Let's recap the week before discussing what happened today.
MONDAY:Mortgage Rates Rise as Flight to Safety Reverses Course
Mortgage rates rose after the European Union announced over the weekend an official plan to address growing debt problems in their member countries, specifically Greece, Portugal, Italy, and Spain. The long awaited move helped calm the market's fears that a localized fiscal shortage abroad would evolve into a global economic downturn. This shifted investor sentiment on Wall Street which led to correction in stock valuations, Unfortunately the stock market rally forced benchmark Treasury yields higher as traders sold their "flight to safety" positions in government guaranteed Treasuries to fund their purchase of riskier investments. The uptick in Treasury yields led mortgage-backed security prices lower which caused lenders to increase mortgage rates.
TUESDAY: Mortgage Rates Hold Steady as Markets Mull European Bailout
Mortgage rates continued to take their directional guidance from headline news and stocks. Stocks opened lower which helped Treasuries and MBS rally. However stocks regained their losses by mid-session and benchmark rates began to rise from the best levels of the day. MBS prices did manage to avoid a sell off even as Treasury yields rose. This left mortgage rates priced very similar to where they were on Monday.
WEDNESDAY:Mortgage Rates Move Sideways At 2010 Lows. Still Locking Loans
Mortgage rates moved sideways just above the lowest levels of 2010 as benchmark interest rates had little motivation to move in either direction. The most mortgage rate influential event of the day was supposed to be the Treasury's auction of $24 billion of 10 year notes. However the auction results came and went, demand for U.S. debt remained healthy and there was no reaction in the marketplace. This allowed lenders to keep rate sheets unchanged. "No trend" was "the trend" in the financial markets. Both stocks and bonds held to a tight range and mortgage rates barely budged.
THURSDAY: Lenders Keep Mortgage Rates Priced at Aggressive Levels
Mortgage rates continued to move sideways near the best levels of 2010, extending the trendless trend. We did have our final Treasury auction of the week though. The Treasury successfully sold $16 billion 30 year bonds. Just like the previous two auctions of the week, demand was strong. Nothing seemed to be moving the financial markets up until late in the afternoon on Thursday when stocks suddenly started to sell. This led Treasury yields lower and helped MBS prices close near their highest levels of the day. Although reprices for the better were uncommon, the stage was set for Friday....
FRIDAY: Mortgage Rates Hit New 2010 Lows as Stocks Sell Off
For whatever reason, which fundamental and technical can be offered, stocks sold off today. The S&P was down 2.01% to 1135.80 and the Dow fell 1.50% to 10,621.14. This led to another "flight to safety" rally in Treasuries which led mortgage-backed security prices to new highs of the year. This allowed lenders to improve mortgage rates. We actually saw some lenders offering 4.75% at no points.
Reports from fellow mortgage professionals indicate lenders have lowered consumer borrowing costs. The par 30 year conventional rate mortgage remains in the 4.75% to 5.00% range for well qualified consumers. 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 one point loan origination/discount/broker fee. You can always elect to pay less in closing costs but you will have to accept a higher interest rate. This is a great option for home owners or home buyers that do not plan on keeping their home for more than 3 years.
A flight to safety happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate money into risk-free U.S Treasury debt to provide a safe-haven AND an investment return. To remind readers, as benchmark Treasury yields fall, prices of mortgage-backed securities move higher, which allows lenders to offer lower mortgage rates. As Treasury yields rise, mortgage-backed security prices are led lower, which forces lenders to push mortgage rates higher.
It is very tempting to advise floating in this situation. Mortgage rates are literally at their best levels of the year. Consumer borrowing costs really are at the mercy of stocks right now. If investor sentiment on the global economic environment really has soured and stocks move continue to move lower, mortgage rates would fall a few more basis points but lenders would be slow to pass along improvements. On the other hand, if the recent downturn in stocks is just another "break", similar to what we've seen several times over the past 12 months, and stocks end up recovering and extending their rally, then the flight to safety in Treasuries that is preventing mortgage rates from rising will be reversed and consumer borrowing costs will go up as investor funds are reallocated to higher yielding assets.
I must remind: mortgage rates always rise faster than they fall! With that in mind, it seems like it is going to take another major headline news event to spook stocks enough to allow lenders to offer 4.625% mortgage rates on fixed rate conventional loans. If you think this is highly likely, then you should play the market and see if the "contagion" spreads around the financial markets a little more because it is possible that your mortgage rates could fall a few more basis points. Me personally, I think it's a gamble. I am still advising my clients to take the aggressive pricing while its being offered.
Enjoy the weekend.