Lock/Float Strategy Successful. Mortgage Rates Lower
Although the market briefly tested the reliability of our lock/float strategy on Monday ("lock at the price highs, float at the price lows"), mortgage-backed security prices are returning to the confines of our comfort zone...also known as "THE RANGE".
Following the seemingly bottomless rates selloff that occurred on Monday, benchmark Treasury and MBS prices underwent a corrective rally yesterday. Buying beget more buying and before we knew it, the 10yr Treasury note yield was back under 3.50%, helping MBS prices move considerably higher. A strong auction of $44 billion 2 year Treasury notes helped add momentum to the rally as well. MBS prices held into the close which allowed many lenders to republish rate sheets for the better, lowering consumer borrowing costs. Again, MBS have moved back into the well defined range which we have used as a gauge of lock/float strategies. To remind readers, since MBS prices began trading in a range, borrowers have had great success floating when MBS prices were at the low side of the range and locking when MBS were at the high side of the range. The last couple days, MBS have been testing the low end of the range, thus my recommendation for floating. With yesterday’s rally, MBS have moved comfortably into the middle of the range and mortgage rates are lower.
Economic data started coming in early this morning. The Mortgage Bankers’ Association released their Weekly Application Index at 7am. This index tracks the weekly change in mortgage applications at major lenders. Much like last week’s report, today’s report continues to show more weakness in the housing market. Applications for home purchases fell 5.2% and the refinance activity posted a 16.2% drop! With interest rates edging higher last week, it is not surprising to see a drop in the refinance activity. With the first time home buyer tax credit still in effect, it is troubling to have a couple weeks in a row with much less demand. Click here to read more.
The U.S. Department of Commerce released the monthly Durable Goods Orders report. This data tracks the monthly change in the amount of new orders placed with manufacturers for immediate and future delivery. An increasing trend of orders suggests that goods producers will be busy in the months ahead as workers increase output to fill new orders. Additionally, increased orders suggests consumer spending is increasing, which can boost corporate profits, so the stock market likes an increasing trend while the bond market usually benefits when orders are falling. Today's data shows Durable Goods Orders came in right on expectations with a 1.0% rise following last month’s disappointing revised for the worse decline of 2.6%, initially reported at a -2.4%. When excluding transportation orders, the report showed a larger than expected increase of 0.9%. Of particular note, Motor Vehicle and parts orders fell 0.1% after rising 1.6% in August. This is a direct factor of the expiration of the governments auto sector stimulus program, Cash for Clunkers. If the stabilization is to evol
The final data set for the day gives us another reading on the housing sector with New Home Sales. This report measures the number of newly constructed homes with a committed sale during the prior month. Since the purchase of a new home leads to many other purchases such as furniture and appliances, the stock market likes an increasing trend. The previous five month’s have posted increasing amounts of new home sales with last month’s report posting an annualized pace of 429,000 sales. In addition to the positive news on higher new home sales, last month’s report also showed the inventory of new homes available dropping to a 7.3 months’ supply which is the lowest in 2 ½ years.Economists’ surveyed prior to this report expected new homes sales to continue to improve, consensus estimates were calling for an annualized pace of 440,000.
Today's release of New Home Sales data indicates that new home sales declined for the first time since March, posting a lower than expected annualized pace of 402,000. Last month’s figure was also revised lower to 417,000. Following this worse than expected economic data, MBS prices have continued to improve.
At 1pm, the Department of Treasury will auction $41billion of 5 year notes. If we see strong demand, MBS could benefit with the risk adverse trade. Yesterday’s auction was very well received which could indicate strong demand for today’s offering. Matt and AQ will cover the auction once it is completed on the MBS Commentary blog.
Reports from fellow mortgage professionals indicate lender rate sheets have improved overnight. The par 30 year conventional rate mortgage has fallen to the 4.75% to 5.00% range for well qualified consumers. In order to secure a par 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.
If you are a mortgage or real estate professional, you are no doubt aware of the Home Valuation Code of Conduct. This legislation has dramatically changed the way that appraisals are ordered by no longer allowing the loan originator to order the appraisal rather the lender does through a Appraisal Management Company that they have approved. Well, there is hope for change. Here is what Rob Chrisman had to say about HR3146 and HVCC on his blog PIPELINE PRESS:
"The House Financial Services Committee has just passed an amendment to the Consumer Financial Protection Agency Act to phase it out, and allow all loan originators, licensed or registered in accordance with the SAFE Mortgage Licensing Act, to order appraisals directly. H.R. 3126 is the number of this bill. Although this is just a committee vote, and still has a long way to go, it is a "first step" the Consumer Financial Protection Agency Act is expected to be merged with a number of other regulatory reform bills before moving to the House floor for a vote, and any differences must be ironed out within the House and then with any Senate versions before going to the President."
In my opinion, HVCC is misguided and is negatively impacting the housing market. Due to this law, appraisal costs have increased, loan processing turn times have grown longer which has resulted in higher borrowing costs to the consumer due to lock extensions. Furthermore, the quality of appraisals have been reduced due to AMC's use of appraisers not familiar with the subject properties area.
What is your opinion on HVCC? Also, if HVCC law is rescinded do you think lenders will still require that loan originators to use the HVCC process?