Market Reports
A Mortgage Update from Jay Skwierawski for the Week of January 18
Hello Everybody!
Interest rates rose slightly this week, as a two-day winning streak in the stock market at the end of the week seemed to offset the latest round of bad economic news. Even with the slight increase, mortgage rates are still sitting at historically low levels for most borrowers. Changes announced by Fannie Mae and Freddie Mac may affect those low rates, but the trend in mortgage rates still seems to be lower.
First let's take a look at the news out last week:
On Tuesday, the U.S. Trade Balance was reported to have dropped to $40 billion in November, as the price of oil dropped. On Wednesday we found out that Retail Sales in December dropped by 2.7 percent, much worse than the 1.1 percent that was expected. Excluding automobile sales, retail sales dropped by 3.1 percent. Retail sales are the best indicator of the mood of U.S. consumer. Thursday's report on the Producer Price Index (PPI) showed a drop of 1.9 percent, as expected, also a result of the recent drop in oil prices. The core PPI, excluding food and energy, increased by .2 percent, slightly higher than was expected. The Empire State Index, showing economic activity in the New York area came in at a dreary -22.2, while the Philadelphia Fed Index came in at -24.3. Initial claims for unemployment benefits jumped to 524,000, showing the labor market continuing to struggle, which is no real surprise during these challenging economic times. Finally, on Friday, we learned that the Consumer Price Index (CPI) was reported at -.7 percent in the month of December, while the core CPI was unchanged in December. Industrial Production and Capacity Utilization, showing factory activity both came in lower than expected, while the University of Michigan Consumer Sentiment Index showed a slight improvement over the previously reported number.
In addition to these economic reports, there was news that Citigroup lost $8.29 billion (with a b) in the first quarter, completing its worst year ever, and Citi can trace its roots back to 1812. Bank of America also reported ugly earnings, saying that it lost $1.79 billion in the 4th quarter - making it their first yearly loss in 17 years. The Federal Reserve continued its Mortgage Backed Securities (MBS) purchase plan. As of Wednesday, they have purchased $33 billion in MBS out of their commitment to purchase $500 billion by the end of June. This plan has helped to bring down mortgage rates to their current low levels. Finally, this week was the start of earnings season on Wall Street, which initially continued a sell off in the stock market, but buyers returned on Thursday and Friday, pushing stock market indexes up and treasury and mortgage bonds down, causing mortgage rates to drift higher.
This week will be a fairly quiet one, as far as economic reports are concerned. The markets will be closed on Monday for the Martin Luther King, Jr. holiday. Reports due out this week include:
Thursday - Building Permits are expected to show a slight decrease in December. This number has a MODERATE effect on mortgage rates.
Thursday - Housing Starts are also expected to show a decrease in December over November's numbers. Perhaps with mortgage rates sitting at their historically low levels, we could start to see an improvement in these numbers in coming months. MODERATE
Thursday - First time unemployment claims are expected to show a rise this week over last. MODERATE
Now, regarding FNMA's recent changes to mortgage rates: Fannie Mae announced two changes to its pricing structure that will have an effect on mortgage rates for many buyers. Last year Fannie Mae issued Loan Level Price Adjustments (LLPA), which basically meant that borrowers with lower credit scores started paying higher rates on FNMA issued mortgages, especially at higher loan to values. For example, if a borrower had a credit score of 675, and they put down 20 percent, they would have to pay an extra 1-3/4 points at closing. Since borrowers do not pay points in many markets, mortgage companies make up this extra cost imposed by FNMA by charging a higher interest rate, making the mortgage more valuable at the time that it is sold on the secondary market. This added value is used to cover the extra cost imposed by FNMA. With the changes that FNMA just announced, this same borrower will now have to pay an extra 2-1/2 points, as FNMA has increased these LLPA's by anywhere from 1/4 to 3/4 percent. In addition, FNMA has announced that buyers of condominiums that put down less than 25 percent will now have to pay a fee of 3/4 percent. These changes go into effect for loans sold to FNMA as of April 1, which means that most lenders have already started pricing in them into their ratesheets, keeping in mind that loans locked in now for 60 days may not be delivered to FNMA until after that deadline. The reason behind these changes, according to FNMA, has to do with risk. They feel that this risk based pricing policy will make their Mortgage Backed Securities more valuable on the secondary market. What's confusing about this is that FNMA and FHLMC are now run by the government. Yes, that same government that I mentioned earlier has a plan in place to purchase $500 billion of those Mortgage Backed Securities to help push mortgage rates down. Hmmm, now THAT doesn't make much sense, does it?
Finally, on Tuesday, Barack Obama will become our nation's 44th president, as we celebrate another peaceful change of leadership in the greatest country in the world! He intends to hit the ground running, with his own economic stimulus plan. Many of the elements of his plan could have a positive impact on mortgage rates. He certainly has his work cut out for him!
Have a great week!
Thank you!
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
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