What happened to float income?
One of the ways mortgage bankers earn income, even small amounts, is the float between their warehouse line and the mortgage coupon that they originate. Obviously warehouse rates vary. But as any mortgage banker knows, a low-interest rate ARM, like many of the Option ARM loans that are being funded, will generally have a rate less than their warehouse rate. Unless the loan funds under the investor's warehouse line, the longer a lender holds a low-interest rate ARM, the more money they (or the investor) spend in paying a "negative float"! Therefore, unless the premium for bulking ARM loans outweighs not only the negative carry but also the closed-loan hedging cost, it makes little sense to hold these after funding.
It's hard to argue that rates are going lower when consumers "found jobs plentiful" and "business conditions improved significantly". So said the Conference Board as their index of consumer confidence unexpectedly gained 2 points in August. And although Factory Orders were down 1.9%, less than expected, the market rallied (improved). Why? Yesterday the release of the Fed minutes from the August 9th meeting boosted prices.
What the minutes said weren't new ("strengthening in aggregate spending", "inflation pressures remained elevated", etc.), although they did say that "inflation expectations remained 'well anchored'". And what the bond market liked was the absence of anything worse! While the Fed is still poised to increase the Fed Funds rate on Sept 20th, there is some skepticism about the September rate increase in the wake of the magnitude of Katrina's destruction.
Of interest for anyone originating ARM loans is that the yield on the 2-yr and 3-yr Treasury securities is now identical, and the difference between 2-yr and 5-yr is only 2 basis points! Today the second look at 2nd quarter's GDP showed a reading of 3.3% versus 3.4%. The Chicago Purchasing Managers survey is expected at 61, down from July's 63.5.
Expect muted reaction to any economic numbers unless they are far from
forecasts: Katrina's impact on the economy, the impact on oil and Mississippi River traffic, and the havoc that it wreaked on Mississippi and Louisiana is taking center stage.
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