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Fed Hikes Rates. Mortgage Rates Drop. Here's How That Works

  • For some, this will be old hat.  For others, there's a mystifying dynamic that demands explanation.  The confusion stems from years of being conditioned to believe that when the Fed "hikes" or "cuts" rates that mortgage rates move accordingly.  That's actually not exactly how it works. The Fed is currently in a rate hike cycle, so we'll focus on that.  Today was the latest installment with an as-expected 0.25% increase to the Fed Funds Rate.   There are two important points in that last sentence.  First off, the rate hike was entirely "as-expected."  That means the market was able to fully prepare for it in advance.  One portion of the market in question is that of mortgage-backed securities (MBS).  These are basically bonds that are guaranteed by pools of mortgage loans.  As investor demand waxes/wanes for those securities, the value of a mortgage changes in the eyes of investors.  This is what determines day to day mortgage rate movement above all else. The Fed only has 8 scheduled meetings to hike/cut rates per year whereas MBS can move as frequently as they want on any given business day.  All that to say that if the market knew the Fed would hike 0.25%, it has long since been baked into MBS prices as well as the rest of the bond market. The second important point is that the Fed deals with the "Fed Funds Rate."  This is a target range for the shortest-term lending among large financial institutions.  The easiest way to think of it is like the Fed setting the rate of return on a savings account.  The higher it is, the more banks will park money there and the higher rates they must charge other banks and clients to borrow money (otherwise it makes more sense to just park the money in the bank and earn that interest).  

    Wed, 01 Feb 2023 21:48:13 GMT

Markets Surprisingly Surprised by Unsurprising Powell Comments

  • Markets Surprisingly Surprised by Unsurprising Powell Comments We were pretty sure we knew what Powell would generally say in today's press conference.  He turned out to be generally predictable.  After all, there are really only two things the Fed can think or say right now: A) still need to see more progress on inflation and B) data will determine when our job is done.  Despite Powell's unsurprising comments, the market was apparently surprised (or relieved?).  This is surprising considering the simple list of routes in the Fed playbook.  Perhaps it's as simple as the market being overly prepared for a Hawkish smackdown from Powell and instead getting a logical approach.   Econ Data / Events ADP Employment 106 vs 178 f'cast, 253 prev ISM Manufacturing 47.4 vs 48.0 f'cast, 48.4 prev ISM Prices 44.5 vs 39.4 prev Job openings and labor turnover survey (JOLTS) 11.012 vs 10.44 mln prev Market Movement Recap 08:38 AM Flat in Asia.  Slightly stronger in Europe.  Additional gains after ADP Employment data.  10yr down 4bps at 3.472.  MBS up nearly a quarter point. 10:24 AM Weaker into and out of the 10am data.  Still stronger on the day, but at weakest levels.  MBS down 1 tick (0.03) in 5.0 coupons.  10yr down 1.3bps at 3.499 12:09 PM Decent recovery now.  MBS up at least an eighth in 5.0 coupons.  10yr down 3.5bps on the day at 3.479. 03:11 PM Almost exclusively positive in response to the Powell press conference.  10yr down 11bps at 3.402 and MBS up half a point.

    Wed, 01 Feb 2023 21:08:14 GMT

Here's What Changed in The New Fed Announcement

  • Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. elevated. Russia's war against Ukraine is causing tremendous human and economic hardship. The war hardship and related events are is contributing to upward pressure on inflation and are weighing on elevated global economic activity. uncertainty. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace extent of future increases in the target range, the Committee the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

    Wed, 01 Feb 2023 19:01:15 GMT

Today's Fed Announcement is All About The Press Conference

  • Long gone are the days where the market waits to find out he size of a rate hike/cut.  The current regime clearly communicates these things ahead of time and takes what the market gives.  Right now, 25bps has been communicated and also priced-in by the market.  That won't be a surprise.  Less obvious, but still likely surprising to some will be the way Powell delivers the message in the press conference.  Hopefully markets haven't confused a "smaller rate hike" with a softer stance from the Fed.  Powell's message will likely reiterate that fact.  The big question is whether the average trader appreciates and understands the Fed's stance.  They probably do, based on the reluctance to challenge the prevailing range in the past 3 weeks, but we'll find out for sure after 2:30pm ET.

    Wed, 01 Feb 2023 16:44:15 GMT

U/W, PPE, Marketing, Compliance Products; House Price Stats Dissected; Vendor Monopolies

  • I’ve never seen my cat Myrtle fly commercial. That aside, time “flies” by, Tom Brady retired again, and here’s a trivia question for your friends and family: how many 747’s did Boeing produce before the last one rolled off the assembly line yesterday? Over 54 years, about two per month. (And did you catch that subtle word play?) Changing the scale, one would be hard-pressed to find the financial section of a newspaper in the last 54 months that didn’t mention the Federal Reserve or inflation (the Fed does not set the inflation rate, nor mortgage rates), and today we’ll have yet another announcement about the targeted range of Fed Funds. (It is the interest rate that banks charge each other to borrow or lend excess reserves overnight.) But wait! High inflation is a problem, but… Weak inflation could become a long-term challenge after high inflation ends, Treasury Secretary Janet Yellen says. Unlike in the 1970s and 1980s, this latest bout of high inflation has not triggered a wage spiral, Yellen says. "We're just coming through an unusual and difficult period. (Today’s podcast can be found here and this week’s is sponsored by Milestones. Giving homeowners an all-inclusive homeownership experience including home value and equity monitoring, home maintenance reminders and how-to articles, cloud-based document storage, one-click access to hire professionals for various projects around the home, and much more. Today’s has an interview with Coviance’s Omar Jordan on the latest in home equity lending and how technology is driving mortgage originations forward.)

    Wed, 01 Feb 2023 14:48:42 GMT

Mortgage Applications Slow Their Pace, But Rates Should Help Soon

  • Mortgage activity slowed significantly last week, pulling the Mortgage Bankers Association’s (MBA’s) Market Composite lower after three weeks of gains. The Index, a measure of loan application volume, decreased 9.0 percent on a seasonally adjusted basis during the week ended January 27. It did, however, increase 6 percent on a non-seasonally adjusted basis.    The Refinance Index dropped 7 percent from the previous week and was 80 percent lower than the same week one year ago. The refinance share of applications dipped to 31.2 percent from 31.9 percent the previous week. [refiappschart] The same pattern prevailed for home purchase loans. The seasonally adjusted Purchase Index decreased 10 percent but was up 7 percent before adjustment. The Index is 41 percent lower than it was during the same week in 2022. [purchaseappschart] “Mortgage rates declined for the fourth straight week and have now fallen almost 40 basis points over the past month, according to Joel Kan, MBA’s Vice President and Deputy Chief Economist.  “Treasury yields were higher on average last week, while mortgage rates decreased, which was a sign of a narrowing spread between the two, he said. “The spread between mortgage rates and the 10-year Treasury has been abnormally wide since early 2022. Further narrowing of that spread is expected to put downward pressure on mortgage rates in the coming months. Overall application activity declined last week despite lower rates, which is an indication of the still volatile time of the year for housing activity. Purchase activity is expected to pick up as the spring homebuying season gets underway, bolstered by lower rates and moderating home-price growth. Both trends will help some buyers regain purchasing power.”  

    Wed, 01 Feb 2023 14:41:26 GMT

Mortgage Rates Have Been Calm So Far This Week. That Could Change Now

  • Mortgage rates have been roughly in line with last week's latest levels at the beginning of the current week.  That means they're fairly close to the 4 month lows seen 2 weeks ago with the average lender able to offer conventional 30yr fixed rates in the low 6% range on top tier scenarios. The past several weeks have been the calmest in more than a year.  This has more to do with indecision than intention.  Market participants are waiting to see what the data says about the next leg of the journey and how the Fed will respond to the data. We'll get our latest update from the Fed tomorrow where they're all but certain to hike rates less than last time (0.25% instead of 0.50%).  Fed Chair Powell is likely to remind the market that the smaller rate hike isn't a sign that the Fed is going easy on inflation--simply that the Fed Funds Rate is getting closer to the level where they'd like to hold it steady for as long as possible and let the disinflationary vibes soak into the fabric of the economy. Powell's comments (and the market's interpretation of them) could cause plenty of volatility in the bond market that underlies mortgage rates.  That volatility could continue into Thursday and Friday as other big central banks make their own policy announcements.  There are also several important economic reports that could lead traders to revise their assessment of the Fed's likely course of action. In other words, even after the Fed-induced volatility, traders could find new reasons to buy/sell bonds at an even faster pace, thus causing bigger movement in rates for better or worse.

    Tue, 31 Jan 2023 21:02:33 GMT

Home Prices Are Slightly Lower, But Far From Plumetting

  • As rates spiked and sales contracted at the fastest pace in decades last year, we knew the post-pandemic surge in home prices was set to reverse.  By the middle of 2022, the average forecast saw the annual pace of home price appreciation falling back toward historic norms with prices losing a bit of ground on a monthly basis.  That is exactly what has been happening. Both the FHFA and S&P Case Shiller publish home price indices (HPIs) each month.  There's a bit of a lag in the data (today's is for the month of November), but collectively, they're considered the most official record of home price changes. Case Shiller's index focuses on 20 major metro areas.  As such, it tends to be more volatile--zooming to the higher highs and lower lows than the more stable FHFA version.  Case Shiller shows a 0.5% decline in November, which was actually a bit less of a drop than forecast.  FHFA's monthly numbers were down even less (-0.1%) after holding steady in October.  This is perhaps worth some small amount of reassurance given November's prices should have been affected by a sharp spike in rates in September.  In any event, the chart above gives us the impression that the worst is behind us in terms of monthly price declines. The takeaway from the long term chart of year-over-year change is even more upbeat.  It actually shows price gains remaining higher than the past 16 years according to FHFA and among the highest levels of the past decade according to Case Shiller. 

    Tue, 31 Jan 2023 20:48:13 GMT

What to Expect From Fed Day

  • What to Expect From Fed Day Markets can see the changes in inflation data and traders are eager to refine their understanding of how the Fed will balance those changes against their determination to avoid mistakes of the past (i.e. easing policy too soon after a big inflation battle).  We expect Powell to remind the market yet again about erring on the side of caution while a strong labor market affords the opportunity employ restrictive policy with minimal fallout. Econ Data / Events Employment Costs 1.0 vs 1.1 f'cast, 1.2 prev Q4 wages/salaries 1.0 vs 1.3 f'cast/prev FHFA Home Prices -0.1 vs 0.0 f'cast Chicago PMI 44.3 vs 45.0 f'cast, 45.1 prev Consumer Confidence  107.1 vs 109.0 f'cast, 109.0 prev Market Movement Recap 08:34 AM Sideways to slightly stronger overnight.  Some selling heading into 8:30am econ data, but gains afterward.  10yr down almost 4bps at 3.505.  MBS up 6 ticks (.19). 09:51 AM Choppy, illiquid weakness in MBS, still up 6 ticks (.19) on the day, back near highs after being down 6 ticks (.19) a moment ago. 10yr down 3.3bps at 3.509. 11:51 AM bounce back in the past hour after falling to 'unchanged' levels just after 10am.  Currently up an eighth.  10yr down 2.6bps at 3.516. 02:27 PM MBS up to best levels of the afternoon with 5.0 and 4.5 coupons both up 5 ticks (.16) on the day.  10s are down 3.3bps at 3.518.

    Tue, 31 Jan 2023 20:19:39 GMT

HMDA Compliance, Expansion Plan, Pricing Engine, Subservicing Products; Program and Procedure Changes

  • Does technology always trump personal skills? Sometimes. But not all the time. Good LOs use the technology that best suits them in combination with their personal attributes to help borrowers every day. “In space, no one can hear you scream. In cyberspace, no one can shut you up.” How ‘bout some IT-related stuff? Here’s a softball: did you know that “Bluetooth” was named after Harald Bluetooth? The Bluetooth wireless specification design was named after the king in 1997, based on an analogy that the technology would unite devices the way Harald Bluetooth united the tribes of Denmark into a single kingdom. Another good use of technology is exhibited by Tim Lucas who writes, “There are more than 5 million Native Americans in the U.S. but only about 140 approved lenders. I created a Section 184 calculator that shows the required down payment, MI costs, and more. There's also a flowchart and a ton of info about the program.” Thank you, Tim! Here’s some more good news: Ransomware victims are refusing to pay, impacting attackers’ profits. (Today’s podcast can be found here and this week’s is sponsored by Milestones. Giving homeowners an all-inclusive homeownership experience including home value and equity monitoring, home maintenance reminders and how-to articles, cloud-based document storage, one-click access to hire professionals for various projects around the home, and much more. Today’s has an interview with Milestones CEO Dustin Gray on turning leads and transactions into forever clients.)

    Tue, 31 Jan 2023 14:14:19 GMT