Written by Victor Burek, CMPS (Ross Wright Mortage)

After making little to no ground during the holiday shortened work week, mortgage backed securities are still in search of clear direction. Last week MBS closed at the same level at which they opened on Monday, even a very poor Employment Situation report was unable to increase demand for "rate sheet influential" MBS coupons. To remind readers, as MBS move higher in price, mortgage rates move lower. Following the release of the employment situation report on Thursday, MBS did manage to gain some ground but eventually gave back early morning gains as market participants made for an early exit ahead of the three day weekend. Matt and AQ inform me that MBS are battling a very unclear economic picture which is prohibiting prices from moving higher. The week ahead is very light on economic reports with the highest impacting events to come from Treasury auctions throughout the week.

Today we get one piece of data, the Institute of Supply Management(ISM) non-manufacturing survey which measures the strength of the non-manufacturing sector of our economy. Readings above 50 indicate growth while readings below 50 indicate contraction. The last 3 surveys have each come in better than the prior one; however, last month’s report missed expectations to the low side coming in at 44.0 for May. Economists surveyed were expecting June’s report to come in at 46.7 but the release has indicated a better than expected reading at 47.0, continuing the trend of improvement within the non manufacturing sector of the economy. Following the release, there was little reaction from the markets.

Tuesday

- The first of three Treasury auctions for the week. At 1pm the Treasury Department will auction $35 billion 3 year notes. The added supply of debt on the market will apply pressure on treasury yields to move higher to attract bidders. For the auction to be viewed as a success, we look for high demand from indirect(foreign) bidders. The last auctions that took place 2 weeks ago, saw well above average demand from these accounts. It will be very difficult for MBS to move higher unless Treasuries can move lower in yield and with more and more supply coming this is becoming more difficult.

Wednesday

- At 700am, The Mortgage Bankers’ Association Application Index. This data set tracks the increase or decrease in purchase and refinance activity at major lenders. The recent spike in rates has had a greater impact on the refinance activity but last week’s report showed both refinance and purchase activity declining. The purchase activity posted a 4.5% decline while the refinance activity dropped 30 %.

- The second treasury auction for the week takes place at 1pm. The Treasury will auction $19billion 10 year notes. Since the average life of a mortgage is between 5-10 years, this auction is more relevant to MBS than the 3 year auction. Market participants will be looking at the indirect demand data to gauge the auction’s success. Strong demand would be positive for MBS and lower mortgage rates.

Thursday

- Weekly jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week. Last week’s report showed that claims fell 16,000 to 614,000 and expectations call for this week’s report to indicate 610,000 first time claims. An increasing trend in unemployment claims points to a weak labor market which would lead to less consumer spending. If you do not have a job, you are much more likely to put off buying any unnecessary items. So, MBS tend to benefit with a higher than expected reading. As part of this report we also get continuing claims which totals the number of Americans that continue to file for benefits due to lack of finding employment. Last week’s report showed a decline of 53,000 to 6.702 million.

- The last treasury auction for the week will take place at 1pm. The Treasury will auction $11billion 30 year bonds. When our government does not have the cash to pay for spending, they issue treasury bills, notes and bonds to borrow the money. A treasury bill has a term of less than 2 years, a treasury note has a term of 2 to 10 years and a treasury bond has a term of greater than 10 years.

Friday

- International Trade which measures the difference between what we import into our country and what we export to other countries. Expectations call for the trade balance to be at $-28.8billion following last month’s $-29.2billion gap. The biggest impact to MBS from this report is the potential impact of importing inflation. A smaller trade gap would be a sign of a stronger dollar which makes import prices like the price of oil decline.

- Import and Export prices which gives a measure on inflation. The biggest enemy to mortgage rates is inflation as it eats away at the fixed return to the end investor. Your mortgage is a debt to you, but it is an investment to someone else. Last month’s report indicated that month over month, export prices increased by 0.6% while import prices increased by 1.3%. The main driving force behind the increase in import prices has been the run up in oil prices. Year over year, export prices posted a 6.5% decline while import prices fell a whopping 17.6%. Any report showing signs of inflation is negative for MBS and can result in higher mortgage rates.

- The Reuter’s/University of Michigan’s Consumer sentiment index which is a survey of 500 households on their personal financial conditions and attitudes about the economy. A more optimistic consumer is much more likely to spend while a pessimistic consumer is more likely to save. Since our economy is driven by consumer spending, the stock market generally rallies with a better than expected reading while MBS generally benefit with a lower reading. Over the last 4 month’s this report has shown sentiment to be increasing and economists’ surveyed are expecting that trend to continue with a reading of 71.5 following last month’s 70.8.

- At 10a eastern, Treasury Secretary Tim Geithner will testify before the joint hearing of House Financial Services and Agriculture Committee on derivatives regulation. Anytime Mr. Geithner speaks, market participants will pay attention as his words can move all markets.

Mortgage Rates Sideways Ahead of FOMC Meeting

I hope everyone had a safe Memorial Day weekend, but now it’s time to get back to work.

Onto the data for the week.

Tuesday

- The first relevant report of the week is the S&P/Case-Shiller home price idex which tracks the monthly change in the price of homes in 20 metropolitan regions. Many people believe that our current economic situation will not stabilize until home prices stop falling. In times of real estate appreciation, this report has very minimal effect but of late, this report has become much more important.

The release indicated that home prices still have not found a bottom with a record year over year decline of 18.7%. They went further to say that no evidence that a recovery in home prices is on the horizon. I have spoken to many realtors who are starting to see some indication of improvement in housing with multiple offers on homes. How is the housing in your area? Are homes on your street on the market for 6, 9, 12 months? How do you feel your home value is doing? We must also keep in mind that many home sales happening now are foreclosures that are bought at very low prices which will exaggerate the downside in this report. In addition, the month over month decline is showing signs of an easing in home price declines.

- The Conference Board released the monthly consumer confidence report this morning. This is a survey of 5000 consumers from across our country of their attitude on present economic conditions and future expectations. A confident consumer is much more likely to spend while a pessimistic consumer is much more likely to save. Last month’s report indicated a much more positive consumer leading many to believe the end of the current recession is in sight. Economists’ surveyed had expected this report to come in at 42 but the report has shown that the consumer is much more confident with a reading of 54.9. Apparently, high unemployment, declining home prices and oil on the rise is not suppressing consumer confidence. On the release, the stock market has sprung legs and is in full rally, oil has moved off its lows of the day and MBS have moved into negative terroritory.

- The first of 3 Treasury auctions will be held later today in the form of $40b of 2 year treasury notes. The actual auction is not as relevant as the release of the amount to be auctioned which happened last week. Investors will watch the auction for the amount of interest from buyers, especially foreign/indirect bids. The added supply of debt available for sale, will continue to pressure treasury yields higher. Our benchmark 10 year treasury note is pushing a yield of 3.50% while just a month ago it was well under 3.00%!

Wednesday

- The weekly Mortgage Bankers Association purchase applications index which tracks the month to month activity of purchase applications at mortgage lenders. Many economists believe our current recession will not end until housing picks up, so this report is becoming much more important. Our government has been doing all they can to encourage low mortgage rates as an incentive to home buyers. If you do not recall, the Fed has set aside $1.25trillion to buy mortgage backed securities (MBS) and to date have only spent $481billion. Mortgage rates are set by the buying and selling of these assets in the secondary market. Additionally, our government has offered tax incentives for first time home buyers in the form of up to a $8000 tax credit.

- Existing Home Sales will be released by the National Association of Realtors and expectations call for a annual pace of 4.670million. Last month’s report showed a further decline in home sales to a 4.570million pace

which was a 3.0% drop from the prior month. This report gives a count of the total number of previously constructed homes, condos and co-ops that a sale closed during the month.

- The US Treasury Department will auction of $35billion of 5 year treasury notes.

Thursday

- The US Department of Commerce will release the monthly Durable Goods Orders report which tallies new orders placed with US manufactures for immediate and future delivery of factory hard goods. An increase in this report will indicate future economic growth which would be positive for equities traders(stocks) and negative for fixed income investments (MBS and Treasuries). Last month’s report indicated a decline of new orders of -0.8% and economists’ surveyed are expecting a 0.0% reading this month.

- Weekly Jobless claims numbers will be released and expectations call for 635,000 first time claims for unemployment insurance following last week’s 631,000 reading. Continuing problems in the labor front will help to keep inflation in check which is positive for low mortgage rates. With many people unemployed, consumer spending will likely be contained which will make it difficult for our economy to show signs of growth.

- New Home Sales index which measures the number of newly constructed homes with a committed sale during the prior month. Last month’s report continued to show weakness with an annual pace of 356,000 and this month’s report is expected to show a slight increase to a yearly pace of 360,000. With a glut of existing homes on the market, a lower reading on this report will be welcomed. To give you an idea of how far housing has fallen, at the height of the real estate boom, new home sales in summer of 2005 reported an annual pace of almost 1.4 million units.

- The last of the Treasury auctions for this week will occur with the auction of $26billion worth of 7 year Treasury notes.

Friday

- The Department of Commerce will release the first revised numbers to first quarter Gross Domestic Product which is the broadest measure of total economic activity. Initial readings showed a contraction of -6.1% and economists’ surveyed are expecting a small improvement to -5.5%. A worse reading would be positive for MBS.

- Chicago PMI which is a survey of business conditions around the Chicago area. Readings below 50 indicate a contracting business sector while reading above 50 indicate a expanding sector. Last month’s report showed continued contraction with a reading of 40.1 and economists’ surveyed are expecting a slight improvement to 42.0.

- The Reuter’s/University of Michigan’s consumer sentiment index will be released which gives investors a gauge into how the typical US consumer feels about their own personal financial condition and attitude toward the economy. Since our economy is driven by consumer spending, a optimistic consumer is much more likely to spend while a pessimistic consumer is more likely to save. A higher reading is better for stocks, while a lower reading usually benefits MBS. Last month’s report showed the consumer becoming more optimistic with a reading of 67.9 which was slightly higher than the prior month’s 65.1. Economists’ surveyed for this month’s report are expecting a continuation of the optimistic consumer with a reading of 68.0, albeit, just slightly more optimistic.

Last week was not a good week for MBS. In total, they lost ¾ of a point which increases consumer borrowing costs. Most lenders started out last week with par 30 year conventional rates at 4.5% but by week’s end that rose to 4.625%. If you missed it, North Korea over the weekend tested a nuclear bomb and fired a few short range missiles despite their pledge to end their nuclear ambitions. International invents such as this quite often leads to a flight to quality bid where investors sell stocks and money the money into the safety of fixed income investments. Apparently the very bullish consumer confidence numbers are over shadowing North Korea.

Written by: Victor Burek, CMPS

Worldwide economic optimism has led investors to liquidate their risk averse fixed income positions (ie mortgage backed securities and treasuries) to fund a global stock market rally consequently pushing mortgage rates a few basis points higher. In what has become a consistent pattern, Treasury buying and selling is providing directional guidance for MBS....stocks go higher, Treasuries sell, and MBS move a little lower (not as much as Treasuries though), etc etc. To remind readers, when MBS sell off, or move lower in price, consumer borrowing costs and mortgage rates move higher. Yesterday, the benchmark 10 year US treasury sold off near a full point while MBS only lost ¼ a point and consumer borrowing costs increased by .125-.250 discount points after many lenders repriced for the worse yesterday.

There are several factors that are leading many to believe the economy is on the verge of turning the corner. Retail store Lowes, posted better than expected numbers and gave a optimistic outlook for the future as did Treasury Secretary Tim Geithner. Morgan Stanley, JPMorgan, Goldman are planning to pay back the government loans that were given to them late last year. Many companies are successfully raising money in the corporate bond market (to pay back TARP). Currently, they are working with the government to determine how and when to pay the funds back. The National Association of Home Builders index came in higher than expected leading many to believe that the worst of the housing slump is behind us. German investor confidence came in higher posting a 3 year high in the confidence index. The 3 month LIBOR rate, which is a key rate that lenders borrow money from each other, has seen dramatically declines over the past few weeks. At the height of the financial meltdown, the 3 month LIBOR was over 4%...it currently sits at .75%.

Today is a light day for economic data but we do have 2 reports which might give investors a dose of reality. The first economic report of the day is the ICSC-Goldman Store Sales which shows the percentage increase/decrease in same store sales on a weekly basis. This report is not a market mover but in light of the optimism currently displayed by investors, it does give us data to support that the consumer is not spending. Same store sales for the week of May 16^th fell by- 1.2% and year over year down -0.3% Since consumer spending makes up the vast majority of our economic growth, this might change the outlook by investors.

Next, the US Department of Commerce gave us a disappointing report on housing starts...disappointing depending on your point of view. Expectations were for housing starts to post an annual pace of 520,000, but the actual number came in considerably lower at 458,000, a 12.8% drop from last month’s 510,000 pace. Housing permits also posted worse than expected numbers at 494,000. Following the release of this report, stock market futures went from a positive number into the red and MBS followed treasuries higher in price. Poor housing starts is generally bad for the economy but in this case we are glad this data set isn’t growing....isn’t there already enough supply of homes on the market?

There are many people who continue to sit on the sidelines regarding refinancing and home buying. If our economy is truly on the recovery path, mortgage rates even with the massive amount of Fed support, will have a difficult time holding levels under 5%. To remind readers, the Fed has set aside $1.25 trillion to purchase MBS and to date they have only spent $450billion. Fed support will continue but they cannot do it all. It might be time for all fence sitters, in the words of Dan Marino pitching diet food, to get in the game. If you have been watching the market waiting to buy or refinance, please let us know what you are waiting on? Do you think mortgage rates will move lower? Do you feel home prices have further to fall? Do you think our economy is on the path to recovery or is the current optimism a bear market rally? Either way getting an application submitted doesn’t mean you are locking in a mortgage rate. Submit an application so you are ready to lock when rates move lower because as we have seen over and over again this year....low rates come and go quickly...be ready when/if they go lower!

Early reports from fellow mortgage professionals are indicating lenders rate sheets are about .375 worse in discount from what we received yesterday morning. This places the par 30 year conventional rate mortgage in the 4.625% to 4.875% for the best qualified consumers. To qualify for a par interest rate, you must have a FICO credit score 740 or higher, a loan to value at 80% or less and pay all closing costs associated with loan including 1 point loan origination/discount/broker fee.

Written by: Victor Burek, CMPS

Mortgage backed securities (MBS) moved marginally higher yesterday following worse than expected jobless claims numbers. The improvement in MBS prompted a few lenders to reprice for the better but most decided to hold back intraday gains.

The US Department of Labor released the monthly Consumer Price Index (CPI) which reports inflation at the ever so important consumer level. Just like the Producer Price Index released yesterday, this report gives us 2 readings, the headline number and the core number. The headline number reports overall inflation while the core reading strips out food and energy as they are quite volatile in price. The Federal Reserve prefers the core reading as the best indicator of inflationary pressure. For the month of April, the headline consumer inflation was flat while the core rate jumped higher. Headline inflation came in right on expectations of a 0.0% change while the core rate came in higher than expected at a month over month increase of 0.3% compared to expectations of only a 0.1% increase.

On the surface, the increase to the core rate is a concern; however, over 40% of the gain was due to a second consecutive hike in tobacco taxes from states looking to increase lost revenue. Year over year, the headline CPI posted a -0.6% decline which is the weakest reading since 1955. The core rate moved slightly higher year over year from last month to post a 1.9% increase. If oil continues to move higher, cost push inflation may become a concern again. Currently oil is trading a little lower at $58 a barrel. Even though the Fed’s favorite gauge is the core which does not include the price of oil, keep in mind that everything you buy has the price of oil worked into it. . Although near term inflationary risks are minimal because aggregate demand is low, MBS still sold off following the release.

The New York Fed released the monthly Empire State Manufacturing survey this morning. This data set g