Mortgage Rates Steady Ahead of FOMC Statement
Mortgage rates were mostly unchanged yesterday as the economic calendar was empty and the market settled in for another FOMC statement. Prices of mortgage-backed securities did manage to move marginally higher following a successful auction of 2 year Treasury notes, which saw the highest demand in over a year. The small price appreciations led to scattered reprices for the better as secondary market gains held into the close, however it should be noted that reprices were not significant enough to lower the par conventional 30 yr mortgage rate.
Early this morning the Mortgage Bankers’ Association released the weekly applications index. This data measures the weekly change in mortgage applications at major lenders. Last week’s report showed activity unexpectedly declining, however this week’s report showed gains in both the purchase and refinance activity. Purchase activity rose 5.6% while refinance activity rose 17.4%. With the first time home buyer tax credit expiring soon, I suspect that we should see increased purchase activity which will undoubtedly slow down the loan process at lenders. I am already seeing some lenders turn times in underwriting loans and clearing conditions increasing. If you are planning to buy a home before the tax credit expires on December 1st, I strongly suggest that you get out there and find a home as the expiration of the tax credit is fast approaching. For more on this report, check out the MND story.
At 1pm eastern, the U.S. Department of Treasury will hold an auction with $40billion of 5 year notes. As the supply is known in advance, market participants will gauge the success of the auction by market participant's demand for the issuance. Since this auction will be held just over an hour before the FOMC statement, market participants might be hesitate to take a position ahead of that release. Already this morning, we are seeing Treasury yields rise which is pressuring MBS to follow. To remind readers, price and yield are inversely related. If yields are rising, the price is falling. So, what we are seeing this morning is the price of treasuries are falling to attract buyers and as the price moves lower, the yield that security pays the investor moves higher. Matt and AQ will cover the auction results once they are released shortly after 1pm eastern on the MBS Commentary blog.
The big event of the day is the release of the Fed statement at 2:15 eastern. The Federal Open Market Committee meets roughly every six weeks and at these meetings our nation’s monetary policy is set. It is widely expected that the Fed will maintain the present level for the fed fund rate which sits at 0 to .25%. Market participants will thoroughly review the statement for any hint at future monetary policy and the fed’s outlook on future economic growth. I suspect that the statement will say that our economy has avoided worst case scenarios and recovery is present; however, that recovery will be slow and sluggish. They will also say that inflation is not a concern today or in the near future which will allow them to maintain the status quo for the fed fund rate for an extended period of time. Of big concern to mortgage professionals and consumers hoping for mortgage rates to remain low will be if any changes to the Fed policy of buying MBS will be announced. The Fed said earlier this year that they would buy up to $1.25 trillion of MBS to help support the troubled housing market. To date, they have spent just under $900billion of the $1.25trillion. I suspect that they will announce no changes to that policy. Matt and AQ will be all over this announcement on the MBS Commentary.
Early reports from fellow mortgage professionals continue to show mortgage rates to be range bound. Today’s par 30 year conventional rate mortgage remains in the 4.875% to 5.125% range for the best qualified consumers. In order to secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee. You can elect to pay additional discount points if you wish to buy the interest rate down. Typically, each discount point lowers the mortgage rate by .25%. So, if you have a $200,000 loan amount it will cost you an additional $2000 in closing costs to get a .25% lower rate. That lower rate will save you approximately $500 per year in interest making the breakeven point about 4 years, so it will pay for itself assuming you are keeping the home for that period of time.
Floating remains somewhat risky at this point. If the Fed statement paints a prettier economic outlook or if they mention a heightened concern for inflation, MBS will move lower in price which will increase mortgage rates. In my opinion, I do not see that happening, but you never know.
Here is your chance to pull out your crystal ball. What do you think the Fed will say in the statement?