Mortgage rates benefited from a flight to safety last week as fiscal concerns in Europe led market participants to sell stocks in favor of the relative safety of risk free government guaranteeed fixed income securities.  Headline news surrounding ongoing developments abroad were seen as the primary source behind directional movements of mortgage rates, not even a better than expected Employment Situation report could overwhelm a shift in sentiment away from risky stock investments into risk free Treasury securities. This flight to safey led prices of mortgage backed securities to levels not seen since 2009 which allowed lenders to offer mortgage rates near the best levels of the year. However, we did once again witness a lender reluctance to push consumer borrowing costs below 4.75% on a 30 year conventional mortgage. 

Last Wednesday I wrote, “We have seen several days in a row of improving lender pricing thanks to the sovereign debt concerns with Greece and other European countries.  At some point this is going to come to a conclusion which will probably result in the unwinding of the “flight to safety” trade that has benefited mortgage rates recently.  Once that happens, we will see increases in mortgage rates.” 

Over the weekend the European Union, IMF, and several Central Banks including the U.S. Federal Reserve announced a coordinated effort to put an official stop to the crisis of confidence in Europe (READ MORE).  This action helped improve investor sentiment which resulted in broad based selling of U.S. Treasuries in favor of stocks. Higher benchmark yields pushed mortgage-backed securities prices lower and forced lenders to offer higher mortgage rates today.

Reports from fellow mortgage professionals indicate the par 30 year conventional mortgage rate does remain in the 4.75% to 5.00% range for well qualified consumers, but it will cost more to obtain this rate.  To secure a par interest rate on a conventional mortgage 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 an estimated 1 point loan origination/discount/broker fee.  For consumers not planning on keeping their home for more than 3 years, you should consider a no cost loan.  Rates on no cost loans are currently around 5.375%.

While fiscal developments in Europe appear to have convinced the market that the debt problem is being addressed appropriately, interest rates are still highly sensitive to headline news regarding Greece and the rest of the European Union. There are however some scheduled economic events that we should take note of when debating the direction interest rates take in the week ahead:

Tuesday

• Wholesale Trade(low impact)
• 3 Year note auction totaling $38billion (medium impact).  This is $2 billion less than the last few auctions.  Our government announced last week that they will need to borrow less money from the public in the 3rd Quarter of 2010. Less supply of debt on the market is a positive for mortgage rates and our economy as a whole. READ MORE
  

Wednesday

• MBA Applications Index(low impact)
• International Trade (low to medium impact)  The Trade Balance report measures the monthly difference between what our nation imports and what our nation exports.
• 10 year note auction totaling $24 billion(medium to high impact).  This is $1billion less borrowing than previous 10 year auctions.

Thursday

• Jobless Claims (medium impact)
• Import and Export Prices (low to medium impact)
• 30 year bond auction totaling $30billion.  Same as last few offering (medium to high impact)

Friday

• Retail Sales. Besides Treasury auctions, this is the most influential release of the week (high impact
• Industrial Production (medium to high impact).  This report gives us a measure of the strength of the manufacturing sector by measuring the output at U.S factories, utilities and mines.  Higher industrial production would be a positive economic indicator which would benefit the stock market tha the expense of the fixed income sector.
• Consumer Sentiment (medium impact)

For more on the week ahead, check out the MND STORY.

With lenders still offering 4.75%, I continue to favor locking all loans closing within 30 days.   Lenders have proven time and time again their reluctance to lower rates below current levels.  I am typically not a fan of suggesting longer term locks, but with MBS prices at the best levels of 2010, longer term locks should be considered and might well be worth the additional cost to secure.