Mortgage Market Perspectives -- LendingTree -- July 31, 2009

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Mortgage Market

Perspectives

July 31st, 2009

by

Cameron Findlay

Chief Economist

11115 Rushmore Drive

Charlotte, NC 28277



1

INTRODUCTION

This is the first installment of “Mortgage Market Perspectives” to be published on a quarterly

frequency, usually one month post the closing of each quarter. The goal of this document is to

provide a brief perspective on the key economic and mortgage related market influencesdescribed in a manner that make reading this material interesting.

We always welcome suggestions, please send us yours [email protected]

HIGHLIGHTS

The mortgage origination process is overheating under weight

of new guidelines. The risk is extended origination times

thereby constraining the flow of mortgages the Fed can

purchase and restricting its influence.

Economic Stabilization Act is having the desired impact on

Mortgage rates keeping them low. Paying interest on the excess

reserves held at the Central bank will allow the Fed to control

its balance sheet operations and rate policy objectives separate.

Measuring inflation has always created a healthy discussion of

what exactly are the measures we should monitor? Below we

make the argument that CPI and PPI alone do not suffice and a

third measure GDP Price Deflator in these times may be a goodbenchmark.



2

MORTGAGE EXPOSURE

ORIGINATION CONSTRAINTS

The mortgage application universe is presently comprised of

53% Refinance applications at a time when 30yr Fixed Rates

Mortgages are ~ 5.44% assuming 1pt. To provide perspective

that’s way down from the 85% high back in January of this year

when rates hit their national average low of 5.08%, suggesting

as rates declined refi volume would pick up.

Fast forward from January to April 28th

rates hit their low point

of 4.85%. The Refi volume which you would have expected to

jump, staggered at just 75% which was well below the 85%

despite lower rates. More recently between June and July rates

came down but Refi volume which you would expect to pick uphas also declined bottoming out at 46% by the end of June.

[Fig 1] Note : Rates Inverted on Left Axis

Refi Volume decline

despite rates

directionally heading

lower



4

MORTGAGE RATES (VS) TREASURY MARKET

Traditionally looking to the Bond Market specifically 10yr

Treasuries was guidance enough for brokers eager to

communicate future direction of mortgage rates, that was

yesterday. Below in [Fig 2] you see the spread between noterates and 10yr Treasuries on the right hand scale presently at

~170bps or 1.70%.

Buoyed by indecision regarding inflation and exposure to

foreign central bank buying of the huge supply of Government

debt 10yr Treasuries have been noticeably poorly correlated to

mortgage note rates.

[Fig 2]. 30yr Fixed Mortgage Rates (assuming 1pt) vs 10yr Trsy

Looking back 10yrs for example this historical median spread

has been 150bps, not too different from where we are today at

170bps. This doesn’t suggest much other than a comfort

10yr Treasuries

against consumer

mortgage rates

for a 30yr Fixed

Spreads have

finally started to

align to their

historical median



5

knowing where things have been, spreads can easily gap out

again. The basic difference in these two items is the “risk

premium” assumed by investing in a Mortgage instrument vs a

risk free treasury investment. There are more technical measures

we use to calculate this but bottom line as a consumer recognize

when the expectation of default is high mortgages rates will be

higher, over and above what’s happening in the treasury market.

Use caution if you are only monitoring the Treasury market.

INFLATION RISK

KEY ECONOMIC INDICATORS

Most inflation indicators build their data from two key

indicators;

[1] Consumer Price Index [CPI] a measure of price changes in

consumer goods and services (items like gas, food clothing and

auto’s) it’s published by the Bureau of Labor Statistics.

CPI Data takes the perspective of the purchaser.

[2] Producer Price Index [PPI] is measuring the average change

over time in selling prices by domestic producers of goods and

services and is comprised of a family of indexes. It’s also

published by the BLS but takes the perspective of the seller.

For your consideration, when measuring inflation I’d suggest athird item might provide more insight relative to current

economic times, it’s the GDP Price Deflator.

Some quick but painless math that will help calculate and

understand why the GDP Price Deflator is a great index to

monitor, especially in this market.

Nominal Real GDP Price Yr / Yr

GDP GDP Deflator % Chg 2006 13,370 11,356 117.74 2007 14,031 11,621 120.74 2.6% 2008 14,200 11,522 123.24 2.1%

Consumers ability

to substitute for

lower priced

goods exposes the

deficiency of CPI

as a sole measure

of Inflation



6

The “Yr / Yr % Change” which can be considered inflation

guidance is being derived by calculating Nominal GDP divided

by Chain Weighted GDP and is measuring PRICE changes

while excluding the increase in GDP due to increases in

Quantity.

[Fig 3].CPI (vs) GDP Price Deflator -Measured YOY %

Change

[Fig 3] Shows current CPI change year over year measured at

the rate of (1.40%) versus the GDP Price Deflator published by

the Bureau of Economic Analysis as +2.14%.

The “GDP Price Deflator” provides a method of over coming

some of the deficiencies of CPI data which is basically

constructed from a “Fixed Weight” applied to a basket of goods.

Using a fixed weight system in CPI does not considerconsumers basic choice of substitution, where prices have

fallen. If you have ever shopped at health food stores (think

premium pricing, premium goods) and have converted back to

your local grocery store (generic brands) you have caused a

ripple in CPI



7

Noticeably [Fig 3] the CPI numbers (Blue) are painting a

picture of very low arguably too low a drop as compared to

GDP Deflator (Red) which shows a decline but not as drastic as

CPI might indicate.

DOCUMENT INFORMATION

This material has been prepared by Cameron Findlay, the opinions contained within this report (which

are subject to change without notice) are his own and may not represent LendingTree’s (or its

affiliates) views on the market. LendingTree (and its affiliates) issue publications from time to time for

informational, educational and promotional purposes only. The data and analysis presented are based

upon information obtained from sources that we consider reliable and any mention of levels or prices

are indications only and do not represent firm market levels. Changes in market conditions since the

issuance of this document may affect some or all of the levels and prices listed. We make no

warranties, express or implied, regarding the accuracy or completeness of any information, analysis,or opinions presented. No part of any LendingTree publication may be reproduced in any manner

without the written permission of LendingTree, LLC. LendingTree (and its affiliates), its employees,

agents, and contractors are not registered investment advisors, financial advisors, or broker dealers,

and they are not acting in a fiduciary capacity. The information contained in this newsletter does not

constitute a recommendation, offer to sell, or solicitation of an offer to purchase any particular

investments or products, including without limitation securities of any companies discussed, and it

should not be construed or relied on as such. It is the reader’s responsibility to evaluate the suitability,

risks, and merits of any investment, funding strategy, or business proposal presented in this

publication. The products mentioned in this document may not be eligible for sale in some states or

countries, nor suitable for all types of investors; their value and the income they produce may fluctuate

and/or be adversely affected by exchange rates, interest rates or other factors.

Mortgage Market Perspectives -- LendingTree -- July 31, 2009

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