Mortgage Rates Improved, Fed Announces QE2

If you have been following my advice on floating your loan, you should be very happy. Over the last few days, mortgage rates have rallied in anticipation of Quantitative Easing part 2. Well yesterday the Federal Reserve released their Fed statement following the conclusion of the two day FOMC meeting. In the release they announced the Fed will buy up to $600billion of US Treasuries. In addition, they are going to reinvest principle payments from their current portfolio of mortgage backed securities into US Treasuries which should bring the total investment closer to $900billion by the end of the second quarter of next year.

Following the release of the FOMC statement we had quite a bit of volatility. MBS prices moved lower initially which resulted in a few itchy trigger lenders to reprice for the worse. By day’s end though, MBS managed to move higher closing where they began the day which allowed for those same lenders to reprice for the better.
It was quite disappointing we didn’t see a huge rally, but sometimes you have to allow for the information to be digested by market participants. At the open today, MBS are rocketing higher as the Fed statement and QE2 are very supportive of low mortgage rates. We should see better pricing today but we do have some data hitting.

First out was the weekly jobless claims. From the Department of Labor, this report tracks the number of Americans that filed for first time unemployment benefits in the prior week. Since our economy is driven by consumer spending, higher jobless claims indicates consumers will have less money to spend which is bad for corporate profits and stocks but generally helpful in keeping interest rates low. This report gives us three measures of unemployment claims:

- Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits in the previous week
- Continued Claims: totals the number of Americans who continue to file for benefits due to an inability to find a new job
- Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now collecting extended and emergency benefits which can last as long as 99 weeks

Here are the results:

- Initial Jobless Claims: +20,000 to 457,000 vs estimates of 443,000. Prior week revised worse to show an additional 3,000 claims.
- Continued Claims: -42,000 to 4.340million vs. estimates for a print of 4.38million.
- Extended and Emergency Benefits: +357,700 to 5.01million

Released at the same time was the Productivity and Costs Report for the third quarter of this year. This data measures how efficient our work force is at producing our nation’s goods and services. A more productive work force means employers do not need to hire additional staff to increase production, while unit labor costs measures the labor cost of producing each unit of output. Higher productivity lowers the unit cost of producing goods which helps to keep inflation in check which is one of the biggest enemies of low rates.

The release indicated productivity rose 1.9%, much higher than the 1.0% rise that was expected. Unit labor costs fell 0.1% vs estimates of a 0.7% rise indicating that there is no wage based inflation, very good news for bonds. Higher productivity and lower labor costs is positive news for both stocks and bonds but not great news for those without a job. Employers are squeezing more work from the current work force instead of hiring new employees. Following the release of this report, stock futures and MBS both moved higher.

Currently MBS are at all time price highs which should allow lenders to pass along the best rates ever… but they didn’t. The par 30 year conventional rate mortgage has fallen to the 3.875% to 4.125% range for well qualified consumers. To be considered well qualified you must have a FICO credit score of 740 or higher, a loan to value at 80% or less. And to secure a par interest rate you must be willing to pay all closing costs including an estimated one point loan origination/discount/broker fee. Consumers with lower FICO scores or higher loan to values will either pay additional fees to secure a par rate or accept a higher interest rate. If you are seeking a 15 year term, you should expect a par rate in the 3.375% to 3.625% range.

Tomorrow we get the Employment Situation Report. This is the highest impacting report we get on a monthly basis. If it shows more jobs created than expected or a lower unemployment rate, mortgage rates could come under pressure but QE2 should lessen that pressure. It is expected to show 60,000 jobs created last month and the unemployment rate holding steady at 9.6%. If worse than expected, we should see new record low rates next week.

Lock or float? If you have been following my advice, you have been floating for a couple weeks and have seen rates improve by .25% to .375%. You have to know when to pull your money off the table and walk away a winner. So, if you are within 15 days of closing you should go ahead and lock later today. Longer term closings should also consider cashing in on the improved rates offered but I don’t feel you have to lock today. If tomorrow’s report is worse than expected, rates could continue to rally but it is risky floating through the Employment Situation Report.