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Mortgage Market in Review – December 28, 2015

Market Comment

Mortgage bond prices finished the week slightly lower which pushed rates a bit higher. Trading started on a sharply positive note amid no data early in the week. Oil prices continued to hit lows not seen since 2004. Unfortunately rates worsened Tuesday morning in response to stronger than expected gross domestic product data. Q3 GDP rose 2% which was higher than the expected 1.9% mark. PCE core inflation rose 0.1% as expected. Durable goods were unchanged versus the expected 0.6% decline. Personal Income rose 0.3% versus the expected 0.2% increase. Spending rose 0.3% as expected. Stock strength materialized with the DOW up over 300 points for the week. Weekly jobless claims were lower than expected at 267K. Mortgage interest rates finished the week worse by approximately 1/8 of a discount point.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
2-year Treasury Note Auction Monday, Dec. 28,
1:15 pm, et
None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Consumer Confidence Tuesday, Dec. 29,
10:00 am, et
91 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
5-year Treasury Note Auction Tuesday, Dec. 29,
1:15 pm, et
None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
7-year Treasury Note Auction Wednesday, Dec. 30,
1:15 pm, et
None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims Thursday, Dec. 31,
8:30 am, et
269K Important. An indication of employment. Higher claims may result in lower rates.

GSEs

Government sponsored enterprises (GSEs) are financial services created by Congress. Two of the most important GSEs in the mortgage industry are Fannie Mae and Freddie Mac. These corporations are designed to make credit available to targeted borrowers in an efficient manner. Fannie and Freddie were privately owned until September 2008 when the lines were blurred. The credit crisis resulted in Fannie and Freddie facing huge liquidity concerns. Their insolvency under fair value accounting sparked worries about their failure. The Treasury and Congress worked to avert a catastrophe but faced many challenges. The Treasury ultimately placed the entities in “conservatorship.” This enabled the Treasury to increase lines of credit to the GSEs and bought equity in the companies. This US Government “ownership” of these companies left many unknowns and clouded the future. The stocks of these entities were delisted in June of 2010 but still trade “over the counter.” Creditors, which include hedge funds, institutions, and individual investors, filed lawsuits against the Federal Government regarding the matter.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) issued by Fannie and Freddie differsignificantly. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Because homeowners can sell or refinance their homes, investors in 30-year mortgage-backed securities usually see principal repayment in significantly shorter periods of time. MBSs are part of many retirement accounts, which citizens depend on for income. The Federal Housing Finance Agency tried to preserve those investments while shrinking Fannie and Freddie. Some want to see them completely dissolved and a new system put in place. The ramifications of that could be widespread and the debate continues. The most likely occurrence in the short term is more of the same. The GSE’s are still viewed as too big to fail.


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