Lenders Whack Loan Pricing. Rebate at Six Month Low
Loan pricing got whacked by lenders today. On average rebate is 55.5bps worse with some chunky reductions in the note rates below 4.50%. As much as 75bps have been shaved from those offers. The back and forth nature of MBS trading over the past week is illustrated by a modest 34bps decline vs. pricing last Wednesday. Then again last Wednesday was the worst day of pricing in the week and we're worse today, so perhaps I just threw salt in your wounds....
I had been hearing scattered reports of phantom 4.25s still being offered to borrowers. That quote is about 1 point underwater now and the buydown is astronomically expensive with a 10+years breakeven on buydown/discount points paid at closing.
Primary/Secondary spreads have inched tighter but as you can see in the BE vs. Man column, the range is wide and the average is distorted by two lenders. After months of covering margin calls into rising MBS prices, originators are now trying to gauge the appropriate amount of coverage they have on their pipelines. It seems like lock desks overhedged last week into rising vol and have recently peeled off a portion of those hedges which added an expense to the bottom line, an expense that has been passed down to consumers.
4.50% looks like best execution for well-qualified borrowers but we're leaning closer to 4.625% in markets with lower home price values.
EXPLANATION OF LOAN PRICING COMPARISON
Buydowns are the cost of floating down to the next lowest note rate. Buydown costs are matched to the note rate in the same row. For example, the first number in the buydown column is 0.341%, this is the cost to float down from 5.000% to 4.750%, as a percentage of the loan amount (bc they are priced the same!). This is important because it helps an originator determine the best execution rate/points combination for a borrower who has a good idea of how long they intend to keep their mortgage (breakeven on points paid vs. monthly payment savings). In the Buydown Delta column, red is cheaper. Black is more expensive.
The pricing change column is a direct rebate comparison of pricing today vs. pricing yesterday. Red is worse. Black is better.
The Δ BE v M column shows you how margin is changing. Red means more margin. Black means less bps are baked into pricing.
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Plain and Simple: loan pricing hasn't been this weak since June.
To illustrate loan pricing weakness I've graphed rebate averages at the five majors on 4.00%, 4.25%, and 4.50% note rates. Average SRP values are baked in.
Recently optimistic econ reports are my main cause for concern. The week ahead offers plenty of data points for us to judge the market's sensitivity to new data. Again, we do anticipate a long slow recovery but the market's investment horizon is still short term and biases are largely tactical. This means momentum will be one of the market's main motivation for movements. If econ data continues to be better than anticipated, it could spell trouble for 3.00% yield support in the 10yr and 101-00 price support in FNCL 4.0s. Weigh that against ongoing EU contagion concerns, conflicts in Korea, political jawboning in the U.S., six Fed open market operations, and month-end index extensions. Basically if bond investors really are that confident the economy is improving at a faster rate than anticipated, there are several bullish TSY influences they must overcome to illustrate their point of view.
Well. Econ data didn't disappoint in the overnight session and domestic releases didn't do much to stall bullish momentum in stocks, which are still contained within their one-month range (near the highs of the year). So 10s are testing 3.00% and the FNCL 4.0 has broken 101-00 support. The 8bp bear steepener has exerted additional extension pressure on production MBS valuations as real$ accounts dump duration and fast$ buyers are not jumping at lower dollar prices/wider spreads yet. Bid wanted....
The outlook for December doesn't look pretty at the moment but we have to remember this market is highly motivated on short term tactical considerations. It's a trader's world.
Momma said there'd be days like this.....