Finally, a Successful Auction Helps Rates
Posted 07-31-2009 at 08:38 AM by VictorBurek
The roller coaster theme continued yesterday but in reverse from the prior two days. If you recall, on both Tuesday and Wednesday mortgage backed securities rallied early on but gave back all the gains following disappointing treasury auctions of 2 and 5 year notes. Yesterday, MBS moved lower in the morning but following a successful auction of 7 year notes they managed an impressive rally closing higher on the day and at the highest levels of the week. A few lenders repriced for the worse in the morning as MBS moved lower ahead of the auction; however, after MBS moved higher and held onto the gains into close most lenders repriced again but this time for the better. To remind readers, mortgage rates are set by the trading of mortgage backed securities (MBS) in the secondary market. As investors buy MBS, the price of the security moves higher which lowers mortgage rates but as investors sell MBS, the price moves lower to attract buyers which increases mortgage rates.
Today is the busiest day of the week for economic data. The first report out this morning and highest impacting is the Advanced Gross Domestic Product numbers for Quarter two. GDP is the broadest measurement of total economic activity across all sectors of our economy. Basically, this report lets market participants know the pace at which our economy is growing or contracting. A fast growing economy is good for higher corporate profits which is good for stocks; however it could lead to inflation so MBS tend to benefit with a slower growing or contracting economy. Included within this data set is a read on inflation which is the biggest enemy to mortgage rates. Economists expectations call for an ease in our contraction from first quarter’s -5.5% to -0.7%. The inflation part of the data set is expected to post a decline from first quarter’s 2.8% reading to 1.3%. The report has shown that second quarter GDP contracted at a -1.0% pace basically in line with expectations; however, first quarter numbers were revised worse to -6.4% marking the largest contraction to economic growth in 27 years! The GDP price index which gives a measure on inflation, came in much lower than expectations at only a 0.2% increase and the prior quarter’s reading was revised lower to 1.9%. This is yet another report indicating that inflation is not a concern at present time. Immediately following the release of this data set, MBS moved much higher on the day and are posting some nice gains.
Also out this morning from the U.S. Department of Labor is the Employment Cost Index which measures the total employee compensation costs. If employment costs are increasing, companies tend to pass along that higher expense onto the consumer. This is known as wage based inflation. The report has indicated that employment costs rose 0.4%, slightly higher than expectations of 0.3%. The year over year reading declined from first quarter’s 2.1% to 1.8%. Even though the headline number was slightly worse the year over year decline is offsetting that news. This report is also confirming that inflation is of no concern.
Lastly today we get the monthly Chicago PMI which is a survey of both manufacturing and non manufacturing firms around the Chicago region on the strength of business conditions. Readings above 50 indicate expanding business conditions while readings below 50 indicate contraction. Last month’s report posted a 5 point gain to 39.9 and expectations for this month’s report is for continued improvement with a 44.0 reading. The report has shown that business conditions are still contracting coming in a touch lower than expected at 43.4.
Early reports from fellow mortgage professionals are indicating that rates for 30 year fixed conventional mortgages have improved to the 4.875% to 5.125% range for the best qualified consumers. In order to qualify 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 1 point loan origination/discount/broker fee.
If you are currently floating an interest rate, you might want to consider locking. Recent history has shown that each time rates break below the 5.00% level, they do not remain there very long. Of course, we could buck that trend this time but a bird in hand is worth more than 2 in the bush. I received many emails from readers wishing they would have locked a couple months ago when rates where even lower than today. Each of them stated that they thought rates would move even lower so they waited and missed the bus. Mortgage rates could move lower, but I have stated many times in this blog that anytime you can lock a 30 year fixed rate under 5% that is hard to pass up. With most lenders 30 year, 25 year and 20 year fixed rate mortgages are the same interest rate. If you prefer a 15 year term or 10 year term, you should expect a rate around 4.375%. To qualify for a par rate on a 15 year term you must have a FICO credit score of 620 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.
Today is the busiest day of the week for economic data. The first report out this morning and highest impacting is the Advanced Gross Domestic Product numbers for Quarter two. GDP is the broadest measurement of total economic activity across all sectors of our economy. Basically, this report lets market participants know the pace at which our economy is growing or contracting. A fast growing economy is good for higher corporate profits which is good for stocks; however it could lead to inflation so MBS tend to benefit with a slower growing or contracting economy. Included within this data set is a read on inflation which is the biggest enemy to mortgage rates. Economists expectations call for an ease in our contraction from first quarter’s -5.5% to -0.7%. The inflation part of the data set is expected to post a decline from first quarter’s 2.8% reading to 1.3%. The report has shown that second quarter GDP contracted at a -1.0% pace basically in line with expectations; however, first quarter numbers were revised worse to -6.4% marking the largest contraction to economic growth in 27 years! The GDP price index which gives a measure on inflation, came in much lower than expectations at only a 0.2% increase and the prior quarter’s reading was revised lower to 1.9%. This is yet another report indicating that inflation is not a concern at present time. Immediately following the release of this data set, MBS moved much higher on the day and are posting some nice gains.
Also out this morning from the U.S. Department of Labor is the Employment Cost Index which measures the total employee compensation costs. If employment costs are increasing, companies tend to pass along that higher expense onto the consumer. This is known as wage based inflation. The report has indicated that employment costs rose 0.4%, slightly higher than expectations of 0.3%. The year over year reading declined from first quarter’s 2.1% to 1.8%. Even though the headline number was slightly worse the year over year decline is offsetting that news. This report is also confirming that inflation is of no concern.
Lastly today we get the monthly Chicago PMI which is a survey of both manufacturing and non manufacturing firms around the Chicago region on the strength of business conditions. Readings above 50 indicate expanding business conditions while readings below 50 indicate contraction. Last month’s report posted a 5 point gain to 39.9 and expectations for this month’s report is for continued improvement with a 44.0 reading. The report has shown that business conditions are still contracting coming in a touch lower than expected at 43.4.
Early reports from fellow mortgage professionals are indicating that rates for 30 year fixed conventional mortgages have improved to the 4.875% to 5.125% range for the best qualified consumers. In order to qualify 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 1 point loan origination/discount/broker fee.
If you are currently floating an interest rate, you might want to consider locking. Recent history has shown that each time rates break below the 5.00% level, they do not remain there very long. Of course, we could buck that trend this time but a bird in hand is worth more than 2 in the bush. I received many emails from readers wishing they would have locked a couple months ago when rates where even lower than today. Each of them stated that they thought rates would move even lower so they waited and missed the bus. Mortgage rates could move lower, but I have stated many times in this blog that anytime you can lock a 30 year fixed rate under 5% that is hard to pass up. With most lenders 30 year, 25 year and 20 year fixed rate mortgages are the same interest rate. If you prefer a 15 year term or 10 year term, you should expect a rate around 4.375%. To qualify for a par rate on a 15 year term you must have a FICO credit score of 620 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.
Total Comments 10
Comments
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Some good news! Yeah I'm seriously considering a lock. Most likely I will. Here is what I was offered today. 5.25% and to buydown to 5.125% is .625%, to buydown to 5% is 1.375%. If the rates drop you can lock in at the new rate for .5%.Posted 07-31-2009 at 09:42 AM by BBall Coach
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This is an FHA loan by the way.Posted 07-31-2009 at 09:44 AM by BBall Coach
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Bball coach, you should be able to get 5% with 1 point today on fha. Are you working with a direct bank or broker?Posted 07-31-2009 at 10:45 AM by VictorBurek
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direct bankPosted 07-31-2009 at 10:56 AM by BBall Coach
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I thought so. Consumers usually get better deals working with a broker. Not sure if you would want to start the process over, but if you find a good broker in your area you can get a better deal than what this lender is offering. 5% would cost a point and not 1.375. If your loan is for $200, that saves $750 in costs.Posted 07-31-2009 at 11:03 AM by VictorBurek
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Thanks for the advice. I do actually have a broker I can consult. He was working with me when I was looking for a 1-3 year old home prior to going new. Had I found something back then when I was working with him I could have gotten my loan for 4.75%! Couldn't find anything I really liked as mcuh as the new house I picked though. Anyways, the other issue at work here is my builder is paying my 1% origination fee by going with there lender. As you have me sitting here thinking it over, I suspect that after all the fees and whatnot are added up, I'm probably coming out about the same. Yeah, this may be worth looking into. Thanks again.Posted 07-31-2009 at 11:15 AM by BBall Coach
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Actually, you are paying the fee. They are paying the 1% but giving you a higher interest rate so they can make the 1% back on the loan. We are in a buyers market, i would inform the builder you are going with another lender and you still want the 1%.
Makes me so mad how builders offer an incentive to work with a certain lender leading consumers to believe they are getting a good deal. But in reality, they are making all the money back that they are offering as an incentive by giving the buyer a higher interest rate.
Good luck.Posted 07-31-2009 at 11:24 AM by VictorBurek
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Do you think they're overcharging me on the interest rate,the buydown, both?Posted 07-31-2009 at 11:44 AM by BBall Coach
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Yes. They are being nice agreeing to pay 1% of your costs, but on the other hand they are giving you a higher rate and making the money back.Posted 07-31-2009 at 11:52 AM by VictorBurek
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Ok, just got in touch with my broker and he'll send me something to compare with what the bank has given me. Should be interesting.
Posted 07-31-2009 at 12:13 PM by BBall Coach
