Don't Be Fooled: Interest Rates May Fall Yet Again

Only a fool (or an economist for that matter) would try to predict where interest rates are headed. And only a complete fool writing a monthly column would try to do the same. After all, a lot can change in a month: Unexpected financial data or some big "surprise" from a large company can blow a hole in the market faster than you can say "Freddie Mac."

So, I'm not going to let that stop me. I'm going to go out on a limb here and say, for the record, that mortgage rates could fall in the months ahead - that would be October, November and December of 2003.

How do I know this is going to happen? I don't, not really, but two things point in the direction of lower yields on the 10-year Treasury (which mortgages are pegged to): an overvalued stock market and crappy employment numbers.

The employment market is soft. Even though the economy is growing, it's not adding new jobs. That's bad news for President Bush and it's even worse news for mortgage lenders who hope to make up for lost refi volume by tapping a strong "purchase money" market. If people don't have jobs, they aren't going to buy homes.

If the job market doesn't improve, chances are that inflation will continue to be a non-issue. No inflation means no rate hikes by the Federal Reserve. Of course, the Fed doesn't control the yield on the 10-year Treasury. Market traders determine that.

As any mortgage banker can tell you, mortgage rates - as well as the yield on the 10-year - rose rapidly this past summer, but come September the rates have fallen again. As I write this column, the yield is just under 4.2%. Thirty- year FRMs are at 6.16%, 15-year's at 5.46% and one-year ARMs are fetching 3.87%. (Rate data courtesy of Raymond James & Associates.)

Refis have slowed considerably since June/July's highs and mortgage bankers with the likes of Bank of America, Countrywide Home Loans, DiTech, E*Trade Mortgage and a host of others have already moved to cut their "temporary" workers. But that was when the yield on the 10-year was north of 4.6%.

Now that the yield is back down, refi applications are starting to pick up again. I can hear the telephone calls now between supervisors and just-laid-off workers: "Can you come back to work? I know I just laid you off and all ." Click.

But hey, that's the nature of the business. And now for the stock market: Stocks have risen nicely this year, especially the technology-laden Nasdaq composite index. I can remember when networking giant Cisco was trading at just above $10 a share last year. My barber told me to buy when it dipped below $10. I did not. Today's it is going for $20 a share. Other tech bellwethers are hitting new yearly highs, including Applied Materials, Intel and Microsoft.

Money has been pouring out of mutual funds back into the stock market. But guess what? If earnings don't look stellar, chances are the Nasdaq gains of the past six months could reverse. And if that happens, you can bet that big mutual fund money will come out of the market and back into bonds.

When big money pours into bonds, that means bond yields - particularly the 10-year - will head south. And that means lower mortgage rates.

Will things play out like this? I think so. If it does, that means mortgage firms will need all the production workers they can get their hands on. Refis will continue unabated. It may not be like the second quarter (the high point of production, according to the Quarterly Data Report), but volumes will be strong.

What does all this mean for mortgage servicers? Thanks to the increase in rates during July and August, servicers were partying hearty. Why? Because runoff slowed and there would be less of a likelihood that servicing impairment charges would be needed. And maybe even some firms would test the secondary market for servicing receivables (servicing rights).

My advice? Not so fast all you servicing brokers and sellers out there. Not so fast. The July/August rise in rates may be a bear trap set by bond bulls. Got that? I'm not sure I do, but there's plenty to think about right now. If I'm right, maybe some nice investment banking firm (are there any such animals out there?) will hire me to trade bonds for them. But I wouldn't bet on it.

Paul Muolo is executive editor of both Mortgage Servicing News and its affiliate, National Mortgage News.

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