Mortgage Rates Improve with a Strong Auction
Posted 10-28-2009 at 08:13 AM by VictorBurek
The prices of mortgage backed securities moved higher yesterday thanks to a strong auction of $44billion of 2 year treasury notes. As the prices held until close, most lenders did reissue new rate sheets lowering consumer borrowing costs. With the rally, MBS have moved back into the well defined range we have used to gauge lock/float sentiment. To remind readers, when MBS are trading in a range it has been successful to float at the lows and lock the highs. The last couple days, MBS have been testing the low end of the range, thus my recommendation for floating. With yesterday’s rally, MBS have moved comfortably into the middle of the range.
The economic data starts this morning with the release of the Mortgage Bankers’ Association Application Index which tracks the weekly change in mortgage applications at major lenders. Much like last week’s report, today’s report continues to show more weakness in the housing market. Applications for home purchases fell 5.2% and the refinance activity posted a 16.2% drop! With interest rates edging higher last week, it is not surprising to see a drop in the refinance activity. With the first time home buyer tax credit still in effect, it is troubling to have a couple weeks in a row with much less demand.
The U.S. Department of Commerce released their monthly Durable Goods orders report. This data tracks the monthly change in the amount of new orders placed with manufacturers for immediate and future delivery. An increasing trend suggests that manufacturers will be busier in the months ahead as manufacturers work to fill the orders. Additionally, more orders suggest more consumer spending which can increase corporate profits, so the stock market likes an increasing trend while the bond market usually benefits when orders are weak.
The release of the data shows that durable orders came in right on expectations with a 1.0% rise following last month’s disappointing revised for the worse decline of 2.6%. It was initially reported at a -2.4%. When excluding transportation orders, the report showed a larger than expected increase of 0.9%. This is the fourth time in six months that durable orders have risen indicating that the economic recovery is here.
The final data set for the day gives us another reading on the housing sector with New Home Sales. This report measures the number of newly constructed homes with a committed sale during the prior month. Since the purchase of a new home leads to many other purchases, the stock market likes to see an increasing trend. The previous five month’s have posted increasing amounts of new home sales with last month’s report posting an annualized pace of 429,000. Economists’ surveyed prior to this report expect the trend of higher sales to continue to an annualized pace of 440,000. In addition to the positive news on higher new home sales, last month’s report also showed the inventory of new homes available dropping to a 7.3 months’ supply which is the lowest in 2 ½ years!
The report indicates that new home sales have declined for the first time since March posting a lower than expected annualized pace of 402,000. Last month’s figures were also revised lower to 417,000. Following this worse than expected data, MBS have continued to improve.
At 1 pm eastern, the Department of Treasury will auction $41billion of 5 year notes. If we see strong demand, MBS could benefit with the risk adverse trade. Yesterday’s auction was very well received which could indicate strong demand for today’s offering.
Early reports from fellow mortgage professionals are indicating lender rate sheets have improved overnight. The par 30 year conventional rate mortgage has fallen to the 4.75% to 5.00% range for well qualified consumers. In order to secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.
If you are floating, you are safe to continue to do so but be ready to lock if the auction today is weak. If you are unable to keep up with the auction, than locking this morning might be a good call. You have picked up some gains with improved pricing this morning and nothing wrong with walking away a winner. However, MBS are still in the range so floating can pay off especially if the auction today is received well by investors.
The economic data starts this morning with the release of the Mortgage Bankers’ Association Application Index which tracks the weekly change in mortgage applications at major lenders. Much like last week’s report, today’s report continues to show more weakness in the housing market. Applications for home purchases fell 5.2% and the refinance activity posted a 16.2% drop! With interest rates edging higher last week, it is not surprising to see a drop in the refinance activity. With the first time home buyer tax credit still in effect, it is troubling to have a couple weeks in a row with much less demand.
The U.S. Department of Commerce released their monthly Durable Goods orders report. This data tracks the monthly change in the amount of new orders placed with manufacturers for immediate and future delivery. An increasing trend suggests that manufacturers will be busier in the months ahead as manufacturers work to fill the orders. Additionally, more orders suggest more consumer spending which can increase corporate profits, so the stock market likes an increasing trend while the bond market usually benefits when orders are weak.
The release of the data shows that durable orders came in right on expectations with a 1.0% rise following last month’s disappointing revised for the worse decline of 2.6%. It was initially reported at a -2.4%. When excluding transportation orders, the report showed a larger than expected increase of 0.9%. This is the fourth time in six months that durable orders have risen indicating that the economic recovery is here.
The final data set for the day gives us another reading on the housing sector with New Home Sales. This report measures the number of newly constructed homes with a committed sale during the prior month. Since the purchase of a new home leads to many other purchases, the stock market likes to see an increasing trend. The previous five month’s have posted increasing amounts of new home sales with last month’s report posting an annualized pace of 429,000. Economists’ surveyed prior to this report expect the trend of higher sales to continue to an annualized pace of 440,000. In addition to the positive news on higher new home sales, last month’s report also showed the inventory of new homes available dropping to a 7.3 months’ supply which is the lowest in 2 ½ years!
The report indicates that new home sales have declined for the first time since March posting a lower than expected annualized pace of 402,000. Last month’s figures were also revised lower to 417,000. Following this worse than expected data, MBS have continued to improve.
At 1 pm eastern, the Department of Treasury will auction $41billion of 5 year notes. If we see strong demand, MBS could benefit with the risk adverse trade. Yesterday’s auction was very well received which could indicate strong demand for today’s offering.
Early reports from fellow mortgage professionals are indicating lender rate sheets have improved overnight. The par 30 year conventional rate mortgage has fallen to the 4.75% to 5.00% range for well qualified consumers. In order to secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.
If you are floating, you are safe to continue to do so but be ready to lock if the auction today is weak. If you are unable to keep up with the auction, than locking this morning might be a good call. You have picked up some gains with improved pricing this morning and nothing wrong with walking away a winner. However, MBS are still in the range so floating can pay off especially if the auction today is received well by investors.
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