Mortgage Rates Waiting on FOMC Statement

Mortgage rates improved yesterday after prices of mortgage-backed securities moved higher for a second straight session.  Yesterday’s trading action was however a bit more choppy than Monday's session.  During one of the weaker parts of the day, a few lenders did reprice for the worse, however as MBS prices rebounded those lenders quickly gave back what they had just taken away.

It appears the main reason for MBS gaining ground over the last couple days is weakness in the stock market as participants are starting to second guess whether the recent run up in the stock market is justified.   It's not so much that the stock losses themselves directly benefit bonds, but rather the future IMPLICATIONS to which these uncertainties speak.  In essence, to whatever extent it suggests a moderation to the pace or scope of economic recovery, some extra money can flow back into the bond market. The benchmark 10 year note has moved from a yield last week of 3.85 to close yesterday at 3.68!  To remind readers, price and yield of MBS and treasuries are inversely related meaning as the price moves higher, the yield(mortgage rate) moves lower and vice versa. 

Today is Fed day, which will probably result in very slow trading action pre statement followed by volatility.  It is highly expected that the Fed will maintain status quo on the fed fund rate and the MBS purchase program.  You may recall that the Fed is also currently buying treasuries in addition to MBS.  Some are expecting further information on the phasing out of that program. To whatever extent that verbiage is more aggressive, rates could suffer this afternoon.  The outlook they provide on the economy will be scrutinized by market participants for any clues as to future monetary policy and/or changes with existing programs.  Matt and AQ will cover the statement in detail on the MBS Commentary blog. 

We do have some data this hitting the wires this morning.   The Mortgage Bankers’ Association released their weekly applications index which tracks the weekly change in the number of mortgage applications at major lenders.  They break the report into 2 categories, purchase applications and refinance applications.   The report shows that the purchase applications index increased 1.1% making for the third straight small gain in a row.  The refinance activity declined from last week by 7.2%...probably due to the recent uptick in mortgage rates. READ MORE

At 1pm eastern, the U.S. Department of Treasury will auction $23billion in 10 year notes.  Since the average life of a mortgage is closer to 10 years than 3 years (plus other technical reasons), today’s auction stands to exert a bigger impact than yesterday's auction of 3yr notes.  With the Fed statement coming an hour after the auction, it will be interesting to see if the demand for US debt is strong.  Weak demand at the auction may pressure treasury mortgage rates higher.   But whatever direction markets move after the auction, expect it to be to a much lesser extent than it otherwise would be in the absence of an impending Fed announcement.  That said, auctions can move rates so much that even if the normal intensity of the reaction were HALVED, things could still move quite a bit.   Matt and Adam will cover the auction results shortly after 1pm est. 

Early reports from fellow mortgage professionals are indicating that mortgage rates continue to improve.  The par 30 year conventional rate mortgage has fallen to the 5.125% to 5.375% range for the best qualified consumers.  In order to secure a par interest rate you must pay all closing costs including one point loan origination/discount/broker fee, have a FICO credit score of 740 or higher and a loan to value at 80% or less.   If you are looking for a 15 year fixed rate mortgage, expect the rate to fall into the 4.5% to 4.75% range. 

We are seeing the best rate sheets this morning in over a week and a half.  With the Fed statement coming out later today, the market can turn rather quickly.  Keep in mind, rates worsen much faster then they improve.  With that said, you might want to consider locking this morning ahead of the statement to remove the risk of higher rates.  If you have been floating your rate since last week, you have improved by .375% and now might be a good time to take the profits.