Mortgage Rates: Lenders Absorb Weakness

By: Matthew Graham • Thu, Apr 14 2011, 5:34 PM

Home loan borrowing costs were roughly unchanged today. This is surprising because loan pricing should have worsened given the behavior of the secondary mortgage market.

Whereas yesterday started weaker and improved to end just slightly better than the day before, today was the total opposite. Loan pricing (MBS) started strong but progressively weakened throughout the day. The interesting thing about yesterday and today "cancelling each other out" is loan pricing is almost exactly where it was on Tuesday..if not slightly better. Few lenders repriced for the worse, when most should have..

This is important because if loan pricing (NBS) weakens tomorrow morning, many lenders will have some catching up to do on their rate sheets (in a bad way!). Consumer borrowing costs would jump if that happened.

CURRENT MARKET: The "Best Execution" conventional 30-year fixed mortgage rate is 5.00%. Some lenders may offer pricing that makes 4.875% an attractive option, but that is a best-case scenario. 5.00% is a much more common Best Execution quote. In the case of 4.875%, this offer carries higher closing costs but could be worth it to applicants who plan on keeping their new mortgage outstanding for longer than the next 5 years. Ask your loan officer to run a break-even analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is still 4.75%. 15 year fixed conventional loans are now best priced at 4.25%. Five year ARMS are still stratified and there is more variation in what will be "Best-Execution" depending on your individual scenario.

See Rates from Lenders in Your Area

VERY IMPORTANT CAVEAT: Mortgage rates are being quoted in a wider range right now due to recent regulatory changes in Loan Officer Compensation policies. Because of this, the Best-Execution mortgage rate can vary greatly from lender-to-lender. The quotes we have listed above are on the more aggressive side of the primary mortgage market.

PREVIOUS GUIDANCE: The level of risk involved in attempting to take advantage of the current "mini-recovery" was made apparent today as rates were worse this morning, we lucked out when pricing rallied back this afternoon. That being said, the "glimmer of opportunity" we mentioned on Monday got some firm support with the afternoon recovery rally. Betting on it however, remains highly speculative. We'll need economic events to transpire favorably for a few more days before we'd get any more optimistic about further improvements in home loan borrowing costs (It's good day to re-read previous guidance... still applies 100%)

CURRENT GUIDANCE: Yesterday's strength was encouraging but could still prove to be a minor correction within the broader bearish trend. It could also turn out to be a legitimate reversal leading conventional 30-year fixed Best-Execution rates back to their recent perch at 4.875%. We're in wait and see mode.... The ceiling we hit today could be made of glass or concrete. As feared, it looks like markets have taken the entire week to decide which direction to push rates next. With Best-Execution rates improved from their recent highs, it's a good time for anyone who can't afford the risk of higher rates to favor locking. But much like yesterday, those willing and able to take a speculative risk for further improvements cannot be automatically labelled as "crazy" given recent gains. And thank your lender for absorbing today's price weakness when they should have increased borrowing costs! (COMPETITIVE MARKET!)

IMPORTANT PERSPECTIVE: Reassuring Rates Rally Gives Pause to Bearish Bias

What MUST be considered BEFORE one thinks about capitalizing on a rates recovery?

   1. WHAT DO YOU NEED? Rates might not recover as much as you want/need.
   2. WHEN DO YOU NEED IT BY? Rates might not recover as fast as you want/need.
   3. HOW DO YOU HANDLE STRESS? Are you ready for MORE VOLATILITY in the bond market?

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"Best Execution" is the most efficient combination of note rate offered and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. When deciding on whether or not to pay points, the borrower must have an idea of how long they intend to keep their mortgage. For more info, ask you originator to explain the findings of their "breakeven analysis" on your permanent rate buy down costs.

Important Mortgage Rate Disclaimer: The "Best Execution" loan pricing quotes shared above are generally seen as the more aggressive side of the primary mortgage market. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who 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 recording. Don't forget the intense fiscal frisking that comes along with the underwriting process.