July 30, 2014
For weeks, we've discussed the prospects for increased volatility centered on today's economic calendar. The chances of a bigger move were much higher going into today's GDP data, and a bigger move is exactly what we got. Unfortunately, it was in an unfriendly direction. GDP was significantly stronger than expected, which caused an equally significant amount of weakness in the secondary mortgage market. With the data released at 8:30am and most lenders not putting out their first rate sheets until after 9am, mortgage rates shot rapidly higher right out of the gate.
Bond markets (which include the mortgage-backed-securities or "MBS" that most directly affect mortgage rates) continued to weaken throughout the day, and never really leveled-off until 1-2pm. When MBS fall enough during the day, lenders will issue a "reprice," which is just another way of saying rates are higher or lower effective immediately. Most lenders repriced to even higher rates in the afternoon. Things calmed down after that, and even the Fed policy announcement did little to change the tone for better or worse.
So if we lost this much ground today, what should you do?
First of all, in the grand scheme of things, today's losses were not that horrible. Granted, they may seem very horrible to you if you were considering locking yesterday and held off, but ultimately, the worst-case scenario is that your quoted rate will be an eighth of a point higher today. Some borrowers will merely see the increase in the form of higher closing costs. On average the most prevalently-quoted conforming 30yr rate for flawless scenarios moved up to 4.25% from 4.125%.
One of those two rates has been in force for more than 2 months, and together, they sit at the lower end of 2014's range. The long term risk is that today's GDP marks a broad turning point for US rates markets (Treasuries, MBS, etc.). There's an uncertain amount of balance brought to that risk from the ongoing slide in European rates markets. For instance, German government debt just hit an all-time low yield yesterday. If the trends that brought it there continue, it will be hard for US rates to move up too quickly.
While there's no way to know how that will shake out, the short term risk lies primarily with Friday's jobs report. If it's much stronger than expected, it will be a strong vote in favor of this week's potential role as a turning point. Bottom line, the thesis remains intact this week: bigger risk, bigger reward.
Loan Originator Perspective
"If you took the advice, the last two days, to play it safe and lock you're very happy with that decision today. Pricing is quite a bit worse today after steady selling of MBS throughout the day. There is more data on tap for tomorrow and Friday, so things could remain volatile. The selling that took place today lessens the likelihood of more selling the next 2 days, but it does not eliminate it. The safe play is to lock, but if I could afford to gamble a little, I would very cautiously float. " -Brent Borcherding, www.brentborcherding.com
"If you missed the opportunity to lock yesterday, then I think floating from here is the way to go. We have our final auction of the week tomorrow, and with the new supply out of the way it isn't uncommon to see bonds improve. In addition, lenders have worsened pricing more than the actual drop in MBS price justifies which is also very common during a sell off. So, I like floating from here and see what tomorrow brings." -Victor Burek, Open Mortgage
"We knew this week would be volatile for rates, and today certainly confirmed that. Both second quarter GDP and the Fed statement indicated a growing economy, which led to numerous negative reprices. Rates are still within this year's range, the question is whether Friday's jobs report will push out of it. Hard to recommend floating to anyone now unless they're a LONG time away from closing and have hardy risk tolerance." -Ted Rood, Senior Mortgage Planner, tedroodteam.com
"Today's selling was well warranted with the overall positive economic data. If you failed to lock your loan prior to today's volatility, you need to consider that Friday's employment report will either reinforce the current direction or simply pause the bleeding (the former can be brutal). Geopolitics do not seem to play too much of a role in breaking any important support/resistance thresholds currently, but simply add to any strength in bond momentum. The "let's wait and see" approach is a losers game. Loans closing within 15 should have been locked, 30 days out should strongly consider locking." -Constantine Floropoulos, Quontic Bank
"Locking yesterday would have been a really good call and definitely the safe play. All things considered, we’ve seen more dramatic sell-offs in bonds before, so a recovery could happen. However, I would definitely not float into the payroll report on Friday, as this could be the first leg of a rate climb. " -Michael Owens, VP of Mortgage Lending at Guaranteed Rate, Inc.
Today's Best-Execution Rates
- 30YR FIXED - 4.25
- FHA/VA - 3.75%
- 15 YEAR FIXED - 3.375%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- The hallmark of 2014 so far has been a disconcertingly narrow range in rates. Too many market participants bet on rates going higher in 2014, and markets have punished that imbalance with a paradoxical move lower.
- As of June, rates were officially lower year-over-year, but that's due to rates' path higher in 2013. The current path in 2014 remains sideways.
- European markets continue to play a nagging role in the background, generally helping rates in the US remain lower than they otherwise might be.
- From a wider point of view, we're in limbo, waiting for the first significant move away from the narrow range. A rally into late May stood a chance to act as this break, but rates have since returned to what were previously the lower limits of the 2014 range.
- As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.' Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy. It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).