Prices of "rate sheet influential" mortgage backed securities lost some ground yesterday following tepid demand at the 30 yr bond auction. More than anything this reflects the market consolidating and taking profits from the recent run up in fixed income prices. Unfortunately the selloff  in the fixed income market led to most lenders repriced for the worse, pushing mortgage rates higher. 

As we have pointed out recently, in order for MBS to continue to move higher in price we need a couple things to happen.  First we need the stock market to continue to trend lower.  This has been occurring recently as investor sentiment has shifted away from the green shoots theory (economic recovery) to a feeling of  economic stagnation. The next step in the process of lower mortgage rates is the marketplace being moderated by risk averse trades, meaning investors will move money into safe assets like Treasuries and MBS.  This "flight to safety" will help treasury yields move lower which will allow MBS prices to move higher, therefore giving lenders the opportunity to reduce consumer borrowing costs. Onto the data of the day...

First out this morning from the US Department of Commerce was the International Trade numbers which measures the monthly difference between what our country exports and imports.  Economists surveyed expected our trade balance to come in at -$28.8 billion. When the data flashed many were surprised to see a better than expected print of -$26.0billion.   May's trade gap is the smallest since November 1999's reading of -$25.7billion!  The bigger winner in the report was the exports which posted a 1.6% increase while imports fell 0.6%.


In this report we also received data on inflation via import and export prices. This data measures the change in prices paid for the items we import and items we export.  The report has indicated a higher than expected reading on headline import prices,  coming in at a month over month increase of 3.2% when expectations only called for a 1.9% rise.   The cause of the much higher than expected increase is the recent run up in oil prices which increased 20%.  When excluding oil from the reading, import prices only rose 0.2% indicating inflation remains under control.  Year over year, import prices have fallen 17.4%.   Export prices rose more than expected as well at 1.1% but year over year  export prices are still down 6.4%. Reminder: oil prices have fallen over $10 since the end of June as the market indicates a fear of deflation is still present. Next week we do get more data sets on inflation.  

The final data set that came in this morning was the Consumer Sentiment report.   The University of Michigan's Consumer Survey Center surveys 500 households on their personal financial conditions and attitudes about the economy.  An optimistic consumer is more likely to spend money while a pessimistic consumer is more likely to save.  Since our economy is driven by consumer spending, the stock market prefers a higher reading while the fixed income market benefits when the consumer is pessimistic (risk aversion).  The last four consumer sentiment readings have indicated optimism was growing among consumers which helped the green shoots theory gain momentum.  However, this month it  appears that the run up in gas prices and increasing unemployment have had an impact on consumers as sentiment fell from 70.8 to 64.6.   This is far below the consensus estimate of 71.5.  

Early reports from fellow mortgage professionals are indicating rates to be lower than yesterday.This places the par 30 year fixed rate mortgage in the 4.875% to 5.125% range for well qualified consumers.  In order to qualify for these rates you must have a FICO credit score of 740 or higher, a loan to value under 80% and a pay all closing costs including 1 point loan origination/discount/broker fee.  If you are looking to access any home equity you should expect a rate about .25% higher or additional costs.