-On mortgage rates:

We are unlikely to see a significant market disruption in the Agency market stemming from the Fed’s retreat. … if and when we see mortgages cheapen, we expect to see private institutions stepping in to buy. Even a 15 basis point move could spark a flurry of buying. Therefore, we don’t expect a major widening of mortgage spreads …

Translation: He doesn’t expect to see mortgage rates move sharply higher following the Fed’s expiration of the TALF program which helped subsidize mortgage rates over the past year.

-Will the Fed reenter the MBS market and buy rates down again?

Probably not. Barring a major double dip in the economy or housing, private balance sheets have plenty of room to add Agency MBS (unlike in late 2008, when the Fed program began).

-On housing:

We continue to believe that lower-priced homes bottomed last year. Higher-priced homes should bottom later this year. If one labels recovery as prices rising dramatically, we do not foresee that anytime soon.

Mortgage rates are unchanged from Friday.

This week’s schedule for US Treasury fixed-income securities auction:
The US Treasury is scheduled to sell a high volume of T-bills, notes, and bonds this week. On Monday, $6 billion in Treasury-inflation-protected 19.5-year notes will be auctioned; along with $32 billion in 13-week bills and $31 billion in 26-week bills. On Tuesday, $27 billion in 52-week bills will be auctioned, along with a heart-stopping $42 billion in two-year notes. On Wednesday, the Treasury will auction $39 billion in five-year notes. And on Thursday, $28 billion in seven-year notes will be auctioned. In total $205 billion in securities will be sold.

Here is a link to read the blog post on the new mortgage rules which could delay real estate closings.

Current Outlook: bias towards locking on short-term transactions with additional supply of treasury bills.

The chart below shows mortgage rates ticking higher after hitting a low:

We pointed out earlier in the month the importance of the financial sector in this 2nd-quarter earnings season.  This morning Morgan Stanley & Wells Fargo reported earnings.  Morgan Stanley reported a 3rd straight quarterly loss and Wells Fargo provided weak guidance for the second half of the year.  These two reports are weighing on stocks which should help mortgage rates.

Given that mortgage-backed bonds rallied sharply yesterday we may see traders pull profits off the table which would cause rates to reverse back higher.  For now mortgage rates are extremely attractive but we could see them go a touch lower.  We are shifting to a neutral position.

Current Outlook: neutral

Watch today’s you tube video for details on what he said.

Click this link to view Fed Chairman Bernanke’s Op-ed piece in this morning’s WSJ.

Current Outlook: floating

The Commerce Department reported this morning that housing starts in the month of June increased by 3.6% which is much higher than expectations.  With historically low interest rates & lower house prices some analysts believe that this morning’s report signals a “bottom” in the housing market.  Ironically, this news is helping to pressure mortgage rates higher in the near-term.

In another sign of stabilization Google announced today that they were beginning to see demand for advertising firm.  Their encouraging message is also supporting stocks which is hurting mortgage rates.

Not all the news is positive this morning.  Financial bellwethers Citigroup & Bank of America posted mediocre 2nd-quarter earnings.  Furthermore, CIT, which we covered in yesterday’s ‘rate update’ is still scrambling to avoid bankruptcy.

It does look like rates will be higher this afternoon so we recommend locking in at current levels.

Current Outlook: locking

We are shifting our outlook to a neutral stance because mortgage-backed bond prices appear to have technical support at the current levels. Should prices dip below support we will shift our outlook to locking. Tomorrow the Labor Department will be releasing consumer inflation data (CPI) & on Thursday JP Morgan is scheduled to release earnings.

Current Outlook: neutral

Currently stocks are trading modestly higher following positive comments made by banking analyst Meredith Whitney on CNBC this morning.  Her comments have helped push financial stocks higher.  If you recall back to last week’s ‘rate update’s we believe that the financial sector will play an important role in determining the direction of mortgage rates for the coming weeks.  Although stocks are higher mortgage rates have not moved higher.

There is a strong possibility for volatility tomorrow as Goldman Sachs is scheduled to release 2nd-quarter earnings and the Labor Department is scheduled to release inflation-related data.  Given that mortgage rates are .75% lower than they were four weeks ago we maintain a bias towards locking.

Current Outlook: bias towards locking

The chart to the left shows that the “implied volatility” in the interest rate market has increased rather significantly since the beginning of the year.

What does this mean for mortgage rates?

First, it means that predicting mortgage rates accurately will likely be difficult in the coming weeks.

Second, it means that we may see wild swings in mortgage rates.  Instead of gradual increases and decreases over time that we’re accustomed to we might see more severe adjustments in shorter periods of time.

As always, if you’re happy with the fact that your interest rate is at a historically low level and your payments are comfortable it is probably a good idea to go ahead and lock in your rate to protect yourself.

Although mortgage-backed bond prices declined yesterday afternoon threatening to push mortgage rates higher; they have rallied this morning on weaker than expected consumer confidence figures.

Early on in 2nd-quarter earnings season there hasn’t been too many surprises.  The bulk of reports will begin to roll out next week and we still believe this is the most important story to follow.  We’ll keep you posted.

Current Outlook: bias towards locking