Daily Mortgage News

In a "surprise" move, The Bank of England raised its benchmark by 0.25% to 5.250%. Only one of 50 economists surveyed had predicted the increase and its unexpected nature played a key role in moving mortgage rates higher today on this side of the pond.

The Bank of England is equivalent to our own Federal Reserve Bank. It issues debt (i.e. bonds) backed by a strong government and, therefore, the debt is considered to be guaranteed money.

This is its third rate hike since August.

Because global bond money tend to flow to higher relative returns (i.e. to England) from lower relative returns (i.e. the United States), we can assume that The Bank of England's move forced traders to sell U.S.-backed bonds and that pushed mortgage rates higher

It’s truly a global marketplace and this is one of the major reasons why it’s impossible to predict where interest rates are headed in the future. Just when you think you understand the U.S. market, a foreign nation makes an announcement that shifts the entire balance.

After last week's data showed ongoing strength in the U.S. economy, there is a growing sentiment that the Fed will choose to raise the Fed Funds Rate before it begins lowering it.

FFR currently stands at 5.250% and here is what markets are predicting over the near-term:

After January 30-31 Meeting:

Decrease to 4.750: 0% probability
Decrease to 5.000: 4% probability
Remain at 5.250: 96% probability
Increase to 5.550: 0% probability

After March 20-21 Meeting:

Decrease to 4.750: 1% probability
Decrease to 5.000: 5% probability
Remain at 5.250: 91% probability
Increase to 5.550: 3% probability

After May 9 Meeting:

Decrease to 4.750: 3% probability
Decrease to 5.000: 20% probability
Remain at 5.250: 72% probability
Increase to 5.550: 5% probability

These predictions are important they give insight into how markets think the economy will grow over the next two quarters. A lower FFR would be indicative of a slowing economy and should cause mortgage rates to fall.

Interest rates remain inverted, a market condition in which the longer you commit to lending your money, the less that you earn on your investment.

Why is that a big deal? Imagine if a friend asked you to borrow money for two years you charged him interest on that money. We can list some of the risks in lending to your friend:

1. The risk of not getting paid back
2. The risk that the money could have earned more for you somewhere else
3. The risk that the value of the dollar will be lower when you get your money back

The more risk you take, the higher the interest rate you should expect on your money This is a basic tenet of finance.

Now, if that same friend wanted the money for 10 years instead of 2 years, you would expect that your risks would be higher on all counts.

• He could lose his ability to repay you in those 10 years
• You could have had countless other investment opportunities over those 10 years
• The value of the dollar could swing wildly in those 10 years

Your theoretical risk is much, much higher because your money is tied up for longer periods of time.

How big of an impact is this having on mortgage rates? Three years ago, the spread between a 3-year ARM and a 30-year fixed mortgage was about 1.875%. Today, that spread is negative 0.375%.

This morning’s Non-Farm Payrolls report (i.e. the number of new jobs created for industries other than farming) registered a 167,000 gain in November This is tremendously higher than the 115,000 jobs economists had predicted.

Markets were caught leaning in the wrong direction after an ADP report released Wednesday said that 40,000 jobs were likely lost in November.

It’s chaos in the markets right now and mortgage rates are surging higher, completely erasing yesterday’s gain.

This summer, economists were predicting that 175,000 new jobs were created in June and then payroll processor ADP shared their own estimate of 368,000 with the markets.

In a panic, mortgage rates moved higher because - well, what if ADP was right?!?

The actual figure turned out to be 121,000.

That major miss jolted the markets because it had suddenly wondered if ADP knew something "inside". After all, ADP is one of the largest payroll processors in the world and people believed that they might have the inside track to know if companies were adding jobs to the economy.

But, they didn’t.

Naturally, it’s big news that ADP is predicting that 40,000 jobs were lost in December 2006 versus economists’ predictions of 115,000 jobs were created.

Mortgage bonds have staged a small rally and mortgage rates are retreating as markets wonder once again — what does ADP know?

They won’t have to wait long to find out because the government’s job report is released at 8:30 EST Friday.

Washington Mutual-owned Long Beach Mortgage announced yesterday that its underwriting guidelines are changing, effective Monday, January 8.

Following the lead of a host of other sub-prime lenders including large-players Fremont and New Century, Long Beach is hoping to avoid the fate of sub-prime lenders Ownit, Sebring Capital, and Mortgage Lenders Network. All three closed their doors in recent weeks.

When a mortgage lender "implements new underwriting guidelines", its pool of eligible applicants narrows This is because the rules for approving applications are now "stricter".

One area in which Long Beach is expected to get tough is in requiring borrowers to have a history of managing multiple tradelines for high LTV mortgages. Another area is to limit the combined loan-to-value for mortgage applicants for whom income is stated. Long Beach currently requires a 640 FICO score to go 100% on stated applications.

Expect to see more lenders to make headlines as the follow Long Beach’s lead in the coming months.

In observance of President Ford’s death, the NYSE, NASDAQ and the Federal Reserve Board are closed today. This marks the first time that markets are closed for four consecutive days since the days following the attacks on September 11, 2001.

Despite the closures, the Federal Reserve’s regional banks will continue to operate as usual so money can still be wired between bank accounts and to title/escrow companies.

Rate locks expiring and purchase closings scheduled for today are not in any sort of danger whatsoever.

As we head into the last day of trading in 2006, there are a lot of market players that have already left for the long weekend. That's good for them, but rough for everyone else left behind.

With so many traders on vacation this week, there are fewer buyers and fewer sellers at any given price point for mortgage bonds. Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price

This is the concept of liquidity at its best.

With an already-fragile market psyche, the market’s complete lack of liquidity is causing what - on the surface - looks like an over-reaction to economic news, but is really just market forces at work. There just aren’t as many sellers willing to sell at the given prices that buyers want to pay.

Low liquidity causes prices for mortgage bonds move wildly and is the reason why rates have moved so much this week.

Markets are closing today at 1:00 P.M. EST which means that even fewer traders will show up at the office. Expect continued volatility.

Yesterday's New Home Sales report revealed the following signs of immense strength in the housing sector and mortgage rates are moving higher on the news.

• Sales registered 1.047 million versus the expectation of 1.015 million — a difference of 3.15%.
• Sales were revised higher by 46,000 over the past three months.
• Inventory levels dropped to 6.3 months worth of supply from 6.7 months worth of supply.

The Fed has told us many times that a slowdown in the housing sector will lead to a slowdown in the overall economy. Only, it doesn't appear that housing is slowing down.

Or, is it?

According to the Wall Street Journal, contract cancellations for big builders are hovering at about 40%, twice last year's levels. Suddenly, New Home Sales doesn't seem so rosy. It doesn't matter that more homes go under contract if more contracts are cancelled, too.

Let this be one more lesson to look deeper than the headlines for clues about the economy.