Wednesday, October 21, 2009

Improving stock market performance driven by better-than-expected corporate earnings and the imminent retreat of the Federal Reserve as a direct buyer of Treasury debt are the "one-two punch" behind this morning's price swoon = HIGHER RATES = in the mortgage market.


So far in this early part of the corporate earnings season financial performance results from American businesses have generally exceeded analysts expectations, feeding speculation that the economy overall is solidly on the road to recovery. That growing mindset among capital sources has undermined the safe haven appeal of government debt obligations and mortgage-backed securities - resulting in upward pressure on mortgage interest rates.


The upward pressure on mortgage interest rates is being compounded as the Fed moves through the final stages of their commitment to directly purchase $300 billion of government debt obligations. They have already spent $297 billion of the funding available for this program. After today's small acquisition, they are scheduled to make their last purchase under current program guidelines on Thursday, October 29th. The exit of a big checkbook buyer from the market place has inevitably put some downward pressure on prices today - but the overall impact of the Fed's retreat will almost certainly be short-lived as freely trade markets tend to seek their natural balance points pretty quickly following a disruption. Investors' memories tend to be pretty short.


In other news of the day the Mortgage Bankers of America said their seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, slid 13.7% lower during the week ended October 16th. Applications to buy a home, a tentative indicator of sales, dropped 7.6% lower from the previous week while refinance applications fell 16.8%. The MBA said borrowing costs on 30-year fixed rate mortgages, excluding fees, rose 0.05 percentage points from the previous week to average 5.07%. This was above the all-time low of 4.61% set in March, but well below the 6.28% level of a year ago.