Mortgage rates were priced at the most aggressive levels of our era on Wednesday following a steady stream of disappointing housing data that sent stock indexes lower. Rates did back up a few basis points yesterday for what seemed like no reason besides rally exhaustion, but we got those losses back today...

Consumer borrowing costs were influenced by two economic reports today. First out was the final revision to first quarter Gross Domestic Product (GDP).

GDP is the broadest measure of total economic activity.  It reports on the output of every economic sector.  It's basically our economic report card.  A rapidly growing economy can lead to price inflation, the bond market prefers stable growth while stocks generally enjoy a faster pace of economic expansion. 

We receive three different assessments of GDP: the Advance Read, the Preliminary Release, and the Final Report. Today the Bureau of Economic Analysis released the Final Report.

From the Release:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.7 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. 

The increase in real GDP in the first quarter primarily reflected...

Positive contributions from:  personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment

Negative contributions from: state and local government spending and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased.

From MBS Commentary:

State and Local governments are REDUCING their spending....with 6.5 million jobless Americans (not counting underemployed and discouraged) it is downright scary to see state and local governments spending less. WHY? Because they are cutting education funding, snow budgets, police overtime,  parks and rec allocations, fire fighter training, etc, etc, etc....

This reduction in state and local government spending will reduce the tax payer's quality of life.

Besides the headline GDP number being worse than economist forecasts, we also got another read on inflation with the Personal Consumption Expenditure Price Index (PCE). Inflation is the enemy of mortgage rates. The reported indicated that price inflation grew at a well below average rate in Q1 2010. Low levels of inflation are allowing the Federal Reserve to keep interest rates low.

Many economists were quick to call attention to a 0.5% decline in consumer spending. To be more clear, the quarterly change in consumer spending was revised lower from a preliminary read of +3.5% to the final read of +3.0%.  This decline in spending was most significant in the services sector. This concerned market participants who are skeptical about a double dip recession. We did however get another chance to gauge the sentiment of consumers at 9:55 am eastern.

Our final release of the week: Consumer Sentiment.   The Reuter’s/University of Michigan’s Consumer Center surveys 500 households on their attitudes on the economy and personal financial status. Market participants track consumer attitudes to gauge  future economic momentum.  An optimistic consumer is more likely to spend, this benefits stock markets.  A pessimistic consumer is more likely to save, which supports low yields in the bond market.  Low yields in the bond market allow lenders to keep mortgage rates low. The survey data provides a few indicators. Below are the results...

CONSUMER SENTIMENT INDEX:  76.0 vs. consensus 75.5 vs 73.6 in May. BETTER THAN EXPECTED AND IMPROVED
CURRENT CONDITIONS INDEX:  85.6 consensus 82.9 vs. 81.0 in May BETTER THAN EXPECTED AND IMPROVED
CONSUMER EXPECTATIONS INDEX: 69.8 consensus 70.9 vs. 68.8 in May WORSE THAN EXECTED BUT IMPROVED
12-MONTH ECONOMIC OUTLOOK INDEX: 79 vs. 83 in May
1-YEAR INFLATION OUTLOOK: 2.8 PCT VS  3.2% in May
 5-YEAR INFLATION OUTLOOK:  2.8 PCT VS 2.9% in May

This is the highest the Consumer Sentiment Index and Current Conditions Index have been since January 2008. So while consumer spending declined in the first quarter of the year (January to March), consumers attitudes look to have improved during Q2 2010 (March to June).

The first release of lender rate sheets was interesting. MBS prices opened basically unchanged vs. closing levels yesterday, but loan pricing was much worse. As AQ explained, this makes sense because lenders were inundated with lock request yesterday afternoon and needed  time to recover, so they made pricing worse in an effort to slow lock request activity. READ MORE. This was pretty frustrating to any loan officer who missed the boat on locking their loans yesterday, but MBS prices were rallying and the day wasn't over. In fact,  we weren't even halfway through the morning when several lenders repriced for the better. This brought mortgage rates down a few more basis points. 4.375% is once again an attainable mortgage rate after reprices for the better.

Although loan pricing is not as aggressive as it was on Wednesday, the par 30 year conventional rate mortgage is back in the 4.375% to 4.75% range for well qualified consumers.  If a 4.375% rate was costing you 1.25 points on Wednesday, it will cost you about 1.50 points today. While this is the lowest rate available, we're still seeing most borrowers end up between 4.50% and 4.75%.  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.

I still favor locking all loans.