2010 was a mortgage banking year synonymous with the “perfect storm.”

• Double-dip recession fears,
• European debt crisis,
• rising unemployment, etc. etc. took the 10-year treasury note from 3.75% in January to 2.39% in October.

Texas mortgage rates dropped into the high 3’s to low 4’s and everyone and their brother wanted to refinance Austin mortgages. Those people that had a job and remained confident with their personal balance sheets, took a leap of faith and bought a new home at the highest affordability levels in history.  The Fed started operation “Quantitative Easing” and put 8k in every first time home buyers pot.  Life was good and it still is.

Investor sentiment changed course in late October, feeling more confident the economy, which was once in recession, is now making the transition from recovery to expansion. That sentiment, coupled with a fickle and illiquid holiday market, took the 10 year note on a ride to finish the year at 3.31% after printing 3.54% in December.

So what’s ahead in 2011? No one knows for sure.  We do know that treasury and mortgage pricing will be looking for clues.  Clues as to whether or not the economy is really expanding or needs more time to clear the mine fields.  Will the debt crisis in Euro land heal or blow up?  Will the employment picture in our country start to improve?  Answers to both will unfold as we move into the first quarter.  Our big picture outlook tends to follow the thinking of expansion within the economy but will be two steps forward and one step back.

Keep in mind that we have come though a time period that has seen historic financial devastation and the consequences that go with it. Think Fed and governmental regulation.  Getting back to even will take a lot longer than in previous recessions.  Patience will be a virtue, something few of us have.  The future will create opportunity.  Once the expansion can be trusted, consumer confidence will improve, employment will gain strength, and with 11 million housing units available to purchase (homeowners selling, foreclosures, etc), affordability will be great and consumers will start to see that they are not alone when making an offer on a home.

Time table on this recovery is optimistically 3^rdquarter 2011. Realistically, early 2012.  In the meantime, many mortgage lenders will struggle with changes in compliance and regulatory issues. Their costs will become a bigger concern as Uncle Sam forces them to conform.  Loan officer compensation will affect everyone and most certainly mortgage company balance sheets.  Fortunately, I work for PrimeLending, A PlainsCapital Company. PrimeLending is at the forefront of the mortgage industry and quite simply: PrimeLending allows me to provide the best rates, loan products, customer service, 30-day closings and more to my clients. This mortgage company enables me to make promises to clients and realtors and KEEP them.

As far as the market is concerned, the tactical bias is neutral to start the year. We feel with a new set of books, investors and traders alike will see yields have moved a little too far a little too fast.  This should give us a New Year’s rally or at least some stability in mortgage pricing.  10 year note yields should produce a short term range of 3.30% to 3.39% (currently at 3.35%).  Longer term will depend on a number of factors, the biggest being employment or the lack thereof.  We’ll get that party started with this Friday’s release of December 2010 figures.

Private sector jobs led the way, adding 154K to post the strongest reading since April.  Manufacturing was on the other side of the ledger, shedding 7K from the payrolls.  Market reaction was close to our call.  Matter of fact, our hats off the JPMorgan for their call at plus 110K.  RBS and PrimeLending came in second but will try harder!

Currently, the 10 year note is off 5/32’s.  Mortgage backs are off 12/32’s on the low note rates but higher rates are only off 5/32’s.  Not bad considering the positive news.  Reason here is the Fed is still the elephant in the room, looking to buy treasuries in the belly of the curve (5’s through 10’s), supporting the market.  Stocks liked the news but soon gave up the trade (currently down 2 points on the big board) as the dollar gained strength.

We see the market and the economy in a transition phase.  One that will continue to hold steady and improve, ever so slightly as time goes on.  The Fed, and their magic checkbook will see to that.  This country needs to see jobs growth of at least 250K per month just to break even.  That will take time allowing Austin mortgage rates to stay low into yearend and beyond.

Mortgage backs have slipped into the red. As I mentioned last week, the next few days could be high volatility, market moving affairs with the mid-term elections, FOMC meeting, and a boat load economic data culminating with the Employment Report on Friday.

New Home Sales were also released, up 6.6% to an annual rate of 307K units.  Good news for builders yet they will continue to look over their shoulder at the massive amount of foreclosed properties still coming to market.  The market continues to slip day after day.  Reasons behind the move seem to be “from 10,000 feet”, talking about how quantitative easing will raise inflation expectations, etc. etc.  Seems a stretch to me.

Overall, we do not see that the fundamental economic picture has changes much at all.   Technically, we are in an intermediate term bear market correction.  One that could push the market to yields on the 10 year of 2.75%/2.78% (currently 2.70%).  If correct, we should see good support from the 62% Fibonacci level (comes in around 2.75%).

Caution is advised to Austin mortgage borrowers!

Leading Economic Indicators were also released, up .3%.  This index has posted positive gains for the last three months yet the six month index is down .8%.  Doing better but a long way to go.  Last on the data plate was the Philly Fed Index which rose from minus .7 to plus 1.0.  Slow growth in manufacturing did the trick.

Stocks have been all over the board but holding a positive bias so far today.  The big board is up 102 points, primarily on the heels of solid earnings from Caterpillar and Mickey D’s.  Companies with global exposure are the place to be.  Bonds, notes, and mortgage backs are seeing some profit taking today.  Currently, the 10 year note is off 10/32’s while current coupon mortgage backs are off 7/32’s.  Mortgage backs have been trading like a roller coaster, down 10/32’s and then a minute later, down 4/32’s.

Weakness today has formed bearish divergences on the 60 minute chart.  ADX has turned bearish as well.  These signals hint that a new leg down is forming on the triangle pattern we follow.  Odds are starting to increase that the next move could send the 10 year note down another ½ point.  Austin mortgage borrowers are advised to be defensive. Stocks will be the key.  If they slip, we’ll do better.  Overall, QE2 will keep a floor under the market.  Just the same, we’ll need to deal with the volatility.

Nevertheless, stocks are off 200 and treasuries/mortgage backs have been goosed higher.  Currently, the 10 year note is up 5/32’s while mortgage backs are plus 6/32’s. Shaping up to be a nice day.

Stocks have been in the driver’s seat today, slipping by over 100 points as Big Blue (IBM) and Apple disappointed the market with weak results. China, raising its lending rate by .25%, helped the dollar but put additional pressure on stocks. You would think that note and mortgage back pricing would have gotten a boost from all this equity punishment. Not to be. Currently, the 10 year note is off 8/32’s. Good news is that mortgage backed securities have tightened to treasuries.

Overall, trading today has been a range-bound affair with prices above yesterday’s lows and below yesterday’s highs. Traders call this an “inside day” which is simply a neutral pattern. Expecting mortgage pricing to hold steady is a pretty good bet.

Retail Sales and strong manufacturing results out of the Empire State didn’t help either.  Mortgage backs performed better than treasuries as spreads tightened.  Technically, it is time to pay attention.  Weak day structure on the 10 year note chart is reinforced by a second consecutive day close below the 8 day moving average.  That’s the bad news.  Good news is that intraday studies are very oversold and the market has good support close by.  So to speak, we are at that line in the sand.

Next week will be the true test, one that we would expect will see the market trade sideways to a little better (slightly improving mortgage pricing). Overall, we think this is the low probability trade as QE2, even though it is fully priced in, is a force to be reckoned with.  When the Government is the buyer of choice, most follow the ant age, “Don’t fight the Fed.”

Call it neutral/bearish and not a market to throw caution to the wind.  Next week’s data is light with Housing numbers, Leading Economic Indicators, Philly Fed Survey, and the Fed’s Beige Book.  Have a great weekend.