Monday, October 4, 2010

The mortgage market is the beneficiary of a round of "flight-to-quality" buying by domestic and foreign investors this morning spawned by new terror warnings for Europe and word that Swiss Banks may have to almost double their capital reserves.



These two events are currently little more than background noise compared to the growing chatter regarding the increasing likelihood the Fed will launch a second round of quantitative easing as early as the next meeting of the Federal Open Market Committee scheduled for November 2nd and 3rd.


Quantitative easing is a process wherein the Fed prints dollars and uses the cash to directly purchase Treasury debt obligations in the open market - with the expressed intention of rekindling economic activity to the level that inflation pressures grow and the threat of a downward recessionary spiral dissipates.


Keep-in-mind should the Fed be successful in this endeavor -- the longer-term upward pressure on note rates will be far more significant that any support this strategy may give to the short-term prospects for steady to fractionally lower mortgage interest rates. For this reason be at least a bit skeptical of some who claim the forth coming round of "quantitative easing" from the Fed will virtually guarantee a 3.5% or lower target for 30-year conforming fixed rate mortgages.



In terms of economic news the National Association of Realtors said its Pending Home Sales Index, based on contracts signed in August, increased 4.3% from month earlier levels. It was the second straight month of gains in the index. The data shows home sales have stabilized at very low levels. From this statistical floor, we could see some good percentage increases for the pace of the pending home sales index without representing a notable uptrend in housing conditions. Look for mortgage investors to shrug this data off as they did today - for many months yet.



In a separate report the Commerce Department said factory orders fell 0.5% last month. As you are probably aware, manufacturing activity has been the primary driver behind what little economic growth the country has experienced so far this year. The latest data shows the stockpile rebuilding that has been at the center of the surge in manufacturing demand will likely provide less of boost to growth through the balance of the year. This tidbit of news from the manufacturing sector was broadly anticipated - rendering it essentially "toothless" with respect to its impact on the mortgage market today.