Lenders were hesitant to pass along loan pricing improvements yesterday but made up for it today with broad based reductions in consumer borrowing costs. Unfortunately the secondary market did not cooperate and many lenders were forced to reprice for the worse before the day was done. The good news is, even after reprices for the worse, mortgage rates still moved slightly lower today. The bad news is, even when you ignore the reprices for the worse, 4.375% is as good as it gets for the majority of borrowers in the primary mortgage market.
A clear line has been drawn in the sand that lenders refuse to cross. That line runs between 4.25% and 4.375%. 4.375% is out there for the taking, 4.25% is not. Well actually, some aggressive lenders are quoting 4.25% to well-qualified consumers, but the buydown structure of that note rate continues to be too expensive for most borrowers. For example, a 4.25% buydown at one of the major lenders costs 1.007 points. On a 250,000 loan that buydown would add $2,517.50 in closing costs to the borrower's bottom line(1.007% of the loan amount). The monthly savings when floating down from 4.375% to 4.25% on a 250,000 loan is $18.36. Thus it would take the borrower 137 months to recover the points they paid at closing to float down to 4.25%. That's 11.4 years. That is an expensive buydown!
The line in the sand between 4.25% and 4.375% is a factor of what MBS coupons are trading in the secondary mortgage market. If lenders are going to offer 30-year fixed rate quotes at or below 4.25% again, we really need to 3.50 MBS coupons trade. In order for that to happen we'll need to see benchmark Treasuries make substantial positive progress. The last time 3.50 MBS coupons were trading in the secondary mortgage market, the 10 year Treasury note yield was about 25bps lower in the 2.50% range. At this point, barring a global financial system meltdown, it seems highly unlikely that 3.50 MBS coupons will trade before the Employment Situation Report is released on Friday.
That means, if you're floating, you'll have wait it out until Friday morning to see if a continued recovery rally is in the cards for mortgage rates. The problem with waiting it out, floating through Friday is a risky move because mortgage rates could rise from here...
Remember what happened last month following the October Employment Situation Report? Just two days after the FOMC announced QEII (bonds rallied for only one day which pushed mortgage rates to new record lows), the bond market erased record low mortgage rates when the labor market was reported in better shape than economists expected. That leaves us in a difficult position.
Recently optimistic economic reports are my main cause for concern in regard to a sustained move higher in mortgage rates, but we did witness some encouraging behavior today. 2 of 3 economic releases were not bond market friendly, yet events in Europe related to their debt crisis overwhelmed investor optimism and helped the bond market retain recent positive progress(flight to safety). This was a hint that the "QEII Cleansing Process" has been more about technical trading considerations (too many long positions) vs. a shift in fundamental economic outlooks. That theory will be put to the test in the day's ahead though. We will get plenty of opportunities to judge the market's sensitivity to new data with the main event scheduled for Friday morning (Employment Situation Report).
If the Employment Situation Report is better than economist forecasts, consumers should expect the best 30 year fixed mortgage rates to move up to a range between 4.375% and 4.750%. Within that range, 4.375% would become an unattractive floatdown option and borrower best execution would likely rise to 4.625%.
The best conventional/FHA/VA 30 year fixed mortgage rates remain in range between 4.250% and 4.50% for well-qualified borrowers. The best conventional/FHA/VA 15 year fixed mortgage rates are in a range between 3.500% and 3.875%. Best execution on a 30-year fixed loan for a well-qualified, no LLPA borrower is 4.50%.
Important Mortgage Rate Disclaimer: Loan originators will only be able to offer these rates on agency conforming loan amounts to borrowers who are have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recordation + escrows (things like upfront MIP (if required), property taxes, homeowners insurance, accrued interest)".