signs that the economy is slowly starting to recover. Unless the market continues to worsen (and it very well just might), I don’t know why rates would come back down to the levels of last week. We will definitely see some improvement from yesterday’s volatility, but the fundamentals will push us higher in the long term. Expect to see some lock opportunities every now and again.

As a friend of mine said yesterday: “I think I’ll take that razor blade to my arm now.”

In other news…

Durable Goods jumped more than forecast as a slow rebound in auto demand and surge in defense spending compensated for declines in general business equipment. The 1.9% increase reported by the Commerce Department was the largest since in over a year, and followed a revised 2.1 percent drop in March that was more than twice as large as previously estimated.

Jobless Claims dropped by 13,000 to 623,000. The number of people collecting unemployment insurance however rose to a record high for the 17th straight time. Who is hiring?

New home sales were reported to a projected pace of 352K, just under consensus estimates of 360K. Inventory is finally moving. I wonder why? Do you think decreased prices and cheap financing has anything to do with it?

More mortgage specific, delinquency rates are hitting record levels with almost 8% of loans currently delinquent. This figure does not count for loans currently in foreclosure, which represent another 3%, so add it up and the combined percentage of loans not current is more than 11%. FYI, this is a really big number! This should continue to weigh on the housing markets, as properties already in foreclosure or about to hit foreclosure will compete with any new listings. And if you were wondering how loan modifications are working? Not so well… According to the rating agency Fitch, mortgages that are modified typically only delay the inevitable and roughly 75% of such loans re-default inside of 12 months.

Ryan Ogata
Senior Mortgage Consultant