Mortgage Rates Rise Ahead of More Treasury Debt

Mortgage rates took a small step backward yesterday following a very weak treasury auction of 3 year notes. The demand was well below recent averages. Following the release of the results, many lenders did reprice for the worse increasing consumer borrowing costs. We also received the FOMC minutes, but no major surprises as it only reaffirmed what we already knew…economic recovery will be sluggish, deflation is a greater risk than inflation and more quantitative easing is on the way.

We have no major economic data released today but we did get two reports.

First, the Mortgage Bankers Association released their weekly Applications Survey which tracks the weekly change in the amount of loan applications at major lenders. It contained no surprises. Purchase activity continues to be weak declining 8.5% last week, while record low interest rates have spurred a refinance boom with refinance applications surging 21%! But keep in mind, a loan application does not always lead to a closed loan. With tougher underwriting guidelines and property values still declining in many areas, many loans are started but never end up closing.

Next came our first look at inflation data for the week with the release of Import and Export Prices. This report is not as impactful as tomorrow’s Producer Price Index or Friday’s Consumer Price Index. Today’s release indicated that import prices fell 0.3%, more than the 0.2% decline that was expected. Export prices rose 0.6%, also higher than the 0.2% increase that was expected. So we have yet another report affirming that inflation is not a concern and supports the belief of many Fed members that inflation is too low, thus the need for more Quantitative Easing.

Our most important event for today will occur at 1pm, when the Department of Treasury releases the results of today’s $21billion debt offering of 10 year notes. If today’s auction is met with the same weak demand as yesterday’s 3 year note auction, rates will continue to be pressured higher. Hopefully the recent rise in treasury yields will attract strong demand.

Lender rate sheets are worse this morning. The par 30 year conventional rate mortgage remains in the 4.00% to 4.25% range for well qualified consumers. Rates below 4% have disappeared from many lender rate sheets but are still available for the taking but they will cost even more this morning. If you are seeking a 15 year term, par continues to hold in the 3.50% to 3.75% range. To be considered well qualified you must have a FICO credit score of at least a 740 or higher and a loan to value at 80% or less. If you have a lower FICO or a higher loan to value, you should consider a FHA loan which offers similar rates with lower credit score requirements, but it will cost you more due to the upfront fee that FHA charges which is 1% or the loan amount.

Same basic advice as yesterday regarding locking or floating. If you are being quoted a rate at or below 4.125%, you should lock it up. If you rate quote is above that, there is room for you to float.