Interest rates rose last week after the FOMC meeting — as there was no hint for additional Treasury purchases. As a result, 10 year Treasury note yields shot up to 3.20 percent from its previous level of 3.05 percent and Mortgage-backed Securities (MBS) also followed a sell off as the 30 year current coupon MBS has drifted above 4 percent. The FOMC statement which closed this week’s meeting was considerably less pessimistic; they noted approvingly that “the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions” and that “household spending has shown signs of stabilizing.” Obviously, there was no change to short-term interest rates, but they did indicate that short-term rates would remain “exceptionally low… for an extended period.” The Fed has not been as concerned about the rise in Treasury rates, as their focus has been on improving conditions in the private market. With the mortgage-Treasury basis at historically tight levels, a further sell-off could lead to a rise in mortgage rates — of definite concern to the Fed.
Mortgage application activity was down 18.1 percent as mortgage rates declined. Despite lower mortgage rates, application activity declined in the week ending April 24th. The Refi Index dropped 21.9 percent to 5108.2 – its lowest level since the week ending March 13. As a percent of total applications, refinancing share fell to 75.3 percent from 79.7 percent. The Purchase Index fell for the third week in a row to 251.6 from 253.0, or 0.6 percent. Overall, refinancing activity is expected to remain muted over the near term, relative to mortgage rate levels, as originators are still setting up systems to handle the government’s programs and adding staff. Further declines in home prices and increased unemployment are also affecting activity. Any increase in mortgage rates will certainly not help refinancing. Overall, rates shouldn’t be expected to go too far, too fast, as the private mortgage market tries to regain health, while the government-backed market is supported to extend any activity. Later, when the actual “recovery” happens, concerns about inflation will quickly find their way back into the economy, and mortgage interest rates will begin to rise. By that time the private market will become more dominant and the Federal Reserve will no longer be the largest component of support for the mortgage market. There are still no signs of that day on the horizon.
©2007 ABBA First Mortgage, Inc.
