Dave Woodland - Your Bend, OR Friendly, Knowledgable Mortgage Professional

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?

(Originally sent to subscribers on June 1st - Subscribe by emailing dave@signetmortgage.com)

Good Morning and welcome to June!

This morning’s news includes another large dose of car talk. The bankruptcy filing of once-king General Motors has finally happened and the path is cleared for a very swift flow through the bk court with taxpayers, you and I ending up with 70% ownership, the unions (a large creditor) receiving 20% and bondholders settling for 10%. Current shareholders will receive nothing and the stock moves off of the NYSE and out of the DJIA. They along with CITI are being replaced by CISCO and Travelers onto the Industrial 30 list. The other big news is that the bankruptcy court for Chrysler has approved the sale of most of its assets to Fiat. When we were growing up Fiat stood for Fix-it-again-Tony and their quality was so bad, they retreated from the US car market. What a difference, 30 years later they are thriving and the only lifeline for once-proud Chrysler.

In other big news, China announced their 3^rd consecutive month of economic growth which is being hailed in international markets as a strong indication that the global drop may be bottoming. All of this is good news for the stock market where the Dow is up +200 and the S&P 500 is above its 200 day moving average and pinned up against a 944 high-water mark from January 6^th. The ebullient stock market is draining cash from bonds this morning. Let’s take a look at what is happening in Bonds in general and MBS in particular.

Friday we sent out the a news alert on the HUD action to enable the $8k credit be used up front and pointed out the largest swings in MBS since the crisis gyrations last fall. See the chart below with a drop of over 200 basis points in one day (the Fannie Mae 4.0% MBS fell from a price of over 99 to less than 97 in one day) followed by a rebound to well above 98 again by Friday. The impact of that on 30 year conforming residential mortgages is that on Tuesday, for the price of an origination you could still get 4.75%. By Wednesday it had moved solidly to 5.25% and on Friday it was at 5.00% again. Today the stock market reactions to China and the settling car situation is pulling from MBS and we have moved south over 100 basis points on the day, back below 97.50 and rates are at approximately 5.125%.

So what threw us into the 200-story elevator free-fall on Wednesday (now known as Black Wednesday by MBS traders)? This was our first whiff of inflation scare and we better get used to it. The big picture is that the US government is going to issue in new- and replacement-debt $2 Trillion dollars in 2009 and into 2010. Stimulus acts and deficit spending need to be funded. Just last week, over $100 billion dollars of federal debt was floated. You can read more about this supply impact below. This along with the scare of lack of foreign support for our debt has sent 10-Year Treasuries skyward. Emphasizing this is the tepid response Geithner is getting in China this morning. (Have you noticed that when Geithner speaks, trouble brews in the markets?) But what about the billions, even trillions the Fed is spending in buying debt to support the mortgage rates? Indeed the NY Fed bought over $25 billion again last week in MBS. This was a normal weekly allotment and not a knee-jerk reaction to what was taking place. This brings the total bought to just over $480 billion so far of a promised $1.2 trillion during this program. (Did you see the visual last week on what a trillion looks like? Ten thousand $100 million stacks!) These are big dollars, but when 10-year Treasury yields rise to over 3.6% buyers of MBS move over and buy Treasury bonds. At that rate, the NY Fed purchases are just spoonfuls against the flood.

So, what now for the future? Good question. Every grey, economic-cloud seems full of silver lining these days. The “green-shooters” seem to have absorbed the commentators. In fact, 90% of the NABE economists now agree that some recovery will be in place by the 4^th quarter. So for us, the keys will be the tug of war between the Feds efforts to maintain lower interest rates to spur the turnaround in housing markets against the 900-pound gorilla of inflation. That gorilla is eating $100 billion dollars of new Fed issuances in a given week and really bulking up. By mid-summer it will be over 1,000 pounds and soon enough no amount of Fed purchases will hold him down. Other indicators to watch will be the unemployment rate (expected to continue rising well into 2010 and peak over 10% nationally) and the savings rate now at 50-year record numbers above 5% when it was at zero and actually negative just 36 months ago. This pendulum swing is dangerous and we will keep our eye on it.

The banks are lending and approving great loans. Rates are at or near 5.0% for conventional 30 year fixed loans. When have you ever been disappointed with a mortgage rate of near 5.0%? We can help get your transactions closed. Give us a call and we’ll be your partner through any transaction. Remember, these days - more than ever - experience counts! Make it a great week! -Dave

(Originally sent to subscribers on May 25th - Subscribe by emailing dave@signetmortgage.com)

Best Wishes on this Memorial Day!

I had the opportunity yesterday to reflect on two servicemen from one family who gave their lives in World War II battles at Normandy, France and Corregidor, Philippines. I honor and respect our servicemen who serve me and all of our country this day and pray they remain out of harms way.

There were some very moving events this past week and as a holiday issue of the weekly, it may appear slightly different from our normal weekly newsletter. I think you’ll appreciate the visual comparisons below that help put into perspective the magnitude of one million vs. one trillion. Please also enjoy some insight delivered by two highly successful CEOs at recent Chamber sponsored events here in Bend: Ray Davis, CEO of Umpqua Bank and Kevin Blakely, CEO of The Risk Management Association. Both gave advice to successful leadership and growth in our tenuous economy but there was one point made by both executives regarding accountability that reflects extreme opposites in approach and offers some hints about the origins of our financial troubles and the difficulties we may still see with our ϋber-regulated, tight credit markets.

First, it was refreshing to hear Blakely call for congress to stand up and accept responsibility for the loosened credit standards in the residential lending world that was the genesis of the global financial crisis we continue to experience today. I have rarely seen any reference in the mainstream media to the congressional directives given Fannie Mae and Freddie Mac chairmen that they “will enable home ownership, the American dream to all Americans”. This process required creative, low- and no- documentation loans to get some hard pressed portions of our country into home ownership. I grant you that the steam-powered extension of these tools exacerbated the problem but the genie should never have been let out of the bottle to begin with.

Unfortunately it is clear that we are headed into increasing foreclosures in both the residential and commercial worlds in the next 2-3 years. Blakely focused on the commercial lending dilemma and gave an interesting answer to the question of “why wouldn’t banks just refinance maturing commercial loans if the cash flow supports the payments?” (a reasonable question from a small-business man.) The fact is that bank regulators are watching so tightly over the shoulder at banking institutions, that any loan that a regulator concludes is a deviation in any way from established conservative underwriting standards must be placed in a troubled loan category, requiring greater reserve balances be established, that reduces capital, that puts banks on watch lists and news headlines. You can see why banks will be loath to enter this battle with regulators. What is less apparent is the incentives and accountability of the regulators. In the aftermath of the credit meltdown, we have seen the posturing chairman of the House Financial Services Committee call Fannie and Freddie chairs and bank regulators such as the OCC and FDIC on the carpet and receive a very complete and public dressing down for any perceived mistake. The effect of this to a regulator is that being overly conservative causes the regulator no harm and being too aggressive causes what is tantamount to the death penalty. How do you think that regulator will respond when he approaches a bank that lent money to a business with reasonable lending scenarios in many but not all underwriting criteria? These loans are not going to happen.

Now contrast the experience of regulators being held accountable by congress to the experience of associates and management of Davis’ Umpqua. Davis points to some classic empowerment techniques. First all team members must fully understand and buy into the discipline of their culture, then be well trained, supported, empowered, and held accountable. When a mistake is made in this environment, the answer is not to bring on the death penalty or call on the carpet publicly, but to discuss the empowered decision that led to the outcome and how it should be handled in the future. If an organization is going to move fast and have decisions made at the customer interface level there needs to be strength in all five of the steps from discipline to accountability and risk of error must be reasonable. This was a very refreshing view from a successful and progressive way of leading.

The mortgage markets took a bit of a hit on Thursday as two rumors swirled. First Britain’s AAA debt rating was threatened (though not changed) and everyone began to wonder about the US debt capacity. At the same time, an analyst put out a thought that the Fed may slow down and stretch out their MBS buying pattern. MBS worsened that day, but we are still seeing residential conforming 30-year loans with a 4 in the first digit in spite of the shift. Lending is available and at best possible rates for both residential and commercial opportunities. We look forward to helping you and your family, friends and clients get the best available deals. Have an enjoyable and thoughtful Memorial Day and make it a great week - Dave

As a reminder, contributions may be made to the "Steve Larsen Memorial Fund" c/o The Lowes Group, 920 NW Bond St, Ste 200, Bend, OR 97701 or to Umpqua Bank in the Westside Safeway Complex off of Century Drive. Our deepest, heartfelt wishes go out to Steve’s family and friends.