Lenders Reprice Following Decent Auction

The best rates of our lifetime were seen Friday morning following the Employment Situation report. Since then, mortgage rates have been under some pressure to move off record lows.

There isn’t much to recap from yesterday as mortgage rates opened the day slightly worse, again. However, after the Department of Treasury released the results of the 10 year note auction, bargain buyers stepped in to purchase the lower priced mortgage backed securities after several days of declining prices. As a reminder, as MBS move lower in price, lenders increase consumer borrowing costs. The bargain buying quickly moved MBS prices to session highs allowing some lenders to reprice for the better but since the gains came late in the day many lenders held back on passing along the gains.

We have a couple economic reports released at 8:30am.

I will start with the least impacting… Weekly Jobless Claims. This economic release provides three timely metrics on the health of the labor market:

1. Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits in the previous week 2. Continued Claims: totals the number of Americans who continue to file for benefits due to an inability to find a new job
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits

Since our economy is driven by consumer spending, market participants track employment data to get a sense of economic momentum to come. Higher jobless claims imply less consumers have jobs and therefore less money to spend. This is a negative for the economy but generally helpful in keeping consumer borrowing costs down.

Here are the results:

1. Initial Jobless Claims: +13,000 to 462,000 vs. estimates for a read of 443,000. Prior week’s data revised worse to show an additional 4,000 claims. This snaps 5 consecutive weeks of declining claims. The Labor Department did note that they had to use estimates for five states due to administrative delays tied to Columbus Day.
2. Continued Claims: -112,000 to 4.4million
3. Extended and Emergency Benefits: -340,000 to 4.8million

We also got our second look at inflation data with the release of the Producer Price Index(PPI). The PPI measures the monthly change in prices paid by manufactures and wholesalers for the goods they consume to produce their product. If businesses are paying more for the materials they use to produce their widgets, they may be forced to pass along those additional costs to the consumer. During periods of economic stagnation, when unemployment is high, producers find it difficult to pass higher costs along to consumer because demand is already below average. This report gives us two measure on inflation… the overall read and the core read. The core rate strips out food and energy due to their monthly volatility.

The overall Producer Price Index rose 0.4%, higher than the 0.2% that was expected. Year over year, overall producer prices are up 4.0%. The core level came in right on expectations and matching last month’s increase of 0.1%. Year over year, core producer prices are up 1.6%. Inflation continues to be of little concern and the higher producer prices will help ease concerns of deflation, which can be a bigger economic problem than inflation.

Tomorrow we get a more important read on inflation with the release of the Consumer Price Index. The CPI measures the monthly change in prices paid by consumers. Quite often, producers cannot pass along higher prices to the end consumers which makes tracking consumer prices much more important.

Lenders that didn’t reprice yesterday have passed along better pricing this morning but the lenders that did are offering similar rates. The par 30 year conventional rate mortgage remains in the 4.00% to 4.25% but many lenders are offering rates as low as 3.875% but it will cost a little extra. To secure a par interest rate on a conventional loan, your credit criteria and loan to value would have to be not subjected to Loan Level Price Adjusters(LLPA). Typically, this means your FICO score would have to be 740 or higher and your loan to value would have to be 80% or less. If you have a lower FICO score or higher loan to value, you should consider a FHA loan which offers similar pricing with higher costs due to a upfront fee of 1% of the loan amount that FHA charges.

Since MBS are very close to their price highs, I favor locking all loans closing within the next 15 days. Longer term closings should also consider locking as today’s rate sheets are very close to the best ever. It is always better to lock when you should have floated than it is to float when you should have locked.