About Mortgage Lenders
The Primary Market The primary market consists of mortgage loan originators, the community of banks, lenders, credit unions, saving and loans (virtually any lending institution willing to originate and underwrite a mortgage). In fact, the secondary market uses the term "originator" to refer to the original lender.
Most lenders make loans with the understanding they may sell those loans to the secondary market (see below).
Why would a lender sell your loan after all the trouble you've both gone through to get it in the first place? Two reasons. First, the lender wants to free up the money it has invested in your mortgage to make additional loans (which may in turn be sold again to the secondary market).
The Secondary Market The secondary market comprises of insurance companies, pension funds, banks, securities dealers, thrifts and government-sponsored enterprises such as Fannie Mae and Freddie Mac. These organizations invest in mortgages made by lenders in the primary market.
The loan you negotiate (especially fixed rate loans) will probably be sold into what is known as the "secondary market."
The secondary market won't change your mortgage. But it may change where you pay and who receives your money. The reason - the financial community views a mortgage as an asset. And like any asset, it can be bought and sold. More than likely, your mortgage will be sold to another party (perhaps more than once during the life of the loan). Regardless of who "buys" your loan, both you and that buyer are bound by the terms you negotiate with the original lender.
Fannie Mae and Freddie Mac, Who and What Are They? Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are large, quasi government charted corporations with significant influence in the mortgage industry. Technically, Fannie Mae and Freddie Mac are "government sponsored enterprises." They are publicly traded (you can buy stock in either organization), profit oriented, and responsible to their shareholders; but Congress retains some control over their operations.
How influential are Fannie Mae and Freddie Mac? Together, they buy approximately half of the family home mortgages originated each year. The two organizations compete directly and follow very similar business plans. Fannie Mae is the largest corporation in America in terms of assets. This economic clout enables the pair to influence the mortgage market nationwide (generally in favor of the home buyer) in the following ways:
- Allowing lenders in the primary market to originate new loans by purchasing mortgages made according to conforming guidelines.
- Helping lessen regional differences in interest rates nationwide by encouraging investment in areas with high interest rates, which promotes competition among lenders (pushing interest rates down)
- Providing a bridge between capital markets and the mortgage market, increasing the availability of mortgage dollars.
About Mortgage Rates
Interest Rate Forecasting
There are a variety of economic indicators used by the Federal Reserve, Wall Street bond traders and institutional investors to forecast the direction of interest rates. Some indicators are released by the Federal government; others are released by private research firms and trade associations.
Residential mortgages, US Treasury securities, municipal and corporate bonds are part of what is termed the "long term debt market" known as the "Capital Markets." There are many variables which influence the rates on long-term debt instruments. An understanding of key economic indicators can provide clues to the future direction of interest rates.
Beige Book
This is the Federal Reserve's analysis of the economy and an explanation as to why they do what they do. This is published before each meeting of the FOMC and gives some insight into their intentions.
Gross Domestic Product
The gross domestic product (GDP) is considered by many to be the most important economic indicator published. Providing the broadest measure of economic activity, the GDP is considered the nation's report card.
The four major components of the GDP are: consumption, investment, government purchases, and net reports.
Consumption spending represents about 56% of the GDP and is divided into three categories: durable goods (items expected to last more than three years), non durable goods (food and clothing), and services.
Investment spending accounts for about 14% of the GDP and covers three categories: nonresidential (spending on plants and equipment), residential (single-family and multi-family homes), and the change in business inventories.
Government spending represents about 17% of the GDP, covering spending on defense, roads, schools, etc.
Net exports account for the balance or about 13% of the GDP. Imports deduct from GDP and exports add to the figure. In recent years, the U.S. has consistently experienced net imports, with imports exceeding exports.
The economy's average sustainable growth rate has historically been between 2.5% and 3.0%. Rapid economic expansion, growth, in excess of the average sustainable rate, is generally short-lived, as it can lead to inflation and, in turn, cause the Federal Reserve to tighten monetary policy in order to slow growth. An economic downturn, or negative growth, is known as a recession. During a recession, the Fed may lower interest rates to stimulate the economy and increase the growth rate.
Bad news is good news for the bond market. A weak GDP is received favorably by bond investors; a strong report causes concern the Fed might need to intervene and raise interest rates (a negative for the fixed income market).
Consumer Price Index
The consumer price index (CPI) in considered, by most economists to be the most important measure of inflation. It compares prices for a fixed-list of goods and services to a fixed period of time.
The consumer price index (CPI) in considered, by most economists to be the most important measure of inflation. It compares prices for a fixed-list of goods and services to a fixed period of time.
The CPI categories and respective weightings are:
- Housing 42%
- Food 18%
- Transportation 17%
- Medical Care 6%
- Apparel 6%
- Entertainment 4%
- Other 7%
Unlike other measures of inflation, which only cover domestically-produced goods, the CPI covers imported goods, which are becoming increasingly important to the US economy.
Analysts focus on the "core" CPI, which excludes the volatile food and energy sectors. The core index is considered a more accurate measure of the underlying rate of inflation.
The bond market can be extremely sensitive to changes in the CPI which exceed expectations. Example: a higher-than-expected CPI can cause bond prices to fall and yields to rise. Likewise, a lower-than-expected figure is bullish for the market, causing the bonds to gain and yields to fall.
Producer Price Index (PPI)
The producer price index (PPI) is a monthly indicator of inflation. It is a measure of wholesale prices at the producer level for consumer goods and capital equipment. Unlike the CPI, it does not included services.
The PPI categories and respective weightings are:
- Finished Consumer Goods 40%
- Food 26%
- Capital Equipment 25%
- Energy 9%
Employment - Payment Jobs
Except for the GDP, the government's employment report is the most significant economic indicator reported. It provides information on employment, the average workweek, hourly earnings, and the unemployment rate.
The data covers the following major categories:
- Goods-Producing
- Manufacturing
- Construction
- Mining
- Service-Producing
- Transportation and Public Utilities
- Wholesale Trade
- Retail Trade
- Finance, Insurance, and Real Estate
- Services
- Government
Jobless Claims
Jobless claims are US Labor Department reports of initial state jobless benefit claims, seasonally adjusted. They give an indication of potential "wage inflation" when they remain low.
Housing Starts
The housing industry accounts for approximately 5% of the overall economy. Housing starts is important because it is a leading indicator. Sustained declines in housing starts slow the economy and can push it into a recession. Likewise, increases in housing activity triggers economic growth.
Building permit data is released at the same time as housing starts. Permit activity provides insight into housing and overall economic activity in upcoming months. It is so important that it is included in the index of leading economic indicators.
Housing activity is directly impacted by mortgage rates. Higher interest rates increase housing costs and reduce the number of qualified borrowers, thus, a decline in home sales and drop-off in starts. Conversely, lower interest rates increases housing affordability and spurs homes sales and housing starts.
Housing data can have a significant impact on the bond market. A stronger-than-expected report is viewed negatively, suggesting strong growth and possible inflation. Housing data can have a significant impact on the bond market. A weak report has the opposite effect on the market.
National Association of Purchasing Managers
The National Association of Purchasing Managers (NAPM) index is based on a survey of over 250 companies, twenty-one different industries, covering all 50 states.
The survey covers the following six areas:
- Production
- Orders
- Commodity Prices
- Inventories
- Vendor Performance
- Employment
Participants are asked to evaluate their position in each of these categories as "up," "down," or "unchanged." The calculated index is then adjusted for seasonal changes.
The bond market views a strong number as negative and a weak report as bullish or positive.
Retail Sales
This report contains valuable information about consumer spending the consumption part of the gross domestic product (GDP). Consumption spending accounts for more than one- half of GNP.
Retail sales data represents merchandise sold for cash or credit by retailers. Durable goods, such as autos, make up about 35% of the figure. The balance consists of non-durables, like gasoline, restaurants, and general merchandise.
There are several drawbacks to the report. The data covers purchases of goods only, not services. Services are becoming a major factor in our "new" economy.
The bond market reacts negatively to a strong report.
Durable Goods Orders
A leading indicator of manufacturing activity. Increases in orders generally leads to increases in production. Drops in orders are followed by a build-up of inventories and, eventually, a decline in production. Economists use durable goods data to forecast changes in manufacturing.
Durable Goods are hard to predict. A strong report is bad news for the bond market, causing the bond to slump. Likewise, a weak report is viewed positively by investors.
Leading Economic Indicators
This is a composite index of economic variables that generally lead changes in overall economic activity. This index is followed as a forecasting measure of broader indicators of growth such as payroll employment and GDP. It is also followed as an early indicator of future inflation. This is not viewed as an important release because it is a rehash of previously released data.
Industrial Production
This report measures the physical volume of output of the nation's manufacturing sector, including factories, mines, and utilities. Goods-producing industries account for about 45% of the economy. The balance, the service sector and construction industry, account for the remaining 55%.