Increased concerns about Europe helped mortgage rates improve this week, although the impact of the recently passed extension to the payroll tax reduction is beginning to push up mortgage rates for certain loans (discussed below).

The news from Europe was mostly negative this week. Economic growth in Germany was slower than expected. Negotiations on restructuring Greek debt did not progress as planned, increasing the risk of default. S&P is downgrading the debt of several European countries, including France. Finally, the European Central Bank (ECB) provided no relief, as it gave no indication that it would increase the level of aid available to troubled countries. As a result, investors shifted funds to relatively safer investments, including US mortgage-backed securities (MBS), which helped mortgage rates move lower.

The recently passed extension to the temporary payroll tax reduction contained a lightly publicized revenue raising provision to increase the guarantee fees charged on Fannie Mae and Freddie Mac loans. This fee results in higher rates for borrowers, and mortgage rates for loans not expected to close within the next month or so have begun to reflect this coming increase in guarantee fees. 

Also Notable:

Consumer Sentiment jumped to the highest level since May
Retail Sales ex-autos posted its first monthly decline since May 2010
The Fed's Beige Book reported that economic activity expanded at a "modest to moderate" pace The European Central Bank (ECB) made no change in rates

 Week Ahead

The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Industrial Production, an important indicator of economic growth, will come out on Wednesday. Housing Starts will be released on Thursday, and Existing Home Sales will come out on Friday. Philly Fed and Empire State will round out the schedule. Mortgage markets will be closed on Monday in observance of MLK Day.

Allen Cravello

During the first week of the new year, mortgage rates continued to be influenced by the same factors as in 2011. Stronger than expected US economic data roughly offset continued concerns about Europe, and mortgage rates ended the week nearly unchanged.

Friday's Employment report provided further support that the US economy is gaining strength to begin the new year. Against a consensus forecast of 150K, the economy added 200K jobs in December. The Unemployment Rate unexpectedly fell to 8.5%, the lowest level since February 2009, from 8.7% in November. The decline was partly due to the increase in jobs and partly due to people dropping out of the labor force. Average Hourly Earnings, a proxy for wage growth, increased 2.1% from one year ago. This was an encouraging report in nearly every area.

Many investors wanted to avoid risk during the final week of the year, which helped relatively safer assets such as US mortgage-backed securities (MBS). As a result, mortgage rates fell a little to end near the lowest levels of the year.

While economic growth was well below average for the first three quarters of 2011, a pickup during the fourth quarter bodes well for stronger housing market activity next year. Nearly all of the economic data released during the fourth quarter pointed to improvement. The labor market picked up, consumer confidence rose, and home sales activity increased. This week, in the final piece of housing data for 2011, Pending Home Sales rose 7% from the prior month, to the highest level of the year.

Increased concerns about European debt issues and the pace of global economic growth caused investors to shift to relatively safer assets this week. As a result, mortgage rates declined a little to near the lowest levels of the year.

Investors hoping for the European Central Bank (ECB) to expand its role in providing aid to euro zone countries were again disappointed. The ECB clearly indicated that it currently has no plans to introduce any major new aid programs. It appears that ECB officials believe that the appropriate next step in easing the debt issues is for tighter budgetary discipline. Along those lines, European Union officials suggested that working out the details of an agreement on fiscal integration between the many EU countries may take months. Investors responded to the lack of significant progress by selling many European stocks and bonds and purchasing relatively safer assets such as US government guaranteed Treasuries and mortgage-backed securities (MBS).

Little Reaction to EU Summit

With little economic data in the US this week, the focus was on Europe. Some investors were hoping that a more concrete plan to address the region's issues would be announced during the week, but they were somewhat disappointed. As a result, relatively safer assets saw gains, and mortgage rates ended the week lower.

A highly anticipated EU summit left investors with mixed feelings and produced little reaction in financial markets. On Friday, European leaders announced that at least 23 of the 27 members of the European Union have agreed in principle to tighten their fiscal coordination and to limit budget deficits. The details, which will determine the effectiveness of the plan, are to be worked out in the future. In essence, investors viewed this news as only a small step forward.

New Leadership in Italy and Greece

With little economic data in the US this week, events in Europe were the primary influence on mortgage rates. During the week, shifting sentiment about the risk posed by Italy caused a high degree of volatility. By the end of the week, though, mortgage rates were little changed from last week.

Italy was the center of attention this week. While an important budget vote passed, Prime Minister Berlusconi failed to gain the support of a majority in Parliament. As a result, he agreed to resign. Italy will either hold special elections or will be ruled by a national unity government, a temporary coalition. Investors believe that a national unity government might be better able to implement politically unpopular austerity measures. The rapidly shifting events in Italy have had a significant impact on global financial markets and likely will continue to do so.

Earlier Wednesday a bipartisan group of senators, led by Sens. Kay Hagan (D-North Carolina) and Bob Corker (R-Tennessee), introduced the United States Covered Bond Act of 2011 in order to kick-start what some regard as necessary for a full-fledged housing recovery.

This could get really interesting.  There have been no specifies on the plan – 

                Would it look like DU Refi Plus?

                What would the qualifying standards be –
                       credit, ratios, appraisal, etc.

                What about borrowers who have subordinate financing

                Who would handle the volume

                What about non-conforming borrowers               

I am all for doing more loans by allowing more homeowners to refinance. But in the world of securitization and MBS, there are more parties involved in a loan besides the borrower and the bank which make it difficult to execute a national refi program.  I don’t think the current refi plus program has been that successful due to the limitations.  

Debt troubles in Europe, worries about the health of European banks, and weaker than expected economic data in the US have contributed to an outlook for slower global economic growth. The reaction from investors has been to shift from riskier assets such as stocks to relatively safer assets such as gold and bonds. Despite the S&P downgrade of US debt, US government-guaranteed bonds, including mortgage-backed securities (MBS), have been a primary safe haven for investors. During the week, 10-yr Treasury yields reached a low below 2.00% for the first time since 1945, and MBS prices climbed to new highs. At these levels, though, it may be difficult for yields to move much lower.