Last Saturday’s WeeklyBasis said rates should be even but could rise slightly on Greece debt crisis progress and Bernanke confirming a June 30 end to QE rate stimulus. Rates actually dropped slightly as Greece worries persist, Bernanke threw up his hands on the jobless conundrum, and weak economic data prevailed: 1.9% GDP for 1Q2011, weekly jobless claims up 9000, FHFA year-over-year home prices -5.7, and a 6mo low for existing home sales.

Rates closed Friday just above the 2011 low set June 8, and below is a preview of this week’s market activity which should keep rates in this range.

Monday is the Fed’s preferred consumer inflation measure. May’s Personal Consumption Expenditures index should confirm flat consumer inflation with and without food and energy prices included. Rates even or better.

Tuesday is the April Case Shiller home price report, which markets consider the most broad home price report. The March report confirmed home prices fell to an eight year low, and home sales reports of recent months don’t suggest the demand that will push any upside price surprise for April. Rates even or better.

Wednesday brings the latest on home sales. NAR’s May Pending Home Sales reports on homes entered into contract during May and are expected to close. No positive surprises expected from this report, and even if there was, it’s still not quite the market moving report that last week’s new and existing closed sales reports are because these new contracts can still not close. Rates even.

Also Tuesday and Wednesday bring $64b in new Treasury supply to bond markets with $35b 5yr Note and $29b 7yr Note auctions respectively. New supply can rattle mortgage bond investors but probably not this week since QE2 finishes up and other data outweigh this as a concern. Rates even.

Thursday and Friday bring June’s regional Chicago and national manufacturing survey reports respectively. Both surveys are done by the Institute for Supply Management and give markets current projected activity levels plus some inflation information. Activity and inflation has backed off the past two months, and June surveys are likely to show the same. Rates even or better.

All week Greece will be a hot topic as their government resumes debates Monday over a five year, $39.7b tax hike and spending cut plan needed to tap into their $156b EU/IMF bailout funds for debt payments due next month.

Even though Greece would default without these funds, the debate rates because citizens are facing both higher taxes and pay cuts. Reuters reports that many Greeks have already lost jobs or seen their real income decline by nearly one-fifth over the last two years.

The unions who organize massive protests to apply pressure during government deliberations have a point when they argue that more austerity will make matters worse.

Still, if an austerity resolution isn’t reached, the contagion could more quickly spread to other vulnerable Euro countries. If more austerity comes, there will be more chaos on Greek streets.

The net for U.S. rates next week is even to better. Stay tuned on daily developments.

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
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The major disadvantage of renting is that your entire monthly payment vanishes, and you have nothing left to show for it. Home ownership allows you to acquire equity, and allows you to deduct interest and local property tax from your income taxes. And let’s not forget the lifestyle that renters miss out on. Having your own home opens up a world of decorating an entertaining options, and also offers you greater freedom.

This calculator compares the cost of renting versus the real cost of buying a home.

Trichet’s remarks are temporarily countering negative European sentiment that was causing U.S. mortgage bonds to rally. ADP signals an improving economic picture for now: ADP data showed private sector added 93,000 jobs in November, the 10th straight monthly gain, and the biggest monthly gain in 3 years—which means Friday’s official Bureau of Labor Statistics jobs report could also be better (although ADP is not a very reliable predictor of BLS data). China’s manufacturing strength is the latest reminder of inflationary pressure and imminent rate hikes for that region, which all global bond markets are wary of.

Rates have risen because mortgage bond markets were expecting the Fed to say on November 3 that they’d buy more mortgage bonds. But the Fed committed only to buying Treasuries, and mortgage bonds sold off as a result. When mortgage bond prices drop in a selloff, rates rise. Below is a preview of the short but incredibly volatile Thanksgiving rate week: the upward rate trend is likely to continue.

Tuesday’s three key reports and rate impacts:

(1) Second of three GDP readings for 3Q2010. The first reading showed the economy grew at 2% in 3Q vs. 1.7% from 2Q. If GDP goes up or even if the contribution of consumer expenditures goes up, rates will rise.

(2) October Existing Home Sales from the National Association of Realtors. The September report showed a 10% increase. This may be net neutral for rates because investors will hold out for November 30 Case Shiller home price report.

(3) Minutes from the November 3 Fed meeting are released where markets will see if there was any extra debate about mortgage rate support—if not, rates will rise.

Wednesday’s three key reports and rate impacts:

(1) The Fed’s favorite measure of inflation, Personal Consumption Expenditures Index, will give markets another October inflation reading. This follows last week’s readings where consumer (CPI) inflation was neutral and business (PPI) inflation was up. Rates will rise if PCE Index is higher.

(2) Personal Income & Spending: Another measure of wage inflation and consumer strength. Most likely net neutral for rates because wages probably won’t move notably.

(3) October New Home Sales: As with Existing Sales, this number was up a lot, 6.6%, in September. This is probably net neutral for rates as this number eases off for October.

Ahead of tomorrow’s critical Fed meeting, below is a Q&A explaining what every homeowner and buyer must know about Quantitative Easing in simple terms. And here’s a link to this piece: http://www.thebasispoint.com/?p=6261

What Is Quantitative Easing (QE)?

QE is when the Fed buys bonds to lower rates. It was introduced in the U.S. during the heat of the financial crisis in late-2008 as a way to stimulate a severely ailing economy.

Why does buying bonds lower rates?

A bond’s price and yield (or rate) move inversely, so when bond prices rise in a QE buying campaign, rates drop. It must also be noted that the reverse happens: when bond prices drop in a selloff, rates rise.

How does QE help mortgage rates?

The Fed engages in two kinds of QE: Treasury bond buying to lower overall rates in the economy, and mortgage bond buying to lower home mortgage rates. The Fed spent $1.25 trillion buying mortgage bonds from January 2009 through March 2010 which helped 30yr fixed rates to drop 1% during this period: 30yr fixed rates dropped from 6% to 5%.

Does QE disrupt normal rate market activity?

Yes. The aforementioned $1.25t mortgage bond buying campaign was announced by the Fed November 24, 2008. If you look at the accompanying chart, you’ll see November 1, 2008 rates were just above 6% before the Fed announcement. You’ll also see that rates were just above 5% by January 1, 2009, before the Fed spent one dime buying mortgage bonds. This entire 1% rate drop was from private investors buying mortgage bonds, not the Fed.

So QE did nothing to lower rates?

The mere announcement that the Fed would buy mortgage bonds caused the market to rally ahead of actual fed buying, and this brought rates down.

Why buy mortgage bonds before the Fed?

The goal of every investor is to buy a security that’ll appreciate so they can sell for a profit. When the Fed said they’d be bidding up mortgage bond prices in November 2008, big global investors put billions into mortgage bonds knowing the Fed would be a massive buyer behind them. The question for private mortgage bond investors was, and still is, when to sell.

Did rates drop more after the Fed started QE?

No. Rates were 5% rates as of the January 1, 2009 QE start date. On the chart, you’ll also see 5% rates as of March 1, 2010, the last month of QE. And you’ll see rates rose as of April 1, 2010 because many investors sold mortgage bonds (to take profits) when the Fed’s QE program ended.

Then why does the chart show rates dropping since May 2010?

Rates drop on bond rallies, and bonds have rallied since then for three reasons: (1) A European debt crisis caused global investors to sell European bonds and reinvest in U.S. mortgage and Treasury bonds, (2) the U.S. economy started stumbling again so investors have sought safety in bonds, (3) bond investors think the Fed will announce a second round of QE on November 3.

Would more QE bring rates down further?

Not likely. Markets are already bidding up mortgage bonds in anticipation of QE round two, and as we saw from the first round, the rate impact of anticipated QE was felt before the Fed spent one dime buying bonds. The same thing is happening again, and current rates most likely already reflect any future QE impacts.

So what is the rate outlook from here?

In the next 3-6 months, I think rates will rise or stay in their current range. Investor rationale for holding mortgage bonds is that there are no better alternatives in a globally unstable market—if they do hold, rates will stay in their current record low range. Investor rationale for selling mortgage bonds is that QE round two is the perfect opportunity to sell at a profit while the Fed again props up prices artificially—if investors do sell, rates would rise. And of course the Fed’s rationale for another round of QE is to help the economy improve. If it works (or if the Fed doesn’t do QE round two at all), that’s more rationale for investors to sell mortgage bonds at a profit and seek new returns elsewhere, which would also push rates up.

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Arthur Brito has given up on the idea of buying a house because the qualifying process is so difficult for self-employed people like him. Credit: Kirsten Aguilar / The Chronicle

September 12, 2010|By Robert Selna and Carolyn Said, Chronicle Staff Writers

In 2006, Arthur Brito, a self-employed Bay Area landscape designer, and his wife were prequalified for a $625,000 home loan. After being priced out of the housing market by inflated values, they started looking again last year, but quickly learned that the mortgage crisis had changed their fortunes: They now qualified for a loan of only $280,000.

Brito’s experience illustrates how residential lending practices have shifted dramatically, from a market where high-risk buyers got loans far exceeding their ability to pay to one in which borrowers who are employed and have good credit and a healthy down payment may be out of luck.

“Financially, we are the same people as we were in 2006, so it’s pretty frustrating,” said Brito, 33. “Our incomes haven’t changed, but the rules have changed, so we don’t really talk about buying houses anymore. We’ve shelved it.”

Like Brito, many borrowers are suffering a housing loan hangover precipitated by historically lax lending standards.

In 2006, chicanery driven by avarice infected the mortgage industry food chain: Some mortgage brokers pushed risky loans, borrowers lied about their income, appraisers inflated home values, lenders originated shaky mortgages, Wall Street firms bundled them as securities and sold them, and ratings firms characterized them as safe investments.

At the center of this distorted world was the subprime loan, issued at a high interest rate to borrowers with tarnished credit, checkered employment history and little or no money in the bank. Wall Street firms such as Lehman Bros. traded in the lucrative high-interest loans, which yielded quick profits for brokers who sold them and lenders that originated them.

By 2005, the subprime market was $630 billion a year and growing – triple the $210 billion market in 2002.

Mortgage-backed securities create the liquidity that allow banks to originate mortgages, so they are not going away, but in many respects real estate lending has returned to its more traditional and conservative standards.

Higher standards

Borrowers generally need good credit, relatively large down payments, stable employment and a high percentage of income to debt to get a home loan. Dubious mortgages – with no money down, no documentation of income, adjustable rates that skyrocket after an introductory period – have largely gone by the wayside.

“The bottom line is that we have had a complete reboot of the mortgage lending system in this country,” said Keith Gumbinger, vice president at HSH Associates, a leading publisher of mortgage and consumer loan information…Read More.

However, what was odd about the request was the information Wells Fargo was looking for.

Besides asking for information about their family plans, which was paired with questions about plans to change the “property size,” Wells Fargo also requested that the letter include information that supported the fact that the property, in Glen Mills, Pa., would be their primary residence. The bank also asked them to include their commuting distances to work, as well as other properties that they may own in the area. The request for the so-called motivational letter was included in the bank’s mortgage commitment letter, which offered to approve their loan if they answered the bank’s questions and provided other documentation.

As the blog notes and as one can tell, some of the questions are reasonable but some are crossing the legal line.

[B]asing a loan decision on a borrower’s family status or future plans is…against the law. It violates the Fair Housing Act,… which prohibits discrimination in lending based on disability, sex or family status – including pregnancy or having children in the family.

This blog brought up memories about my own recent mortgage approval process just a couple of months ago. Last spring, when I was laid off after my maternity leave, I enjoyed the subsidized time off with my newborn before taking on another full-time role. In our application process, our mortgage broker asked me to write a statement explaining my brief absence from the grind. I first wrote a straightforward two sentence statement saying I was laid off but went back to work in the beginning of the year. He came back and suggested that the statement be longer, provide more color and personal details…Read more.

Homeowners whose loan payments were reduced in 2009 are falling back into default less often than those who got modifications in 2008.

BOSTON — Homeowners who had mortgages modified recently are faring better than those who did so earlier in the housing crisis, according to a report released Tuesday, possibly debunking predictions of a huge wave of defaults to come.

The State Foreclosure Prevention Working Group warned of other troubling signs, however, on the same day that a separate industry report showed the most severe July sales drop-off for previously occupied homes in 15 years.

The group of 12 state attorneys general and state banking regulators said Tuesday that foreclosures still easily outpace the number of loan modifications. Modifications lower monthly payments and reduce the odds of losing a home.

Nearly three years into the foreclosure crisis, the group of state officials also found that nearly 63% of homeowners who are at least 60 days behind on their mortgage payments aren’t taking part in a foreclosure prevention program.

Banking officials warned that lenders must aggressively seek out homeowners who are teetering on the edge, even if it means short-term pain for banks…Read more.

Adapting to Tighter Rules After Collapse, Scammers Turn to More Complex Plots

By ROBBIE WHELAN

New data suggests that mortgage fraud—which got tougher to pull off after the collapse of the U.S. real estate market—is returning in a big way.

Data prepared for The Wall Street Journal by research firm CoreLogic, examining about seven million home loans made by hundreds of lenders, show that losses from mortgage fraud—ranging from falsified credit reports to identity theft—rose 17% last year after declining 57% in the two years after its 2006 peak.

In 2009, $14 billion in loans, or about 0.7% of all mortgage loans made in the U.S., were originated with fraudulent application data.

The figures are a fraction of the mortgage market, but the increase is sharp.

CoreLogic, which tracks fraud only by mortgage value, examines about 7 million loans each year using a proprietary computer program that detects discrepancies in loan documents and predicts the likelihood of fraud. The real losses to banks won’t be known for several years when banks are forced to write off the value of the loans’ value.

Some of CoreLogic’s profits come from selling market research to lenders aiming to cut losses from mortgage fraud.

Investigators and lenders say they are seeing a similar upswing in fraud.

The Federal Bureau of Investigation in June indicted a Phoenix man for mail and wire fraud among other alleged crimes when the agency says he tried to steal a house from his landlord. Also in June, federal prosecutors in New Jersey charged 29 defendants—including 12 real-estate agents, four mortgage consultants, an appraiser, a bank employee and a mortgage broker—with wire fraud in an alleged scheme involving 17 properties in the state and losses of $5.5 million.

“Even though we have certain compliance measures in place, people will adapt whatever scheme,” said Sharon Ormsby, the FBI’s section chief for financial crimes. “It doesn’t matter if the market is going up or down.” Read more.

Rates are up about .125% following a mortgage bond selloff late last week, but rates are still at unprecedented lows. There was very little economic news last week, and the selloff (which pushes rates higher) came as bond markets traded on two main factors that will continue next week.

Rate Factors Week of August 23

These are all key reports that move bond markets, but they’ll be overshadowed by $109b in new Treasury bond auctions as follows: $7b in reopened 30yr TIPS Monday, $37b in 2yr notes Tuesday, $36b in 5yr notes Wednesday, and $29b in 7yr notes Thursday. This massive Treasury supply will disrupt bond markets and mortgage bonds may sell off, pushing rates higher.

How Long Can Low Rates Last?

Last week I explained (http://ow.ly/2rudZ) how government issues billions in new Treasury debt biweekly, why global markets have had such a big appetite for Treasury and mortgage debt over the past 18 months, and what might happen to rates if this bond rally reversed into a selloff.

A few days after those comments, Wharton finance professor Jeremy Siegel published a Wall Street Journal OpEd entitled The Great American Bond Bubble (http://ow.ly/2ru3P) discussing similar concerns about an overbought Treasury bond market. He thinks a bond market selloff is imminent, and presented estimated investment losses for bondholders.

But you don’t have to be a mortgage or Treasury bondholder to experience investment losses. The rate increase that comes from a bond selloff is, in essence, an investment loss for consumers seeking mortgages.

The fragile global economic climate still justifies investors seeking the safety of mortgage and Treasury bonds, but Siegel is not alone in his sentiment, and markets can shift violently. If the U.S. had a debt crisis like they’re having in Europe, it would cause huge mortgage and Treasury selloffs and sharp rate spikes.

But the more likely scenario is a correction off current price levels for mortgages and Treasuries, and even this would push mortgage rates up .25% to .5%.

For now though, it’s still a full tilt U.S. credit boom, so consumer rates are stunningly low. The rest is whether a homebuyer can negotiate the right deal on a home in an area with price stability.

Which brings us to the second rate factor for next week: bond markets realizing that their boom era can’t go on forever.

First is market calendar for the week beginning Monday, August 23. We have July’s Existing Home Sales (from the NAR) and New Home Sales (from the U.S. Census Bureau) Tuesday and Wednesday, then the second reading of 2Q2010 GDP and Consumer Sentiment on Friday.