QEII MORTGAGE RATE ALERT: Nobody Panic
So much happened today and it caused so much commotion. I'm not even sure where to begin. Actually yes I am....
The FOMC announced a $600 billion asset purchase program ! Yay. Woohoo!!
This is the message shared by the NY Federal Reserve on their directions from the FOMC:
On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.
Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.
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This is the "QEII" we've been talking about for the last month. This is the "Quantitative Easing" program we expected to be extremely supportive of record low mortgage rates. Phew! Everyone should be excited/relieved right?
NOT SO FAST...
Mortgage rates didn't plummet back down to record lows immediately after "QEII" was announced. Instead a panicky knee-jerk bond market sell off (profit taking) followed the FOMC release at 2:15pm. Declining benchmark bond prices pushed benchmark yields higher and negatively influenced mortgage-backed securities prices. The move was so violent that it spooked a few fence-sitting borrowers into prematurely pulling the trigger on their interest rate lock.
So How Did Mortgage Rates React?
Think of the bond market's QEII reaction the same way you would describe panic in a movie theater. If someone in the front row shouts "FIRE" and runs for the door, folks in the top row would be quick to follow. Right? That's essentially what happened in the interest rate marketplace at 2:15pm, except the people heading for the exits were bond sellers. Fortunately, when the theater was about halfway empty, a bargain buyer realized there was no fire and movie watchers started shuffling back into their seats. READ MORE ABOUT THE BEAR STEEPENER
Check out the MBSonMND chart below. The large displacement on the right side of that line graph illustrates the bond market's knee-jerk panic when the FOMC Statement was released. Interest rates and MBS prices recovered into the close!
In terms of lenders and loan pricing....
Some lenders panicked and repriced worse, but then they repriced for better once MBS prices recovered. Some lenders repriced for the worse but didn't reprice for the better. Some lenders simply stopped accepting lock requests until the dust settled. Then went back to business as usual.
At the end of the day I still see 4.00% 30 year fixed mortgage rates being offered to well-qualified borrowers with conforming loan amounts, but closing costs are steep. That assumes you are able to find a lender who will go that low. And even if you do, it'll take upwards of 5 years to recover the points you'll pay at closing to float down your home loan rate. That isn't the most consumer friendly rate/points structure, be sure to ask your loan originator to run a breakeven analysis and explain your "permanent buydown" costs. 4.125% is widely offered in the broker and banker portion of the primary mortgage market and 4.25% should be a "no cost" loan for borrowers whose credit and collateral profile doesn't trigger any risk based loan level pricing adjustments. This would apply to 30 year fixed FHA/VA loans as well. The best 15 year rates are being offered in a range between 3.50% and 3.875%. I won't endorse closing on a 5-year ARM.
Mortgage Rate Disclaimer: Loan originators will only be able to offer these rates to borrowers who have perfect credit profiles and enough equity in their home to qualify for a refinance. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan a riskier investment. (investment properties and second homes are a riskier investment )
I know what you're thinking. "AQ you promised record low mortgage rates if the FOMC announced QEII. Where's our record low rates?"
Yeh you got me. The most important part of the plan has yet to materialize. Record low mortgage rates are clearly not being offered on a widespread basis. Heck we aren't even over the knee-jerk selloff yet. This was a traumatic experience for a lot of rate watchers! Please don't panic though. Did you hear what the FOMC said today? $850 BILLION IN DEBT ASSET PURCHASES!
The interest rate environment is ripe for record low mortgage rates!!!
Remember our MND RateWatch motto? Play the range until the range plays you. Bernanke didn't play us and it doesn't seem like he intends to anytime soon. Let's keep playing the range until he does. That means we should at least give the bond market a chance to sort through the details of this program (me included). We should at least give $850,000,000,000 in mortgage rate supportive asset purchases a chance to settle into the bond market's mind. I don't think you'll regret it.
Plain and Simple: Don't Panic.