Tuesday, January 5, 2010

Looming on the horizon is Friday's December nonfarm payroll report, which some expect to show the first month of job growth since December 2007 - a condition should it prevail -- will almost surely push mortgage interest rates higher and prices lower.

Other mortgage investors are absolutely convinced the December sell-off in the mortgage market pushed rates too high and prices too low - a condition that suggests these high-quality assets can currently be acquired at "garage-sale" prices.

The capital market is an arena in which losers pay winners every day. One of these two groups of mortgage investors is headed for a spanking in the financial woodshed - and the other will likely be calling random people in the phonebook to brag about their financial market genius.

Overhanging all of them is the fact that the direct government buying of mortgage-backed securities that drove 30-year fixed rate mortgages to historical lows in 2009 - is coming to an end in less than 90 days. To get to their total purchase authorization of $1.25 trillion by March 31^st - the Fed will need to buy about $8.5 billion a week in agency eligible mortgage-backed securities. The "so what" factor here is significant. From mid-November through mid-December the Fed's weekly net purchases of these securities totaled $16.5 billion - meaning Uncle Sam, the benevolent benefactor of the mortgage industry, is rapidly morphing from the most dominant player in the market into nothing more than a ghost of days gone by.

The probabilities are high that the rotation from a big-buyer spending taxpayers' money to a buyer spending private capital will initially result in higher mortgage interest rates and lower prices - no matter what the activity levels in the manufacturing sector happen to be or whether the economy is creating or destroying jobs.

Bear-in-mind fixed income investors (those that actually buy and hold the mortgage-backed securities created from the loans you originate) live in the future - not the present. Trading decisions these investors make on a daily basis are largely predicated on market conditions they expect to prevail in the weeks and months yet to come - not the market conditions that may happen to develop between 10:00 a.m. ET and the close of trading for the day.