Mortgage apps down

Still no sign of private sector credit expansion from housing.

US Home Loan Demand Drops, Rates at 10-Month High

February 9 (Reuters) — Applications for U.S. home mortgages dropped last week as the highest interest rates in 10 months sapped demand for home loan refinancing, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.5 percent in the week ended Feb. 4.

The MBA’s seasonally adjusted index of refinancing applications fell 7.7 percent last week.

The gauge of loan requests for home purchases was down 1.4 percent.

Fixed 30-year mortgage rates averaged 5.13 percent in the week, up 32 basis points from 4.81 percent the prior week.

It was the highest rate since the week ended April 9, 2010.

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51 Responses to Mortgage apps down

  1. JKH says:

    The following is just for the record, but I think its a pretty good example of the kind of thinking hard core monetarists have applied to QE2, as noted above. It’s forced paradoxical logic, layered over a misunderstanding of how the monetary system works – but I’m not sure its entirely wrong as a short term element in the response by the market:


    Oliver Reply:

    Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative.

    Bizarre. So you scare them first so you can claim victory when they realize it was all a hoax? Sounds more like Candid Camera than economics.


    Oliver Reply:

    or am I missing something?


  2. GOOGLEHEIM says:




    D.Boerse, NYSE narrow in on name as talks intensify
    FRANKFURT (Reuters) – Deutsche Boerse and NYSE Euronext may call a merged company “DB NYSE Group,” according to two people close to the negotiations, though the companies said no name for what could become the world’s largest exchange operator has been picked.



    hopefully they dig it all up and take it home as well.


  3. beowulf says:

    Well the proprietor of Should Trump Run, Michael Cohen is also Trump’s EVP and Special Counsel. I suppose that’s the fellow to send a book to.

    Michael D. Cohen
    Executive Vice President &
    Special Counsel to Donald J. Trump
    The Trump Organization
    725 Fifth Avenue New York, NY 10022


  4. beowulf says:

    OT but I see The Donald is considering a run for the presidency. He spoke at CPAC yesterday and, using the unique Trump brand of rapport on a crowd of Ron Paul supporters, immediately unloaded on Ron Paul. :o)

    Warren, if you have any mutual friends in PBC, perhaps you should try to set up a meeting with Trump before Allen Sinai tells him to say something crazy like the last time he considered running…
    His first proposal a plan to end the nation’s debt by imposing a one-time wealth tax of 14.25% on megamillionaires like himself was widely panned by a cross-section of economists…However, Allen Sinai of Primark Decision Economics, called Trump’s idea “intriguing,” adding, “It’s worthy of examination and consideration.”



    thanks, if you have an address for him I’ll send him a book


  5. JKH says:


    Some very good information in Brian Sack’s speech today on duration and interest margins at the Fed:

    “The securities that have been purchased by the Desk since November have had an average duration of about 5.5 years. With those purchases and the adjustments from the earlier purchase programs, the duration of the overall SOMA portfolio has reached about 4.5 years, which is somewhat higher than the typical level of between 2 and 3 years that was observed before the financial crisis…

    The assets held in the SOMA portfolio have fixed coupon rates that reflect longer-term interest rates. However, the purchases of those assets create reserves in the banking system, and the Federal Reserve pays interest on those reserves at a short-term interest rate that it controls. The interest paid on reserves can be thought of as the “funding cost” of the portfolio…

    Today, because short-term interest rates are low relative to longer-term interest rates, this mismatch produces a very elevated stream of net income. In particular, the SOMA portfolio has a weighted average coupon yield of about 3.5 percent, which, if applied to a $2.6 trillion portfolio, produces about $90 billion of income at an annualized rate. In contrast, the annualized funding cost of the portfolio at this time is only around $4 billion. This cost is relatively low because of the near-zero level of the interest rate paid on reserves. In addition, the private sector holds nearly $1 trillion of currency, which are liabilities of the Federal Reserve that bear no interest. Thus, the SOMA portfolio should produce a considerable amount of net income over the near term…

    Beyond the near term, though, the income that will be produced by the SOMA portfolio is uncertain….

    What would be affected by unexpectedly large realized losses on the SOMA portfolio would be our remittances to the Treasury. All Federal Reserve earnings in excess of those needed to cover operating costs, pay dividends and maintain necessary capital levels are remitted to the U.S. Treasury on a weekly basis…

    Indeed, the SOMA portfolio has already produced a large flow of income for the Federal Reserve for these same reasons. Over 2009 and 2010, the SOMA portfolio produced $46 billion and $76 billion of interest income, respectively, while the interest expense on reserve balances was $2 billion and $3 billion, respectively, in those years. Over the preceding 10 years, the average SOMA income was about $30 billion. The excess income in recent years has already been remitted to the Treasury.

    In the most extreme case, the Federal Reserve would have to cease remittances to the Treasury for a time. Of course, one might also want to take into consideration the additional tax revenue to the government that could be generated by the more robust economic recovery supported by the asset purchase programs.


    Matt Franko Reply:

    Yes I also noticed that the last time Bernanke went before Congress (not today) he was really talking up how much they were returning to the Treasury (“Ive just been given some upated figures this morning that I can report” oh boy!), and that it was helping to reduce the deficit. It seems they dont want to be left out of the deficit reduction contest. This increased interest transfer and it looks like a 43B hit to spending over the next 7 mos of the FY rolled out by the GOP today and the fiscal environment is certainly not getting any more stimulative here. Resp,

    PS they are really turning into quite the politicians…


    Ramanan Reply:

    Don’t think you can attribute it to him Matt – Bernanke is just saying that the Fed’s large scale asset purchases do not add to deficits and in fact reduce deficits.

    That is different from the tone “look we are helping reduce the deficits”

    To give the benefit of the doubt, he is helping people understand the difference between financial flows and income flows.

    “As I am appearing before the Budget Committee, it is worth emphasizing that the Fed’s purchases of longer-term securities are not comparable to ordinary government spending. In executing these transactions, the Federal Reserve acquires financial assets, not goods and services; thus, these purchases do not add to the government’s deficit or debt”

    Of course he brings in reduction of deficits but that is a slightly parallel discussion.


    Scott Fullwiler Reply:

    Take THAT anybody thinking that IOR has reduced seigniorage income!


    JKH Reply:

    Also, IOR is only around 1 per cent of pre tax interest margins for US banking – for those monetarists who think IOR is why banks haven’t been lending (apart from the fact that banks don’t lend reserves).

    I like the MMT analysis that QE operations extract income from the private sector, because it’s factual and coherent, and these numbers show it. But I don’t think it’s the full story. Meanwhile, mainstream gropes to understand things by pleasuring itself with real interest rate theories, instead of studying the real world numbers. I’m finding explanations of QE to be generally unsatisfying.


    macrosam Reply:

    This is something I’ve struggled with and would be grateful for an answer. QE operations remove interest income from the private sector in the form of taking away future coupon interest payments from the private sector, but if the Fed is paying market prices for those securities in the buybacks, isn’t that discounting the future cash flow streams in the price paid? Is this not an accelerated realization of deferred coupon income somewhat comparable to some of the changes to corporate taxation rules that allow for more immediation tax expense recognition of what were previously deferrals (like the already existing bonus deprecation rules), moving up tomorrow to today?

    And isn’t QE taking duration risk out of the market allowing those previous holders to then purchase longer maturity securities (assuming they’d go that far out the curve which they may not) or higher yielding risk assets now more able fit within their overall duration risk profile (not by using reserves but within their existing portfolios)?

    I realize I may be way off the mark here but would like to clear my misunderstanding on this.


    JKH Reply:

    Good points, I think.

    The market price discounts the current market yield – e.g. the premium to par paid for a 4 per cent coupon yielding 3 percent – but the current yield e.g. 3 per cent still translates to a future cash flow that exceeds the cash flow of 25 basis points on reserves or deposits. So the sellers are giving that up in an immediate sense.

    QE removes duration risk, which may result in sellers subsequently moving into duration risk or risk in some other form. E.g. if banks are sellers, that frees up some capital previously allocated for interest rate risk. That’s consistent with the idea of monetary easing.

    JKH Reply:

    But from a static perspective, the duration risk that is removed from the market by QE is removed from the market as a whole – with subsequent trades by sellers being redistribution – until new securities are issued etc.


    correct on both counts.

    but look at it this way. suppose the tsy simply stopped issuing rather than issue and have the fed buy it. functionally nothing changes, but it’s more obvious that interest paid by the govt, as well as duration, goes down.

    does that help?

    macrosam Reply:

    I understand that it is taking away interest income from the private sector, just still stuck on the idea that the sellers are being compensated for that in the selling price. Functionally, though I can understand that QE and ceasing issuance is the same.

    But they’re not going to stop issuance. And I may be giving the Fed too much credit, but anticipating a back-up in yields, QE takes duration risk (and liquidity risk of some of the off-the-runs) off the holders, and the back-up allows the new issues to be auctioned at higher coupons, like we’ve seen this year with the 10-year (3.625% vs 2.625%) and the 30-year (4.75% vs 4.25%). Particularly interesting is that the 30-year was issued with a 4.75% coupon when the 12PM mark was below that yield, normally implying a 4.625% coupon. If the Treasury and Fed desired to issue higher coupon securities, wouldn’t the Fed have to remove some duration risk first, have the yields back up as they have, then have the Treasury issue higher coupon securities? In this manner, QE could be seen as a swap of lower coupon UST for higher coupon UST with excess reserves and the 25bps being a form of purgatory.


    yes, qe alters the duration of the outstanding govt liabilities.

    yes, the yields gravitate towards indifference levels for the holders of those liabilities.

    yes, the sellers feel the exchange is at least somewhat better than ‘fair’ at the yields they are selling to the fed.

    yes, the sellers may believe that rates will someday rise sufficiently such that they made the right choice in taking less income now, in return for the possibility of more later.

    However, while their income is down, their risk may not be down, if their liabilities have longer durations.
    In that case, it took the lower yields paid by the Fed for them to take that additional duration risk.

    So assuming duration risk was in balance before the Fed intervened, the buying served to increase that risk

    JKH Reply:

    QE is not a swap of new coupons for old coupons.

    The counterfactual is no QE. That means old coupons remain outstanding, plus new coupons (for deficit financing), all at some blended rate, depending on what your rate assumption is for new coupon rates under the counterfactual.

    You have to compare that with the actual, which is 25 basis points on new QE reserves (or bank deposits) replacing old coupon rates, plus new coupons, all at some blended rate according to the actual new coupon rates.

    The rate assumption for new coupons is arguably different for the counterfactual. Rates have risen in conjunction with QE, and you can argue causality.

    But the blended actual rate is definitely lower than the blended counterfactual rate, given the proportionate effect of 25 basis points, even if you argue that the new coupon cost is higher due to QE.

    macrosam Reply:

    I realize QE is a swap of UST for reserves. Operationally, however, if the QE buyback reserves are shortly redeployed into higher coupon issues, functionally excess reserves served as a 25bp holding tank in the interim of a transition to a higher coupon UST. So, let’s say 2.625% to 0.25% to 3.625% as on-the-runs are the issues that have reportedly been sold the most recently.

    Old coupons, had they remained outstanding and not bought back by the Fed, are subject to capital losses, or losses of existing unrealized capital gains. The Fed via the buybacks allows the holders of these securities to realize the capital gains, the Fed then absorbs the capital losses rather than the holders, the holders then move into the higher coupon securities.

    Pension funds also benefit from the back-up in yields, I would think. The PV of their liabilities decreases and they can they move into higher coupon long maturity securities like the 5+% strips now available.

    I’m not arguing that QE drove higher rates. But rates did rise during QE, more likely influenced by signs of recovery though EMs have not caught a bid in 2011 so not sure what the risk appetite has been heading towards. TIPS have not been indicating that investors have growing inflation fears. I’m saying that QE allowed the Fed to absorb the capital losses instead of the holders, and allowed the holders to move out of lower coupon UST into higher coupon UST.


    and yes, the fed buying secs followed by the tsy issuing same at higher rates was in a sense an ‘opportunity loss’ for the US govt. With ‘better timing’ it could have removed even more interest income from the private sector than it actually did.

    JKH Reply:

    3.625 % goes to .25 % for sellers, and both are represented as asset and liability respectively on the Fed’s balance sheet.

    .25 % does not go to 3.625 % because new bonds are not sold from the Fed’s balance sheet – Treasury issues them new.

    Only the Fed allows the system to pay for bonds with reserves, and only if the bonds are sold from the Fed’s portfolio. That doesn’t happen with new issue bonds.

    See my factual/counterfactual above.

    Agree those who sold to the Fed and bought later picked up yield.

    The “absorption” of capital losses by the Fed is equivalent to the opportunity cost of the Fed holding the bonds they actually bought to maturity instead of bonds yielding the new issue rate – which they may actually do in some cases. They can easily absorb the opportunity cost over time or piecemeal it over time as actual losses through actual sales. Either way, it amounts to the same thing in their long term interest margin performance.

    One might attempt to argue that the backup in yields had something to do with the expectation that QE would work by making other asset prices rise, etc. If so, it’s a cost that can be justified by the Fed, given that the rationale for QE was in part a response to the risk of deflation. The margin cost – opportunity or actual – is justifiable on that basis.

    JKH Reply:

    “Only the Fed allows the system to pay for bonds with reserves”

    I mean pay with reserves on a net system basis – i.e. wrt to final position change in Fed reserves at the end of the day

    JKH Reply:

    i.e. if new bond issuance roughly matches the pace of net deficit spending, then that won’t affect system reserves per se apart from short term cash management bumps

    whereas sales from the Fed portfolio will

    a bit tricky at the micro level here

    macrosam Reply:

    “.25 % does not go to 3.625 % because new bonds are not sold from the Fed’s balance sheet – Treasury issues them new.”

    – The new issuance by the Treasury serves as a reserve drain, which is where I came up with the 0.25% going to 3.625%. The new treasuries don’t have to be sold from the Fed’s balance sheet for this reserve drain to occur. When either the Treasury or the Fed sells securities, reserves balances decline. When either buys securities, reserve balances increase. The Treasury was in fact conducting reserve drains on behalf of the Fed via the SFP program, now being scaled down to insignificance.

    “Agree those who sold to the Fed and bought later picked up yield.”

    – This is what I believe is one overlooked aspect of QE. We discuss the interest income taken out of the economy via QE, but may be missing the bigger picture that those former holders now can earn more coupon interest income for the same duration. There is only so much duration risk that can be taken, might as well get higher coupon payments for duration risk held. So it can be argued that QE is helping holders receive more interest income from US Treasury holdings than they previously were, without the private sector having to absorb the capital losses associated with a rate backup since those securities have been held by the Fed post-11/3/10.

    JKH Reply:

    “The new issuance by the Treasury serves as a reserve drain”

    it’s not when combined with equivalent net deficit spending, which is what I specified, and what is generally the case

    macrosam Reply:

    Either way I don’t think I have much basis for this argument. The Fed bought back many high coupon securities so going back to your blended rate commentary, it still applies. My argument only holds if the Fed were only buying back the lower coupon on-the-runs and the Treasury only issuing higher coupon new issues.

    macrosam Reply:

    Just re-read Warren’s reply and somehow it resonates more with me now even though it is easy enough to understand upon first glance. Sometimes it is just hard to believe or acknowledge that it really is that straightforward.

    Many thanks JKH and Warren!



    JKH Reply:

    One more exercise, a much overly simplified hypothetical:

    Suppose the yield on new issues is X, on average, without QE or equivalently pre-QE.

    Suppose the Fed buys from the market at X, all at once in batch, through QE.

    Suppose the yield on new issues is Y, on average, post QE, causally induced by QE.

    (In reality, not the case because Y started to move up when the Fed was only partially into the QE program, so the Fed partially “benefited” from the rate rise as well)

    Individual sellers will pick up yield if they sell at X and buy later at Y.

    But the market as a whole won’t pick up yield until:

    V(Y – X) > 600(X – 25bp),

    Where V is cumulative new issue volume post batch QE

    E.g. if X is 3 % and Y is 5.75 %, then the income withdrawn by QE is restored by the income added through new issue (compared to the counterfactual) once V exceeds 600


    I may have to ban math on this website…


    ESM Reply:


    Don’t quite get you here. QE lowers interest rates; it doesn’t raise them. The fact that interest rates have risen since QEII started is coincidence. Rates would be even higher without QEII.

    Matt Franko Reply:

    When they stopped their quantitative easing QE1 last time, interest rates immediately fell (substantially). 10-yr yield went from about 4 down to about 2.5… bottomed after QE2 was announced in August ’10.

    Matt Franko Reply:

    Deja Vu all over again?

    JKH Reply:


    I’m just doing a hypothetical on causality, in line with macrosam’s concern, not claiming causality. I think the whole sequence of rates can be argued a number of different ways.

    Matt Franko Reply:

    From Para 7 of the above link:

    “The Fed has actually been swapping the bank and fixed-income universe OUT of their term treasuries and mortgages and into cash. By definition they have actually been crowding OUT overall NIM in the universe. And generating revenue for the Treasury. It’s actually an investor tax not a bailout. When they step away, those (and by parity zero-sum principles they are there) who were swapped out of their investments and into cash will swap back into term duration. ….”

    Is this not the same thing now with the QE2?

    JKH Reply:


    e.g. monetarists tend to argue that higher rates indicate QE is a success, boosting growth expectations, “real rates”, and inflation premia – paradoxically dominating any QE supply effect on yields

    JKH Reply:

    the interesting thing is that the bond market may (temporarily) price the expected effect of QE, based on a misunderstanding of how the monetary system works


    right, for example, if the market believes it actually works, and is inflationary, they will believe rates will be higher in the future as the fed hikes that much more to contain the inflation.

    this moves markets near term, but over time the long end tends to come back down in yield as ‘real money buyers’ needs prevail and speculators who caused the initial move get tired of their losses and cover.

    Just like the way it happened in Japan.

    Unless, of course, there is inflation for some other reason and the fed does hike for that reason. then it’s a case of better lucky than good.

    Matt Franko Reply:

    Zero Hedge (again apologies but they are the only ones reporting on it)
    has analyzed todays QE2 purchases:

    “So between today and the last time the 7 Year bond (which was just auctioned off two weeks ago) was monetized, Primary Dealers have already given back 75% of the entire take down from the January 27 auction!”

    The 7-10 year bond ETF is down about 2% since January 27. So how do these PDs stay in business when they buy 12B of bonds from the govt on Jan 27 and then today sell back 9B to the same govt at a 2% loss ($180M loss).. they must be protecting themselves somehow.

    The Fed thinks this is great as they can claim they are getting a better price for the taxpayers… they get a two week 2% discount off the price they have to pay and hope for some more sell offs and anxiously wait for Monday to hopefully pay even less.

    ESM Reply:


    It’s not a particularly important point, but when the government comes in to buy something in big size, the price goes up (which, in the case of bonds, means the yield goes down). There is no doubt in my mind that Treasury yields are lower than they would otherwise be without QEII. The fact that yields did not drop precisely when the program was started only means that the market was anticipatory. The market began pricing in QEII months before it was actually implemented.

    The recent backup in yields is due to more (and I think deserved) confidence in the economy. I don’t think it’s because the market is anticipating that the Fed’s policy of buying Treasuries will yield to greater inflation and therefore higher rates in the future. Bond traders don’t strategize like that, and frankly, I think deep in their subconciouses bond traders understand MMT because they look at bonds and money from a technical and operational perspective.


    i tend to agree with you. and a lot more often than not

    JKH Reply:


    Makes sense in the main.

    (I’m uncomfortable accommodating the views of monetarists, even in a hypothetical.)

    You might be a tad optimistic about bond traders, at least except for the one in the mandatory readings here. Either way, the ones that understand have to anticipate the strategies of the ones (including end buyers) that don’t.

    Matt Franko Reply:

    This story does not read (to me) like they are running an operation that is supportive of bond prices:

    And it’s not like the NYFed is buying bonds in some sort of “open outcry” type of market, it is a Dealer market where everything has to be “greased”, etc.. for example the Zero Hedge data shows how the PDs are only inventorying for 2 weeks in some cases and selling the same CUSIP right back to the govt…

    Also, the bottom in rates (at the 5 yr which is closer to where the Fed is buying (5-6 yr avg) was put in just a few days before the Fed went in for their first QE2 purchase on Nov 12th.^fvx;range=1y;indicator=volume;charttype=ohlc;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

    Seems highly coincidental that somehow also at that very same exact time, all of a sudden “the market” started to perceive that the economy was getting better and it was time to ‘sell bonds’.

    And then you have Sack talking like he thinks he’s running a hedge fund and Bernanke in full blown deficit reduction fetishism, bragging about how much money the Fed is making “for the taxpayers”, etc.. this is all disturbing. None of these people are demonstrating that they know what their roles as Central Bankers are. It looks very chaotic and I cannot see how any good can come out of this. I have to think that they are screwing this up and somehow contributing to a monetarist/speculative led sell off in bonds over this period.

    I guess we’ll have to see how this plays out over the next few months… Resp,


    right, and of course it’s all like the kid in the car seat with the steering wheel who thinks he’s driving, and everyone else in the car thinks so too

    ESM Reply:

    Matt, that NY Times article is pretty funny.

    First, I don’t care how smart those guys at the Fed are. I’m sure they’re getting their faces ripped off by the dealers. Second, as Warren has pointed out many times, if they really wanted to “save money” for the “taxpayers,” the Treasury would just cut down its issue of $600B of notes and bonds and replace it with T-bill issuance instead. Third, would they really be saving money for the “taxpayer” or would they instead simply be reducing the deficit which could manifest itself in myriad ways (one of which is to increase unemployment)?


    and in the 2004 fed paper by bernanke/reinhart/sack they note the ‘fiscal channel’ where reduced govt interest payments reduce non govt sector income.

    so he knows this ‘profit’ is an equal loss of income for the non govt sectors, knows it is material, but fails to mention it.

    i call that intellectually dishonesty- the lie of omission, etc.


    macrosam Reply:

    I need to read this paper. My apologies in advance if it answers me question for me (or the answer present in the mandatory readings has eluded me).


    Mr. E Reply:

    I hear the sound of 10,000 hands hitting 10,000 foreheads. Doh!

    They cannot admit they were wrong in 1 day. 10 years is a good amount of time.


  6. Dave Begotka says:

    No sign of any jobs either


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