Monday, January 25, 2010

Mortgage investors are skittish this week as Uncle Sam wades back into the credit markets looking to borrow $118 billion in the form of 3-, 5- and 7-year notes.


The fact that the Fed will be holding a two-day monetary policy meeting right in the middle of Uncle Sam's borrowing spree is not helping lower trader anxiety levels. Mortgage investors are fretting about what the Fed may say about it's exist strategy from its emergency market measures. Current speculation that Wednesday's post-meeting statement from policymakers will sound sharply threatening to the prospects of steady to lower mortgage interest rates is, in my opinion, way over done.


The Fed has essentially two responsibilities; promoting full employment and keeping inflation in check. The high jobless rate means the Fed is far from accomplishing its first goal while extremely benign inflation pressure are helping them achieve their second objective. Against this backdrop it is highly likely the Fed's post-meeting statement on Wednesday afternoon will include only minor changes to the December statement but will focus on the headwinds still facing the economy as it struggles to recover from the worst recession since World War II. At the end of the day - the probabilities are high that this event will exert little, if any significant influence on the trend trajectory of mortgage interest rates.



This week's Federal Open Market Committee meeting is at bit more dramatic than normal due to the fact that Fed Chairman Ben Bernanke's path to a second term has taken an unexpected, and potentially dangerous turn for the worse. If Bernanke is not confirmed before his current term expires on January 31st - the effect on mortgage interest rates will likely be swift - and unpleasant. A Congressional refusal to give Bernanke a second term will likely be perceived by credit market participants as politicizing decisions on monetary policy, a condition sure to negatively impact the creditability of the central bank with domestic and foreign investors alike.


The latest buzz-on-the-street suggests law makers are quickly coming to the realization that refusal to reseat Bernanke for a second term is a "slippery-slope" that is probably in their political best interest to avoid ahead of November's mid-term elections.



The larger-than-expected drop in the December existing home sales figures almost went unnoticed as mortgage investors were distracted by other developing events. The National Association of Realtors reported earlier this morning that the pace of December existing home sales fell 16.7% from month earlier levels. It was the biggest decline for this index since records began in 1968. Much of the sharp month-over-month decline was the result of "front-loading" as the end of the $8,000 first-time home-buyer tax credit in November drove many buyers who might have otherwise delayed their home purchases to push forward their buying plans. While this phenomenon will probably result in a slower pace of sales in the first quarter, the extended and expanded homebuyer tax credit program will help put a floor under overall sales. The missing ingredient for a sustainable improvement for both existing and new home sales figures is jobs. Until job growth and the attendant improvement in consumer confidence returns -- the pace of home sales across the board will likely remain muted.