Market Reports
A Mortgage Update from Jay Skwierawski for the week of June 1
Good Morning Everybody!
Mortgage rates rose last week by about 1/4%, to their highest level in about 3 months. The increase in rates was caused by some positive news on the economy.
Last week, the following news was reported:
Tuesday - Consumer confidence came in much lower than expected, with inflation being the number one concern for the consumer. New Home Sales actually rose 3.3% in April, the first increase in six months.
Wednesday - Durable Goods Orders declined a smaller than expected .5%, and stripping out transportation orders, there was actually a larger than expected increase of 2.5%.
Thursday - The Gross Domestic Product (GDP) was revised to show the economy grew at a .9% pace in the first quarter of the year, instead of the .6% originally reported. Although it was revised upwards, .9% isn't all that great. Crude Oil Inventories unexpectedly dropped, which caused oil to temporarily spike upward, increasing inflation fears.
Initial Unemployment Claims increased more than expected
Friday - The Chicago Purchasing Managers (PMI) report came in higher than expected, but still showing the economy contracting. The Personal Consumption Expenditures and Core PCE (the Fed's favorite inflation gauge) came in as expected, with inflation at or below the level the Fed likes to see. Personal Income and Personal Spending both came in as expected. The University of Michigan Consumer Sentiment survey came in lower than expected.
All in all, the reports showed that perhaps the economy was doing SLIGHTLY better than expected, but no more. Mortgage bonds seemed to take their cue this week from the stock market and inflation worries in the marketplace. As you will see by the mortgage bond price chart below, mortgage bonds sold off big-time on Tuesday, Wednesday and Thursday, and then recovered a little bit on Friday with the positive PCE news. However, in selling off, the bonds breached a key level of support at the 200 day moving average. It is struggling this morning to try to get back above that level. If it is unable to in the days ahead, it could mean that we will see higher mortgage rates. The mortgage bond has only fallen below the 200 day moving average 3 times in the last three years. Each time it does, it brings higher mortgage rates until it can work it's way back above it.
This week, we have the following news to look forward to:
Monday - The ISM (Industrial Supply Managers) manufacturing index already came in a little bit better than expected. (HIGH)
Wednesday - The ISM services index (MODERATE)
Crude Oil Inventories (MODERATE, BUT LATELY HAS HAD A HIGH IMPACT ON RATES)
Productivity (Moderate)
Friday - Friday brings the monthly employment report for May, including:
Non farm payrolls created or lost (HIGH)
Unemployment rate (HIGH)
Hourly Earnings (HIGH)
Average Work Week (HIGH)
So, the big news of the week will be released on Friday. Last month, the report surprised the markets with news that the economy had lost 20,000 jobs, which was less than the 70,000 that was anticipated. Often times these reports are revised from month to month, so we could expect to see April's number revised to show more jobs were lost. If there is another surprise, with a better than expected number, we could see mortgage bonds sell off and mortgage rates rise in the process. Last month, when the better than expected news was released, mortgage bonds sold off drastically on the news, but then recovered most of their losses before days end.
In other mortgage news, FNMA has announced that, beginning June 1, they are doing away with their declining markets policy, and will once again offer high LTV financing (to as much as 97%) in all markets. At the same time, they announced that they have made significant changes to their automated underwriting system (Desktop Underwriter). While we have not seen the changes yet, they are expected to have been re-set to help minimize FNMA's risk, especially in high LTV lending. As we start to see the impact of these changes, we will send out an alert to you. Freddie Mac has also announced that they are doing away with their declining markets policies. Although FNMA and FHLMC have made these changes, the leading private mortgage insurance companies have not. So, FNMA may approve a 97% loan, but lenders may not be able to get PMI coverage on the loan without reducing the LTV. I am hopeful that as the PMI companies start to see the affects of the underwriting changes put in place by FNMA and FHLMC, they will begin to reduce the constraints they have placed on high loan to value loans. This is especially important when it comes to financing condos, as most of the PMI companies have set a limit of 90% LTV on condo financing.
We will keep you posted with any significant movements in the market. Above is the mortgage bond chart from last week. Remember that the most recent day (Friday) is on the far right. Green and up is good, while red and down are bad. Notice how the week got progressively worse, although Friday showed some improvement. From the time that I started writing this, until now, the market has improved and is currently above the 200 day moving average. If it is able to hold at that level, that would be a good thing for mortgage rates!
Have a great week!
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
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