Marc's Mortgage Matter's

The Transportation Security Administration recently implemented new search routines at airports. There is growing public controversy over pat downs and full body scans at airports, The TSA Administrator stated that "there is a continual process of refinement and adjustment to ensure that best practices are followed." To go along with this change in policy, a series of TSA airport signs are about to be released, with catchy slogans:
"Can't see London, can't see France - unless we see your underpants."
"Grope discounts available."
"Don't worry - my hands are still warm from the last guy."
"Wanna fly? Drop your fly!"
"We rub you the wrong way, so that you can be on your way."
"It's not a grope, it's a freedom pat."
"We handle more packages than the UPS."

One can write several volumes about how movements in the dollar impact mortgage lending, and our economy in general. The value of the dollar is certainly tracked in the financial press. For example, the New York Federal Reserve reported that the U.S. monetary authorities did not intervene in the foreign exchange markets during the July-September quarter. But during that period the dollar depreciated 10% against the euro, 5% against the Japanese yen, and its trade-weighted exchange value declined about 7%. So what? Well, a country that cuts interest rates makes its currency less attractive to the world's fixed-income investors, and money is moved to countries that pay a higher yield on investments.

The quantitative easing program (QE2) pumps dollars into the economy, critics say by merely printing money, and the increased supply weakens the value of the dollar relative to other currencies. Over 50% of our US debt is held outside the United States. When foreign investors sell US securities, they must convert the US dollars they receive into their own currency. If the value of the dollar falls, then the value of their US investment falls in relative terms to their currency. As a result, as the dollar drops foreign investors may reduce their purchases of US securities, including mortgage-backed securities (MBS), which would cause yields to increase. This fear of weaker foreign demand hurt mortgage rates.

But unfortunately it is not that simple. Recently China's rate hike was another negative for US mortgage rates. Yields must rise in other markets to compete with higher yields in Chinese markets. But then the recent troubles in Ireland caused the typical "flight to quality" and increased the purchases of fixed income US securities - including mortgage-backed securities. If the Chinese currency (yuan) is being valued too low, it makes their exports cheaper and more competitive world-wide. QE2 is designed to increase the demand for Treasury securities and therefore to hold down interest rates and stimulate the economy, which impacts the value of the dollar - but the currency value of many developing countries has skyrocketed during this recent time period. And the dollar index raising has also caused interest rates to rise in line.

But the country that has the most inflation ends up with the weakest currency, the strongest exports and the best performing risk assets. A drop in the dollar can help US companies sell their products overseas, but makes imports more expensive. One could almost make a bumper sticker that said, "No country has ever deflated their way to prosperity!"

For the most part, mortgage rates leveled off this week after a minor bump put us back to "only" fantastic September levels. The most recent economic news, though, shines a rosier light on the economy, and if economic improvement is actually gathering steam, mortgage rates are less likely to move lower to any great degree, barring any new widespread crisis. Mortgage rates bumped up to 4.78% a steep bump up.

With the warming of the economic data, mortgage rates don't really have much reason to decline. At the moment, even mildly improving fundamentals suggest firmer interest rates are to be expected, but there's no reason for them to move upward by very much in this climate, either. It seems to us that a lot is riding on the next employment report, due this Friday. If the pattern of layoffs is any indication, hiring may be picking up a little more than expected, particularly in private employment, which added 159,000 people to payrolls last month. If the report comes on the stronger side, mortgage and interest rates in general will have some space to rise. Until then, and if not, we may simply have found a new level to hang around at as we wait for true faster economic growth.

As you gather with family and friends for the holiday season, please take a minute to consider and give thanks for those in our armed services, far away from their loved ones, who serve all of us at great distance and at great personal cost.

A hooded robber burst into a Round Rock, Texas bank and forced the tellers to load a sack full of cash. On his way out the door a brave Texas customer grabbed the hood and pulled it off revealing the robber's face.
The robber shot the customer without a moment's hesitation.
He then looked around the bank and noticed one of the tellers looking straight at him. The robber instantly shot him also.
Everyone else, by now very scared, looked intently down at the floor in silence.
The robber yelled, "Well, did anyone else see my face?"
There are a few moments of utter silence, in which everyone was plainly afraid to speak.
Then one old man tentatively raised his hand and said,
"My wife got a good look at you."