While mortgage rates ended the week on a three day losing streak, we did find solace in the fact that prices of mortgage-backed securities (MBS) were able to stabilized by the end of the trading session on Friday. After two better than expected economic reports, retail sales and consumer sentiment, MBS prices were pushed lower as benchmark Treasury yields rose, forcing lenders to increase mortgage rates for the third straight day. While not widespread, several "reprices for the better" were noted by day's end as an afternoon recovery led MBS prices off the lows of the day. After hitting an all time price high for MBS on November 30th, the first two weeks of December erased all the price gains taking us back to the same levels from the beginning of November. READ MORE. To remind readers, as the price of MBS move higher, lenders can offer lower mortgage rates.
This week begins with an empty economic calendar, but the rest of the week is busy!
Tomorrow we get a few economic reports. The first of which is expected to be a market mover in the months ahead: INFLATION DATA...the Producer Price Index. Higher inflation implies to value of fixed income investment will lose value over time, this forces market participants to demand higher returns to compensate for lost value. Unfortunately this leads to higher mortgage rates...let’s hope this month's report does not provide reason to believe that inflation will become a problem in the near term.
We also get a couple readings on the strength of manufacturing on Tueday. The Empire State Manufacturing Survey and Industrial Production. While these two reports are indeed important, there is an event that will likely overshadow data: day 1 of the Federal Open Market Committee’s two day meeting. The FOMC is the Fed committee which determines monetary policy for the United States. The FOMC meets eight times a year to set our nation’s monetary policy and give an outlook on future economic growth. The Fed's main job is to set monetary policy in a manner that supports long term ecomic growth and stable employment all while while keeping inflation in check.
Wednesday brings us a much more important reading on inflation, the Consumer Price Index. Tuesday’s PPI measures inflation on the producer level while Wednesday’s CPI read provides a look into inflation on the consumer level. Often times, when consumer demand is low and spending is weak, producer's will attempt to cut costs in specific areas, like labor, in an effort to offset the rising cost of the inputs that are used to build their "widgets".
Besides the CPI release, the market will another opportunity to judge the health of the housing market on Wednesday. First out is the release of the weekly Mortgage Bankers’ Associations Application Index which is followed by Housing Starts and Building Permits data. Building permits data is of the utmost importance as it is a forward looking indicator in the housing market. Building Permits data provides an estimate on the number of homes planning on being built. It tracks how much future construction activity we can expect to take place. This data is a part of Conference Board's Index of Leading Economic Indicators.
Lastly, the MOST IMPORTANT EVENT OF THE DAY on Wednesday will be the conclusion of the FOMC meeting, which is marked by the release of the FOMC Statement. It is widely accepted that the Fed will maintain the current Fed Fund rate, however market participants remain skeptical of shifts in the sentiment of their statement, from a more guarded tone to a less defensive outlook with embedded caveats. Call then "if then's" and "but's". If the Fed sees a much improved economy, then it could lead to monetary policy tightening sooner rather than later which means mortgage rates move higher. But the outlook remains clouded by several uncertainties, two of which are the labor market and housing. See what I mean by "if, then" and "but" now?
Thursday brings us the usual Weekly Jobless Claims which is expected to show a decline in the number of Americans filing for first time unemployment benefits from the prior week. In addition, we get the Philly Fed Survey which gives us a measure on the strength of business conditions in the Philly region and Leading Indicators.
The week wraps up with a data less day on Friday.
For forecasts for the above economic indicators and more detail on the week ahead, check out the MND STORY. If you are looking for added color on the long term direction we expect mortgage rates to head, read AQ's MBS OPEN, he provided an outlook.
Reports from fellow mortgage professionals indicate 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 you must have a FIC 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 may elect to pay less in fees but you will have to accept a higher interest rate.
Last week Fed Governor Duke called to attention overtightened lending standards in the mortgage market (READ MORE). Well, this weekend, a few more changes were implemented that do not make it any easier for a borrower to qualify for a mortgage loan.
HERE is a summary of the changes:
- Minimum FICO score is now 620.
- Maximum Debt to Income(DTI) of 45% with exceptions to 50%. DTI is the ratio of your income to total monthly obligations. If gross income is $5000 per month and total debt obligations are $2000 per month, your DTI is 2000/5000 or 40%.
- Chapter 7 Bankruptcy must be discharged for at least 4 years.
- Chapter 13 Bankruptcy must be filed for at least 4 years and discharged for at least 2 years or dismissed for at least 4 years.
- Foreclosure greater than 5 years but less than 7 years requires a 680 FICO and a 90% maximum loan to value.
- Reserves are calculated at 70% for stocks, bonds and mutual funds(used to be 100%) while 401k’s are now calculated at 60%. If you have $100,000 in your 401k account, the lender reduces to show only $60,000 in reserves.
- 2 Units loan to value has been reduced to 75%.
If you are looking to obtain a new mortgage loan, you should discuss the above changes with your loan originator, they may affect your ability to qualify.