Mortgage Rates Fall Below 5%, Again
Posted 08-26-2009 at 08:34 AM by VictorBurek
Prices of mortgage backed securities managed to rally for a second day in a row leading to most lenders repricing for the better. After early morning weakness following better than expected data on home prices and consumer confidence, MBS started to rally following a decent auction of 2 year treasury notes. Typically when better than expected economic data hits the wires and a treasury auction has only decent results, you would not expect to see MBS move higher. This signals that investors had hedged ahead of time that the auction would not be received well, it was a record offering of 2 year notes by the way. Since worse than expected results did not occur it was viewed as a positive which helped spark the rally.
The first economic report this morning comes from the Mortgage Bankers’ Association with the release of their weekly applications index. This report tracks the monthly increase or decrease in mortgage applications at major lenders. An increasing trend, especially with purchase applications, is a positive economic indicator as the purchase of a new home should lead to additional major purchases. The report shows that purchase applications continue to improve moving higher by 1% marking the 4th consecutive increase. It appears that the government tax credit to first time home buyers is helping the overall demand for housing. The refinance activity increased by 12.7% for a third straight gain thanks to low mortgage rates.
Next comes the Durable Goods Orders report which tracks the monthly change in orders placed with manufactures for items that are expected to last for more than 3 years such as appliances, autos, etc… Durable orders shows market participants how busy factories will be in the months ahead. Increasing orders signal that factories will be busy meeting those orders which is positive for economic growth. The report shows a large increase in durable orders mainly boosted by increased auto sales. If you can recall, our government created Cash for Clunkers where they paid $4500 toward the purchase of a new automobile as an incentive to help the struggling auto sector. This program created large demand for new autos last month which boosted orders. When you exclude transportation sales from the report, durable orders came in slightly lower than expected. Even though the headline number posted a significant increase, this report had no significant impact on the markets as an increase to the overall reading was expected due to Cash for Clunkers.
The final report to be released today gives us a measure on the strength of demand for housing. New home sales report tracks the monthly increase or decrease in the number of newly constructed homes with a committed sale during the month. A committed sale does not always lead to a actual sale. With tougher underwriting guidelines and HVCC creating problems with appraisals, many more loans are being denied. In June, new home sales increased by 11% over the prior month’s report to an annualized pace of 384,000. This marked the largest monthly percentage increase in nine years. This month’s report shows that new home sales continue to move significantly higher with a month over month increase of 9.6% beating all economists’ expectations. This sets the annualized pace at 433,000 versus expectations of 390,000. It appears that the government stimulus for first time home buyers is helping to stabilize home sales.
Early reports from fellow mortgage professionals are indicating that the par 30 year fixed conventional rate mortgage remains in the 4.875% to 5.125% range for the best qualified consumers. In order to secure a par interest rate 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 one point loan origination/discount/broker fee. As always, you can elect to pay less in fees and secure a higher rate or pay additional fees to buy a lower rate.
If you are seeking a government loan such as FHA or VA, expect the rate to be about .25% higher than a conventional loan. One huge benefit of government loans is the qualifying is much easier. For example, to qualify for the best rate you only need a FICO score of 620. A drawback to government loans is higher closing costs in the form of up front mortgage insurance. A typical FHA loan will have a upfront fee of 1.75% of the loan amount. So, if you are buying a $200,000 home that fee is $3500. In addition to the upfront fee, FHA loans also have a monthly mortgage insurance premium that also must be paid.
Many consumers have heard of and are paying mortgage insurance. This is not the homeowner’s insurance that covers the house in case of damage, this is insurance that the consumer pays so if they default on the loan the lender does not lose money will they sell the house in a foreclosure sale. For example, let’s say you have a $200,000 mortgage on a home worth $220,000 but you go into default. Typically, homes in foreclosure sales go for between 70 to 80 cents on the dollar. So in this example, let us say that the lender sells your home in foreclosure for $160,000. Well, if you owe them $200,000 and they sell for $160,000 they lost $40,000 plus the costs of foreclosing. This is where the mortgage insurance comes into play. The lender will contact the mortgage insurance company who will then compensate the lender the money they lost from the premiums they receive from homeowners.
As I advised last week, I will continue to advice that you lock your loan especially if closing within the next 15 days. Today, rates are as good as they have been for the last few months. There does not seem to be much motivation to drive rates lower which only leaves one direction for rates to go. Yes, rates could move lower but much more room for rates to increase than to drop. In addition, rates move higher much faster than they will move lower. Anytime you can lock a 30 year fixed rate loan under 5%, that is hard to pass up. Each time rates have hit this level over the last couple months, they did not remain there for more than a day or two. Already this morning, we are seeing selling pressure on MBS following the much better than expected housing data.
The first economic report this morning comes from the Mortgage Bankers’ Association with the release of their weekly applications index. This report tracks the monthly increase or decrease in mortgage applications at major lenders. An increasing trend, especially with purchase applications, is a positive economic indicator as the purchase of a new home should lead to additional major purchases. The report shows that purchase applications continue to improve moving higher by 1% marking the 4th consecutive increase. It appears that the government tax credit to first time home buyers is helping the overall demand for housing. The refinance activity increased by 12.7% for a third straight gain thanks to low mortgage rates.
Next comes the Durable Goods Orders report which tracks the monthly change in orders placed with manufactures for items that are expected to last for more than 3 years such as appliances, autos, etc… Durable orders shows market participants how busy factories will be in the months ahead. Increasing orders signal that factories will be busy meeting those orders which is positive for economic growth. The report shows a large increase in durable orders mainly boosted by increased auto sales. If you can recall, our government created Cash for Clunkers where they paid $4500 toward the purchase of a new automobile as an incentive to help the struggling auto sector. This program created large demand for new autos last month which boosted orders. When you exclude transportation sales from the report, durable orders came in slightly lower than expected. Even though the headline number posted a significant increase, this report had no significant impact on the markets as an increase to the overall reading was expected due to Cash for Clunkers.
The final report to be released today gives us a measure on the strength of demand for housing. New home sales report tracks the monthly increase or decrease in the number of newly constructed homes with a committed sale during the month. A committed sale does not always lead to a actual sale. With tougher underwriting guidelines and HVCC creating problems with appraisals, many more loans are being denied. In June, new home sales increased by 11% over the prior month’s report to an annualized pace of 384,000. This marked the largest monthly percentage increase in nine years. This month’s report shows that new home sales continue to move significantly higher with a month over month increase of 9.6% beating all economists’ expectations. This sets the annualized pace at 433,000 versus expectations of 390,000. It appears that the government stimulus for first time home buyers is helping to stabilize home sales.
Early reports from fellow mortgage professionals are indicating that the par 30 year fixed conventional rate mortgage remains in the 4.875% to 5.125% range for the best qualified consumers. In order to secure a par interest rate 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 one point loan origination/discount/broker fee. As always, you can elect to pay less in fees and secure a higher rate or pay additional fees to buy a lower rate.
If you are seeking a government loan such as FHA or VA, expect the rate to be about .25% higher than a conventional loan. One huge benefit of government loans is the qualifying is much easier. For example, to qualify for the best rate you only need a FICO score of 620. A drawback to government loans is higher closing costs in the form of up front mortgage insurance. A typical FHA loan will have a upfront fee of 1.75% of the loan amount. So, if you are buying a $200,000 home that fee is $3500. In addition to the upfront fee, FHA loans also have a monthly mortgage insurance premium that also must be paid.
Many consumers have heard of and are paying mortgage insurance. This is not the homeowner’s insurance that covers the house in case of damage, this is insurance that the consumer pays so if they default on the loan the lender does not lose money will they sell the house in a foreclosure sale. For example, let’s say you have a $200,000 mortgage on a home worth $220,000 but you go into default. Typically, homes in foreclosure sales go for between 70 to 80 cents on the dollar. So in this example, let us say that the lender sells your home in foreclosure for $160,000. Well, if you owe them $200,000 and they sell for $160,000 they lost $40,000 plus the costs of foreclosing. This is where the mortgage insurance comes into play. The lender will contact the mortgage insurance company who will then compensate the lender the money they lost from the premiums they receive from homeowners.
As I advised last week, I will continue to advice that you lock your loan especially if closing within the next 15 days. Today, rates are as good as they have been for the last few months. There does not seem to be much motivation to drive rates lower which only leaves one direction for rates to go. Yes, rates could move lower but much more room for rates to increase than to drop. In addition, rates move higher much faster than they will move lower. Anytime you can lock a 30 year fixed rate loan under 5%, that is hard to pass up. Each time rates have hit this level over the last couple months, they did not remain there for more than a day or two. Already this morning, we are seeing selling pressure on MBS following the much better than expected housing data.
Total Comments 0
