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Mortgage Market in Review – November 10, 2014

Market Comment

Mortgage bond prices finished the week near unchanged holding mortgage rates steady. Rates were slightly negative the beginning of the week tied to stronger than expected data. The Institute for Supply Management release printed at 59 versus the expected 56.2 mark. The trade deficit stood at $43B versus the expected $40.2B deficit. Factory orders data fell 0.6%, which was near expectations. The ADP payroll report indicated the US economy added 230K jobs in October. Traders expected the addition of 220K jobs. Unemployment came in at 5.8% and payrolls rose 214K versus the expected 235K increase. Mortgage interest rates finished the week flat.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
3-year Treasury Note Auction Monday, Nov. 10,
1:15 pm, et
None Important.  Notes will be auctioned.  Strong demand may lead to lower mortgage rates.
10-year Treasury Note Auction Wednesday, Nov. 12,
1:15 pm, et
None Important.  Notes will be auctioned.  Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims Thursday, Nov. 13,
8:30 am, et
272k Important.  An indication of employment.   Higher claims may result in lower rates.
30-year Treasury Bond Auction Thursday, Nov. 13,
1:15 pm, et
None Important.  Bonds will be auctioned.  Strong demand may lead to lower mortgage rates.
Retail Sales Friday, Nov. 14,
8:30 am, et
Up 0.4% Important.  A measure of consumer demand.  Weakness may lead to lower mortgage rates.
U of Michigan Consumer Sentiment Friday, Nov. 14,
10:00 am, et
87.1 Important.  An indication of consumers’ willingness to spend.  Weakness may lead to lower mortgage rates.

GSE’s

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.”

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) issued by Fannie and Freddie differ significantly.  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.

 

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