Mortgage Market Update

Weakness in Retail Sales data this morning is causing a knee-jerk reaction in trading circles, edging mortgage rates lower this morning.

Against expectations of a flat reading, retailers reported a 0.9% decrease in sales volume in June. This is the largest reported drop in two years.

As we’ve discussed before, though, when looking at data trends, we cannot ignore revisions to months prior. The same report from the U.S. Census showed that May’s Retail Sales data was revised higher by 0.1%.

Now, also worth noting is that this month’s report shows a margin of error of 0.7%.

That means that actual sales could have slid by as much as 1.6% or as little as 0.2% — nobody knows for sure because the reported data is an extrapolation of the readings from a small sample set of all retailers nationwide.

So, in the best-case scenario, last month revised higher by 0.1% and this month showed a 0.2% loss — a net loss of 0.1%.

This is a sharp reversal from last month’s runaway numbers and should make the inflation-weary (i.e. the Federal Reserve) feel a little more at ease.

Slowing consumer sales reduces inflationary pressure on the economy and that is why we’re seeing rates improve this morning.

Credit “piggybacking” used to be a handy way to boost a person’s credit score in order to help them get a home loan approval. Starting in September, it’s going the way of the Dodo bird.

Piggybacking involves linking one person’s strong credit rating to another person’s weak credit rating.

By adding the latter as an authorized signer on the former’s credit cards, the weaker credit scores are pulled higher because of better payment histories and lower debt-to-limit ratios.

Recently, credit repair companies began paying people with good credit several hundred dollars monthly to “rent” their credit to people with poor credit scores.

The agencies charged the low credit scoring group up to $1,000 for the service, promising (and delivering) an increase to their FICO. Outed by Kenneth Harney in April and under pressure from credit scoring stakeholders, the practice will soon be halted.

Beginning in September, credit agencies will protect their scoring methods from gamers of the system.

There are no records documented how many people have abused piggybacking and credit scoring loopholes.

The change will negatively impact people that legitimately use authorized accounts, including children and spouses. There are an estimated 41 million people in that category.

There are also close to 2 million people that only have authorized accounts in their credit history. For these people, their credit history is about to go blank.

Source
Can you ‘piggyback’ on a credit score?
Liz Pulliam Weston
MSN Money, June 18, 2007

On the week, mortgage rates are slightly improved as traders keep a watchful eye on tomorrow’s Retail Sales report.

Largely, markets want to know how Americans are using their disposable income. Are they buying big-ticket items like automobiles? Are they buying luxury items? Are they buying appliances and home goods?

Retail Sales is released at 8:30 A.M. ET Friday. Later that morning, markets will digest the University of Michigan Consumer Sentiment survey.

This report asks 500 consumers how they feel about the economy and their personal finances and extrapolates those answers to estimate how consumers are likely to spend in the future.

The UofM Survey is helpful, but not rock solid.

Since January 2007, the gauge has declined from 96.9 to last month’s 86.0 reading. That would foretell a slowdown in spending nationwide, but so far this year, that hasn’t been the case. People may know that they shouldn’t go spending, but they’ll often do it anyway.

Retail Sales are a better economic indicator because it measures facts and not feeling. Economists are expecting a flat reading tomorrow. If the number is on the weak-end, expect mortgage rates to fall.

Source
Reuters: Customer Zone – Reuters/University of Michigan Surveys
http://customers.reuters.com/community/university/default.aspx

Before paying down your mortgage balance with extra principal payments, be sure to plan carefully.

The biggest risk in lending for banks is that you will suddenly stop paying your mortgage. In that event, the banks hope that you owe them as little as possible against the value of the home.

That way, your mortgage balance is covered in full and paid off in a discounted sale via foreclosure.

The fear of foreclosure is why lenders are eager to take your dollars and to help you increase your equity position through bi-weekly payments and other systems.

When banks encourage you to pay down your principal balance, their hope is that you will voluntarily decrease their risk in lending to you.

Important to remember, though: your interest rate is determined by the risk that you represent to the bank. When you pay down your mortgage balance with extra principal payments, your risk to the bank decreases.

However, do you think that the bank will call you to offer you better interest rates now that your risk is lower?

Therefore, before paying extra principal dollars, consider some of your alternatives first:

• Save for college
• Establish an emergency fund
• Fund a retirement plan
• Invest in stocks or bonds
• Pay down credit card debt
• Pay down installment loans

There are many more options, of course, but just remember that you have choices. Once you give the money to the bank on your first lien, you can’t get it back without a refinance.

Crude oil prices have been increasing lately and that tends to lead to higher gas prices at the pump.

The heat map at right is courtesy of GasBuddy.com, a Web site that tracks gas prices on a national, state, county, city and hyper-local basis.

According to GasBuddy.com, gasoline prices are beginning to rise after 7 weeks of decline.

Typically, higher gas prices lead to less disposable income for Americans and that normally puts downward pressure on mortgage rates.

This year, however, traders have been largely ignoring that once-common Rule of Thumb because — despite the cost of the world around them — consumers continue to consume at a dizzying pace.

Mortgage rates will likely not respond to crude oil or gas prices unless they reach new all-time highs.

As expected, the holiday-shortened week led to extreme volatility in mortgage rates, led by better-than-expected job growth and rising wages for workers.

In conjunction, these two data points lead to increased consumer spending and the prospect of higher spending pushes the economic slowdown likelihood lower.

That’s bad news for mortgage rate shoppers because without a slowdown, mortgage rates are unlikely to make a dramatic decline like they did at this time last year.

There’s not much data this week except for Retail Sales on Friday. You can bet that markets will keep a close eye on this one; it’s a terrific report to gauge whether Americans are spending more dollars (as expected) or not.

The Retail Sales report will be backed up with the University of Michigan Consumer Confidence survey. The survey asks random sets of Americans how they feel about the economy and is used by markets to predict spending patterns in the months ahead.

So, big focus this week on spending as it pertains to economic growth. More spending and high confidence will push mortgage rates higher.

On a stronger-than-expected jobs report and upward revisions to April and May’s figures, mortgage rates are moving higher this morning.

Against an expectation of 120,000, the Bureau of Labor and Statistics reported that 132,000 new jobs were created in June. This not a huge deal in and of itself.

It’s the revisions that are causing markets to move today.

Revisions are a normal part of government data. They occur because the government bureaus cannot survey every business in the country prior to get an exact figure.

The government, therefore, talks to a small subset of business and then projects that data across the whole economy using sophisticated statistical analysis tools.

The Non-Farm Payrolls report, for example, is usually released on the first Friday of a month — hardly enough time to get a comprehensive look at jobs data country-wide.

This is one of the reasons why the BLS also released data for April (+ 42,000 jobs) and May (+ 33,000) — it’s had more time to pin down the actual number after the original “estimate”.

It’s the revisions that are mostly to blame for higher rates today. Overall expectations were beat by 87,000.

Mortgage markets are making like last night’s fireworks, exploding in the sky with a bang.

There are three main factors pushing rates higher today:

1. Bank of England raised their interest rates by 0.25% and foreshadowed future increases
2. European Central Bank Chairman Jean-Claude Trichet said that inflation is “likely to rise again significantly towards the end of the year”.
3. The ADP National Employment Report showed 150,000 new jobs created in June, putting pressure on traders siding with the economists’ predictions of 120,000 new jobs created.

Trading volume is still light and that makes rates more volatile than usual. Tomorrow’s government jobs report has the potential to really shake up the markets — for good or for bad.

In honor of Independence Day, here are 13 little-known bits of trivia about the United States constitution, courtesy of constitutionfacts.com:

1. The first constitution was not known as the Declaration of Independence. It was called the Articles of Confederation.
2. The U.S. Constitution has 4,400 words. It is the oldest and shortest written Constitution of any major government in the world.
3. There are spelling errors throughout the Constitution, but the misspelling of the word “Pensylvania” above the signers' names is a notable one.
4. Thomas Jefferson did not sign the Constitution. He was in France during the Convention, where he served as the U.S. minister.
5. The Constitution was “penned” by Jacob Shallus, a Pennsylvania General Assembly clerk, for a fee of $30.
6. The entire Constitution is displayed in public just one day a year — September 17. This is the anniversary of the day the framers signed the document.
7. Patrick Henry was elected as a delegate to the Constitutional Convention, but declined, because he “smelt a rat.”
8. The oldest person to sign the Constitution was Benjamin Franklin (81). The youngest was Jonathan Dayton of New Jersey (26).
9. When the Constitution was signed, Philadelphia was the nation's largest city, with 40,000 inhabitants.
10. Because of his poor health, Benjamin Franklin needed help to sign the Constitution. As he did so, tears streamed down his face.
11. The first time the formal term “The United States of America” was used was in the Declaration of Independence.
12. There was initially a question as to how to address the President. The Senate proposed that he be addressed as “His Highness the President of the United States of America and Protector of their Liberties.” Both the House of Representatives and the Senate compromised on the use of “President of the United States.”
13. The word “democracy” does not appear once in the Constitution.

Have a safe and happy July 4th, everyone.

Source
Fascinating Facts about the U.S. Constitution
http://www.constitutionfacts.com/index.cfm?section=constitution&page=fascinatingFacts.cfm

As expected, Ben Bernanke & Co. left the Fed Funds Rate unchanged at 5.250% last week but that didn’t stop markets from improving slightly overall.

Markets were buoyed by a low reading on last Friday’s PCE index, the Fed’s favored inflation measure.

Low inflation readings are good for mortgage rates so it’s no surprise that as the week opens, mortgage rates are about 0.125% lower than at the start of last week.

Of course, different home loan products carry different risks so the drop isn’t present equally in all mortgage types.

Because Independence Day falls in the middle of the week this week, many traders are just taking the whole week off. Therefore, expect very light trading in mortgage bonds.

Low trading volume, of course, creates volatility as buyers have a hard time finding sellers and vice versa.

The major wildcard this weekend is Friday’s Non-Farm Payrolls report (i.e. the jobs report). Economists are predicting 120,000 new jobs created.

If the number is off the mark, expect a more wild ride than normal. If the actual falls short, rates should improve; if it’s running hot, rates should spike.

Fun Fact Of The Day: Congress made Independence Day a federal holiday in 1870, but didn’t make it a paid federal holiday for government employees until 1941.