Looking Back And Looking Ahead: October 20, 2008

Last week, the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.

Mortgage markets got whipsawed, too.

From day to day, huge rate swings made mortgage rate shopping difficult. It wasn't uncommon for lenders to change pricing 3 times per day.

When the week closed, though, rates were lower than at Market Open Monday, marking the first week of improvement in mortgage rates since early-September.

Last week's constant mortgage rate movement had several causes:

-- Retail Sales data was weaker than expected
-- The Federal Reserve report showing a slowdown in all 12 regions
-- New evidence that commodity inflation pressures are easing

The biggest driver was -- and continues to be -- trader uncertainty.

As measured by the "Fear Index", market volatility reached an all-time high last Thursday. Investors moved into cash positions, selling assets of all types -- including mortgage bonds. This created an excess supply of bonds on the market which drove down prices and, in turn, pushed up rates.

But, there was a demand-side issue impacting rates last week, too.

If you'll remember, the first $250 billion of the government's Rescue Plan was meant to buy bad mortgage debt. Last week, however, those plans changed. Instead, the $250 billion was applied to the balance sheets of the nation's largest banks.

This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices. Again, mortgage rates rose as a result.

This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates -- more than 20% of the S&P 500 will report their July-September 2008 numbers.

If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern. Conversely, if earnings are strong, expect mortgage rates to improve.

(Image courtesy: The New York Times)

Looking Back And Looking Ahead: September 22, 2008

In a historic week for American Finance, mortgage rates rose considerably, reversing a 3-week trend through which rates had fallen.

The U.S. Treasury is the biggest reason why most conforming mortgage rates increased by a half-percent.

Hank Paulson's government group helped to restore investor confidence that had steadily eroded from concern to fear since July 2007, before succumbing to outright panic last week.

Wall Street nerves were so frayed that at one point

Wednesday, yields on government bonds were actually in the negative; investors were paying the U.S. government to hold and protect their money in exchange for a guaranteed loss of investment.

After the Treasury's interventions, however, a sense of normalcy returned to Wall Street. Money poured back into stocks, siphoned from the bond market and that pushed rates higher.

This week, it's anybody's guess what will happen.

From a data perspective, it's light -- there's Existing Home Sales, New Home Sales, and not much else. From a policy perspective, however, the week is heavy:

-- Congress is expected to authorize "hundreds of billions" for market support
-- Ben Bernanke and Hank Paulson will testify before the Senate Banking Committee
-- 7 members of the Fed are making public appearances

With so much rhetoric, it's difficult to predict how mortgage rates will perform this week. The stock market may be the best predictor of rates.

If stocks are up, risk-taking is back in vogue and the bond market should suffer, pushing mortgage rates higher. By contrast, if traders stay clear of stocks in search of safer investments, mortgage rates should fall.

(Image courtesy: Wall Street Journal)