Visualizing the Behavior of Mortgage Rates from a Consumer's Perspective

A moderate recovery to what seemed like decently aggressive loan pricing over the past three days was wiped out in a matter of minutes today.

While that sounds somewhat dramatic, in the big picture, the positive progress we've made since melting down (up) last week has yet to really warrant a celebration on the consumer level. Don't get me wrong, encouraging events have definitely played out in the secondary mortgage market and closing costs have indeed improved, but those uplifting improvements haven't produced much of a return to borrowers.

They've been symbolic of a recovery rally but have yet to evolve into concrete reductions in monthly payments. To illustrate my point I decided to convert loan pricing data from my model, which includes rate quotes from the five major lenders, into a format that consumers would better identify with and relate to...

What's on the Chart?

Points Paid by the Consumer or Lender Credits Awarded to the Consumer when they have been quoted 4.00%, 4.25%, and 4.50% mortgage rates over the last 6 months (GSE/FHA/VA 30 Year Fixed).

When above the zero line and rising, the borrower's closing costs are moving higher. When below the zero line and falling, the borrower's closing costs are moving lower. Once in negative territory, the borrower should be expecting closing cost help from their lender.  The 6-month trend of falling mortgage rates should be obvious. Notice how closing costs get progressively cheaper from July to November, but shot significantly higher following the release of the October Employment Situation Report on November 5th.  Also check out 4.00% quotes, they've moved below the zero line only three times in the previous 6-month period.  

Assumptions: These quotes have a 1% origination fee removed already. This fee accounts for the loan originator's compensation. This is not an industry standard or a regulatory requirement, it's the minimum compensation assumption I feel comfortable awarding loan originators in my model. Don't mutter under your breath about this consumers. The loan process is not a walk in the park in this credit environment. Loan originators deserve to earn at least 1% (of the loan amount) for the time and effort they must put forward to successfully usher you through qualification into closing. SEE MORTGAGE RATE DISCLAIMER BELOW.

Dots represent individual days. Notice how far the dots moved today. Closing costs on these quotes are at 6-month highs and 4.00% quotes aren't even on the board unless you want to pay upwards of 2.5% at the closing table.

Hopefully now that you've seen my loan pricing model in motion it will be easier to visualize what I meant when I said "the positive progress we've made since melting down (up) last week has yet to really warrant a celebration on the consumer level".

Yeh closing costs were improving. Yeh we were on a three day winning streak. But where did that three day winning streak leave us in the big picture? Not where we want to be. There seems to be a line drawn in the sand at 4.25%. We need to break through 4.25%. This is where the discussion gets a little more technical...

The encouraging events we've witnessed in the secondary mortgage market relate to the restoration of trading liquidity in the 3.50% agency MBS coupon. (MBS = mortgage-backed security, the primary guidance giver of mortgage rates)

If 3.50 MBS coupons are not trading in a liquid secondary mortgage market, lenders won't be offering mortgage rates below 4.25%. This is the end goal of the "QEII cleansing process". We are waiting for benchmark Treasury yields to move low enough to give lenders the opportunity to safely buy and sell 3.50 MBS coupons in the secondary mortgage market... which will in turn allow them to offer mortgage rates below 4.25% again. The 10-year Treasury note needs to move below 2.75% and build bullish rally momentum if mortgage rates are to move below 4.25% again.

Unfortunately the "QEII cleansing process"  took a step in the wrong direction today, at least on the surface. Whether or not the return of weakness in the bond market was a function of a fundamental shift in investing perspectives (in a mortgage rate unfriendly manner) OR a factor of an illiquid holiday trading environment combined with a confluence of contradictory events remains to be seen.  The waiting game continues...

MG provides closing comments...

I wish I could tell you that this selloff constituted some drastic shift in the marketplace and that it was an extremely "big deal" to the trading world, but the fact is this selloff although large was very much in-bounds.  It might have been a big deal if the 10yr note--as it's one of the benchmark for the broader fixed income market--had risen higher than it's 2 week highs, but the sell-off stopped just short of that range.

In the shorter run, this obliterates the availability of any halfway-decent rates offered since last Monday.  In the long run, however, it's actually yet another day where benchmark rates have not moved higher than their 11/15 highs, thus counting as another day toward confirming the cleansing process.  It's frustrating to have to entertain something positive about the long run when the short run can seem almost entirely negative, but it provides us with a stark example of just how fast things can change.

The best conventional/FHA/VA 30 year fixed mortgage rates remain in a range between 4.25% and 4.50% 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)".