August 8, 2014
During the most normal of times in the mortgage world, rates will take cues mainly from economic data. The stronger the economy, the more rates move up and vice versa. The current dynamic, however, places an inordinate significance on other factors. These include the geopolitical risks around the world a weakening Eurozone economy, and the prospects for increased easing on the part of the European Central Bank. All of the above increases the demand for safe-haven assets like US Treasuries. The mortgage-backed-seucrities (MBS) that most directly affect rates tend to see far less benefit than Treasuries during these types of moves.
This was indeed the case overnight as headlines about potential US air strikes in Iraq sent Treasury yields plummeting. When MBS started trading this morning, they were only moderately stronger. As such, mortgage rates started the day in stronger territory but didn't move nearly as much as Treasuries. Adding insult to injury, bond markets turned around in the afternoon after Russia announced it was wrapping up temporary military operations on the Ukrainian border. Several lenders repriced to higher rates shortly thereafter.
The upside to all this is that mortgages take less of a hit than Treasuries on the way back up. The challenge comes in identifying a short term correction vs a longer term change in trend. For now, the trend is toward lower rates, but to be sure, that's been less easily seen in Mortgages. Also keep in mind that even if the longer-term trend manages to remain favorable, there will be periodic corrections that can last long enough to make you regret a decision to float. The chances of such periodic corrections are greater after days like today. To translate: risk outweighs reward when it comes to floating over the weekend, but the longer your time horizon and the more willing you are to accept some losses if the market moves against you, there is still an argument to be made for it.
Loan Originator Perspective
"After breaking below a long term trend line yesterday and seeing a break lower for a large portion of today, there was some real hope rates may be making a move lower. However, as the day dragged on I lost some of that confidence. The 10 year treasury rose in yield, and looks like it will end the day above that line of support. The safest move here is to lock and take the gains we’ve received, as technically, we’re at the bottom of a year long range and an effort to break lower, just reversed course." -Brent Borcherding, brentborcherding.com
"Despite a healthy rally in Treasuries, mortgage backed securities have not kept up so lender pricing is just a touch better than yesterday. With the current geopolitical climate around the globe, I would float all loans over the weekend for a several reasons. First, I don't like locking on Fridays as I feel lenders tend to be somewhat conservative with pricing, especially in light of geopolitical issues. Secondly, if things get worse overseas, this rally could continue which would improve lender pricing. Lastly, since MBS have underperformed during this rally, they should lose less ground if treasuries sell off to higher yields." -Victor Burek, Open Mortgage
"Our early rate improvements evaporated quickly this afternoon as Ukrainian Drama appeared to wane. Gains based on geopolitical strife can vanish (or appear) quickly, and it's important to take that into account. Buyers within 30 days of closing may want to lock up their gains today. Those with an appetite for risk and time on their side might consider continuing to float, as long as they understand both the risks and rewards." -Ted Rood, Senior Mortgage Planner, tedroodteam.com
Today's Best-Execution Rates
- 30YR FIXED - 4.125-4.25
- 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).