Stock Market Rally Pressures Consumer Borrowing Costs Higher

Following a much better than expected Industrial Production report yesterday, both benchmark treasury yields and mortgage rates came under pressure to move higher. Most of the damage was done prior to lenders issuing rate sheets, but a few lenders did reprice for the worse.

We only received one economic report today: the Mortgage Bankers Association Weekly Applications Survey.

The MBA loan applications survey covers over 50% of all US residential mortgage apps taken by mortgage bankers, commercial banks, and thrifts. Survey data gives economists a sample of consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications could imply more consumers are seeking out lower monthly payments. If more homeowners are able to qualify for lower payments, their disposable income would increase which could lead to a rise in consumer spending (or give consumers a chance to pay down other debts like credit cards). A falling trend of purchase applications indicates consumer demand for new and existing homes is on the decline, a negative for the housing industry and the economy as a whole. This report is historically has very little if any impact on the markets.

The release indicated purchase applications fell 3.4% in the August 13 week. This was the first decline in purchase activity in a month. On the other hand, refinance activity continues to post strong numbers posting a 17.1% increase thanks to record low mortgage rates. Refinance applications are at their highest level since May 2009.

Early morning weakness with mortgage backed securities has led lenders to worsen rate sheets again this morning. The par 30 year conventional mortgage remains in the 4.25% to 4.50% range for well qualified consumers. The few lenders offering 4.125% yesterday are no longer doing so today. To secure a par interest 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 an estimated one point loan origination/discount/broker fee. Lower rates are available, but you will have to be willing to pay additional costs to buy down the rate.

I definitely continue to favor locking all loans closing within 30 days as I feel you have more to risk than to gain. However, I also don’t see the recent selloff to be a reason to panic. If you are still floating, I would suggest you keep an eye on the stock market today. If stocks move higher, I would lean toward locking. If stocks move lower, you could probably float for the day but there isn’t much to gain.