Mortgage Rates Steady, Applications Plunge

Both benchmark Treasuries and mortgage backed securities held relatively stable yesterday despite a late day triple digit rally in stocks. The only event relevant to mortgage rates was an auction of $36billion of 3 year treasury notes. The auction went well and following the release of the results mortgage backed securities managed to move higher in price. The gains in MBS pricing were not large enough to entice lenders to reprice for the better.

Early this morning we received data on the housing front with the release of the weekly Mortgage Bankers Association’s Application Index. The Mortgage Bankers Association application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment which can increase disposable income and consumer spending (or give consumers a chance to pay down other debts like credit cards). A falling trend of purchase applications indicates a decline in home buying interest, a negative for the housing industry and the economy as a whole.

Since the end of the homebuyer tax credit on April 30, purchase applications have plunged as many people pushed forward their purchase plans to take advantage of the tax credit. In contrast, the recent “flight to safety” bid which pushed mortgage rates to the best levels of 2010, has helped to substantially increase the refinance activity as homeowners look to take advantage of the near record low mortgage rates.

This morning’s report gave us disappointing news on both fronts. In the week ending June 4, purchase applications fell another -5.7%. Since the end of the tax credit, just 4 weeks ago, purchase applications have plunged -35%! The refinance activity, which has shot higher due to mortgage rates falling, took a large step backward dropping -14.3% and ending a streak of four consecutive weeks of increasing demand. With mortgage rates steady at the best levels of the year, it is troubling to see refinances decline. This may indicate that most people that could refinance have already done so leaving only those homeowners who may be upside down or cannot qualify due to income or credit. If you have been considering a refinance, now is a great opportunity as mortgage rates are holding near all time record lows.

At 1 pm, the Department of Treasury will release the results of today’s auction of $21billion of 10 year notes. Since the life of a mortgage is much closer to 10 years than 3 years, today’s auction is much more relevant to mortgage rates then yesterday’s 3 year note auction. If demand remains strong for our nation’s debt, mortgage rates should be able to hold at present levels. However, if demand is weak, mortgage rates will be pressured higher later today.

At 2pm, we get our final data release of the day…the Beige Book, named that simply for the color of its cover. This data outlines economic conditions around the United States and is used as a point of reference during the FOMC meetings where our nation’s monetary policy is set. Much of the information contained within this report is already know, but market participants will still thoroughly review it to see what Fed members are seeing. The last release of this data painted an uncertain economic outlook which should have benefited the bond market, but that didn’t happen as both treasuries and MBS lost ground following the release forcing lenders to reprice for the worse. If today’s report shows stronger economic activity than thought, mortgage rates will be pressured higher.

Reports from fellow mortgage professionals indicate lender rate sheets to be similar to yesterday. The par 30 year conventional rate mortgage remains in the 4.50% to 4.75% range for well qualified consumers. To secure a par interest rate on a conventional mortgage 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 an estimated one point loan origination/discount/broker fee. For consumers with lower FICO scores or higher loan to values, you should consider a FHA loan which offers similar pricing, lower FICO score requirements, but higher costs.

I continue to favor locking. Lenders are offering very attractive rate sheets and I find it difficult not to recommend locking. Like yesterday, the only loans I would consider floating would be ones a day away from a shorter lock period which offers better pricing.