Last week’s jobless claims exceeded expectations and pointed to some encouraging news for the economy’s outlook. Initial claims fell significantly, down 33,000, in the week of October 3. The four week average is at 539,750, down 9,000 from the previous week. Continuing claims also fell by a robust 72,000 to 6.040 million. This was one of the better weeks of employment news we have seen recently.
Most of the Treasury auctions I wrote about last week were well received. And we had a ton of them going on every day. But Thursday’s 30 yr bond auction did not fare so well. By definition, Treasury notes are sold at regularly scheduled public auctions. The competitive bids at the auctions determine the interest rate paid on each note issued. Dealers can hold, resell or trade the securities with other firms. Before 2009, the 30 yr auctions were held quarterly. This year the Treasury added more auctions that occur almost on a monthly basis and help fund the expanding federal deficit. This auction fared much worse than the last one in September, and reflects a lack of enthusiasm for holding long term government debt. And rates took it on the chin Friday as a result.
This week brings us a couple of big reports to watch out for. Mainly, Retail Sales on Wednesday and Friday’s Consumer Sentiment. Both these reports will give us a glimpse into the hearts of consumers as we approach what could be a tough holiday season. Since consumer spending makes up nearly 70% of the economy, both of these reports will be heavily watched.
On the mortgage side, we are starting to hear some unsettling rumblings coming from FHA. As you know, both Fannie Mae and Freddie Mac are now effectively run by the government due to horrific losses from mortgages gone bad. FHA took up the slack for what used to be considered Subprime loans. Subprime loans were made to people with less than perfect credit. As Fannie and Freddie increased their mortgage guidelines to unheard of and ridiculous standards, FHA became the place to get a mortgage. FHA doesn’t originate loans, but it does guarantee the loans through the mortgage company that originates the loan. And FHA issues its own mortgage insurance, instead of going to outside private companies. And these private insurers are more difficult to get approvals from than Fannie/Freddie!! Here is an example. There are currently over 10,000 zip codes in the US where you cannot get private mortgage insurance at all. That is almost 25% of all the zip codes in the country! So what that means to a consumer is that unless you put down 20% or more you would have no choice but to use FHA.
As recent as one year ago, if you have a 580 credit score you could get an FHA mortgage. Now the minimum is 620 and rising fast. Lenders now impose a pricing or interest rate adjustment on scores below 660. FHA is still the way to go mainly because of its mortgage insurance and 3.5% down payment (versus 10% down for Fannie/Freddie, mainly due to the difficulty in getting private insurance). But FHA is now starting to have the same problems that Fannie and Freddie did with underperforming loans. If FHA’s problems continue, we could see higher credit score requirements and a higher minimum down payment. If you are looking to buy a home and are waiting for prices and/or rates to drop, you may wait yourself out of a mortgage entirely. I do not see an end to these high mortgage guidelines any time soon. And I actually expect them to get more strict for at least another year.
Interest rates hit a wall Friday and I don’t see rates getting much lower. We are seeing technical factors keeping rates from getting better. In other words, there is a “ceiling of resistance”, or a price that rates reach and are unable to break through. When they do not break through, they fall (raising rates) and then start the climb back towards the ceiling of resistance all over again. Sometimes rates break through this ceiling and we see incredible rates for a period of time. This could be for a couple of days, hours, or even sometimes only for a couple of minutes. Our current ceiling has been one we have not broken through, and Friday rates really took a hit as they bounced against this ceiling and fell hard. We may see rates come back this week some, but I am recommending locking all loans that are 30-45 days out.
Thanks for reading and I hope you learned something.
Have a great week!
Mike
Mike Haeffner, CMPS
Vice President
1st American Trust Mortgage
10270 Old Columbia Road, Suite 150
Columbia, MD 21046