Another strong Treasury auction, among other things, helped Mortgage Rates in lower again today.  Although Best-Execution rates still haven't moved any lower (currently at all-time lows), the borrowing costs involved to obtain them are now at least as low as they were in late September, the last time we had 3.875% Best-Execution rates. 

Even though the response to yesterday's 10yr Note Auction sent most longer term interest rates steadily lower (lower rates are less enticing for investors bidding at auction), today's 30yr bond auction was still much stronger than expected, both in terms of the amount of bids as well as the aggressively low yields offered by bidders.  That helped the overall fixed-income rally and the Mortgage-Backed-Securities (MBS) that drive mortgage rates were able to get on that bandwagon, moving to their best levels since early October. 

While it's abundantly true that mortgage rates are not based on US Treasuries, the Mortgage-Backed-Securities (MBS) that DO influence rates are similar to Treasuries and tend to trade in the same direction, even if it's by different amounts.  We wrote about this extensively in a previous post: Why Aren't Mortgage Rates Getting Lower as Fast as Treasuries?

Today's BEST-EXECUTION Rates

• 30YR FIXED -  3.875%
  
• FHA/VA - Back firmly to 3.75%
  
• 15 YEAR FIXED -  3.375%, Approaching 3.25%
  
• 5 YEAR ARMS -  2.625-3.25% depending on the lender
  

Lock/Float Considerations

Keep in mind that a huge factor in how low mortgage rates can go is the underlying Mortgage-Backed-Securities market.  A vast majority of loan products offered by lenders end up as part of MBS pools.  Even many of the loans that don't end up as MBS are originated at interest rates and guidelines that would allow them to be pooled into MBS "buckets" later in life. 

Without MBS, rates wouldn't be as low as they are and funding for mortgage loans would not be as plentiful.  The reasons for this are complicated and numerous, but the important concept to understand is that there has to be AN ACTIVE ENOUGH MARKET in a particular mortgage-backed-security in order for lenders to be able to offer rates at levels that coincide with that particular MBS.  Think of these like "buckets." 

For a long time, the 4.0 bucket was the lowest MBS coupon for Conventional 30yr Fixed mortgages.  We spent a good deal of time writing about the gradual shift to 3.5 MBS, the next bucket down, over the past 5 months.  The average interest rate of loans in the 3.5 bucket is around 4%, with a range from 3.75% to 4.25%. 

If lenders are to offer rates below 3.75% that make any sort of sense (lower rates are already technically available, but the closing costs required to buy those rates usually doesn't make much sense from a "break-even" standpoint.  In other words, "cost to buy rate down" > "sum of monthly savings over the period of time you plan to have the loan") it would mean that an entirely new bucket of MBS (3.0's) would have to gain enough of a market share for lenders to safely be able to offer such rates.  This has never happened before, and although it COULD happen in the future, it's not happening now. 

We feel that a pick up in the activity in 3.0 MBS would be the first sign of a potential shift lower in rates from current levels.  Until then, 3.875% and 3.75% at best, are sort of the new "wall" in 30yr Fixed rates.