Market Update - a Tale of Three Worlds (also known as - Why have mortgage rates calmed down?)

After a very volatile couple of months, we’ve seen a surprisingly calm month in the mortgage world.   Actually, since the Fed announced they were running the printing presses on overtime is when things calmed down.   I’m referring to it as The Tale of Three Worlds:

The Stock Market World - as everyone knows, the stock market has rallied quite nicely over the last few weeks.   We are no longer in the bottom level of the basement, even though we are still no where near the highs of a few years ago.   If I recall correctly, the Dow is down approximately 30% from back in October when Jim Cramer said that if you need the money within 5 years you should sell.   Is the rally a true thing or a bounce in the market?   Only time will tell, but it remains very volatile.

The Non-Mortgage Backed Bond World (including Treasuries, corporate bonds etc.).    These have been very volatile, just like the stock market, but inversely.   As stock go up, bonds have, in most cases gone down.  

The Mortgage Backed Securities World - So what’s up with mortgage rates?   Each week when I send out my Mortgage Market Week in Review, the rate sheet that I update hardly changes at all.   Let me lay out my theory (and it’s exactly that, a theory, not a proven fact):

• Investor appetite for mortgage backed securities has been deteriorating as the housing market continues to struggle.
• The Fed has announced that they are going to be buying boatloads, literally boatloads, of mortgage backed securities in order to keep the market going.
• Since the Fed’s announcement, mortgage rates have calmed down substantially.

It’s my theory that investors are essentially jumping from treasuries to the stock market and back and are essentially saying that the mortgage backed securities market is now so totally controlled by the Federal government that there’s very little opportunity in it to make money by playing this trade vs. that trade etc.   So we’ve got two worlds that are being actively traded and the mortgage backed securities market that has gotten very calm because of the government’s influence in it.   That raises a couple of questions:

• What does it mean for the future?  In my mind, it means that as long as the government has the will and the cash to keep buying mortgage backed securities, we’re going to see stable rates.
• What’s going to happen in the future?  If inflation becomes too much of an issue or the demand for Treasuries softens substantially (due to China and others), or the Fed can’t print enough money to keep things going, then we’re going to see a major “springback” effect and see rates jump substantially.

So, my prognostication is that for now (30 to 60 days is probably as far out as I’d dare look - probably too far) we’re going to see rates in what’s known as a trading range.   Minor variations but no substantial changes.   Beyond that, the risk is pushing up rather than down.

My recommendation remains to lock all loans.

April 1, 2009