Bad Economic News Means Better Mortgage Rates

Worse than expected jobs reports turned into better mortgage rates this week. Many people feel guilty for wanting lower rates based on worse economic news.

Look for this trend to continue, at least until January when the Treasury ends it purchases of MBS.

Our thoughts and prayers for our soldiers and their friends and families in Ft. Hood/Killeen.

Winds of Change?

The weather isn’t the only thing changing.  Prices of Mortgage Backed Securities are falling – mortgage rates rising.

The stock market is falling mainly as many traders feel that the market is overstated. Bank of America announced some trouble paying back its TARP funds – not that it can’t – but it can’t reach terms with the government. Oil and the banking sector bringing down the dow.

http://online.wsj.com/article/SB125655356470307903.html?mod=igoogle_wsj_gadgv1&

Past experience tells us whats bad for the stock market is good for the bond market, which should make MBS prices rise and mortgage rates fall. Except that the elephant in the room, or not in the room, is Treasury’s dwindling commitment to purchase bonds. Sounds like we’re in for a rocky ride.

What are your thoughts on the Alamo Heights city bond election?

With so many homes for sale in Alamo Heights, can we  afford to pass the city bond proposal?  What are you willing to spend to pay for new City Hall/Police complex on Broadway?

Now What?

Yesterday’s rate increase had it roots in several different economic areas – some technical (the yield curve) and some emotional (the fear of the country losing its AAA credit rating).  The bottom line is that we reached a tipping point where a herding mentality took over and investors sold off their positions in Treasury Bonds and Mortgage Backed Securities (MBS).

 

Several commentators sensed that this type of correction was due, but no one anticipated the severity of the sell-off. Lender’s re-priced as much as 4 times yesterday – all for the worse. The speed of this correction caught everyone off guard – this is the most significant lesson from yesterday.  Think “shock and awe”.

 

Now what?

 

Once the dust settles rates should fall back somewhat to a new normal level. How much lower? This is hard to tell as lenders have clearly factored in a “fear factor” into their rates, curtailing demand while they figure things out. Sooner rather than later they’re going to have to jump back into the market, lowering rates to attract demand.  My guess is that we have .125 – .375% in fear factor in current rates.  

 

The big lesson from this market correction is that these rates will not last forever. In my last post I stated that July or August was more likely the end of this rate cycle. I stand by that prediction. However, the new normal is fragile and subject to adjustment. We learned yesterday that some of those adjustments will be dramatic and swift.

 

With that said:

 

Re-fi’ers – You fence sitters better get off the fence. Current rates don’t look to last much beyond the July or August. That means closed and funded by July and August.

 

Buyers – Same thing. You have the added risk that once more buyers jump into this market our current buyer’s market also has a limited life.

 

Sellers – You may finally see some relief as Buyers jump back into the market to leverage both buying power and interest rate power.

 

 

You can follow my Blog and complete a loan application at www.montviewmortgage.com. Look for the documentation needed to close your loan on the Required Documentation tab.

A Different Perspective

The holiday weekend gave us a chance to catch our breath and reflect where we stand. One thing that caught my eye recently is the notion that investors are looking at Mortgage Backed Securities (MBS) as worthy investments – but not at current rates. Remember, the Federal Reserve’s purchases of MBS is the biggest reason rates are still in the 4’s.

 

The second thing that caught my eye is that there is a growing perception that the Government may be looking to wean the market off of its substantial purchases of MBS. This is supported by some Federal Reserve Governors who believe the Fed’s balance sheet is growing too fast (too many purchases of MBS). Again, we’re only $481 billion into the Fed’s commitment to purchase $1.75 trillion of MBS.   

 

Why slow down the rate of MBS purchases? The simple answer is to encourage other private investors to jump into the game. The more complicated and ominous thought, is that global markets are calling the country’s AAA credit rating into question.  The Fed may have to curtail or at least slow its rate of purchases to appease the global market. What better time to do this than now, when private investors are showing an appetite for MBS, albeit at higher rates.

 

So what does all this mean?

 

Re-fi’ers – You fence sitters better get off the fence. Current rates don’t look to last much beyond the July or August. That means closed and funded by July and August.

 

Buyers – Same thing. You have the added risk that once more buyers jump into this market our current buyer’s market also has a limited life.

 

Sellers – You may finally see some relief as Buyers jump back into the market to leverage both buying power and interest rate power.

 

We have lots of housing data coming out this week that will give us a good indication if the real estate market has hit bottom.  I’ll update you on that news at the end of the week.

 

 

You can complete a loan application at www.montviewmortgage.com. Look for the documentation needed to close your loan on the Required Documentation tab.

So What Are We Looking At Now?

The answer depends on your time frame. Short term rates look to increase this week – housing data bad; bonds in a defensive posture; gains in the stock market; holiday weekend coming up. Long term rates look to be better as the overall housing picture has hit the bottom and is poised for a rebound; Treasury’s continued purchase of Mortgage Backed Securities; post-holiday improvement.  

 

To paraphrase Tip O’Neill, just as “all politics is local”, so is real estate. Hopefully increased consumer confidence (jobs) will coincide with the great buyer’s market and great interest rates to provide the stimulus we all need.

 

Here’s a note of caution to those of you waiting to refinance. While rates will stay relatively low for the foreseeable future, most experts don’t expect them to last indefinitely as the recovery takes hold. Look at the housing numbers – if they continue to increase and consumers act on their pent up demand look for stock market improvement which will drive money away from MBS, thus increasing rates.  I think we’re 60-90 days away from that tipping point.

 

You can complete a loan application at www.montviewmortgage.com. Look for the documentation needed to close your loan on the Required Documentation tab.

Mortgage Rates Holding Steady

Rates are holding steady so far this week, with the prices of Mortgage Backed Securities (MBS) increasing ever so slightly. Remember, increasing prices mean lower interest rates.
 
The big purchaser of MBS has been the Treasury, as part of the Administration’s recovery plan. One thing that caught my eye is that we’re seeing above average demand from indirect/foreign purchasers in yesterday’s Treasury auction.  Any demand from outside the Treasury Department is good news as it raises prices for MBS.
 
Lurking in the background is how the stock market will react to the results of Bank Stress Test. Results have been leaking out over the last several days and the market seems ambivalent to the news that at least 10 of the 19 banks tested will need additional capital. My bet is that this news has already been priced into the market and we’ll see no change in the bond market as a result of this news.  On the positive side, the index of Pending Home Sales increased for the second month in a row, and Fed Chairman Bernanke is quoted as saying that the economic freefall of the last nine months is nearing an end and that we should begin a fragile recovery by year end.
 
 
As always, locking into these great rates and getting your deal closed are two different things.  Be prepared to take advantage of these great rates by having you application and data ready in advance. Montview does not charge an application fee, so it costs you nothing to go online and complete an application. We also have a list of required documents on our website, www.montviewmortgage.com.
 
Have a comment or a question? Email me at martinc@montviewmortgage.com.

Rates are Up. Why?

We’re constantly learning some thing new about this market. Rates increased yesterday, largely on the perceived notion that Treasury Securities will have greater longer term value than Mortgage Backed Securities (MBS). With the stock market in flux due to the Chrysler bankruptcy and pending GM bankruptcy, money flowed into Treasuries and not MBS.

This creates a “steepening yield curve”. To you and me this translates into MBS not keeping up with Treasuries, which means lower prices for MBS which equals higher interest rates. At this point the market is looking for the government to come in and purchase additional MBS to drive up the prices and lower rates. We did not hear this type of language from the Federal Open Market Committee yesterday, which also fueled the drive to Treasuries.

There is some good news – the government still has $845 billion left to spend on MBS. The first of the month also traditionally brings out some MBS supportive events. Finally, many of us believe that part of increase in rates is due to Lenders managing their pipelines. They’d rather manage staff and overhead by controlling demand via rates, than increase overhead on a long-term basis. We think some Lenders will lower rates to increase their pipelines over the next 30 days.

 In the past borrowers and brokers operated on a theory of lock first and then bother with the application. Many borrowers jumped lenders over 1/8th of a point to the rate. This is a doomed strategy in this market. Lenders are at their operational limits. You won’t be able to close a 30 day lock if everything doesn’t fall just right for you. Locking without an approval sets everyone up for disappointment. Changes in this market happen fast. Our job is to put you in a position to succeed and get the benefit of a low rate.

Call us today and let us show you how we can help you. Log onto www.montviewmortgage.com for more information and for instructions on how to complete a secure application.

You Could Have Had 4.25% Today!

 I’ve stressed the importance of being prepared to reap the benefits of the uncertainty of this mortgage market. Today was a case in point. Most everyone is looking at 4.5% as a benchmark interest rate. You can reach that rate at par, right now! 4.25% is reachable at 1 discount point. Mortgage Backed Securities benefited from a flight to quality today, mainly based on fear in the stock market. (When is the last time you heard “flight to quality” and “MBS” in the same sentence?) Incredibly, most experts think that lenders and large block traders are not passing on the full benefit of higher MBS prices – in other words – rates should be lower. How low? Another .125% Even another .250? Could you get to 4.0% at 1 discount point? All great questions, but you can’t get there by sitting on the sidelines. You got to have an application in the hopper and documentation in your Loan Officer’s inbox. If not, you’ll never be prepared to take advantage of this great market.

Interest Rate Movements

Without getting too technical, interest are based on the price of Mortgage Backed Securities (MBS), which in turn fluctuate in price based on the equity (stock) market, the Treasury Bond market and general market news.

 

Keep in mind that interest rates decrease as MBS prices increase.

 

But here are a couple of other hidden explanations for interest rate fluctuations:

 

1. Early pre-payment due to refinances of higher interest rate loans in higher coupon MBS. Investors don’t want to pay a premium for a MBS that will experience a higher rate of pre-pay and thus lose its value.  This, and the Treasury’s purchases of MBS, is keeping a lid on rates rising too much – sort of a cap.

 

2. New business (loans) is there for the taking by any lender. However, lenders are reluctant to hire new staff and take on additional overheard. Thus they limit the amount of new business they take on via higher rates. Remember the supply and demand curve we learned in Economics 101? We always assumed lenders would want an unlimited supply of new business. We forgot the corollary of scare resources. Staffing and available credit to fund the new loans are issues for every lender in the market place.  Lenders are not lowering their rates as low as they could go. Historical data suggests that rates should be as low as 4.25% based on Treasury bond yields.

 

All this leaves us at rate range of 4.625% and 4.750%.  You can get to 4.5%, but you have to have your application completed, supporting documentation ready and be willing to pay some amount of discount points to get there. For example, 4.5% was available Tuesday at a cost of .60 discount point, for about an hour.

 

As I’ve stressed before – be prepared!  

 

Check out our other rate posts and get other helpful information at www.montviewmortgage.com.