Wednesday, March 31, 2010

In classic style Friday's highly anticipated March nonfarm payroll report continues to dominate trading action in the mortgage market once again today.

· The mortgage market has currently priced in completely expectations that March payrolls grew by roughly 190,000 while the jobless rate remained steady at 9.7%. If the actual numbers match or exceed this expectation look for the stock market to rally at the expense of fractionally higher mortgage interest rates.



· On the other hand, should the actual headline payroll figure post a reading of 130,000 or less -- and/or should the national jobless rate climb to 9.8% or higher - there is a strong chance selling pressure in the equity markets will develop that will in turn produce a solid flow of "flight-to-quality" capital into the credit markets sufficient enough to be supportive of steady to fractionally lower rates. While such an outcome is certainly possible -- there is nothing in terms of current macro-economic data to indicate such a result is probable.



· In a nutshell -a softer-than-expected jobs report will likely push prices higher and mortgage interest rates lower to a greater degree -- than will a matching "miss" to the strong side of the employment report push prices down and rates higher.



In other news of the day the Mortgage Bankers of America reported mortgage application rose for the first time in three weeks as demand for home purchase loans reached the highest level since October. The MBA said its seasonally adjusted index of all mortgage applications increased 1.3% during the week ended March 26th. Purchase applications rose a solid 6.8% while refinance requests were off a slight 1.3%.



WORTH NOTING: The Federal Reserve will conclude their 1.25 trillion direct mortgage-backed security purchase today. The program was initiated in January 2009 in an effort to bring down mortgage interest rates and to stimulate the battered housing sector. By all accounts the program met its intended objectives.



There has been considerable handwringing in and out of the mortgage lending community regarding what the end of this program will mean to the mortgage industry, to the housing sector, and to consumers. The original fear was that once the Fed winds up their direct commitment to hold mortgage rates low the interest rate environment for mortgage loans would balloon sharply higher. Those early fears now seem to be exaggerated for three primary reasons;

1. There are few competing "AAA" rated assets in this investment vehicle class. Pent-up demand is strong among private sector investors who have been "elbowed" out of the mortgage market by the Fed for the past year. Persistently low cost of funds for banks has many eager to stock-up on current vintage mortgage-backed securities as well.
2. With demand current so high -- there is a shortage of supply. The sharp reduction in production volumes unleashed on the origination side of the mortgage banking business by the worst economic conditions in 30-years has, by extension, sharply reduced the supply of mortgage-backed securities.
3. A $200 billion delinquent loan buyout announced by Fannie Mae and Freddie Mac in February is expected to put about $140 billion of cash into private investors' hands in the next three to four months - with most of those funds expected to flow back into the single-family mortgage market.