Friday ended strong with Mortgage Backed Securities (MBS) , the money that mortgages turn into that is traded between big banks, improving right up through closing. Today, after some volatility, MBS have held on to those gains which has caused most lenders to release pricing slightly better than Friday.
The numbers may have been better but for the NAPM index report which is a gauge of business conditions in the Chicago area. This report was slightly stronger than expected, but still shows economic contraction.
Many traders follow this index as an indication of the ISM manufacturing numbers which will be released tomorrow. It is also expected to show contraction, but the forecast was adjusted slightly higher after the NAPM numbers. Remember that, in general, a weak economy is good for mortgage rates as it makes MBS an attractive investment as stock returns suffer. The more investors that buy MBS, the higher the price gets, and the more investors are willing to pay for MBS, the lower their returns which equate directly with lower mortgage rates.
So if the data for the rest of the week is weaker than expected, rates could fall further. A word of caution is that, with the improvements on Friday that have held today, rates are approaching a floor that they have failed to break through in the last several trading cycles. The intervention by the Fed in terms of buying MBS or helping other banks buy MBS is helping investor's perception of quality which is good for rates, but it seems the market will still need more convincing that MBS are a safe investment.
The treasury's plan for re-working regulatory agencies in the financial sector may help this perception, but it may also help stocks which makes it harder for mortgage rates to improve. If we make it through the week with limited negative headlines concerning mortgage companies combined with weak economic data, rates could finally break through this floor on which they've been bouncing.
Because of the technical factors and the uncertainty of this week, locking is a decision that will be hard to regret even if the situation improves. If rates get better, it won't be nearly as dramatic as the change that occurs if they get worse. If you have limited risk tolerance, cash in your chips and lock in your rate. If you are an ardent bear on economic growth and think we may be seeing a decrease in negative headlines for mortgages, floating will still pay off. But remember, the lower rates go, the less the payoff for that risk gets.