Wednesday, June 3, 2009

Trading action in the mortgage market is light in today's early going. The Fed purchased $7.5 billion of Treasury obligations maturing in 7- to 10-years out of the $21 billion broker/dealers had available to sell. The Fed spent $7.6 and $8.5 billion at their previous two buy-back operations for Treasury securities in this maturity range. The Fed did not completely "whiff" at this auction - but at the same time I think many had hoped they would be more aggressive buyers. I think this event could best be classified as mortgage market neutral to slightly unfriendly.

Fed Chairman Bernanke made a trip to Capitol Hill this morning to have a chat with the members of the House Budget Committee regarding the impact of the nation's burgeoning deficit on business and consumer interest rates. Mr. Bernanke warned members of the House Committee that rising U.S. debt is contributing to a spike in mortgage interest rates, and encouraged lawmakers to begin reining in the government's deficit spending now. The Fed Chairman said financial market conditions have improved, thanks in-part to the Fed's effort to restore lending, but he also noted the recent spike in yields on Treasury debt and fixed-rate mortgages. Since the Fed announced plans to directly purchase up to $300 billion in Treasury debt obligations - long-term yields have actually risen -- rather than fallen or stabilized as many had hoped. Despite the support from the Fed -- the gap between 2-year and 10-year yields has now climbed to a record level.

The "so what" factor from a mortgage originator perspective is significant. The prospect for a return to the high 4% range for 30-year fixed-rate mortgage is growing dimmer by the day. You can bet the Fed will do everything they can do to keep mortgage rates accommodative - and they may even add capital to their direct purchase "war chest" for mortgage-backed securities - but credit market conditions suggest it may be a very tall order indeed to expect the Fed's forthcoming efforts to drive mortgage rates all the way back to near record lows.
On a related note, the Mortgage Bankers of America said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, fell 16.2% during the week ended May 29th. Borrowing costs on a 30-year fixed-rate mortgage, excluding fees, average 5.25%, up 44 basis points from the previous week but remain well below the year-ago 6.17% level.