10/6/2009 Market Commentary by Larry Baer

Daily Commentary

By Larry Baer, Market Alert



SHORT-TERM TREND (10 days or less). Favors lower rates and higher investor prices.

SUGGESTED PIPELINE STRATEGY: Be prepared to immediately convert any "floating" loan in this category to "locked" should the price of the Fannie Mae 4.5% mortgage-backed security fall and close below 101.593.

A number of short and intermediate term cycles will be merging on or about Thursday, October 8th. The potential for an acceleration of trading activity and/or a trend change lasting several days or more will be highest during this period of time.

LONG-TERM TREND (11 days or more) Favors lower rates and higher investor prices.

SUGGESTED PIPELINE STRATEGY: Be prepared to convert any "floating" loan in this category to "locked" should the price of the Fannie Mae 4.5% 30-year mortgage-backed security close below 101.500.

My cyclical analysis suggests the probabilities are high that a multi-week trend change will in place by the end of the five-day trading period concluding on October 16th.


--------------------------------------------------------------------------------

Commentary: The Treasury Department is gearing up this morning to conduct its third auction of the week. The government will be taking bids on $20 billion of 10-year notes. The final gavel is slated to fall at 1:00 p.m. ET - and I'll provide you with auction results as quickly as possible thereafter.

A well bid 10-year note auction followed by solid demand for tomorrow's 30-year bond offering will be viewed by many as a solid indication that fixed-income investors see no looming threat of inflation anywhere on the horizon - which by extension - suggests these investors believe economic growth will once again begin to wane in 2010. The good news here is that mortgage interest rates will almost certainly continue to hover within a whisper of historic lows while the bad news is that the demand for mortgage financing will likely continue to contract as joblessness rises and the consumer develops a "bunker mentality" with respect to spending of any sort.

On the other hand, if the Treasury's 10-year note and 30-year bond offering result in higher yields for both of these instruments, fixed-income investors will be putting their-money-where-their-mouth-is with respect to their belief the sustained economic growth will prevail -- which will in-turn lead to an increase in employment opportunities followed by a notable increase in mortgage demand. Granted, if this scenario develops it will set the stage for a slow but progressive move to higher mortgage interest rates. If such an event were to occur - it may actually prove to be a "good thing" in terms of origination volumes.

As I have mentioned in this space before, I see an increasing number of reasons to think we've reached a point in the economic cycle where a modest uptick in mortgage interest rates created by accelerating economic growth will actually lead to the development of a far better market place for mortgage originators than a economic backdrop that supports yet lower mortgage interest rates could ever come close to generating.

It is Wednesday - which means the Mortgage Bankers of America have released their index of mortgage applications for the most recent week -- ended October 2nd. The aggregate index, which includes both purchase and refinance loans, rose 16.4% to its highest level since the week ended May 22nd. Requests for purchase money mortgages were up 13.2% while requests for refinance funding were up 18.2%. The refinance share of applications on a national basis rose to 66.3% from 65.3% the previous week, but remained well below the peak of 85.3% during the week ended January 9th. The MBA went on to report 30-year fixed-rate mortgages, excluding fees, averaged 4.89%, down 0.05 percentage points from the previous week and the lowest since the week ended May 22nd. Last week's 30-year conforming fixed-rate was above the all-time low of 4.61% set back during the week of March 27th - but well below the year-ago mark of 5.99%.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME