Daily Mortgage Gazette

With all signs pointing towards economic growth, markets were not all surprised when today’s Producer Price Index registered higher than expected. Mortgage markets are flat in response to the data.

The impact of PPI is muted for three other major reasons, too:

1. At 2.0%, the year-over-year increase in PPI is much lower than it has been over the past 18 months
2. Energy costs continue to drop, reducing the cost of running a business
3. There is no direct relationship between PPI and consumer prices, the basis of inflation.

Tomorrow morning, however, the Consumer Price Index will give insight into just how much of the cost increases have been passed to consumers. Economists are expecting a 0.2% increase, ignoring the impact of the volatile energy and food sectors.

As a big chill settles in over the country, oil prices continue their decline and are now down 15% since mid-July. High oil prices are typically associated with inflation, but given the precarious balance of the U.S. economy, low oil prices may lead to inflation, too.

Americans fuel the economy by spending money on goods and services. With lower oil prices and unseasonably warm weather, Americans are paying less to heat their homes and less to fill the gas tanks. As a result, disposable income is increasing and Americans are doing what Americans do — pumping those "extra" dollars right back into the economy which creates inflationary pressures and may lead to future rate hikes from the Federal Reserve.

This trend may be reversed, however, by the Big Chill sweeping the nation this week. Cold temperatures increase the demand for oil and that should push prices higher. Higher prices means less disposable income which should ease some of the growth pressures on the economy.

In a week practically devoid of economic news, mortgage rates trended higher last week amid falling oil prices and surprise strength in Holiday Season spending.

Investors are jittery about the U.S. economy. Since it stopped raising the Fed Funds Rate this past summer, the Federal Reserve has repeatedly told markets that it is expecting an economic slowdown in 2007. Each week, however, brings more data to the forefront that suggests that the economy is still growing.

This week, there are several economic releases to keep an eye on, including Tuesday’s Producer Price Index (PPI) and Wednesday’s Consumer Price Index (CPI). Both will have a major influence over the direction of mortgage rates so expect volatility surrounding their respective releases.

For all of the talk about the slowdown in consumer spending, it appears that this Holiday Season was a winner. This morning’s Retail Sales report doubled economists’ expectations by showing 1.0% growth.

This is just one more inflationary pressure in the economy and makes it less likely that the Fed will lower the Fed Funds Rate in the next six months.

Strong economic growth tends to keep mortgage rates high and that helps to explain why mortgage rates are slightly higher this morning.In a "surprise" move, The Bank of England raised its benchmark by 0.25% to 5.250%. Only one of 50 economists surveyed had predicted the increase and its unexpected nature played a key role in moving mortgage rates higher today on this side of the pond.

The Bank of England is equivalent to our own Federal Reserve Bank. It issues debt (i.e. bonds) backed by a strong government and, therefore, the debt is considered to be guaranteed money.

This is its third rate hike since August.

Because global bond money tend to flow to higher relative returns (i.e. to England) from lower relative returns (i.e. the United States), we can assume that The Bank of England's move forced traders to sell U.S.-backed bonds and that pushed mortgage rates higher

It’s truly a global marketplace and this is one of the major reasons why it’s impossible to predict where interest rates are headed in the future. Just when you think you understand the U.S. market, a foreign nation makes an announcement that shifts the entire balance.

In a "surprise" move, The Bank of England raised its benchmark by 0.25% to 5.250%. Only one of 50 economists surveyed had predicted the increase and its unexpected nature played a key role in moving mortgage rates higher today on this side of the pond.

The Bank of England is equivalent to our own Federal Reserve Bank. It issues debt (i.e. bonds) backed by a strong government and, therefore, the debt is considered to be guaranteed money.

This is its third rate hike since August.

Because global bond money tend to flow to higher relative returns (i.e. to England) from lower relative returns (i.e. the United States), we can assume that The Bank of England's move forced traders to sell U.S.-backed bonds and that pushed mortgage rates higher

It’s truly a global marketplace and this is one of the major reasons why it’s impossible to predict where interest rates are headed in the future. Just when you think you understand the U.S. market, a foreign nation makes an announcement that shifts the entire balance.

After last week's data showed ongoing strength in the U.S. economy, there is a growing sentiment that the Fed will choose to raise the Fed Funds Rate before it begins lowering it.

FFR currently stands at 5.250% and here is what markets are predicting over the near-term:

After January 30-31 Meeting:

Decrease to 4.750: 0% probability
Decrease to 5.000: 4% probability
Remain at 5.250: 96% probability
Increase to 5.550: 0% probability

After March 20-21 Meeting:

Decrease to 4.750: 1% probability
Decrease to 5.000: 5% probability
Remain at 5.250: 91% probability
Increase to 5.550: 3% probability

After May 9 Meeting:

Decrease to 4.750: 3% probability
Decrease to 5.000: 20% probability
Remain at 5.250: 72% probability
Increase to 5.550: 5% probability

These predictions are important they give insight into how markets think the economy will grow over the next two quarters. A lower FFR would be indicative of a slowing economy and should cause mortgage rates to fall.

Interest rates remain inverted, a market condition in which the longer you commit to lending your money, the less that you earn on your investment.

Why is that a big deal? Imagine if a friend asked you to borrow money for two years you charged him interest on that money. We can list some of the risks in lending to your friend:

1. The risk of not getting paid back
2. The risk that the money could have earned more for you somewhere else
3. The risk that the value of the dollar will be lower when you get your money back

The more risk you take, the higher the interest rate you should expect on your money This is a basic tenet of finance.

Now, if that same friend wanted the money for 10 years instead of 2 years, you would expect that your risks would be higher on all counts.

• He could lose his ability to repay you in those 10 years
• You could have had countless other investment opportunities over those 10 years
• The value of the dollar could swing wildly in those 10 years

Your theoretical risk is much, much higher because your money is tied up for longer periods of time.

How big of an impact is this having on mortgage rates? Three years ago, the spread between a 3-year ARM and a 30-year fixed mortgage was about 1.875%. Today, that spread is negative 0.375%.

This morning’s Non-Farm Payrolls report (i.e. the number of new jobs created for industries other than farming) registered a 167,000 gain in November This is tremendously higher than the 115,000 jobs economists had predicted.

Markets were caught leaning in the wrong direction after an ADP report released Wednesday said that 40,000 jobs were likely lost in November.

It’s chaos in the markets right now and mortgage rates are surging higher, completely erasing yesterday’s gain.

This summer, economists were predicting that 175,000 new jobs were created in June and then payroll processor ADP shared their own estimate of 368,000 with the markets.

In a panic, mortgage rates moved higher because - well, what if ADP was right?!?

The actual figure turned out to be 121,000.

That major miss jolted the markets because it had suddenly wondered if ADP knew something "inside". After all, ADP is one of the largest payroll processors in the world and people believed that they might have the inside track to know if companies were adding jobs to the economy.

But, they didn’t.

Naturally, it’s big news that ADP is predicting that 40,000 jobs were lost in December 2006 versus economists’ predictions of 115,000 jobs were created.

Mortgage bonds have staged a small rally and mortgage rates are retreating as markets wonder once again — what does ADP know?

They won’t have to wait long to find out because the government’s job report is released at 8:30 EST Friday.

Washington Mutual-owned Long Beach Mortgage announced yesterday that its underwriting guidelines are changing, effective Monday, January 8.

Following the lead of a host of other sub-prime lenders including large-players Fremont and New Century, Long Beach is hoping to avoid the fate of sub-prime lenders Ownit, Sebring Capital, and Mortgage Lenders Network. All three closed their doors in recent weeks.

When a mortgage lender "implements new underwriting guidelines", its pool of eligible applicants narrows This is because the rules for approving applications are now "stricter".

One area in which Long Beach is expected to get tough is in requiring borrowers to have a history of managing multiple tradelines for high LTV mortgages. Another area is to limit the combined loan-to-value for mortgage applicants for whom income is stated. Long Beach currently requires a 640 FICO score to go 100% on stated applications.

Expect to see more lenders to make headlines as the follow Long Beach’s lead in the coming months.