Mortgage Rates Marginally Lower. Would You Lock or Float?

Benchmark Treasury prices and mortgage-backed security prices rallied yesterday. AQ described the inner dynamics of the trade strategy that led to rate improvements READ MORE. In terms of the headline news catalyst for the rally in bond markets, some fixed income friendly verbiage from Federal Reserve Chairman Ben Bernanke gave us a boost late yesterday morning. 

In a speech at the Economic Club of New York, Mr. Bernanke stated that the Federal Funds rate is likely to stay exceptionally low for an extended period of time.  He also warned of a slow economic recovery due to continually tight credit conditions and high unemployment.   READ MORE

Despite the generally bearish (cautiously optimistic) tone from Mr. Bernanke, the stock market still posted triple digit gains. Typically a rally in equities pulls money out of the bond market. That didn’t happen  yesterday as MBS approached record price levels which allowed many lenders to reprice for the better.  Later in the afternoon, MBS did move off the highs of the day which led to a few lenders taking back the price gains they gave earlier.  All in all, rates ended up slightly better than where they began the day.

The busy week of data continues today with the release of the Producer Price index.  This data measures the change in the average price of a fixed basket of goods received by producers.   If the cost of inputs (goods used to produce widgets) is rising, these costs may be passed onto consumers. This is inflation, one of the if not the biggest enemy to fixed investments and mortgage rates.   Producer prices fell 0.6% in September following the prior month’s substantial gain of 1.7%.  Economists surveyed for this month expected producer prices to move higher by 0.6% due to higher oil import prices.  When excluding food and energy from the report, producer prices were expected to post a modest rise of 0.1% following the prior month’s 0.1% decline.  

Overall producer prices came in lower than expected, indicating inflation continues to be of no concern.   Headline prices moved higher by only 0.3% and when excluding food and energy, prices fell a whopping 0.6%.  The large decline in the core reading has led to the smallest 12 month gain in five years.  Tomorrow we get another reading on inflation with the Consumer Price index.  This data measures the change in the prices paid by consumers for a fixed basket of goods and services. 

Also out this morning was the release of the Industrial Production report.  This data  shows how much factories, mines and utilities are producing.   Busier factors are a sign of future economic growth as they ramp up production to meet future demand which can lead to higher profits.  The bond market typically benefits with slower production and falls when production is robust.   Recent reports have shown Industrial Production posting gains and economists surveyed are expecting that trend to continue with a 0.4% month over month gain for October.   The release indicates that industrial production only rose 0.1% last month. 

Reports from fellow mortgage professionals indicate the par 30 year conventional rate mortgage is holding in the 4.625% to 4.875% range for well qualified consumers.  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 an estimated one point loan origination/discount/broker fee.  There are a few lenders still offering 4.50% today for consumers with high FICO scores and low loan to values.  If you are looking for a 15 year term, you should expect a par rate in the 4.125% to 4.375% range with similar costs.

Currently, MBS are holding at the top of the trading range which is near the all time high.  Since we continue to hold at this level, I am going to continue to advise clients and consumers to lock especially if you are within 30 days of closing.   If you plan to close beyond that time, check with your loan officer on longer term locks.  I usually don’t recommend locks longer than 30 days due to added fees, but we are near all time low rates which might justify paying an additional fee to secure the longer term lock.   A 45 day lock will generally cost 0.25 extra in fee which on a $200,000 loan is $500 but if you get a rate that is .125% lower for 30 years, the upfront cost is more than offset by the lower interest rate.   

What is your lock/float opinion?