Economy Gaining Steam

Mortgage rates were a bit of a rollercoaster last week. To cut to the chase, rates are lower out of the gate compared to nearly all of last week.

News that pressured rates higher included another drop in weekly unemployment claims, along with an increase in consumer confidence. Labor reports continue to point toward the U.S. economy gaining steam. Reports in Asia also point toward improving manufacturing and exports.

News pulling rates back down was primarily the proposed reform of Government Sponsored Enterprises, as well as continued tensions in Egypt, causing investors to opt for the relative safety of U.S. government debt.

When the Treasury released their white paper on proposed reform of Government Sponsored Enterprises (namely Fannie Mae and Freddie Mac), the proposal indicated that the Government take a smaller role in the mortgage market over the long term, which most notably included raising the cost to insure mortgage backed securities for investors. By raising this cost, the intent is to stimulate more private investment and support for the mortgage market, with the government only targeting a 40% share (vs. close to 100% currently). The result was a drop in interest rates, not only because there was some long awaited transparency with what to expect, but investors also see stronger performance with the loans originated under the current structure. Expect more to take shape here in the coming months.

To start the week, eyes are on the White House’s 2012 budget proposal, and the resulting impact on economic growth. Rumors currently range from small to broad-based cuts to bring the budget deficit within control (the 2011 deficit is expected to reach $1.65 trillion, the largest amount in history). The remainder of the week brings us several important releases, including minutes from last week’s Fed meeting, Retail Sales, and Consumer and Producer Price Indices. Not to mention, the markets will continue to keep a watchful eye on tensions in the Middle East.

Keep an eye for any news regarding the Fed’s “Quantitative Easing” (QE2) plans. With the economy gaining steam, pressure continues to fall on the Fed to potentially cut short their plan to purchase the remaining ~$300 billion Treasuries of the initial $600 billion plan. This could create some upward pressure on rates.

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