Floating is Risky Ahead of Major Market Events

Yesterday, following a better than expected read on Manufacturing and Pending Home Sales, benchmark rates backed up and prices of mortgage-backed securities moved lower, forcing several lenders to reissue new rate sheets with lower prices, therefore increasing consumer borrowing costs.

The economic calendar was very light today.   The most significant report released was Factory Orders. This data shows the monthly change in the dollar amount of new orders for both durable and non durable goods.  Basically, it lets market participants know how busy factories will be in the future as they work to fill the orders.  In August, Factory orders in fell 0.8% following July’s 1.4% increase.  For September, factory orders rose 0.9%. Economists surveyed were expecting a 1.0% increase. There was not much reaction in the market.

Today is the first day of the Federal Open Market Committee’s(FOMC) two day meeting. The FOMC determines our nation’s monetary policy.   Not much happens on the first day, but following the conclusion of day two the FOMC releases a statement where they announce any changes to the Fed Funds rate and give an outlook on the economy.  This statement will be thoroughly scanned by investors for any hints at future monetary policy, the Fed’s outlook on the economy and for any changes to the Quantitative Easing programs that the Fed has in place such as the MBS buying program.   

Reports from fellow mortgage professionals indicate lender rate sheets to be similar to yesterday afternoon’s.  This keeps the par 30 year conventional rate mortgage in the 4.75% to 5.00% range for well qualified consumers.  To secure the 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 an estimated one point loan origination/discount/broker fee.   If you are looking to access home equity, you should expect either a higher interest rate or additional fees.  

Despite MBS prices holding near the top of the recent range, I will continue to caution floating in the near term.  We have some high impacting events approaching, the Treasury Refunding announcement tomorrow morning, the FOMC statement tomorrow afternoon, and the Employment Situation Report on Friday. These events have the potential to move rates considerably.  Always remember, rates move higher faster than they move lower. Consumers closing in the near term have more to risk than to gain by floating.