rates rose purposefully today, as mortgage-backed-securities (MBS) coped with tough trading conditions for a variety of reasons. Lenders who released rate sheets early in the morning were forced to reprice negatively as markets deteriorated, but we've seen several lenders who priced during the weaker market conditions able to reprice positively this afternoon as some of the losses have been recovered. All told, the average rate sheet is back to February 1st rates/fees with 3.625% remaining as the Best-Execution rate and borrowing costs rising.
(What is A Best-Execution Mortgage Rate?)
As we occasionally discuss, in terms of financial markets' effects on mortgage rates, it's not Treasuries, but MBS that have the most direct effect. This stands to reason considering that MBS are the actual financial instruments that groups of mortgages morph into by the time they make it to wall street. On most days, MBS and Treasuries are moving in the same direction, however, and typically in close enough lock-step that Treasuries offer a decent indication of how mortgages might be moving.
While the movement seen in Treasuries over the course of the day does approximate that of MBS today, the differences vs yesterday are noticeable. Specifically, compared to yesterday at 5pm, 10yr Treasuries are trading 2/32nds higher in price. Higher prices mean lower yields or rates. MBS, on the other hand, are trading 4/32nds lower in price, connoting higher yields/rates. In other words, from yesterday's close, the two have gone in opposite directions.
The reasons for this are a bit esoteric and have to do with smaller number of market participants in MBS markets compared to Treasuries as well as some of the structural dynamics surrounding the trading day. These considerations included the snowstorm on the East Coast combined with the fact that a substantial amount of MBS market participants live and work in some of the hardest hit areas. When weather affects wall street, MBS "feel it" more than more liquid markets. Lower volume in any market can increase volatility.
Deeper dive into the structural dynamics... (not required reading, but presented for enquiring minds)
The other structural consideration is the monthly settlement process for MBS. Think of this like an assembly line making gift baskets. There's 1 basket for each month, and only the 3-4 most current months are being prepared at a time. The highest amount of attention is typically paid to the month closest to falling off the assembly line, whereupon it will be boxed up and shipped out to whoever ordered it. At a certain point, that basket on the leading edge has all the "stuff" in it that it's going to get. The finishing touches are going on, quality checks, cellophane wrapping, pretty red bows, you name it.
At that point, attention begins shifting more toward the next basket on the line. It was already being worked on, but now it'll be the new "front of the line," or as it's actually called in MBS markets, "front month." Now imagine that all the time these baskets are coming down the assembly line (and there's no stopping or adjusting the committed deliveries, by the way), they must be assessed and valued, both relative to the broader markets and relative to each other. To oversimplify 7 or 8 more paragraphs, it's this changing of the guard from one gift basket to the next, and the concomitant issues that can arise in determining and assigning their relative values on the fly, that can sometimes create a more challenging environment for MBS during settlement. It's these challenges combined with earlier weakness in broader bond markets that caused MBS, and consequently mortgage rates, to be in incrementally worse shape than Treasuries today.
Loan Originator Perspectives
"MBS sold off sharply this morning then recovered about halfway, leaving rates for loans to $417k unchanged on the week. But that's not without extreme volatility day to day. The sideways action continues as MBS and Treasuries are both holding each time they hit support levels. Still, rates are up .375% since mid January and look unlikely to rebound to previous record lows. One noteworthy item: we've seen rates improve for jumbo mortgages above $417k. Sounds counterintuitive but it's because demand for jumbos in secondary markets is growing. A welcome bright spot in a sideways to higher market." -Julian Hebron, Branch Manager, RPM Mortgage.
Today's Best-Execution Rates
- 30YR FIXED - 3.625%
- FHA/VA - 3.25% - 3.5% (varies more between lenders than conventional 30yr
- 15 YEAR FIXED - 2.875%- 3.00%
- 5 YEAR ARMS - 2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations
- Rates have risen moderately from their all-time lows, making for relatively increased reward for floating at the expense of greater risks of loss.
- Rates could easily move higher or lower, and unscheduled, unexpected events can ultimately have the most say in the direction.
- Near term risks in 2013 include the upcoming debt-ceiling debate in Washington as well as the Fed's policy outlook regarding securities purchases.
- Prospects For Extending The Debt Ceiling Deadline currently seem to be preventing a move back down in rate. Passage of such legislation could further support a rising rate environment.
- (As always, please keep in mind that our talk of Best-Execution
always pertains to a completely ideal scenario. There can be all
sorts of reasons that your quoted rate would not be the same as our
average rates, and in those cases, assuming you're following along on a
day to day basis, simply use the Best-Ex levels we quote as a baseline to
track potential movement in your quoted rate).