We saw three important signals on economic health in the last several days as investors digested slow growth in the first quarter, a stand-pat statement from the Federal Reserve and an encouraging jobs report.

Let's break each item down briefly before I conclude our series on MBS at the end of the blog.

Payrolls rebound in April

Financial markets were greeted with positive jobs news Friday morning as nonfarm payrolls increased 211,000 net jobs in April, rebounding from March's meager 79,000 job increase. The news has been received well as it confirms speculation that last month's report was an anomaly and employers will continue to hire into the summer months.

Job growth is one of the most closely watched numbers by Federal Reserve officials. As I'll explain later in this blog, the solid report on Friday will keep the Fed on track for additional interest rate hikes in the coming months.

We are now looking at an economy approaching full employment, meaning any workers who are interested in a job are able to find work. The unemployment rate in April fell to 4.4 percent, the lowest rate since 2001. Wages also increased by 0.3 percent from a month earlier and 2.5 percent from this time last year. This shows that workers are not only finding jobs, but seeing their paychecks increase, too.

These are important things to remember as we look at the big picture of economic health, rather than just one number for a single month or quarter at a time. For example, the jobs report continues to paint a picture of health, even if GDP growth wasn't very robust at the beginning of this year.

Soft start to Trumponomics

Americans closely watched their spending in the first quarter of 2017. That's the message we can take from last week's Department of Commerce's report of just a 0.7 percent increase in GDP during the first three months of 2017. It's the weakest growth rate in three years as personal consumption increased just 0.3 percent, the worst number since 2009.

This was expected, which explains why the stock market has been mostly flat this week, fluctuating a few points here and there. Various reports on retail spending in recent weeks showed consumers being cautious from January through March. It's a common trend in the winter months.

On the bright side, business investment and homebuilding were the stronger elements of the economy in the first quarter.

The subpar results have led many to question if President Trump's plans to slash regulation and taxes while boosting infrastructure spending will ever come to bear, especially given the division within his own party. Still, there's hope some of his campaign promises will help drive growth later this year.

“This lull in growth should be short-lived, as real GDP growth is expected to rebound to 2.5% this quarter and then rise to 3.5% in Q3 and 4.0% in Q4,” Joseph LaVorgna, Deutsche Bank's chief U.S. economist, said.

Fed keeps powder dry

On Wednesday, Federal Reserve officials announced they would not hike interest rates this month. The move was expected, especially following weak economic growth numbers.

However, analysts reading the Open Market Committee's statement have been quick to point out the Fed remains on course to raise interest rates two more times this year and do not expect the first-quarter results to alter their intentions. The strong jobs report on Friday will underpin this notion.

The Fed dismissed the first-quarter GDP numbers as "transitory" and downplayed March's low inflation, choosing instead to report inflation year-over-year is close to the 2 percent target.

"In our view, the U.S. economy has now reached full employment and is likely to overshoot meaningfully, a path that has often proven risky. From this perspective, the case for further tightening is strong," Goldman Sachs analysts wrote about the Fed's decision.

Analysts now believe a rate hike in June is more likely than not if economic conditions continue on their current track.

MBS Primer – that's a wrap

As a wrap-up to the last several weeks of mortgage-backed securities 101, I wanted to summarize the key components that I have discussed to gain an understanding of how mortgage prices are determined and its impact on the borrower's interest rate. To conclude, I want to tie everything together to explain how the components of MBS all work together to produce the pricing on a rate sheet for individual loans.

First, a refresher on the components.

• Mortgage-backed securities are bonds secured by many individual mortgages with similar characteristics, such as interest rate, mortgage term and loan balance, that are traded in the secondary market. The majority of MBS are issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.  The other type of MBS are issued by private firms which typically include Jumbo and Non QM mortgages. The value of any MBS is determined by a number of factors, to include the MBS coupon, level of current interest rates, maturity, prepayment expectations and many more that can impact the risk and cash-flow.
• Mortgage servicing rights have a value that is either traded in the secondary market or established by the servicer who collects payments of principal and interest and distributes proceeds to investors. This servicing right attached to each loan is valued based on interest rates, prepayments, loan performance, loan characteristics and costs to service.
• Guarantee fee is a charge assessed by Fannie Mae, Freddie Mac and Ginnie Mae to the originator that ensures timely payment to the investor even if the borrower is late on payments or defaults.

So how does all that add up on a rate sheet? To reach the interest rate on a given loan, you apply a simple formula:

Dollar value of MBS, plus the value of mortgage servicing rights (MSR), minus the cost of the guarantee fee, minus the originator's margin = the price on the rate sheet.

Of course, no loan officer or borrower will go through this exercise on an individual basis. But it is helpful to understand how all these factors impact pricing. Economic changes that alter MBS value or servicing rights can directly affect the price of a loan.

As always, I'm happy to answer questions on these topics. Send me an email with your questions, or even suggest a topic for the blog.