The employment data this week will likely result in some mortgage interest rate volatility.

LOOKING AHEAD
Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
ISM Index Tuesday,
Jan. 3,
10:00 am, et 52.8 Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Construction Spending Tuesday,
Jan. 3,
10:00 am, et Up 0.8% Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
Fed Minutes Tuesday,
Jan. 3,
2:00 pm, et None Important. Details of the last Fed meeting will be thoroughly analyzed.
Factory Orders Wednesday,
Jan. 4,
10:00 am, et Up 0.6% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
ADP Employment Thursday,
Jan. 5,
8:30 am, et 165k Important. An indication of employment. Weakness may bring lower rates.
Weekly Jobless Claims Thursday,
Jan. 5,
8:30 am, et 379k Important. An indication of employment. Higher claims may result in lower rates.
Employment Friday,
Jan. 6,
8:30 am, et 8.8%,
Payrolls +115k Very important. An increase in unemployment or weakness in payrolls may bring lower rates.
THE YEAR AHEAD
The future of the economy, recovery or additional weakness, will continue to be debated. There is no certainty in predictions. Data can be used to support both sides of the debate. What we can be certain of is the fact that mortgage interest rates are likely to remain volatile until the economy gains some stability. Historically, mortgage interest rates seem to improve slowly. In contrast, when rates increase, it is often fast and furious. One negative day often erases a week of positive improvements. Of course even that maxim was tested the last few months of last year as market swings of 1/2 a discount point both up and down were often seen in very short spans of time.

It is possible for mortgage interest rates to push lower considering the Fed still wants to keep rates relatively low. However, we are in unprecedented times and we have seen rate volatility throughout last year. The Fed isn’t the only player in the financial markets and there are many others buying and selling securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain rate. Rates are determined by the supply and demand for mortgage-backed securities. However, the Fed is the major player in the market at this time and they do set the lead.

Despite volatility throughout 2011, the Fed kept rates low. The big unknown is how things will play out this year. Now is a great time to take advantage of mortgage interest rates at these still historically favorable levels

LOOKING AHEAD
Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
Consumer Confidence Tuesday,
Dec. 27,
10:00 am, et 56.2 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
Weekly Jobless Claims Thursday,
Dec. 29,
8:30 am, et 362k Important. An indication of employment. Higher claims may result in lower rates.
Early Market Close Friday,
Dec. 30,
2pm, et - Important. Thin trading conditions are likely ahead of the extended holiday weekend.
LIQUIDITY
In years past a borrower would visit their local savings and loan to obtain a mortgage. The Loan Officer at the bank would approve the mortgage and fund it with cash reserves from the vault. This system worked well until the bank ran out of money to lend. Borrowers came to the S&L looking for a loan and were told to come back when a current mortgage paid off. What the bank needed was a way to sell the loans they made freeing up the capital to lend to new borrowers. This way they could lend the “same” money over and over, earning an income from servicing the loans and assisting the community by offering a near limitless pool of money.

To address this issue, FNMA and GNMA were established. The goal is to provide cheap mortgage money to prospective homeowners and a high quality bond for the investment community. The bond or Mortgage Backed Security (MBS) take mortgages with similar risk characteristics and pool them together. Investors in the MBS’s know ahead of time the return they are going to receive, much like a Certificate of Deposit. To ensure the performance of the bond, each mortgage is underwritten to specific guidelines.

During the past real estate boom underwriting guidelines were relaxed giving way to a whole new menu of mortgage products such as 100% financing. In addition, to streamline the influx of applications, income and asset verification took a back seat to a borrower with strong credit. With housing prices rising rapidly, the property could be sold to cover the note and foreclosure costs if this occurred. This cycle worked well until the price of houses moderated in 2006. Once the housing market began to cool and prices moderated, foreclosed homes were being sold for less than the notes. To add insult to injury, the loans underwritten to the looser guidelines did not perform as hoped. With the value of the collateral in question (falling home prices) and the future performance of the borrowers unknown, investors’ appetite for this risk waned. Unfortunately the liquidity issues associated with Alt A and subprime loans carried over to more secure AAA GNMA and FNMA loans. Sellers of AAA MBS’s found it more difficult to find buyers. Fortunately the Fed eventually stepped and purchased mortgage backed securities in an unprecedented effort to keep rates low, the housing market from crumbling, and the entire economy afloat. For all the criticism the Fed receives, these efforts have been successful so far.

How this all plays out in the long term is still up for debate. The one thing that is certain is that rates remain historically very favorable. Now is a great time to take advantage of these low mortgage interest rates

The Mortgage Bankers Association said its refinance index increased 6% last week after three weeks of declines.

The trade group said the refinance index is not seasonally adjusted but does include an adjustment for Labor Day. On an unadjusted basis, refinancings fell 15.2% and are down 23.5% from a year earlier.

The purchase index climbed 7% from a week prior, while the unadjusted purchase index fell 16.2%. The unadjusted overall composite index decreased 15.4% from the prior week.

The refinance share of mortgage activity represented 77.3% of total applications, compared to 77.1% a week earlier.

The MBA said the average interest rate for a 30-year fixed mortgage slid to 4.17% last week from 4.23% a week prior. The average rate for a 15-year fixed mortgage inched down to 3.4% from 3.41%