Feb. 25, 2008: Mortgage chatter to begin the last week of February: Thornburg rumors dispelled

Feb. 25, 2008: Mortgage chatter to begin the last week of February: Thornburg rumors dispelled Rob Chrisman

How many times has someone from Capital Markets explained the inverse relationship between price and yield in bonds? Rates and prices move in inverse fashion with bonds. If you buy a bond for $100, and it pays you a fixed payment of $5, the yield is 5%. If you have to pay $200 for it (the price doubles), suddenly you’re only earning 2.5% (the rate goes down). Conversely, if you pay $50 to earn $5 (price dropped), you earn 10% (rate increased). Simple. Mortgages loosely track the 10-yr Treasury yield, but lately this relationship has gotten way off-track, due to mortgage-related items. Supply, demand, etc., confusion, are all making mortgage prices react, regardless of what Treasury yields are doing. Investors in jumbo mortgages are having trouble estimating their possible prepayment (early pay-off) speeds, further compounding the uncertainty in pricing certain mortgages.

Last week Thornburg, who stopped funding loans for several weeks last year, was the subject of further rumors of their demise. Their position, however, is that, “Due to the recent fluctuations in the marketplace, we have begun receiving an inordinate amount of loan underwriting submissions and loan funding requests from both channels.  We have extended out underwriting turn times to 4-5 days and funding requests have added an addition 24-48 hours. This has caused a back-log of loans in the funding queue and we are working to clear the backlog. We are funding loans.”

There were also rumors of Cherry Creek, a retail net-branch operator headquartered in Colorado, running into financial difficulties, but there was no confirmation of this.

The market seems to be comfortable, in the short-term, with rates where they are: the 10-yr around 3.80% and conforming conventional 30-yr ranging from 5.75-6.25, depending on if the borrower wants to pay or receive a rebate. (Mortgages are worse by about .125 this morning.) The only news out today – Existing Home Sales – is not expected to move rates, but there is quite a bit of news coming out later this week. Tomorrow we will see the Labor Department’s Producer Price Index (PPI) for January. It measures inflationary pressures at the producer level of the economy, one of the reasons why rates are as high as they are: fears of inflation. It is expected to show an increase of 0.3% in the overall reading and a 0.2% rise in the core data. Also tomorrow morning is the release of February’s Consumer Confidence Index, expected to show a decline in confidence from 87.9 in January to 82.5 this month. Wednesday we’ll have Durable Goods, expected -4.0%, and then Thursday we have the first of two revisions to the 4th Quarter GDP. Old news? Perhaps. Analysts’ forecasts currently call for a 0.8% reading, indicating that the economy was a little stronger in the last quarter of the year than initially thought. Lastly, on Friday we have Personal Income & Consumption, and the University of Michigan’s Consumer Sentiment Survey. And besides all of that, we have two Treasury auctions for $38 billion to absorb this week, plus Bernanke’s testimony on Wednesday.

Speaking of auctions, the Federal Reserve established a temporary Term Auction Facility (approved by the Board of Governors of the Federal Reserve System) and the establishment of foreign exchange swap lines with the European Central Bank and the Swiss National Bank (approved by the Federal Open Market Committee).  Under this program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window.  By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, it was thought that this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress. American banks are thought to have borrowed as much as $50 billion in short-term loans from the US Federal Reserve in mid-February, offering further evidence of the ever-deepening problems facing the banks as a result of the sub-prime mortgage crisis in the United States.

The local news station was interviewing an 80-year-old lady because she had just gotten married — for the fourth time. The interviewer asked her questions about her life, about what it felt like to be marrying again at 80, and then about her new husband’s occupation. "He’s a funeral director," she answered. "Interesting," the newsman thought. He then asked her if she wouldn’t mind telling him a little about her first three husbands and what they did for a living. She paused for a few moments, needing time to reflect on all those years. After a short time, a smile came to her face and she answered proudly, explaining that she’d first married a banker when she was in her early 20’s, then a circus ringmaster when in her 40’s, later on a preacher when in her 60’s, and now in her 80’s, a funeral director. The interviewer, quite astonished, asked why she had married four men with such diverse careers. She smiled and explained, "I married one for the money, two for the show, three to get ready, and four to go."

Rob