Friday 2/27… End of Week Recap

Today turned out to be another rather boring trading day for mortgage backed securities.  We opened to the plus side but throughout the day we gave back all the gains and closed down just a couple ticks.  There was a big turn around in treasuries which put pressure on mbs to move lower.  For the week, mortgage rates increased by about .125% to .25% in rate.  The best rates of the week where seen on Monday and Tuesday with rates moving slowly higher the rest of the week.  The main cause of treasuries moving lower in price and higher in yield is the upcoming government spending.  The only way for the government to come up with the money for the huge budget introduced by President Obama, and for the huge stimulus/spending bill is to sell treasuries.  With the record amount of new treasuries available to investors, it is driving the price of the treasuries lower which increases the yield or rate of return that the investor earns. With treasuries paying a higher yield it is attracting more buyers away from mbs and into treasuries.  Thus, when treasuries have been selling off they have been taking mbs with them to higher yields. 

Next week is action packed with economic reports which I will outline on Monday; however, we are supposed to get some details next week of President Obama’s mortgage rescue plan called the Homeowner Affordability and Stability Plan.  I hope to hear in this plan details that will make it easier for people to refinance their mortgage.  One disappointing aspect of President Obama’s short time in office is lack of any details for what they plan to do.  Up to this point, to use a Texas phrase, they have been all hat and no cattle.  The main problem that is preventing interest rates from moving lower is the belief from investors that consumers who have mortgages now will not be able to refinance and take advantage of the lower rates.  With the new LLPA’s, which I spoke of earlier, it will be very difficult for a person with a 660 credit score to qualify and get a low enough rate that it makes sense for them to refinance and pay the huge amount of costs.  In addition, lenders have tightened guidelines; which makes it harder for people to qualify.  Here is a link, Click Me  that will break down many of these new guidelines that is preventing people from qualifying.  If you are a mortgage professional, please assist us with outlining some of these senseless mortgage guidelines that are inhibiting consumers from qualifying.  In my opinion, throughout 2002 to 2006 it was too easy to qualify; however, the pendulum has swung too far the other direction which is preventing many responsible home owners from refinancing to some of the lowest mortgage interest rates in history.  In addition, many home owners are underwater on their mortgage meaning they owe more on the mortgage than what the property will appraise.  Hopefully next week we will get details of a program that will allow people to refinance without having to do a new appraisal.  If I could have 2 wishes for what I would like to hear it would be to allow people to refinance with no appraisal and either a reduction in the LLPA fees or complete elimination of those fees.  If those two things happen, we will see mortgage rates move lower.  If next week there are still no clear details outlined, we will see rates continue to move sideways to slightly higher since investors will continue to believe that people will not qualify for a lower mortgage rate.

 To get a little deeper into what happened this week, I would like to briefly touch on the different mortgage backed security coupons.  There is a 4.0 coupon, 4.5, 5.0, 5.5, 6.0, etc…  The higher the coupon the more yield or rate of return it pays the end investor.  For mortgage rates to get to 4.5%, we need investors to buy the lower coupons.  Now, the biggest concern to an mbs investor is early payoff of the loan.  When the home owner refinances, that means the investor gets paid off early and they lose their monthly cashflow of mortgage payments.  So, for investors to buy the lower coupons we need them to believe that people can and will refinance which will drive investors to what is called down in coupon buying.  This week we saw up in coupon buying meaning investors bought the higher coupons and not the 4.0 and 4.5 coupons because they believe, due to the lack of details, that home owners will be unable to refinance.  So, they would rather own the higher coupons which pay them a higher rate of return.  I do not want to get into a lot of details with up in coupon and down in coupon buying as that is a pretty advanced subject and my blog is really aimed at the average consumer who only worries about a mortgage every 5 years.  You can visit Adam Quinones and Matt Grahams professional blog by clicking this link, Click Me, or simply go to the above tool bar under the blogs/news tab and click mbs commentary.  This is an advanced blog mainly aimed at mortgage and finance professionals and might create more questions than answers for the average consumer but I do encourage anyone that is interested to pay mbs commentary blog a visit.