Treasury Note News Becomes Good News

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