“5.25% is the new 4.75%,” said one trader.  Borrowers have realized that a 5.25% mortgage rate is not so bad after all, and waiting for rates to drop back to 4.75% may not be the best idea.  Mortgage origination volume, stalled completely for the month of June, is picking back up.  Mortgage rates are back down to 5.25%, after rising sharply to 5.75% in mid-June.  Interest rates and stocks have fallen for four weeks straight.

Is the mortgage refinance boom going to boom again? “If the spread between mortgage and Treasury yields narrows to May levels (-0.20%) and origination profit margins tighten slightly (-0.10%), we could have another surge in refinance volume,” reports Mike Cook from the Capital Markets Cooperative.  Spreads of many flavors, from junk bonds to agency mortgages, have widened in recent weeks.

June lock volume slowed to the anemic pace that scared what was left of the mortgage business last fall.  The mortgage lock volume index dipped below 500, a level usually reserved for winter holiday weeks.  But it is on its way higher.

The prime jumbo mortgage market is showing signs of life.  Rates for 30-year fixed-rate jumbo loans average 6.50%, about 1.00% higher than conforming rates.  The spread had averaged 0.25% prior to the market implosion two years ago.  Private investors and community banks have begun to take notice, and want to profit from the relatively high yields and tight credit standards.  JPMorgan Chase and Citigroup have resumed originations, but only from the best of the best borrowers.

Lower rates bring volume and profits.  The spread between mortgage rates and securities yields is as wide as we have seen it in six weeks:  0.95%, up from a low of 0.81% when rates peaked a few weeks ago.

Market volatility brings wider spreads between best efforts and mandatory deliveries.  Having fallen to 40 basis points during the deceptively quiet market in May, spreads jumped to 70bps after the sell-off.

The amount of mortgage and Treasury debt issuance purchased by the Federal Reserve this year is a sight to behold.  In short, the Fed purchased 85% – yikes! – of new MBS issuance from Fannie, Freddie, and Ginnie since March.  Comparatively, the Fed purchased about 50% of long-term Treasuries issued since March. The Fed is roughly half way through the $1.25 trillion of agency mortgage-backed securities it is slated to purchase this year.

You have to wonder where yields would be without the Fed, but at least their efforts are working.  Treasury yields dropped sharply when the FOMC voted to keep its policy on hold “for an extended period.” It added that there would be no changes in its $1.75 trillion in purchases of Treasuries, agencies and agency mortgage-backed securities. Fed-funds futures lowered the probability of a rate increase by year-end to 45% from 96% a few weeks ago.

Meanwhile, Barclays published some re-default statistics for loan modification programs.  It seems that about 45% of borrowers who were current on their payments when they first defaulted, re-defaulted ten months after modification.  About 70% of borrowers late on their payments re-defaulted after modification.  To wit:  All of those “terrible kick-the-can-down-the-road modifications leave borrowers in five-year teaser, ultra-high leverage, 150% loan-to value balloon loans” that will “turn millions of homeowners into over-levered, underwater, renters, and ensure housing is a dead asset class for years to come.”  What fun.

There was a huge computer attack last week. They shut down the U.S. Treasury Department website. Man! I was stunned. I said, “Whoa! The U.S. still has a Treasury Department?”  – David Letterman

Thanks for your business and have a good week.            — Tom Millon