Ugly Week for Mortgage Rates

Mortgage rates took a beating on Friday following Treasuries to higher yields. Mortgage backed securities opened lower and held steady during the early morning trading session. Around noon the selloff began resulting in all lenders repricing for the worse. Not even the announcement regarding the Fed’s asset purchases could prevent the selloff as nobody wanted to catch the dropping knife. By day’s end, all lenders repriced for the worse twice increasing consumer borrowing costs by almost a full point.

At the open this morning, the sell off is continuing, Lender rate sheets will be considerably worse than Friday.

We have a couple reports that were released this morning. First and of highest importance was Retail Sales. This data reports on the monthly change in total sales receipts taken in at retail stores. The Census Bureau's Retail Sales release is the first report of the month on consumer spending, and since consumer spending accounts for a large majority of GDP, it's capable of affecting the sentiment of the broader marketplace.

The report indicated overall retail sales were much better than expected posting a 1.2% month over month increase vs estimates of only 0.6%. This was the largest month over month gain in consumer spending in 7 months. When excluding auto sales, the data matched expectations with a 0.4% month over month gain in spending. The large gain in overall sales is being partly attributed to higher gasoline prices. When excluding autos, gasoline and building materials sales only improved 0.2% after a 0.4% gain last month. This is negative news for mortgage rates as higher spending by consumers indicates economic recovery that can lead to inflationary pressures.

Tomorrow and Wednesday, we get inflation data. Tomorrow we get the Producer Price index which tracks inflation at the producer level while Wednesday we get the more important Consumer Price Index which tracks inflation at the consumer level. If those reports show higher rates of inflation, mortgage rates will continue to be pressured higher.

The other data released gave us a read on the strength of the manufacturing sector in the New York region with the release of the Empire State Manufacturing Survey. Each month, the New York Federal Reserve conducts a survey of approximately 175 manufacturing executives in New York. Participants are asked to state the direction they expect several business condition indicators to head in the upcoming months. Readings above 0 indicate expanding or improving conditions while readings below 0 indicate contraction. Since peaking in April of this year, this report has been trending lower each month, but last month’s report blew away expectations coming in at 15.7, the highest reading in over four months.

Today’s data indicated a sharp reversal in manufacturing outlook in the New York region with a print of -11.1 vs expectations of 15.0! Thursday we get a look at manufacturing in the Philadelphia region which has also been trending lower.

It seems that Quantitative Easing part two is having the opposite intended impact. Instead of rates falling they have risen considerably over the last two days. Critics are everywhere saying the Fed needs to end QEII as it will weaken our currency and create too much inflation…inflation is the largest enemy of mortgage rates.

Lender rate sheets are considerably worse this morning. The par 30 year conventional rate mortgage has risen to the 4.25% to 4.50% 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. If you are looking to get a 15 year term, you should expect par in the 3.75% to 4.00% range with same closing costs but lower FICO score requirements.

If you have been floating, rates have increased .25% since Friday morning…ouch! Proving yet again that interest rates always rise much faster than they fall. At this point, I see no reason to panic lock. We have taken a couple steps back but it seems the selloff has been overdone and ripe for at least some kind of correction. MBS are already well off the lows of the day, so it appears the bleeding has at least stopped for now.