Lenders Less Willing to Push Mortgage Rates Lower
I hope everyone had a fantastic holiday weekend...now it’s back to work. Last week ended on a flat note with mortgage backed securities closing basically where they opened Friday morning. Bolume was extremely light but that was expected as the markets were only open for a half day.
The data calendar is very light today with the only report being the Chicago PMI which is a survey of businesses conditions around the Chicago region. Readings above 50 indicate expansion while readings below 50 indicate contraction. Last month’s survey registered the first above 50 reading since the summer of 2008 with a reading of 54.2. Expectations called for this month’s report to come in slightly lower at 53.0. The release indicated that business conditions around the Chicagoland area continue to improve, with a 56.1 reading. Despite this better than expected economic data, there wasn’t much reaction in the marketplace.
On Tuesday we get a measure of the strength of the manufacturing sector of our economy with the release of the Institute for Supply Management’s Manufacturing Index. This data is a survey of over 300 manufacturing firms. Readings above 50 indicate growth while readings below 50 indicate contracting conditions. On Tuesday we also get Construction Spending data from the Department of Commerce and Pending Home sales from the National Association of Realtors.
On Wednesday the Mortgage Bankers Association releases their loan application index which tracks weekly changes in the amount of loan applications taken at major lenders for mortgages. This report will be followed by the ADP Employment report and then later in the day we get the Beige Book, which is used by members of the Federal Open Market Committee to help determine domestic monetary policy.
On Thursday comes weekly jobless claims numbers. At the same time we get the Productivity and Costs report which measures how efficient our work force is at producing our nation’s goods and services. A more productive workforce keeps wage pressure down which can benefit both stocks and bonds. Lastly, the U.S. Department of Treasury will announce the terms of next week's debt offerings of 3 year notes, 10 year notes, and 30 year bonds.
Friday is the big day: the Employment Situation report!
Since our economy is driven by consumer spending, market participants want to know how many Americans are out of work. Additionally, this data shows average hourly wage and workweek for Americans that are employed. Recent reports have shown our economy losing fewer and fewer jobs each month and this month’s report is expected to continue the trend showing a loss of only 100,000 jobs after the prior month’s loss of 190,000. At the height of the current recession, our economy was losing over 600,000 jobs each month. Average hourly earnings are expected to post a month over month gain of 0.2% while the average work week is expected to climb to 33.1 from 33.0 last month.
For more on the week ahead, check out the MND STORY.
Reports from fellow mortgage professionals indicate the par 30 year conventional rate mortgage is holding in the 4.50% to 4.75% 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. If you are seeking a 15 year term, par rate is in the 4.00 to 4.25% range with similar costs.
As always when securing a mortgage, you can pay less in closing costs but you will not get as low an interest rate. Think of a See-Saw, the higher the costs, the lower the rate and vice versa. As a consumer you can choose to do a loan where you don’t pay the closing costs. This doesn’t mean there are none, just means you are not paying them. Those fees would be paid by the person doing the loan. How this is achieved is premium pricing which means you get a higher interest rate than par and the loan originator pays the fees for you from the money they made from the lender by giving you that higher interest rate. This is a excellent option for anyone not planning on keeping their home from many years. At the end of the day, whether you choose to pay the costs or not, you end up paying them one way or the other. You can pay them as costs up front or pay them over time with the higher interest rate.
Lenders have proven themselves unwilling to push mortgage rates much lower then where they currently sit. I favor locking over floating.
AQ further explained in Friday's MBS CLOSE...while this is advanced discussion, it expands on why lenders are less willing to sell 4.0 MBS vs. 4.5 MBS. (Hint: selling 4.5 MBS is much more profitable!)
"Lenders will find it more expensive to offload loan paper originated below 4.50%. The volatile duration of 4.0 MBS coupons adds an extra helping of "extension risk" to the value of mortgage related cash flows. While the Fed is still participating in the agency MBS market, they too should be looking to avoid adding more duration to their portfolio, especially with the TSY extending the maturity of their debt to line up with the duration of the Fed's MBS portfolio. (Incoming cash flows offset outgoing cash flows). That said, we don't expect the Fed to be heavy buyers of 4.0 MBS. If TSYs do manage to rally on, we would anticipate a widening between primary mortgage rates and the secondary market current coupon yield. (hmmm...excess servicing income!)"