Mortgage Rates Reflect Defensive Outlook

After mortgage rates moved .50% higher last week, prices of mortgage backed securities have managed to start this week in rally mode.   To remind readers, as MBS rally or move higher in price, mortgage rates move lower (though not always as fast as we might like).  Many lenders offered new rate sheets later in the day lowering consumer borrowing costs as the rally continued.  However, before we can get too excited, I must also point out that the volume of trades was very low which implies the is no strength behind the recent reversal of trend...but at least some relief has been offered up.  In markets such as this, we must remain very defensive as sentiment can change very quickly and rates will move higher at a much quicker pace than they will move lower. 

Today, the Federal Open Market Committee begins day one of their two day meeting.  At these meetings, which are held every eight weeks, the Fed sets monetary policy for our country, which is a fancy way of saying they tell us if there's any change to the Fed Funds Rate.  Not much happens during the first day, but following the end of the second day the Fed releases their statement which is closely analyzed by the markets for clues about any potential future changes to their stance on rates and/or programs such as the one that's so important for us: their purchases of MBS.  They're not expected to announce changes to that particular policy.  We'll get into more details on the announcement tomorrow and Wednesday.

Today's only scheduled data release was the Productivity and Costs report.  The productivity part of this report measures how efficient our labor force is at producing our nation’s goods and services. The cost portion of the report reflects the labor costs of producing one unit of output, both speak to inflation.  Today's reading showed sharp improvement on both sides.  Productivity posted a 6.4% gain beating estimates of a 5.5% gain while labor costs declined 5.8% which is more than the expected decline of 2.8%.  This report shows that the labor force is producing more goods and services while earning less money which is positive for corporate profits and also suggests minimal inflation risk, which is generally good for fixed income investments like MBS. READ STORY

At 1pm eastern, the U.S. Department of Treasury will hold its first of three treasury auctions for the week.  Today’s offering will be $37billion of 3 year notes.  Though the 3 year auction is not as pertinent to the mortgage market as tomorrow's 10yr (not to mention an FOMC announcement!), strong demand can still help decrease rates in both treasuries and mortgages.   Even though the higher probability is for reactions to be muted ahead of the FOMC statement, anything can happen if the results are extremely positive or negative.  Just remember, rate changes for the worse happen much quicker than rate changes for the better. Matt and Adam will cover the auction results at 1pm.

Moving to a more long term topic, I'm seeing increased coverage of the Home Valuation Code of Conduct.  This legislation came in effect on May 1st and changes the way that appraisals are ordered on home purchases and refinances.   It states that anyone that might earn a commission on a mortgage loan can have no contact with the appraisal company.   It also places greater emphasis on collecting payment for appraisals from borrowers at the time of appraisal.  Even before that, lenders collect and pass on your payment information to the Appraisal Management Companies--theoretically neutral third parties who randomize the appraiser selection.  That appraisal management company then contacts the consumer to set up the appraisal time and collect payment from the previously specified means.  Many people believe that this law is having a major impact on the housing market by providing inferior reports on value.   One claim is that the AMC's are utilizing appraisers that are not familiar with the area in which the subject property is located.  Another claim is that the appraiser, instead of reviewing multiple comparable properties to find the most accurate value, is choosing the 3 most recent comps so they can quickly complete the report and get back into rotation for the next order.  One cause for this is the dramatically decreased compensation available to appraisers since the implementation of this legislation.  A third claim is that the appraisals are not transferrable from one lender to the next (the law says this should not be the case, but in practice, there have been many problems).  There is a bill currently in Congress that puts a moratorium on this for 18 months.   I would love to hear from the many consumers that read this blog.  Have you been impacted by this law?  Do you agree with it?

Here is my view on HVCC.  The reason for this law was due to appraisers being pressured to hit  certain values in the past.  So to remove that pressure, appraisers will now be randomly assigned.  The first problem with this is the suggestion that all appraisers are equal.  That's like saying that all mechanics, lawyers, or loan officers are equal.  Remember, an appraisal is an opinion of value based on research of like homes in a neighborhood.  I contest that one appraiser might spend more time and do more research to find better comparable properties than another appraiser.   I am big on analogies, so let me provide my view this way.  (No offense to tax attorneys, cpas, accountants)  Many fraudulent tax returns have been submitted due to pressure applied on the tax preparer to take deductions that may not be fully justified.  So, should we pass a law that states when a consumer wants to have their taxes prepared that they contact a 800 number and a tax preparer will be randomly assigned to their file.  How would you feel if such a law were passed?  The cost for an appraisal and basic tax preparation from a CPA is even relatively similar!  Yeah, I know that many of you might point out that the appraisal process is seen to be a key component in the mortgage crisis that brought on the most severe rescession since the great depression whereas tax fraud is not, BUT....  Beyond that, what are your thoughts and comments? 

Reports from fellow mortgage professionals indicate that mortgage rates do not reflect the extent to which the MBS market has rallied over the past two days, however mortgage rates are still slightly improved from yesterday.   The par 30 year conventional rate mortgage is in the 5.125% to 5.375% range for the best qualified consumer.  In order to get a par interest 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 one point loan origination/discount/broker fee.  As a consumer, you can elect to pay less in fees and take a higher interest rate.