Friday, May 29, 2009

False dawn - or the beginning of a sustained move to lower mortgage interest rates? That's the question mortgage investors are asking themselves this morning. For the moment, nobody is quiet sure what to make of today's welcomed rally in the mortgage market.

There are those who strongly believe the rally is nothing more than a pre-weekend profit-taking move by "short-sellers" cashing in on the market crash of Wednesday and Thursday. (A "short-seller" is one who sells an asset they don't currently own (typically borrowed from a dealer) in hopes of buying that asset back at a lower price and pocketing the difference as profit.)

Others argue the Fed will make good on their very public statements to maintain interest rates paid by consumers and businesses at accommodative levels for as long as it takes for the economy to get back on its feet. This camp believes the Fed will expand their size of their "financial war chest" and become an even more aggressive direct-buyer of mortgage-backed securities and Treasury debt obligations. Many analysts in this group believe the Fed may authorize an increase in the size of their direct purchase programs before gathering formally at the next regularly scheduled Federal Open Market Committee meeting on June 23 - 24th.

Many believe this scenario is a stretch. Central bankers will not want to appear as though they are reacting to every market swing -- for fear of losing creditability in the global investment community. If the capital for significant expansion of their direct purchase programs is going to be authorized - it won't be granted in a breathless rush.

I think it is critically important that all the participants in the mortgage cycle - from borrowers to agents as well as we the LO's don't loose sight of the purpose of the Fed's direct-purchase program. The Fed is engaged in nothing other than an all-out effort to fight a delaying action against the inevitable upward pressure on all consumer and business interest rates (not just mortgages) that the record shattering borrowing appetite of the government will inevitably create.

The Fed's objective is not to push mortgage interest rates to a "magic" level - it is simply to hold the door open to the most attractive mortgage financing opportunities in a generation for as long as possible - before the weight of the government debt load ultimately overwhelms the Fed's support - and the door to artificially low interest rates slams shut for decades to come.

Next week's economic calendar is crammed full of everything from Monday's Income & Spending report to Wednesday's Service Sector activity index to Friday's much anticipated May Nonfarm Payroll report. Expect increased mortgage market volatility as the week progresses.