Bend, OR

It has been a great week for long-term mortgage rates! Before I get to some of the causes and what we can anticipate, let me make a quick report on the state of banks and their willingness to lend. If you follow me on Twitter, you saw that another local lender just shut their doors on lending to commercial property investors. I know of two stellar investor deals with exceptional guarantors who were turned away from what I believe is the last remaining local bank who was lending on investor deals. That closing leaves Signet Mortgage as the sole channel to investor purchase- and refinance-money for CRE in Central Oregon. We’ve always been the best source but now it looks like we are a lone source. There’s a reason we say: "Connecting Locally - Funding Globally."^sm Our funding sources are from all over the country and are still active and available to you right here in our market. So why did the local bank not lend to these gold-plated investors? The bank examiners from the US Treasury (in this case the Office of Thrift Supervision) established limits by loan type at such a level that prevent them from making investor CRE loans. This is part of the “Big Pendulum Swing” I have been talking about. The effects of over-regulation are already starting to take a big toll on our ability to stage a full-blown recovery. More on this in the HVCC discussion below, but the take away here is: Signet still has the sources and will help you get your deal done.

The news in last week’s blog was the announced $104B float of Treasury Notes set for the 23-25^th. The announcement was so unappetizing and the fear of shrinking investors so high that on the day of the announcement, the buyers of related long-term Mortgage-Backed Securities voted with their feet and staged a sell off Thursday the 18^th. (see the big red bar just right of middle on this chart)

The good news is that throughout the week, as the Treasury Notes were actually issued, the demand was great (I heard it described as outstanding) and the traders of MBS charged back in with strong buying (all of the green bars on the right side, the last big green bar being last Thursday.) If you saw the Freddie Mac rate announcement on Thursday (reported in papers on Friday), the rates indicated (5.42% on conforming 30Y fixed with 0.7 pts) still hadn’t captured much of the improvement. We expect this week’s number will be better and Signet’s residential lending sources were providing funds at better than this number all during the week and even better today.

If you are a chart reader, you will enjoy seeing that the blue line above (the 200-Day Moving Average) acted as a firm barrier on Monday, Tuesday and Wednesday and that Thursday’s break-out day pushed us well above this tough hurdle, changing it now into a strong level of support (S1 above.)

What was the basis for the outstanding sale of Treasury Notes through the week? Investors in fixed-income securities were relieved to see the strong showing of China in the bidding. This released much of the tension that has surrounded the bond world for the past month (remember that China holds $763 B or 11.8% of the US debt $6.45 T). Some may attribute this bidding to the visit of Secretary Geithner to China some weeks ago. While the communication at that level is helpful, there really is only one driving force behind China’s purchase of US Treasuries. It is an offset to the trade imbalance and keeps making China’s huge export market work. With the US buying 5 times as much from China as it exports to China, the US dollar weakens. China can’t endure a weak dollar as it would make our buying power in China much lower. To keep the goods flowing across the Pacific, China buys US-T and thereby bolsters the US Dollar.

The existing home sales numbers were reported by the NAR last week and they came in good, but just a bit softer than expectations. Continued problems arising from the now regulated residential appraisal system have been called-out as a source of some of the log jam, slowing sales. Our experience with the Home Valuation Code of Conduct (HVCC) is that unintended consequences have really clogged up the residential lending system. Well-meaning federal legislators have once again created onerous regulation of an industry to protect us against ourselves. The effect of this over regulation is deals are being delayed and sometimes killed and consumers are being hurt. Some of you saw an article on this topic late last week (reprinted at the very end of this email.) The follow up to all of this is that two members of the House introduced legislation on Friday to create an 18-month moratorium on the HVCC while the kinks get worked out.

Many other big news items going on and we’ll be happy to share our information with you and your clients. Please give us a call anytime. These days - more than ever - experience counts! Signet stands poised, ready to help you. Make it a great week! - Dave

It’s all about inflation.

The markets have been moving in gargantuan steps over the past month starting on May 21, right before Memorial day with the first realization that all of the deficit spending needs to be funded with Treasury Debt offerings (duh!) More debt offerings mean two very bad things for mortgage backed security interest rates: 1) competition for fixed-income investor dollars and 2) more debt = more inflation. And recently, the competition has been fierce. This past week had some of the best and worst of the tug-of-war for investor dollars in play.

If you follow me on twitter, you saw that we continued a rocket ride up and on Wednesday hit a peak that put us up over 360 bps (basis points or 100ths of 1%) in pricing of MBS. We were glad to ride (float) that rocket Friday, Monday and Tuesday of last week right into lock mode Wednesday afternoon. The following day, Thursday, the Treasury announced a $105+ Billion supply of T-Bonds to be sold in this week and MBS fell off the map again. See the amazing first chart below and descriptions for the MBS activity over the past month relative to the announcements of treasury debt offerings. Then move on further down the page to the 2^nd chart and note that since its printing last week, we continue today in a green recovery mode. In fact, since the low on Thursday’s (red) pricing, we have risen over 130 bps again and today have already touched the 200-day moving average (blue line), recovering all of the loss that happened on Thursday. This has all been at the expense of the stock market, where the S+P at 944 appears to have become impenetrable.

This week, the Fed’s Open Market Committee (FOMC) will be meeting tomorrow and Wednesday and make a brief announcement at 11:15 am our time on Wednesday. While the Discount Rate is not expected to move, the description of Fed plans to buy Treasury and MBS will be interesting and their characterization of future inflation will likewise garner much attention. We’ll be watching that and the announcements of future Treasury Bond issuance.

Of significant interest in the long-run, but buried in the volatile short-term activity of the markets, is the heavy handed regulatory announcements from the Obama administration late last week. There is clearly a pendulum swing underway that has only begun to move into the “over-regulated” zone and is now beginning its upswing into even higher regulation. I experienced first-hand the effects of the pendulum swing into over regulation with the Sarbanes-Oxley act of 2002 and can tell you that the costs of such government intervention are easily double and triple the expectation. Watch for the unintended consequences of this to start becoming visible as early as the end of this year.

Signet Mortgage has lenders willing and anxious to help you close deals. Rates have crept up a bit, but we can work you, your clients, friend and family into the best available loan program and rates. Give us a call and let’s make it happen. Make it a great week! - Dave

PS – a quick shout out to Joanna Van Vleck and her successful startup of trunkclub.com, revolutionizing the way men buy clothes. Bend, OR is blessed to have many brilliant and creative people living in our area and Joanna’s global reach in a short time has been amazing. A welcome counterpoint to the NY Times article on the real estate retraction in Bend. There will come a time in the next 18 months where the migration in of those who recognize the great benefits of this area will be newsworthy again. In the meantime, rock-on Joanna and thanks for being part of what makes this place great. And if you were wondering, yes, Joanna is Paula’s daughter.

(originally sent to subscribers on June 15, you can subscribe too by emailing dave@signetmortgage.com)

Home loan rates have been the subject of much consternation in Washington, D.C. these past 3 weeks. There is serious concern that the rate rise we have just experienced may derail the recovery people have been feeling, and been starting to see as more than just “green shoots” but real growth. Has it been a false start? I know here in Central OR, our green plant shoots had some serious late-May freeze that false-started them off the charts and we had to start over with greenhouse grown plants from the local nursery. The stock market has spent these last two weeks bumping heads against its 200 day moving average and a 944 ceiling on the S&P that has been tough to crack. Let’s take a look at LT interest rates and come back to recovery scenarios.

Thursday we tweeted when the Fr Mac number came out at 5.59% (see chart immediately below). We are betting this week’s number will be another 20 bps higher as it takes at least a week for this number to catch up with reality. In the large scheme of things, 5.75% is a great number. In fact, where rates had been closer to and often above the 10% range over the past 5 decades, it was welcome to be at a 50-year low in 2003 of 5.25%, just 50 bps below the present 5.75% area. (BTW – that is a nationwide average; we are still writing loans at Signet Mortgage at 5.25% and better so it pays to work with connected brokers who can shop for you.)

If you compare the two charts immediately above and below, you will see the delay I am talking about. The MBS number fell off the table on Weds May 27^th in the first week of what has been a torrent of LT Treasury and MBS debt issuances – a supply that has simply exceeded demand. (See the huge red candlestick – more of a dynamite stick – on the left side of this chart.) You can bet that the banks raised their rates immediately that day. Some banks reissued their rate sheets more than 5 times in a single day on May 27^th. Above, however, you could see the weekly average on May 28^th stood still at that 4.88% line. So the delay is in the weekly average charting, not the rates available. Following that logic, take a look at the large green candlesticks on the right side of this chart –they represent last Thursday, Friday and today’s early activity.

We continue in a float mode right this moment as the bond market is recovering from “Bond Flu” that gripped MBS for the past two weeks. We are watching it carefully. It appears there will be some relief this week from the supply and demand woes of late. The Treasury is taking a week off after consecutive weeks of issuing an average of over $80 billion a week. On the demand side, there are now hedge funds and bond funds stepping in to buy bargains in MBS where it seemed only the Fed had been buying before.

So, where is the economy headed Green Shoot guy? There are many scenarios to choose from and I am still with the W recovery team. Not that what we have been seeing isn’t real improvement, I still believe we will fall some from this point before we go into full bull market run mode again. We have seen the dollar weaken for weeks now and oil prices climb from below $45 to over $72/bbl. Gas prices have risen for 45 consecutive days to be at a nation-wide average of $2.63/g now. Interest rates have braced against the fear of inflation and impending debt loads. This fear is real and the fall back that higher interest rates may cause in our recovery will likely bring a bit of an easing in interest rates. This morning’s NY Empire State Manufacturing Index showed contraction again at levels much worse than expected. This is the first bad news to hit after a raft of good economic news through May got us to the point that sent the red sled down the hill.

Again, with today’s rates and property values available, we have all-time best opportunities sitting right now on a signing table near you. Signet has pipelines into the best available rates and we are watching the timing for floating and locking. We welcome your input and look forward to serving you, your clients, friends and family. Let’s make it a great week - Dave

(Originally sent to subscribers on June 8th - Subscribe by emailing dave@signetmortgage.com)

Good Morning!

Mortgage Backed Securities (MBS) have had a miserable 2 weeks of sell off. A combination of inflation scare, over-abundance of available debt securities and improving stock market have taken MBS and the related yields and available market interest rates the wrong way. Take a look at the chart below at the long, and sometimes steep drop we have experienced in the price of MBS. As bond prices drop, yields/interest rates rise.

What happened to the steady rates in the 4’s? Through May 21^st, we had 3 straight months of steady rates. For the price of an origination fee we could get your conforming primary residence mortgage near 4.5% for 3 months. In fact, looking at the Freddie Mac Weekly Primary Mortgage Market Survey (click here) you can see that the market average was within 6/100ths of 4.80% for all of those 3 months, and this includes all lenders and borrowers, therefore higher than the better rates Signet Mortgage is able to provide you. The same Freddie Mac chart shows that as of last Thursday, the same number was already up at 5.29% and that was the weekly average. Look at the chart again for the most recent green bar. That was Wednesday and the cluster at approximately 100.00 was the week prior to that. See that Thursday and Friday following were steep drop offs. I fully expect this coming Freddie Mac weekly average (due out Thursday morning) to reflect a number above 5.4%.

So where are rates right now? Rates and lenders are all over the map. For the cost of an origination, we see our lenders offering 30 fixed conforming on primary residences at anywhere from 5.125 to 5.625% this morning. This range points out the importance of working with Signet Mortgage to get the best available rate. We’ll shop for you as favored lenders change seats regularly during these times.

The coming week has additional offerings of Treasury debt security offerings. The Fed and Treasury continue to try and balance their need for borrowing and attempting to keep the interest rates in check. For the past two weeks, this has been a losing battle. The Fed is buying $25-35 billion of MBS every week. So far they have bought just over $500 billion in this program. They intend to keep this up with a stated target of $1.25 trillion. But with the Stimulus Program and 2009 budget deficit spending, required Treasury spending is far-out-pacing the MBS purchases by 100s of billions each week. With all of that Treasury debt available, the competition for MBS is high and rates rise with it. For this week, the Fed reduced its plans for issuances with the bond market in turmoil, attempting to cool it off a bit. We’ll keep our eye on this progress.

During these times, more than ever, experience counts! We’re here for you. Please let us talk with you and your friends, family and clients. Call anytime and make it a great week! – Dave

PS –a quick personal note: Our 22 year old son David Sven got engaged to Miss Liberty Baker over the weekend. Hooray! She is a fantastic young lady and they and we are very happy. The wedding is just around the corner in August taking place near her hometown of Moses Lake, WA. Did I mention that we are excited?