Patience Pays Off For Mortgage Rate Watchers
The Federal Reserve birthed QEII yesterday as expected, but the bond market's initial reaction was not float boat friendly and a shock wave of panic rolled through the primary mortgage market.
In the hours that followed the 2:15 FOMC statement release, loan originators and borrowers alike watched in horror as benchmark Treasury yields spiked and mortgage-backed securities prices plummeted. Some lenders repriced for the worse and pushed mortgage rates higher while others simply shut down their commitment desks, blocking consumers from locking their interest rate. (dramatic right? haha)
After weeks of build-up, our world seemed to be falling apart right before our very eyes. It got so bad that I received about 500 angry emails from readers who "trusted me" and were now "screwed".
MY RESPONSE TO EACH AND EVERY READER: DO...NOT...PANIC!
Well...Patience paid off today for those who didn't pull the trigger prematurely.
Mortgage-backed securities rallied to record price highs today and mortgage rates leaped lower in an aggressive manner as lenders passed along the loan pricing love. And my stereo system was cranked up all day in celebration...
The best conforming 30 year fixed mortgage rates have moved back down to a range between 3.875% and 4.25%. 3.75% is phantom but I've received more than a dozen emails from borrowers who locked in a 30 year fixed loan at 3.75% today. Read "phantom"as believing in the existence of 3.75% but not having scientific proof. 4.25% is widely quoted with no closing costs while 3.875% still carries an expensive closing cost price tag.
The best conforming 15 year fixed mortgage rates have moved down to a range between 3.250% and 3.625% (this market is more segmented than 30s). 3.25% is "phantom" while 3.625% is a no closing cost quote.
I can't endorse an ARM with 30 year rates so low today. If you do think an ARM is right for you I hope you're paying very close attention to the index your ARM is tied to and you fully understand how it behaves relative to the broader bond market. Clearly an ARM requires a little more financial literacy.
(IMPORTANT: ASK YOUR LOAN ORIGINATOR TO RUN A BREAK EVEN ANALYSIS ON THE POINTS YOU'RE PAYING TO FLOAT DOWN YOUR MORTGAGE RATE!!!)
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 more risky. (Investment properties and second homes are a riskier investment )
BORROWERS BEWARE: There were scattered reports of repricing for the worse today. This gives me the opportunity to revisit the "capacity constraint" issue that surrounds mortgage rates, especially at retail lenders. Basically what you need to know is when the primary mortgage market is buzzing with activity, some lenders may actually reprice for the worse (increase mortgage rates) for no apparent reason. This is generally a function of their shop reaching operational capacity. In an effort to slow loan production and reduce pressure on the processing/underwriting/closing staff, the lock desk will pre-emptively increase mortgage rates. This can occur at anytime but there is a warning sign that might help you avoid being a victim of a "capacity constraint" reprice for the worse. When loan processing turn times begin to grow longer, it's a hint of loan pricing pain to come. Your loan originator should be paying close attention this though, my point is to alert you to the potential for it to occur when the refinance market heats up. This is not a baloney explanation, your LO isn't "yanking your chain" if they use it.
Ok so the rally we enjoyed today was another step in the right direction. Our outlook seems to be playing out perfectly but we're not quite there yet because mortgage rates below 4.00% are not yet offered on a widespread basis with an acceptable closing cost structure (5 year breakeven on points paid is acceptable in my opinion). So there is still work to be done and a decision to be made for many float boaters. With that in mind here are my thoughts on locking and floating in the two week's ahead.
I still feel that 3.75% will be as good as it gets for 30 year conforming loans. This theory is based on a lack of liquidity in the FNCL 3.0 TBA MBS market. 3.0 MBS coupons are generally backed by loans with mortgage rates between 3.25% and 3.875%. Yeh what a mouthful I know. What that means is there haven't been many buyers or sellers of 3.0 MBS coupons in the secondary mortgage market. 3.0s don't exist. There is no market! Heck I've barely seen any 3.0 options trade. Sorry I am getting way ahead of myself here but you get the point. Without 3.0 MBS, mortgage rates won't dip below 3.75%.
If you're already being quoted a rate near the low end of the above discussed "best rate ranges", it makes sense to lock, especially if you're approaching a "clear to close" from underwriting. We're playing a range here and there is a risky event ahead that carries the potential to increase volatility in mortgage rates: THE EMPLOYMENT SITUATION REPORT. Yeh it's so important that it's worthy of all capital letters and bold print.
The Employment Situation Report prints tomorrow morning at 8:30am eastern. This data is the most influential report released to the market on a monthly basis. It shapes investment strategies and shifts trader perspective. I am still confident that mortgage rates will eventually extend their rally, but I have to warn you, the float boat might take on some water if the report is better than expected. This means you cannot panic if we experience a short term spike in mortgage rates in the aftermath.
Plain and Simple: This is a high risk event. If the labor market is in better shape than expected, the initial knee jerk reaction will not be favorable to float boaters. I am however confident that this sell off will eventually abate and mortgage rates will resume their move downward. If the data fails to match expectations, hello broad based mortgage rate offers below 4.00%.
Savy?