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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.

Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage remains in the 5.00% to 5.25% range for the best qualified consumers. In order to qualify you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.

It appears that MBS will continue to take their lead from treasuries, which are taking their guidance from stocks. Currently the benchmark 10 year note is moving slightly higher in yield which is a function of the added supply of Treasury debt to be auctioned off this week. Currently. For MBS to improve today, we need treasuries to improve and hold lower yields.

If you would like to track the price movement of MBS, check out Mortgage News Daily’s Mortgage Rates page where you will find MBS pricing, Treasury yields, mortgage rate changes, and mortgage market data.

NEW YORK (Reuters) -- Mortgage applications plunged to a seven-month low last week as demand for home refinancing loans tumbled 30%, data from an industry group showed Wednesday.

The drop does not bode well for the hard-hit U.S. housing market, which has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended June 26 decreased 18.9% to 444.8, the lowest reading since the week ended Nov. 21, 2008.

Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, said mortgage rates are just one factor driving potential borrowers.

"Rising unemployment, concerns about job security, potential buyers' inability to sell their existing homes and problems with appraisals coming in too low are all weighing on demand," he said.

"The government needs to take more aggressive action to bring mortgage rates back down to below 5% as that seems to be a key level for the market," he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.34%, down 0.10 percentage point from the previous week, but significantly higher than the all-time low of 4.61% set in the week ended March 27. The survey has been conducted weekly since 1990.

Mortgage rates remained above 5% for a fifth straight week, but were well below year-ago levels of 6.33%.

Thirty-year mortgage rates had mostly been on a downward trend since the Federal Reserve unveiled its plan to buy mortgage-backed debt in late November. But the Fed met resistance in the bond market in late May and early June.

Treasury yields, which act as a benchmark for mortgage rates, rose sharply during that period. Treasury yields, however, have come down recently, allowing rates to fall.

The MBA's seasonally adjusted purchase index fell 4.5% to 267.7.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 9.2%.

Refining activity sinks: The mortgage bankers' seasonally adjusted index of refinancing applications decreased 30% to 1,482.2, also the lowest level since the week ended Nov. 21, 2008.

Refinancings accounted for 46.4% of applications, down from 54% the previous week and significantly lower than the peak of 85.3% in the week ended Jan. 9.

The U.S. housing market is in the worst downturn since the Great Depression and its impact has rippled through the recession-hit economy, as well as the rest of the world. Economists contend that the economy might not emerge from its slump unless the housing market stabilizes.

The shares adjustable-rate mortgage activity increased to 4.3% in the latest week, up from 4.1% the previous week.

Fixed 15-year mortgage rates averaged 4.81%, down from 4.93% the previous week. Rates on one-year ARMs decreased to 6.52% from 6.54%. 

Following a rather boring day on Monday, volatility picked up a little yesterday as the second quarter officially ended.  Mortgage backed securities followed treasuries to higher yields.  Most lenders did reprice for the worse increasing consumer borrowing costs by .25 in discount.   So far this morning, the downward pressure on MBS and treasuries continues as the benchmark 10 year note has moved to a yield of 3.59 after closing at 3.47 on Monday.  Though not always in direct relationship, this upward move in treasury yields is leading MBS in the same direction.  We're down .25 in discount so far this AM.  Remember, as PRICE falls, YIELD rises.  The "price" falling means that investors are requiring higher yields (interest rates).  This comparative increase in yield is passed on to you the consumer either in higher rates or higher discount points.

 We do have a busy day of economic reports which will set the stage for the most important monthly report, the Employment Situation, which we get tomorrow ( a day early as markets are closed Friday).   The first report to hit the wires is the weekly Mortgage Bankers' Association Applications index which tracks the weekly change in mortgage applications at banks.  The report has indicated a steep decline in mortgage activity.  First, the purchases index registered a 4.5% decline signaling no improvement in purchase activity and the refinance activity dropped a whopping 30%!  Many think lower mortgage rates are vital to our economic recovery in order to spur home purchases and increase consumer spending capacity through refinancing.  So this report is not the best news for the economy but it isn't a major market mover. 

 We received a couple reports this morning regarding jobs, but these reports take a back seat to tomorrow's Employment Situation.  First out is the Challenger Job-Cut Report which indicated that layoffs at corporations decreased from 111,182 to 74,393, the lowest level since the start of the recession.   The second report on jobs is the ADP Employment report which is similar to the official Employment Situation report we get tomorrow but consists of private payrolls (non government, military, etc...).  Historically, this report has varied greatly from the official report but it's accuracy is improving and investors are starting to give it a little more attention.    Expectations were for ADP to report job losses of 400,000 but the actual report indicated a loss of 473,000 jobs.   Here is a graph from Bloomberg that illustrates the difference between the two reports.

 Next is the ISM Manufacturing index which gives a measure of the strength of the manufacturing segment of our economy.   The Institute of Supply Management surveys more than 300 manufacturers on employment, production, supplier deliveries, and inventories.  Readings above 50 indicate that manufacturing is expanding while readings below 50 indicate contraction.   The last 3 reports have each come in better than the prior month helping to stoke the fires of the optimist who feels the end of the recession is hear and we are on to economic growth.   Last month's report showed an improved reading of 42.8 from April's 40.1 reading.   The consensus for June's report is continued improvement with a 45.0 reading, and the actual report has come in basically in line at 44.8.  

The U.S Department of Commerce has released their monthly report on construction spending which totals the dollar value of new construction activity.  Increasing construction spending would be a positive signal for equities as it would lead to more consumer and business purchases.   This report has a 2 month lag, so today's numbers are for the month of May.  April's report indicated a much better than expected increase in construction spending, improving by 0.8% following March's 0.4% increase.   The release has indicated that construction spending has declined for the month of May by 0.9% which is a larger decline than the expectations of -0.5%.   

The last relevant report we get today is the release of Pending Home Sales by the National Association of Realtors(NAR).  This report shows whether pending home sales are increasing or decreasing.  A pending sale is one in which a contract has been placed on a home but the sale has yet to be completed.   Strong demand for housing is a positive signal for our economy, since a consumer has to feel pretty good about their own financial condition and job security to buy a new home.   In addition, strong demand for housing will lead to increased purchases of appliances, flooring, furniture, etc.... so the stock market prefers to see a increasing trend.  Last month's report indicated a much larger than expected increase of 6.7% leading many to believe that the bottom of housing is near.   It will be interesting to see how the recent increase in mortgage rates has affected this report.  The NAR just released and pending home sales has posted a small increase of 0.1%.  

In what has become a common theme, MBS are continuing to be led by treasuries.  Currently the 10 yr note is trading at 3.58 and MBS are down about .125 in discount.  For MBS to manage any gains today, they will need treasuries to move lower in yield.   If the stock market continues its rally, currently up over 100 points, it will be very difficult for treasuries to gain any momentum. 

With the Employment Situation Report due out tomorrow morning, you might want to consider locking your loan today especially if you are closing in the next week or so.  A better than expected or a "not as bad as it could be" report will apply a lot of pressure on MBS to move lower.  Expectations call for nonfarm payrolls to show a loss of 350,000 and the unemployment rate to hit 9.6%.  If you have some inside information, much like Mr. Meeks obtaining a copy of the Orange crop report,  and you feel the job losses will be greater, than floating could pay off.    

Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage has inched higher to a 5.125% to 5.375% range for the best qualified consumers.  In order to qualify for a par interest rate you must have a FICO credit score of 740 or higher, a loan to value of 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee. 

Last week was a good week for mortgage backed securities and consumer borrowing costs. In total MBS, improved by almost 100 basis points which helped to lower mortgage rates by ¼ percent. Much of the improvement came on the day after the FOMC statement was released. It appears that after market participants had a day to digest the statement, fixed income (of which MBS and treasuries are a part) became popular again. Also helping our cause was 3 very successful Treasury auctions as foreign investors gobbled up over 65% of the total allocation. Strong foreign demand for our countries debt helps to keep our borrowing costs low.

In observance of Independence Day, we have a shortened trading week with all markets being closed on Friday. Today brings us no economic reports to digest, so MBS will be driven by treasuries and money flows once again. Currently the benchmark 10 year Treasury note is trading at a yield of 3.50 after touching a lower yield of 3.47 earlier this morning. If treasury yields continue to move lower, MBS prices should go higher which will allow lenders to pass along better rates. But onto the data for the week.

Tuesday

- Chicago PMI, which is a survey of businesses that gives market participants a gauge into the strength of business activity around the Chicago area. Readings above 50 indicate a expanding business sector while readings below 50 indicate a contracting sector. Recent readings of this report have begun to show some signs of life which has helped stirred the pot of the recession is over crowd. April’s report came in much better than expected at 40.1 from 31.4 the prior month which sparked a big rally in equities at the expense of fixed income. Last month’s report did disappoint coming in at 34.9 and economists surveyed are expecting this month’s report to come in higher at 40.0. MBS usually benefit from a worse than expected report.

- Consumer Confidence, which is a survey of 5000 consumers across the country on their attitudes on present economic conditions and their view of future conditions. Since consumer spending drives our economy, this report is very important to market participants as a optimistic consumer is more likely to spend money while a pessimistic consumer is more likely to save. Our economy benefits more with spending, so the stock market likes a higher reading while the MBS market prefers a lower reading. This report like several others has indicated a shift in consumer attitudes which has helped the stock market rally over the last couple months but unfortunately that rally has led to higher mortgage rates. Last month’s report indicated a sharp move higher for the 2^nd straight month coming in at 54.9 from 40.8 in April. Economists surveyed are expecting this month’s report to continue to show optimism improving among consumers with a reading of 57.0. It will be interesting to see if rising gas prices and unemployment has put a damper on confidence. MBS tend to benefit with a worse than expected reading.

- S&P/Case-Shiller home price index which tracks the monthly change in the value of residential real estate in 20 metropolitan regions across our country. Many economists agree that until home prices stabilize and show signs of improving, it will be extremely difficult for our economy to recover. Recent reports have continued to show home prices falling but at a slower pace. There are no expectations released for this report. Improving home prices would be a positive sign for our economy. The stock market should rally with any hint of improving or declining at a slow pace home prices which would probably pull money out of fixed income to spur the rally in stocks.

Wednesday

- Mortgage Bankers’ Association Index which 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 improving. An increasing trend in purchase applications would be positive for the stock market and negative for MBS. More home sales would lead to increase buying of furniture, flooring, appliances, etc... which should result in higher corporate profits thus the stock market likes to see an increasing trend. If you have been contemplating buying a new home, what is keeping you from pulling the trigger? Do you feel home prices still have to fall further, are you concerned about job security or has the recent rise in mortgage rates put your plans on hold?

- The Institute for Supply Management’s Manufacturing index (ISM) which is a survey of more than 300 manufacturing firms which gives market participants a read on the strength of the manufacturing sector of our economy. Just like the Chicago PMI survey, readings above 50 indicate a growing sector while readings below 50 indicate contraction. This report has also indicated that the worst of the recession is behind us with the last 3 reports all coming in better than the prior month. Economists surveyed are expecting further improvement with a reading of 45.0 following last months’ 42.8. MBS tend to benefit with a lower than expected reading.

- Construction Spending, which is the dollar value of new construction activity for residential and non residential properties. Last month’s report indicated a unexpected jump in construction spending coming in at a month over month increase of 0.8%. Economists surveyed are expecting this month’s report to show a -0.5% decline. The stock market tends to rally with a better than expected reading since higher construction spending would lead to increases in other spending which is good for the overall economy and corporate profits; however the increased spending could lead to higher inflation which is negative for mortgage rates.

- Pending Home sales which is released by the National Association of Realtors and tracks the monthly increase/decrease in pending home sales. A pending sale is one in which a contract has been signed but is yet to close. Last month’s report indicated a sharp increase in pending sales coming in at 90.3 from the prior month’s 84.6 reading which is a month over month increase of 6.7%. Higher home sales should lead to increase in other consumer buying so the stock market generally benefits with a better reading.

- ADP national employment report. This report gives us a private companies reading on the employment situation ahead of the governments report we get tomorrow. Historically speaking, this report has varied greatly from the official government report but is becoming more accurate. Since jobs are a key foundation to any economy, investors are starting to pay more attention to this report as a gauge for the official report.

Thursday

- Employment Situation will be released by the Department of Labor. We usually receive this report on Friday but due to the shortened week we get it today. This report gives us a couple pieces of data to digest. The biggest piece is the nonfarm payrolls which shows how many jobs were lost or created from the prior month. May’s nonfarm payrolls shocked all by coming in considerably better than expectations at -345,000 when economists’ had expected over 530,000! Economists are expected June’s numbers to come in close to last month’s at -350,000. Every month since January, the nonfarm payrolls has continued to show a decreasing trend in the amount of jobs lost helping to stoke the optimistic investor’s belief that the end of the recession is here. MBS tend to benefit with a worse than expected reading. Next, we get the official Unemployment rate which is expected to climb to 9.6% from last month’s level of 9.4% which is the highest level we have seen since August 1983. This report is the single most important piece of economic data that we receive on a monthly basis.

- Jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week. Last week’s report indicated that 627,000 Americans filed for unemployment in the week of June 20 and expectations are for this week’s report to show 619,000 more have filed for unemployment benefits. An increasing trend of claims suggests a weakening labor market which would result in less consumer spending which is bad for the overall economy. So, MBS tend to benefit with a higher than expected reading.

- Factory orders which totals the dollar value of new orders for both durable and non durable goods. An increasing trend is a signal of growing demand by consumers which would lead to higher sales and higher corporate profits. The stock market likes for this report to come in higher than expected while the MBS market which prefers slower economic growth tends to benefit with a worse than expected reading. Economists’ surveyed expect this report to show an increase in factory orders of 1.4% following last month’s 0.7% increase.

- The Treasury Department will announce the total allotment of treasuries to be auctioned at next week’s auctions. Up for the bidding will be a new supply of 30 year bonds, 10 year treasury notes and 3 year treasury notes totaling $65billion. The added supply of debt on the market will apply pressure on treasury yields to move higher which would be negative for MBS pricing. Higher yields on Treasuries will force MBS to move lower in price increasing their yields and overall mortgage rates. Last week, the Treasury Department held 3 auctions with each having large demand from overseas investors. High demand from overseas accounts is a sign of a successful auction and is the reason why treasury yields have been moving lower. As treasury yields have move lower, it has made MBS look more attractive due to their higher yield thus the rally we have seen over the last few days in mortgage rates.

Early reports from fellow mortgage professionals are indicating that borrowing cost continue to move lower. The par 30 year fixed rate mortgage is in the 5.0% to 5.25% range for the best qualified consumers. In order to qualify, you must have a FICO credit score 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.

If you read the blog yesterday, I stated that we were in need of a rally in treasury yields in order for prices of mortgage backed securities to improve before mortgage rates to could move lower. Well, that is what happened. The benchmark 10 year treasury note, after touching on 3.70 resistance in the morning, made a dramatic turnaround and by day’s end before closing near 3.50%. Helping the cause was the last leg of this week's Treasury auctions. Yesterday the Treasury auctioned $27 billion of 7 yr notes. Indirect bids exceeded 65%, well above average, which was close to the demand record at the 2 and 5 yr note auctions on Tuesday and Wednesday respectively. Just before the auction, the 10yr was trading around 3.66 and MBS were slightly improved. After the auction a rally ensued and by day's end most lenders repriced for the better, unfortunately they were not willing to pass along all the improvements so borrowers and loan officers alike were somewhat disappointed. In total, MBS improved by 75 basis points which would imply a mortgage rate costing 1 point in the morning would have only cost .25basis points by day’s end (give or take servicing and GSE fees). To recap yesterday’s action, WOOHOOOO!!!!

This morning began with the Personal Income and Outlays report. This data set measures the increase or decrease in both personal income and spending. Personal income for May was expected to post an improvement of 0.4%, when the numbers were released they indicated a sharp rise of 1.4%. This better than expected read follows last month’s revised increase of 0.7%. This big jump in income is being attributed to onetime payments under the Obama administration's economic stimulus package, the American Recovery and Reinvestment Act of 2009. Many Americans received a check from Uncle Sam which boosted their income. This report is indicating that consumers are making more money, but will it lead to more spending? Consumer spending drives our economy and recent reports haven’t shown spending increasing as consumers are taking the additional income and saving the money. Expectations called for spending to post a 0.3% improvement following last month’s -0.1% and the report came in right on expectations. As part of this report we get another measure on inflation in the form of the Personal Consumption Expenditure. This data set measures the price change for goods and services on the consumer level and is the Fed’s favorite gauge for inflation. As expected, this report indicates the core PCE increased by 0.1% further evidencing that inflation is not a concern as of today. Year over year, the core PCE index fell to 1.8% following last month’s 1.9% reading which is within the Fed’s comfort zone as they want PCE to stay under 2%. All in all, this report indicates that consumers are making more money but their spending is not increasing at the same rate. Where is it all going? Consumers are saving more money! The savings rate reached at 16 year high at 6.9%. This implies consumers are building a safety net in the event the economy has another downturn. Speaking of that...

The University of Michigan’s Consumer Sentiment index was released this morning. This data set surveys 500 households on their outlook for financial conditions and attitude regarding the economy. Recent sentiment and confidence reports have indicated that consumers are beginning to believe that the worst is behind us. Economists surveyed expected this report to post a small increase to 69.7 following last month’s 69.0 reading. When the data was printed most were surprised to see that Consumer Sentiment has improved 1.8 points to 70.8. The 500 houses surveyed are apparently feeling more optimistic about our economy even though gas prices are on the rise and unemployment is approaching 10%!! (Look at U-6 though which has the rate closer to 16%)

So far today the MBS market has been extremely quiet. This is due to the big rally yesterday which brought out some profit takers this morning. Helping MBS prices move higher today is the continued down trend of treasury yields, the benchmark 10 year note is trading near 3.50%. If treasuries can hold this trend or at least remain at current levels, we shouldn’t see a sell off in MBS.

Early reports from fellow mortgage professionals are indicating that rates are improved from yesterday with the par 30 year fixed rate mortgage in the 5% to 5.25% range for the best qualified consumers. If you are currently floating your mortgage rate, please take into consideration that the rates being offered this morning are the best we have seen in a few weeks. When rates were in the mid- 4’s, many consumers continued to float thinking rates would go lower and lost out after rates spiked on “Black Wednesday”. Matt and AQ inform me that we are somewhat at a turning point and things could go either direction.

Well the big event for the week and month came and went with no reaction. The FOMC meeting concluded yesterday with the release of their policy statement. No surprise announcements and the verbiage was little changed from last statement. Many a mortgage professional was hoping for some announcement that would spark a major rally to get rates back below 5%, but no such announcement was included, after reading there was a feeling of disappointment due to the lack of housing verbiage. Maybe the Fed believes that housing can correct with mortgage rates in the mid 5% range which is still incredible, historically speaking. If you would like to read an excellent analysis of the Fed statement, check out AQ’s blog last night by CLICKING HERE.

We have some economic data hitting the wires this morning. First on the slate is jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week. Recent reports have shown an easing in the loss of jobs, but today’s report indicates a sizable increase over expectations. First time claims for the week of June 20 came in at 627,000 when expectations called for only 613,000. Last week’s numbers were also revised worse by an additional 4000 claims. The continuing claims, which totals the number of Americans that continue to file for benefits due to the lack of finding a new job, also moved higher by 29,000 to 6.738 million. Following the release of this report, mortgage backed securities started to move higher on the day. As MBS move higher, consumer borrowing costs move lower.

Next came the release of the final revisions to first quarter Gross Domestic Product(GDP). We receive three reading for GDP. First is the initial reading, than revised reading and the final reading which we received this morning. The Commerce Department reported that final first quarter GDP was revised slightly better at a contraction of 5.5%. Economist’s expectations was for the final reading to be -5.7% matching the revised reading we received last month. Since this report is showing what happened last quarter, the better than expected number had no impact on the markets. As part of this report, we get a reading on inflation which once again shows that inflation is not a concern as of today. The FOMC statement yesterday reiterated that inflation is in check for the foreseeable future but they did add some caution due to the recent run up in oil prices.

Also this morning Federal Reserve Chairman Ben Bernanke is testifying on Capitol Hill regarding the acquisition of Merrill Lynch by Bank of America. There is some suspicion that he forced Bank of America into the acquisition of Merrill against their will and asked that they hold back important information regarding losses at Merrill. Any time Mr. Bernanke speaks, investors will be paying attention as his words can move the markets. Any major news items from the testimony will be covered in detail by Matt and AQ.

The final news worthy item today is the last treasury auction. Today at 1pm eastern, the Treasury Department will auction $27billion in 7 year treasury notes. The first two auctions of the week were met with very good demand especially by indirect bids. Indirect bids measure demand from foreign investors which is one of the key factors that determine whether the auction is successful or not. Weak demand can cause treasury yields to move higher which will apply pressure on mortgage rates to follow.

Early reports from fellow mortgage professionals are indicating that rates are slightly better this morning. The par 30 year fixed rate mortgage has fallen to the 5.125% to 5.375% range for the best qualified consumers. In order to qualify you must have a FICO credit score 740 or higher, a loan to value 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.

Since the release of the jobless numbers which helped MBS to move higher on the day, they are starting to give back the gains. The direction of MBS will be dictated by the movement of treasuries. This is clearly evident when comparing on a graph of the two. In order for MBS to move higher today(as MBS move higher in price, mortgage rates move lower), we need treasuries to move lower in yield. Currently the benchmark 10 year treasury note is trading at a yield of 3.70 after touching 3.66 earlier this morning. When treasuries were at the low yield of the day, MBS were at their best levels. Matt and AQ inform me that 3.70 is a key level to maintain as it is a ceiling of resistance that will hopefully prevent the 10 year treasury note from moving higher. The auction at 1pm will be very crucial as weak demand will apply a lot of pressure on treasury yields to move higher and maybe through the key 3.70 ceiling. If we break above that key level, it might be a good sign to lock your loan as we are seeing the best rates of the week today. If you are currently floating your rate, check in with the MBS Commentary blog. They will inform you if reprices for the worse are imminent.

No major surprises in the Federal Reserve’s policy announcement today. The FOMC said the pace of economic contraction is slowing and should gradually resume to sustainable levels. 

They gave no sign of tightening policy in the near future, vowing to “employ all available tools” and keeping the Fed Funds rate rate at “exceptionally low levels . . . for an extended period.” The FOMC also said it would purchase $1.25 trillion of mortgage-backed securities this year.

Key Statements on Outlook: 

• Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. 
• Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales.
• The Committee “expects that inflation will remain subdued for some time.”

Key Statements on Policy:

•  The Fed “will employ all available tools to promote economic recovery and to preserve price stability.” 
•  The Committee “continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” 
•  The Fed “will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.”
•  The Fed “will buy up to $300 billion of Treasury securities by autumn.”
•  The Fed “will make adjustments to its credit and liquidity programs as warranted.”

The only thing that may disappoint some is that the Fed didn't outline any sort of exit strategy. Many investors have been concerned that the Fed will either tighten policy too early and cause a replay of the policy mistakes in the 1930s, while others are concerned the Fed will keep rates too low for too long, which critics say could cause another bubble or lead to hyper inflation.

Last week ended on a good note with mortgage backed securities(MBS) rallying into the close on Friday. So far this morning, the upward trend in MBS price(higher price, lower rates) is continuing. The media attributes the rally to global conflict (Iran almost in a state of rebellion and North Korea is well North Korea) and the World Bank announcing lowered forecasts of global growth for this year and next year. AQ and MG say this a function of technical trading biases. Regardless of reasoning, fundamental or technical, market participants are leaning towards risk averse assets ahead of the high risk FOMC announcement. Treasuries are posting healthy gains with the benchmark 10 year note moving from a yield of 3.80 on Friday to currently trade at 3.72. MBS are up 10/32 in price and down a few basis points in yield. No matter the activity in secondary markets today, we must remain defensive as market participants are employing day trading strategies ahead of the FOMC meeting, this implies market conditions can change rather quickly.

The week ahead brings us some economic reports but the 2 biggest events will be the FOMC meeting and treasury auctions. Today we get no economic reports to move the markets. Matt and Adam inform me that trading so far is relatively light as investors keep status quo ahead of the FOMC meeting. This will probably result in a somewhat stable day but the possibility of volatility increasing is high because of the lack of volume being traded in the markets, thus be on the defensive.

Tuesday

- The Federal Open Market Committee(FOMC) begins their 2 day conference where they set our country’s monetary policy and give an outlook on the economy. The FOMC meets 8 times per year announcing their policy immediately following the end of the conference on the 2^nd day. We do not expect any announcement regarding increased treasury buying but hopefully they reinforce their commitment to low mortgage rates and keeping the Fed fund rate at present level until next year. Some market participants are expecting the Fed to increase the Fed fund rate by year’s end which is one of the factors that has contributed to the recent spike in mortgage rates. Do not expect that to be the case as inflation is still of no concern at present times.

- Existing Home Sales will be announced by the National Association of Realtors. This report totals the number of existing homes, homes which are not new construction, that a sale closed during the prior month. Expectations are for this report to show continued improvement after April’s 2.9% increase. Economists surveyed expect this report to show existing home sales to increase from a annualized pace of 4.68million to 4.85 million. It will be interesting to see if the recent rise in mortgage rates has a negative impact on this report. A lower than expected number would benefit MBS.

- The first of 3 treasury auctions with $40billion in 2 year notes being offered to the highest bidder. Since the supply is already known, the most important aspect will be the demand that is seen. MBS and treasuries tend to benefit with strong demand especially by foreign or indirect investors.

Wednesday

- Mortgage Bankers’ Association Index which tracks the increase or decrease in purchase and refinance activity at major lenders. The recent spike in rates has dramatically reduced the refinance activity while the purchase index has shown some signs of improving. An increasing trend of purchase applications would be a positive for the stock market and negative for MBS. With more home sales, one would expect increased furniture, flooring, appliance, etc… sales thus the reason why the stock market would tend to rally with a better than expected reading.

- Durable Goods Orders which reflects new orders placed with manufactures for goods they produce. Following April’s revised increase in orders of 1.7%(March posted a drop of -2.2%), economists are expecting a decline of -0.5%. If factory orders are increasing, that suggests a belief that sales will be increasing. Why order more goods if you do not expect an increase in demand? So MBS tend to benefit with a lower than expected reading.

- New Home Sales which measures the number of newly constructed homes with a contract for sale. These are not necessarily sales that close only new homes that a contract has been placed. With tougher underwriting standards many more purchase loans are being denied by lenders. April’s release showed a slight rebound to an annualized pace of 352,000. Year over year, that pace is down 34% and to put this number in perspective, at the height of the housing boom during 2006, new home sales where at a annualize pace of well over a million. Economists surveyed are expecting the increasing trend to continue to an annualized pace of 365,000.

- The 2^nd treasury auction with $37billion of 5 year notes being offered up to the highest bidder.

- At 2:15 eastern, the FOMC meeting concludes with the release of their ever so important monetary policy statement. This will be the highest impacting event of the week.

Thursday

- Gross Domestic Product(GDP) which is a measure of the aggregate economic activity and covers every sector of our economy. This is the final reading for Quarter 1 and since it is looking backwards, measuring growth for last quarter, unless far from consensus this should not have a major impact on the markets. Expectations are for a reading of -5.7%.

- Weekly jobless claims which measures the number of Americans that filed for first time unemployment insurance. Also included within this report is the continuing claims number which totals the number of Americans that continue to file for benefits for lack of finding new employments. Last week’s report showed signs of improvement on both counts with the continuing claims falling from 6.85 million to 6.687 million which broke it’s streak of record highs going back to January. Expectations for first time claims are expected to post a slight increase from last week’s 608,000 to 613,000. MBS tend to benefit with worse than expected numbers.

- The last treasury auction for the week with $27billion of 7 year notes going up for the bidding.

Friday

- Personal Income and Outlays which gives us a measure of the dollar value of income received and money spent by consumers. A part of this report is a measure on inflation in the form of the Personal Consumption Expenditure(PCE). Personal income posted a nice gain last month of 0.5% and expectations are for continued improvement with a 0.4% increase. If consumers are making more money, that tends to be a sign of future increase in spending so the stock market tends to rally with a better than expected number. Personal outlays are expected to show an increase of 0.3% following last month’s decline of -0.1%. Since consumer spending drives our economy, MBS tend to benefit with a lower than expected reading. The PCE index gives us 2 readings, the headline and the core. The core strips out food and energy from the numbers due to their volatility and is the one that is more closely watched by the Fed. So far this year, inflation is of no concern and this report is expected to continue to show that with the core expected to show a month over month increase in prices of 0.1% following last month’s 0.3% increase. A higher than expected read on inflation would be very bad news of MBS as inflation is the mortal enemy to low mortgage rates.

- Consumer sentiment which is a survey of 500 households conducted by the University of Michigan’s Consumer Survey Center on their own financial conditions and attitudes about the economy. An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save. This report has shown signs of improvement which has led to the rally in the stock market and the increase in mortgage rates. Expectations are for a reading of 69.7 following last month’s 69.0. The stock market generally benefits with a better than expected reading.

So far this morning, things are shaping up for a decent day. MBS are up on the day, treasury yields are moving lower and the stock market is posting a triple digit decline. We are operating under in a low volume environment so volatility remains a possibility ahead of the Fed statement on Wednesday. With that said, things can change quickly and often for no apparent reason.

Here's what you need to know about the Fed's surprise attack on the housing crisis.

And you thought 5 percent was a good rate? After already bringing mortgage rates down near 50-year lows, Fed Chief Ben Bernanke unleashed a surprise attack on the housing slump Wednesday by announcing aggressive steps that should make home loans even more attractive. Lower rates, of course, can help push timid buyers off the sidelines so they can mop up the excess inventory that's been driving down home prices. "This is a huge step forward," Ian Shepherdson of High Frequency Economics, wrote in a report shortly after the announcement.

Here's what you need to know about the development:

1. What is the Fed doing? With the federal funds target rate--which is the Fed's conventional monetary policy weapon--already down to as low as zero percent, Bernanke has been forced to get more creative in his efforts to resolve the economic mess. To that end, the Fed announced two key steps Wednesday that should drive mortgage rates lower.

2. Fannie Mae and Freddie Mac assets: The Fed unveiled plans to buy up to an additional $750 billion of mortgage-backed securities backed by government-controlled entities such as Fannie Mae and Freddie Mac, on top of the $500 billion it already committed to purchasing. At the same time, the agency said it would as much as double--to up to $200 billion--its purchase of Fannie and Freddie debt. The moves will help to reduce Fannie and Freddie's financing costs, which should enable them to pass savings on to consumers in the form of lower interest rates. Today's announcement represents a significant expansion of the initial initiative announced last fall, which drove mortgage rates from 6.2 percent in mid-November to 5.2 percent in the week ending March 13, according to HSH.com.

3. Long term Treasury bonds: Meanwhile, the Fed said it would buy up to $300 billion in long-term Treasury bonds over the next six months. The announcement has already helped push yields on 10-year Treasury notes--which play a key role in mortgage rates--down sharply. This could also help lower mortgage rates.

4. How low will mortgage rates go? Nigel Gault, chief U.S. economist for IHS Global Insight, says 30-year fixed mortgage rates could drop to as low as 4.5 percent. But Keith Gumbinger of HSH.com, expects a more modest decline of between a quarter and a half of a percentage point from current levels. "I don't think we are going to have a plummet, but I do think it helps to support some downward pressure on rates," Gumbinger says.

5. So what does this mean for the housing market as a whole? Before today's developments, lower mortgage rates have benefited those looking to refinance more so than home buyers in the fourth quarter of 2008, 51 percent of mortgage originations were for loan refinancing, while 49 percent went toward home purchases. And although it hasn't closed yet, "there is no question [the refinancing share of mortgage originations] is going to be up near 60 percent for the first quarter.

The Fed move should further boost refinancing activity. "It's a huge positive for refinancing, because it means that everyone who hasn't done it is going to come in and do it. But its impact on the housing market will be less profound. It will help "very little,". That's because "the overriding factor [in the housing slump] is the labor market, and consumer confidence," he says. Even with lower mortgage rates, housing won't rebound without improvement on these fronts--and Moody doesn't expect that to occur anytime soon. "You can't make the argument that mortgage rates have been the impediment to home sales over the past several months," he says.

6. How can I qualify for these low rates? As banks jack up their lending standards in the face of higher delinquencies, not all borrowers will be able to get their hands on today's lowest cost of financing. To do so, most home buyers will need to have a FICO score of roughly 720 or higher, a down payment of at least 3.5 percent--although it could be significantly higher in certain markets--and documented income verification. To refinance, borrowers will need to meet similar credit score and income documentation requirements and have minimum of 10 percent equity in their homes, Moody says.

7. What does that mean for me? Should I refinance now or hold off for a better rate? With rates poised to drop to even more attractive levels, fixed rate borrowers that meet the credit requirements should certainly consider refinancing now. (Refinancing, however, only make sense for borrowers who can obtain a large enough break in their interest rate to compensate for the fees associated with the process.) But since rates are expected to remain attractive for some time, there's no pressure to refinance immediately. Still, Moody points out that with home prices on the decline, borrowers who wait too long to refinance could find that they no longer have enough equity in their home to qualify. So you may be better off getting the process started sooner rather than later.

Likewise, homeowners with adjustable rate loans--who have likely seen their interest rate fall recently--should not feel compelled to act this very second. "There is not a gun to your head". However, borrowers with these products should keep close tabs on the market and look for an opportunity--perhaps now, perhaps in the coming months--to get into a more conservative, fixed-rate mortgage while rates remain low. "Do yourself a favor and prevent future disaster.