Volatile Secondary Market Moderates Mortgage Rates

This morning, mortgage backed securities began to continue their recent trend of moving lower in price which tends to increase mortgage rates, however, after some worse than expected economic data, prices have since recovered and are now relatively unchanged on the day. 

The first data to hit the wires today is the weekly Mortgage Bankers’ Association application index which tracks the monthly change in the number of mortgage applications at major lenders.  An increasing trend in purchase applications would suggest a bottoming in housing which most economists agree must happen before our economy can truly rebound.   Recent data on housing is pointing to a bottoming.  The release of the index has indicated that the purchase activity rose 0.9% last week while the refinance activity rose 7.2%.   This is one housing report that is yet to show sizable improvements in the purchase market.

Also out this morning is the ADP Employment report which totals the number of jobs lost or created on a monthly basis.   ADP is a private company that handles payrolls for many companies across the U.S.  Their report only covers private payrolls and excludes government jobs. This data set is always released on the Wednesday prior to the official government numbers  on Friday.  Historically speaking this report has not been taken too seriously among market participants but it is gaining more credibility.   Expectations called for a loss of 320,000 jobs last month but the actual release has indicated a loss of 371,000.   This is a substantial improvement from last month’s revised loss of 463,000 jobs.  Even though this report is worse than expected, the fact that it came in better than last month is yet another suggestion for decelerating losses in the labor markets.   Though another jobs report was out this AM (Challenger Job Cut), it’s inconsequential to the point that we are done talking about it…

The Treasury Department at 9am eastern announced the amount of the upcoming treasury auctions to be held next week.  Our government issues treasuries in order to finance spending.  And of course, with all the spending requirements arising from various stimulus efforts, the coffers have been in need of constant replenishment.  The added supply of treasuries on the market will pressure treasury yields to move higher to attract new buyers.  Since treasuries and MBS are both a fixed income debt investment, they tend to move in the same direction.   The announcement came in right as expected with $37 bln of 3 year notes, $23 bln of 10 year notes and $15 bln of 30 year bonds going to the highest bidder next week.
Next, the Department of Commerce released the Factory Orders report which shows whether orders at factories for both durable and non durable goods are increasing or decreasing.  This data set shows how busy factories will be in the upcoming months.  An increasing trend will suggest higher sales and higher profits which is positive for stocks and negative  for MBS.   May’s factory orders moved higher by 1.2% from the prior month, giving support to the economic rebound.   The data has shown that factory orders continue to show signs of improvement beating expectations of a 0.9% decline to come in at a 0.4% increase.  The better than expected data is being offset by the news that the improvement in orders is due to higher energy costs.

Our last data set this morning is the ISM non-manufacturing index which shows whether the non manufacturing segment of our economy is contracting or expanding.   The Institute of Supply Management surveys 400 firms across the U.S. for their opinion of the strength of the non manufacturing sector.   Readings above 50 indicate growth while readings below 50 indicate contraction.  The last three releases have indicated that the rate of contraction is declining, a trend that’s expected to continue.  June’s report came in at 47.0.  Actual figures came in at 46.4, worse than the expected 48.2, which suggests further contraction in the non-manufacturing sectors.
Following the release of today’s data, the stock market has moved considerably lower moving money into the fixed income sector.  The benchmark 10 year note has moved to 3.65 after hitting 3.75 this morning and MBS have regained all the losses from this morning.

To continue a discussion from yesterday regarding good faith estimates and yield spread premium.  New legislation wants to eliminate yield spread premium (YSP) which is indirect compensation that is paid to the loan originator based on the interest rate they secure for you.  I quote on my blog par interest rates which would pay zero yield spread premium to the originator thus the reason you would be required to pay all costs including a point to secure that rate.   If YSP is eliminated, then no cost loans and no point loans will go away.  You as a consumer will lose the ability to decide whether you wish to pay closing costs or decide not to.  Our current government is eliminating many consumer choices such as the ability for you to decide who appraises your home with the passing of the Home Valuation Code of Conduct and quite possibly the elimination of no cost loans.

Here is an example of the benefits of ysp.  Let’s assume a particular client has excellent credit, mortgage amount of $200,000, home worth $300,000 and a rate of 6.5%.   Let’s further assume that the loan amount started at $210,000 making the P&I payment $1327 and they only intend to stay in home for 1 ½ years.   They could refinance today by paying closing costs including a point, totaling $5400 fees, to 5% making payment $1100.  Now, does it make sense for this client to pay $5400 in fees to save (1327-1100) $227 per month. Well, $5400 divided by 227 gives a break even point of 23 months.  So, if this client only intends to keep home for 18 months, it makes no sense for them to pay costs and get the 5% rate. 

Now, lets say they do a no cost loan at 5.875%.  This would lower payment to $1183 but no costs would be charged to the client since the higher interest rate will compensate the loan originator enough money to pay the closing costs for the client and still make a profit.  This also allows the home owner to take advantage of a lower interest rate and lower payment thus benefiting their family’s financial position and also the overall economy.  A lower payment allows them to have more money to spend in the economy and by refinancing they are also allowing many people to keep their job.   Here is a link to H.R. 1728.  What are your thoughts regarding this topic? 

Early reports from fellow mortgage professional are indicating that the par 30 year fixed rate conventional mortgage is in the 5.125% to 5.375% range for the best qualified consumers.  In order to qualify for a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.  If you are planning to access home equity, you should expect either a slightly higher interest rate or increased costs.