I would like to introduce you to my mortgage rates report which I’ve been writing for over a year. Essentially, I’ll give you some short-term (7 days), medium-term (30 days), and long-term(90 days) predictions about where mortgage rates may be headed. Many of my customers read these reports to determine when they should lock-in their mortgage rate, during the application and processing of their loan.
My interest in this stems from my obsession with getting an edge for my customers. My background was on Wall Street, prior to lending, so I’m naturally suited to follow the mortgage-backed securities market (MBS) and act with alacrity from its movements.
You need to understand that the US Treasury market does not dictate mortgage rates nor does the Fed Funds rate. They are influencing factors but often move in polarity to the mortgage-backed securities market (MBS). The only true influencing market then, is the mortgage-backed securities market. With fewer than 10% of the loan originators following this market, you have a 90% chance of hiring a loan consultant who has his “eye on the wrong ball”. Imagine working with a stockbroker who refuses to subscribe to live stock quotes and you’ll see why 90% of the mortgage consumers end up frustrated with their final rate.
My approach is with an aversion to risk so I’m biased towards locking rather than floating a rate. What I do try to find is overreactions in the MBS market so that you won’t lock your mortgage rate at the top nor float your mortgage rate when higher rates are imminent. My customers RARELY catch the “bottom” but they miss out on many “tops” when locking their rate.
The MBS market has improved dramatically since the new FHFA seized Fannie Mae and Freddie Mac. An implicit government backing of mortgage bonds became explicit with that single event. The rate difference, or spread as we call it, between gov’t bonds and mortgage bonds, has narrowed from abnormally high margins. This means that mortgage rates dropped as much as .375% since the gov’t takeover. Alas, I think that party is a bit short-lived. The exuberance appears to be a bit irrational and the reality of impending bank failures has worried the MBS market again. Short-term, I’m advising clients to lock-in these low rates and be done with it.
For borrowers with a 30 day time period until closing, I’m advising that they lock as well. Rates may spike up and come back down ,to these below 6% levels, but I don’t see a great opportunity for the medium-term to improve upon today’s already low rates.
Longer-term, mortgage applicants may find mortgage rates higher than they are today. The realization that SOMEONE has to pay for this bailout will hit everyone, after the election, and treasury bond yields should rise, pushing the MBS yields, and mortgage rates, higher as well. Not a rosy picture.
So, lock those loans at application. While the current 30-year fixed rate loan offering, with 1% origination fee, is 5.75%, for a conforming loan (6.02% apr), the risk of those rates popping up to the 6% level far outweighs the reward of holding out for 5.625%.
This post was extraordinarily long because it’s our first dance, Future reports will be shorter and hopefuly sweeter.
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Comments
10 Comments so far
David G
I appreciate your direct advice, Brian - “lock-in these low rates and be done with it.” Already it looks like rates in Zillow Mortgage Marketplace are ever so slightly up from their lows earlier in the week.
Are there any borrowers and lenders reading this who were able to make the most of this week’s low rates this week?
Brian Brady
“Are there any borrowers and lenders reading this who were able to make the most of this week’s low rates this week?”
Yep- Thursday was lock ‘em up day for my customers. Monday or Tuesday was the best day to lock so I missed the “bottom” but I think I’ll avoid the “tops”
Martin Farris
Brian,
First off to answer David’s question, I renegotiated the loans in my pipeline on Monday (aka the bottom). They are all closing with rates .5% lower than where we locked. So, you missed the most important piece of advice you could give consumers, which is to lock with a broker that works with a lender that offers a generous renegotiation policy (in my case that lender also happens to offer the best pricing).
Second, in the beginning you correctly note Treasuries are not directly linked to MBS, then later theorize that rising treasury rates will push mortgage rates higher. Are they linked or not? The reality is that 99% of the time they move in tandem. The government is now backing both MBS and Treasuries, so if anything is irrational it is the spread between the two. I look for it to narrow further with mortgage rates dropping and Treasury yields rising.
Third, one of the stated purposes for the government takeover was to get Fannie and Freddie back to doing what they are supposed to be doing, which is not enriching their management teams. One of the first tasks for the new management team is supposed to be a reduction of the guaranty fee. That should translate to lower mortgage rates. While they are at it maybe they will eliminate the LTV/FICO adjusters and adverse market fees too.
Bottomline, none of us knows what is going to happen, so the smartest course is to lock with a lender that will renegotiate your rate when we experience one of these rapid drops that occur with little advance notice.
Brian Brady
“Bottomline, none of us knows what is going to happen, so the smartest course is to lock with a lender that will renegotiate your rate when we experience one of these rapid drops that occur with little advance notice.”
Your explanation of our industry’s commitment to mediocrity is well noted, Sir.
Barry Dalton
Martin,
I do not have experience with dozens of wholesale lender’s secondary marketing policies. The few I deal with are reluctant to renegoiate on a “rapid drop” which may turn out to be more of a temporary event. They typically will want the cost to be shared and the loan to be delivered within 10 or 15 days of the re-price. Again - not having secondary marketing experience- I find it hard to understand how an investor would be willing- or could afford to renegotiate the entire pipeline with all their broker and correspondent relationships on a rapid dip in the market.
It sounds as if you have found an investor who offers the best price with a free float-down option as the market improves.
What if the rates are back to where they were prior to the rapid rate drop, prior to you having the loan ready to close/delivered, do they get to go back to the original rate lock commitment?
Just my observations - good luck and happy lending!
Martin Farris
Barry,
The renegotiation costs .375% with the lender I use, but better to tell your client their rate went from 6% to 5.5% on a dip to 5.375% then to tell them they are stuck at 6%. The lender I refer to does not require delivery within a certain period after the re-price, nor do they go back to the original rate lock if rates rise prior to closing.
Brian,
Commitment to mediocrity? I’m a Mortgage Broker not a psychic. My job is to focus on the things I can control, like the selection of a lender with a generous renegotiation policy, that add value to the service I provide, not BS them with market insights that are one press conference away from becoming irrelevant. If you had any idea what the markets are going to do you’d be playing the commodities markets, not brokering mortgages.
Brian Brady
Keep selling, Martin. Keep selling.
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