Mortgage Rate Volatility Continues

In a week packed with major economic news, the biggest story for mortgage markets was the widening spread between mortgage backed securities and Treasury bonds. Issued by the US government, Treasury bonds are generally considered to be the benchmark for a “safe” security, since the risk of default is extremely low. During the week, the economic news was mixed, and Treasury rates barely changed. Mortgage rates, however, jumped by about half a point. Investors are demanding a higher return from mortgage backed securities, and the result is higher mortgage rates. In another unusual reversal, the mortgage market has been more volatile than the Treasury market, and wide swings in mortgage rates have become a daily occurrence. This past 30 day window could be the most volatile period of daily pricing movements the mortgage markets have ever experienced.

On the economic front, the highly anticipated Employment report failed to meet even Wall Street’s reduced forecast. Against expectations for a gain of 25K new jobs, the economy lost -63K jobs in February, and the figures for January and December were revised lower as well. This marked the largest monthly decline since March 2003. The Unemployment Rate surprisingly fell to 4.8%, but that reflects a large number of people who stopped looking for a job last month, meaning that they officially left the labor pool. Once again, the manufacturing and construction sectors showed the greatest weakness. Until November, the service sector had been steadily producing job gains of 100K or more per month, but even that sector barely produced any new jobs in February.

Big news came out from the Department of Housing and Urban Development (HUD). In accordance with the new legislation passed a couple of weeks ago, HUD released the new loan limits for FHA, Fannie Mae, and Freddie Mac, and they did it a week earlier than expected. The new minimum for FHA is $271,050 nationally and many Metro Markets received increases. In the Midwest, Minneapolis/St.Paul Metro area FHA limit was raised to $365,000 and the Chicago Metro area FHA limit increased to $410,000. The Fannie/Freddie minimum remained unchanged at $417,000 throughout the Midwest.. The formula is based on 125% of each region’s median price within the posted limits. As a practical matter, it will still take some time for Fannie Mae, Freddie Mac, and FHA to prepare their systems and implement the changes.

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