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The Last Week In Review: Two Big Things Moving The Market

The volatility in the financial markets continued this past week, and at the end of it all, home loan rates were pretty much unchanged. Let's break down two big things moving the markets.
More, More, More
1. This past Wednesday, Congress passed a whopping $1.9T stimulus plan. "How did the markets like it?" They loved it! The Dow Jones hit an all-time high, closing above 32,000 for the first time. Interest rates typically move higher when stocks soar, but not this week. Bond prices were able to pause their recent decline, giving lenders a break from the recent spike higher in home loan rates.
The $1.9T plan is expected to help the economy recover more quickly than previously expected, but it also carries two concerns for the bond market and interest rates. One is inflation. We are already seeing inflation expectations for the next ten years hit the highest levels since 2014. Throwing large amounts of money onto an economy that is already doing well where states are open, could elevate inflation further which means rates will be pressured higher again. The other concern is all of this stimulus, now $5T since the start of COVID, must be paid for by selling new bonds in the market. Who is going to purchase all of this debt? And at what price? These are questions that will be answered over time.
Cure for Higher Rates Is Higher Rates
2. The 10-Year Note yield hit 1.60% recently, and that level has been a ceiling for the Treasury market, meaning that level has kept rates from moving higher still. With the recent uptick in rates, the U.S. has attracted foreign investments from around the globe as our anemic Treasury yields are relatively attractive to other sovereign yields. If you look at the 10-Year German Bund yield at minus 0.33% or the 10-Year Japanese Government Bond at 0.10%, it is no wonder foreign investors jumped into the U.S. bond market of late, purchased our 10-Year Note and thereby helped pause the increase in rates here.
Bottom line: The recent pause in rates rising, could be just that: a pause. As economies reopen, we should expect rates to continue to increase over time.

Overview

Effective March 8, 2021, Carrington Mortgage Services, LLC (CMS) is pleased to announce the following enhancements for the Prime Advantage and Investor Advantage loan programs.
Pricing Improvements
**Significant pricing improvements for Prime Advantage, CFA+, and Investor Advantage programs, including new “floor” rates!
Prime Advantage Program

• Increased Loan-to-Values (see matrix for details)
• Cash Out now allowed up to 80% LTV (720+ FICO)
• Improved Loan Amount Tiers – expands LTV’s and reduces Reserves depending on loan size
• Alternative Doc Programs now eligible down to a 660 FICO
• 2-Units – Eliminated the 70% LTV cap and replaces with a program maximum LTV reduction of only 5% (LTV’s available up to 85%)
• Condominiums – Eliminated 75% LTV cap – Same LTV’s as SFR now

Investor Advantage Program

• Increased LTV by 5% for the 700 FICO band
• Improved Loan Amount Tiers – expands LTV’s depending on loan size
• 2-4 Units - Increased the Max LTV cap to 75%

Please Note: www.carringtonwholesale.com has been updated with the expanded LTV eligibility criteria and increased loan amounts.
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Last Week in Review: The Fed, Inflation, and a Twist 

Home loan rates improved modestly week-over-week as the U.S. bond market attempts to stabilize after a sharp increase in rates. Back on Thursday, February 25th, the 10-year yield hit 1.61% and has since declined back beneath 1.50%. This helped mortgage-backed securities (MBS), which drive home loan rates, to also improve in price/rate.
The Sales Pitch Continues
Inflation is the main driver of interest rates. If inflation or inflation expectations move higher, rates move higher, period. The opposite is true. The Fed has had to put on its sales hat recently by continuing to try and sell to the world that inflation in the U.S. will not hit the Fed's target of 2% over the long-term for three years.
The Fed has noted that inflation will be "volatile." What does that mean?
Consumer inflation year-over-year is going to rise sharply in the second quarter of 2021. Here's why. Oil, lumber, and commodity prices like copper, coffee, and grains are up sharply year-over-year. Oil, which is in many consumer products, hovered near $20 a barrel and is now over $60.
"Would need to see inflation exceed 2% in order to even think about starting to get nervous." Fed President Evans – 3/3/21
It would not be surprising to see consumer inflation in the mid to high 2% by May, so Mr. Evans and the entire Fed will have to continue to talk down inflation in order to try and keep rates from increasing further.
"Come on baby, let's do the Twist" – Chubby Checker
The Fed only controls the Fed Funds Rate, an overnight lending rate between banks which impacts short-term loans like credit cards and home equity lines of credit and yes, your savings account at the bank. They do not control long-term rates like mortgages, and proof- positive is the sharp rise in rates in 2021, despite increased bond purchases by the Fed in an effort to stem the rise in rates.
What other tools does the Fed have to try and stabilize long-term rates? The rumor mill is swirling that if rates move higher, the Fed may enforce Operation Twist 3.0. They did it back in 2011, and here's how it works.
The Fed will sell short-term bonds and purchase long-term bonds. This has the effect of driving down long-term rates while modestly boosting short-term rates. Back in 2011, the impact was significant. The 10-year yield went from a high of 3.75% to a low of 1.44%. However, when the Fed stopped the "Twist" and the manipulation was over, the yield spiked back up to 3% quickly.
Bottom line: Home loan rates remain historically low. Fed bond market manipulation may be required should higher inflation cause another increase in rates. Now is a great time to take advantage of rates before we see an even further rise.

Last Week In Review: Rates Go on Vacation

Longer-term U.S. interest rates, including home loan rates, remain on the rise. The big story of the week is Fed Chair Jerome Powell on Capitol Hill to provide his real-time assessment of the economy and rates while attempting to "sell" the notion that higher inflation will not be a problem.
"Inflation will not hit our target for three years." - Jerome Powell
Mortgage rates are determined by the trading action in mortgage-backed securities (MBS), and those instruments respond to inflation and inflation expectations. If inflation moves higher, MBS prices move lower and rates move higher, and vice versa.
Inflation expectations have crept up to the highest levels in seven years. The enormous economic stimulus along with COVID loosening its grip, vaccinations moving quickly, economies re-opening, and consumers ready to spend has caused the spike.
Fed Chair Powell attempted to talk down inflation by suggesting it will be volatile in short term but will not even meet the Fed's target of 2% for three years. The bond market was not having any of it, and despite Powell's seemingly comforting words on inflation, bond prices dropped all week, sending mortgage rates higher.
The Fed Doesn't Control Long-Term Rates
This recent uptick in rates is a stark reminder that the Fed doesn't control long-term rates. Despite purchasing $30B in MBS in the last week in an effort to help keep rates low, rates only moved higher.
Durable Goods Orders Tell a Good Story
On February 17, the Retail Sales Report for January came in five times better than expectations, and this past Thursday, Durable Goods Orders confirmed the strength of the U.S. consumer.
A durable good is an item with a life expectancy of at least three years. Think appliances, furniture, and electronics. These items cost more money, so it is a positive sign to see consumers have the ability, willingness, and confidence to make these purchases. We should expect future readings to be sound as the U.S. economy gets back to fully open.
$1.9T Stimulus Plan at Risk
The recent round of strong economic readings coupled with more state reopenings and vaccination progress has many on both sides of the aisle questioning the size of the $1.9 trillion stimulus plan.
One could argue there is no better stimulus than getting the entire U.S. economy back open.
A plan will need to be approved by mid-March as unemployment benefits are due to expire.
Should the bill get trimmed back, it may help the bond market and rates, as it would likely lower inflation expectations. Some of the present fear in the bond market is the idea that a large stimulus package will exacerbate rising inflation pressures.
Bottom line: Home loan rates are still historically low. With all of the good news and more and more stimulus, we should expect rates to creep higher still. Now is a great time to take advantage of rates before we see an even further rise. 

Last Week in Review: Three Things to Know This Week

Longer-term U.S. interest rates, including home loan rates, increased sharply this past week, touching pre-COVID levels. Let's break down the cause and effect as well as some other stories affecting housing.
January Retail Sales Highlight Pent up Consumer Demand
Retail Sales is a monthly report which highlights the health of the U.S. consumer and their willingness and ability to spend. With consumer spending making up nearly 70% of Gross Domestic Product (GDP), it is important to see continued growth in retail sales.
Expectations were for a month-over-month sales growth of 0.8%. Instead, the number came in at 5.3%, five times hotter than expectations. It also represented the third strongest month-over-month reading ever recorded.
This incredibly strong January Retail Sales number tells us economies re-opening and more stimulus will likely lead to an uptick in consumer spending and activity and higher GDP. All of this good news about the future is bad news for bonds, hence a reason for the uptick in rates this week.
New Home Builders Looking for Lumber Relief
The National Association of Home Builders (NAHB) continues to report unprecedented strong demand for homes as many tailwinds exist for new housing such as migration from big cities, work from home, and millennial household formation.
But home builders do have a challenge on their hands: lumber inflation. The cost of lumber is up over 170% in the past ten months, thereby adding thousands of dollars to the cost of a home and making it unaffordable for many. In fact, the NAHB said customers are walking away from contracts on new homes due to the additional lumber expense. Builders are reluctant to start new developments, as they are unwilling to start projects and absorb the added cost. This could be one reason why January Housing Starts, reported on Thursday, were well below expectations. Where is the relief? It could come through lumber tariff relaxation with Canada and a push for U.S. lumber producers to significantly ramp up production to put a dent in the demand.
Inflation, like we are seeing in lumber and other commodities, is bad for rates and another reason for the recent uptick in home loan rates.
Supply Outweighing Demand
The Federal Reserve has committed to purchase “at least” $120B worth of Treasurys ($80B) and mortgage-backed securities ($40B) (MBS) per month in an effort to keep long-term rates, like mortgages relatively low.
The recent problem? The Fed has been on a pace to purchase $30B in MBS each of the last couple of weeks, yet rates ticked UP. This is because nearly $100B in MBS were available for sale, and the Fed only purchased one third available.
So basic economics kicks in. If supply outweighs demand, prices drop and, in the case of bonds, rates tick higher.
Bottom line: There is an old saying in the bond market: “Cure for higher rates, is higher rates.” Meaning, at some point, the uptick in yields makes investing or buying bonds more attractive. We have not hit that point yet. 

The Redesigned URLA is Here

At the first of the year, Fannie Mae and Freddie Mac rolled out the redesigned Uniform Residential Loan Application (URLA), along with new automated underwriting system (AUS) specifications for DU and LPA.
Get the full rundown on the form updates, which aim to:

• Help lenders more easily capture relevant loan application information
• Support the exchange of data and digitize the loan origination process

On March 1, 2021, the new URLA becomes mandatory for agencies on all applications. But, we’re ahead of the curve, accepting electronic applications with the new form starting February 22nd, 2021. View this video to see the major changes so you are ready before the competition!
[btn link="https://cms.carringtonwholesale.com/urla-video" color="paleVioletRed" size="size-l"]Watch the Video[/btn]
 

Resources

• Joint Announcement - Are you Ready?
• Fannie Mae URLA Website
  • Fannie Mae Flyer with links to Resources
• Freddie Max URLA Website
  • Freddie Mac URLa Fact Sheet - Detail Planning and Break Down

The Redesigned URLA is Here

At the first of the year, Fannie Mae and Freddie Mac rolled out the redesigned Uniform Residential Loan Application (URLA), along with new automated underwriting system (AUS) specifications for DU and LPA.
Get the full rundown on the form updates, which aim to:

• Help lenders more easily capture relevant loan application information
• Support the exchange of data and digitize the loan origination process

On March 1, 2021, the new URLA becomes mandatory for agencies on all applications. But, we’re ahead of the curve, accepting electronic applications with the new form starting February 26th, 2021. View this video to see the major changes so you are ready before the competition!
[btn link="https://cms.carringtonwholesale.com/urla-video" color="paleVioletRed" size="size-l"]Watch the Video[/btn]
 

Resources

• Joint Announcement - Are you Ready?
• Fannie Mae URLA Website
  • Fannie Mae Flyer with links to Resources
• Freddie Max URLA Website
  • Freddie Mac URLa Fact Sheet - Detail Planning and Break Down

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Effective TODAY, we’ve made significant price improvements for VA and FHA full doc programs.
Give us a call, we’d love to talk it over or login to see our rate sheet.
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Last Week in Review: Three Things the Fed Said

This past week, the Federal Reserve held their first meeting of 2021 and shared its thoughts on the economy, inflation, and interest rates.
Below are three important takeaways for the mortgage/housing world and overall economy:
1. "In terms of tapering, it's just premature."
Fed Chair Jerome Powell, in his press conference, essentially told the world they will continue to purchase $120B worth of Treasurys and mortgage-backed securities for the foreseeable future. This means relatively low mortgage rates throughout 2021.
2. "Frankly, we'd welcome higher inflation."
The Fed said inflation is not a problem now, and it would like to see higher inflation in the future. This gives the Fed cover to continue its asset purchase program described above for at least this year. However, if the Fed gets what it wants, higher inflation, it will be talking about "tapering" bond purchases and even hiking interest rates. Follow consumer inflation readings going forward, as they will be what the Fed watches to determine the need for future rate hikes and less bond buying.
3. "There's nothing more important to the economy right now than people getting vaccinated."
All of the stimulus to help revive and stimulate the economy doesn't do much if businesses can't open and people are not out and about. The initial vaccination process had issues, but the process has since ramped up around the country, and there are more vaccines on the way.
When you couple all of the stimulus from both the Fed and the government with economies reopening and the American spirit, we should expect strong economic growth later this year. At that time, we may start to see a concern with inflation and a need to "taper" bond purchases, as described above.
Bottom line: The Fed continues to support the housing industry by purchasing bonds, until they get what they want: higher inflation. 

Last Week in Review: Yellen for More Stimulus

This past week, we watched stocks soar to record highs as Treasury Secretary nominee, Janet Yellen's Senate confirmation began. Ms. Yellen is being embraced by the stock markets because:

1. She is well known, having been Fed Chair for several years.
2. Having been Fed Chair, she knows the inner workings of the Fed. This will help on the stimulus front.
3. Speaking of stimulus, she is very dovish, as evidenced by her "act big" comment regarding an enormous stimulus package.

What do rates think of "acting big?"

Mortgage-backed security (MBS) prices have been unable to push higher, leaving home loan rates elevated on the year. The 10-year yield, a proxy for long-term rates in the U.S., is seeing its yield at 1.11%, also elevated on the year.
Stimulus does three things MBS and long-term bonds don't like:

1. It increases bond issuance, which must get sold into the market. The additional issuance to pay for previous stimulus measures is one reason why yields are creeping higher. More stimulus means more bonds, weight on price, and upwards pressure on rates.
2. It lifts inflation expectations. MBS prices are the instrument that provides mortgage rates, and market forces/inflation are the main drivers. If inflation goes up, rates go up and vice versa.
3. It helps revive and stimulate the economy. This is good news, and bonds generally hate good news.

Fed Safety Net
At the moment, the Fed continues to purchase $120B in Treasurys and MBS each month to help pin down long-term rates. Should rates continue to tick up, there will be a point where the Fed would likely jump back into the market and do more by purchasing more MBS and Treasurys to keep rates from rising. If this sounds like the Fed is keeping rates artificially low, they are. They also recently said they will buy "at least" $120B each month, so the door is open to do more if called upon.
Bottom line: With only a couple weeks into 2021, we are already seeing a shift towards slightly higher rates.