Mortgage Rates Make Positive Progress. Busy Calendar Ahead

Monday's trading of mortgage backed securities (MBS), which most closely dictate loan pricing offered by lenders, brought welcome changes in the scope and severity of the volatility we highlighted last week. 

When volatility is high, MBS prices fluctuate rapidly, moving from the highest parts of their trading range to the lowest in a matter of hours or sometimes minutes!  The charts we provided last week clearly illustrated this phenomenon as prices bounced up and down very much like a pinball between two bumpers.

There is some debate, even among the savviest of pros, as to the cause of the volatility and the way in which it is likely to play out, but at least there is a fairly short list of likely suspects.  Here are a few factors driving the markets last week, this week, and in the weeks to come:

• The much discussed 2nd round of the Fed's Quantitative easing (QEII) purchases of US Treasuries saw it's first full week of purchases.  The fact that it was announced several weeks before buying actually began (and foreseen even earlier) led some to suggest that beneficial effects that mortgage rates would likely see from QEII had already been occurring before purchases began, and that once the purchasing did actually began, rather than simply confirm the previous trading (speculative), the INDECISION surrounding the ongoing fate of the program combined with several of the separate economic considerations from this list, was more than enough to panic the markets a bit, thus causing rates to rise rather rapidly.  That started a bouncy cycle of "yeah but's."  Rather than being resolved with a clear winner in that tug of war, rate volatility merely MODERATED as the week wore on, but the rapid back-and-forth nature of movements did not.
• Employment is a hot topic.  The most recent non-farm-payrolls report presented a challenge to interest rates as growth in the labor market is generally bad for bonds yields and MBS prices.  The next NFP report is right around the corner on 12/3.
• Ireland has been in the throes of the same genre of sovereign debt drama that plagued Greece earlier in the year, which helped drive mortgage rates to record lows all summer.  Because the debt situation in any Euro-zone country has necessary impacts on the Euro currency, it tends to send shock waves throughout the financial world.  The relative uncertainty surrounding the situation, whether or not it was ultimately good or bad for US bond prices, certainly didn't help the volatility.  The US awoke this morning to find an Ireland that had agreed to an IMF/ECB bailout, and sizable improvements in bond prices all around the world ensued.
• Other economic data.  Pretty standard-issue stuff here.  Various scheduled economic reports always have the ability to impact mortgage bond prices by indirectly suggesting that the money that's in play in the marketplace is shifted around based on the specific suggestions of the report.  This is why NFP is listed as a consideration as it is generally considered the most important economic report of the month, in addition to the employment situation being a topic of focus at the Fed and beyond.  The remainder of economic reports can have an impact as well, but they get lumped in to their own bullet point next to the granduer of the mighty NFP report!
• Month End - There are a few factors, too complex to explain in detail here, that tend to have a marginal benefit to MBS prices leading up to the last day of the month, as well as NFP (which can occur soon into the following month as it will on 12/5). 
  
• Year End Approaches - The end of the year can bring bank balance sheet considerations for the largest movers of MBS money which can in turn, end up having a marginal effect on loan pricing.
  
• More QEII buying - Markets will be watching the amounts the fed is choosing to invest in which sectors of the bond market for clues as to the changing shape of the yield curve. 
  
• More Auctions - Treasury Auctions Specifically...  We've already taken down the 2yr note auction that occurred today (and that helped MBS stay in a decent trading range), and there are auctions tomorrow and Wednesday as well before the thanksgiving holiday and the traditionally slow and boring Friday that follows.  If reality deviates too much from expectations, MBS prices can move fairly rapidly in either direction as they keep pace with treasuries that might be moving in either direction. There will be no bond auctions next week, this should be supportive of lower mortgage rates.
  
• FOMC Minutes - Perhaps our best clues about the longer term strategic outlook on interest rate policy can be gleaned from an in-depth reading of the minutes from the Fed's most recent policy meeting, which are available tomorrow.  NOTE: this is NOT one of those days where the prime rate might change (which would be more like the votey-torchy part of Survivor whereas the meeting minutes are more like the snippet with the credits after the show where we get to see how everyone voted and why... In essence, it's a window into why the Fed is doing what they're doing and they're thinking that might inform future policy)

PHEW!  That's alot.  But don't worry... It's not there in order to be memorized, but rather to highlight that there are several important factors pushing and pulling on both sides of the bond market--factors that are likely to continue to make volatility a risk. HERE is the full economic calendar for the week ahead.

All we know at this point is the "so far so good" type of cliche.  We were beginning to entertain the first potential signs of a "cleansing process" in the bond market which would wash out the recent upward momentum in rates to a sufficient extent that the highest rates seen early last week might hold on to be the highest rates seen by the end of the week.  This was indeed the case (but not without a few close calls). 

We noted then, that we would need to see those same levies hold into this week and beyond before we could increase the level of certainty or probability that we'd seen the worst rates (for a while anyway).  Once again, with today's decent gains in MBS and treasuries, we're still in that "so far so good" territory. 

Here's a look at a chart that includes the volatility from last week and shows you just how narrow the trading range has been recently (narrow AND better than last week's range as it has "broken out" of the upper red line which had been guiding it lower)

But as you might imagine from a purely logical standpoint, we'd all like to see that squiggly little green line make some definite movement back above it's previous highs before we'd hope to recapture any more of the goodness in rate sheets earlier in the month.  At least we can say, indeed, that we've taken another step toward confirmation of the QEII cleansing process, but be aware that that's all we can be sure of at this point. 

Plain and Simple: the risks of floating remain high in the day's ahead but we're building a case for a recovery rally.

The best conventional/FHA/VA 30 year fixed mortgage rates remain in the 4.25% to 4.50% range for well-qualified borrowers.  The best conventional/FHA/VA  15 year fixed mortgage rates are in a range between 3.500% and 3.875%.

Important Mortgage Rate Disclaimer:  Loan originators will only be able to offer these rates on agency conforming loan amounts to borrowers who are have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. 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 expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as:  third party fees +  title charges  + transfer and recordation + escrows (things like upfront MIP (if required), property taxes, homeowners insurance, accrued interest.