Mortgage Rates Sideways as Markets Await Guidance. Discussing Risk Based Loan Pricing

Following a global sell in equities yesterday, prices of mortgage backed securities rose into a range not visited since late July. The rally in secondary markets helped mortgage rates fall to monthly lows.

But will it last?

Mortgages failed to keep the pace with rallying Treasuries yesterday and this morning MBS are already losing steam as stock traders look to test the extent to which equities were sold yesterday. Although mortgage rates fell to previous August lows yesterday, it may not last long if stocks decide pessimism was unwarranted. There has however been a change in market sentiment. Fundamental economic releases, mainly consumer related data, should soon start to have more of an effect on mortgage rates.

Data Releases of the Day...

First out this morning from the U.S Department of Commerce was the monthly Housing Starts report.  This data provides investors the monthly change in the number of new homes that have started construction.  The number is reported on an annualized pace and recent reports have shown housing starts to be improving. This month economists’ expected this trend to continue. Forecasts called for an annualized pace of 600,000 new home starts after last  month’s print of 582,000.

The data shows that housing starts in July declined by 1% to an annualized pace of 581,000 following last month’s 6.5% increase.  This is the first monthly decline in 3 months.  On a yearly basis, housing starts are still down a whopping 37.7%!   To give you a perspective on how far the new housing sector has fallen, during the peak of the housing boom housing starts was on an annualized pace of over 2 million units!  This report does provide evidence of the housing sector to be bottoming but does not indicate an improving sector.   For more on this report, click here.

The final piece of economic data was the Producer Price Index which tracks the monthly change in the average price of a fixed basket of goods received by producers.  If the costs of products purchased by producers are increasing, they tend to pass along that higher cost to the end consumer resulting in inflation.    The report shows that inflation on the producer level declined sharply from last month further providing evidence that inflation is not a concern.  Headline PPI declined by 0.9% while the core rate declined 0.1% both beating economists’ expectations.  For more on this report, click here.

After the data was released Treasury futures prices shot higher and MBS price followed suit. However, once again, it appears there is not much motivation in the market to drive MBS prices higher as trader's quickly took profits following the rapid price appreciation. It appears that we will continue yesterday’s trend of moving sideways in a range as the markets wait for confirmation of a new trend or correction back to previous price levels.  ..we refer to this as "wait and see mode".

I have mentioned quite often that each time rates have approached the current levels they did not remain there very long.  If you can lock today under 5%, you should consider doing so as any indication of positive economic news can result in a quick and sudden move higher in mortgage rates. 

Reports from fellow mortgage professionals indicate mortgage rates are mostly unchanged from yesterday (slightly higher).  This places the par 30 year conventional rate mortgage in the 4.875% to 5.125% range for the most qualified consumer.  In order to qualify you must have a FICO credit score of 740 or higher, a loan to value of 80% or less and pay all closing costs including one point loan origination/discount/broker fee.   As always, you can elect to pay less in fees and secure a higher mortgage rate or you can pay additional fees to buy the rate lower.

If you are looking to access equity in your home, you should expect to pay additional fees or take a higher interest rate.   

This is due to risk based Loan Level Price Adjustment fees (LLPA) that are  imposed by Fannie Mae and Freddie Mac.   These additional fees are based on a applicants’ FICO score, loan to value, transaction type, occupancy, and property type. 

A person with a 700 FICO score accessing equity to 70% of the properties appraised value has to pay an additional fee of .625% of the loan amount.  If loan amount is $200,000, that fee amounts to $1250.   In addition to that fee, this applicant would also have to pay another .50 ($1000) fee due to their credit score being under 740.  

An applicant with a 740 score accessing equity to 70% would only pay a fee of .25 or $500 in this example.  To review these fees, click here.    Page 2 of the LLPA fees shows you how much you have to pay based on your credit score and loan to value for all loans with terms greater than 15 years.  Page 3 shows the cashout fees that are paid on any loan based on credit score and loan to value.   So, if you are accessing equity on a 30 year fixed rate ,you will pay the fees on both pages but if you are accessing equity with a 15 year mortgage you only pay the fees on page 3.   The addition of the fees makes it much more important that you maintain the highest FICO scores possible. 

 If you are planning on securing FHA or VA financing, these fees do not apply; however each of the these loans have an upfront fee that must be paid from 1.75% on FHA to over 3.00% on some VA loans.