Mortgage Rates Slightly Higher Despite Bond Market Improvements

After setting new record lows yesterday, Mortgages Rates
rose slightly today, though 3.875% best-execution remains intact.  Rather than affect the prevailing rates being quoted, today’s weakness is most likely to be seen in the form of slightly higher borrowing/closing costs for the same rates quoted yesterday (learn more about how we calculate Best-Execution in THIS POST).  The increases run counter to today’s market movements as well.  

Treasury yields are lower again today, and MBS (the “mortgage-backed-securities” that most directly govern interest rates) are slightly improved as well.  One reason that loan pricing hasn’t adjusted to match that fact is that MBS weakened late in the trading session yesterday.  Not all lenders priced that in by issuing adjusted rate sheets, instead reflecting the changes in this morning’s rates.  The MBS market was indeed weaker this morning, so if we’re comparing the time of day that most lenders put out their first rate sheets, today was indeed worse than yesterday.  Beyond that objective explanation, we also have to consider the fact that continued rate improvements from all-time lows are going to continue to be slow and hard-fought.  Lenders have little incentive to offer lower rates if current offerings are generating more-than-sufficient demand.  (read more on this topic in this previous post)

Finally, and although it’s not the only other potential factor, this Friday’s Employment Situation Report (aka “jobs report,” or “NFP”) represents a high-risk situation, ESPECIALLY with mortgage rates at or near all-time lows.  NFP, which stands for the the reports chief component “Non-Farm-Payrolls” is generally regarded as the single most important piece of economic data each month.  Even against the current backdrop of European headlines exerting more and more influence on domestic markets, it’s immensely important.  Based on where markets sit right now, we think that rates are somewhat vulnerable if the report is better-than expected.  In other words, there’s a certain natural level of “push-back” at current rate levels anyway, and a bullish jobs report would probably accelerate that. 

This, of course, is contingent on the report coming in with better-than-expected results.  If the opposite happens, rates could still improve.  It’s just that those improvements would likely be slower and smaller than the losses would be in the opposite scenario.  It’s also very much contingent on rates not moving much between now and Thursday afternoon, which may or may not be the case.

Today’s BEST-EXECUTION Rates

  • 30YR FIXED –  3.875% mostly, with a few lenders on either side of this
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.25%, some lenders venturing lower, some completely stuck at 3.25%
  • 5 YEAR ARMS –  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • There are technical reasons for that as well as fundamental reasons
  • Lenders tend to get busier when rates are in this “high 3’s” level
    and can throttle their inbound volume by raising rates or costs.
  • While we don’t necessarily think rates are destined to go higher,
    given the above facts, there seems to be more risk than reward regarding
    floating
  • But that will always be the case when rates
    operating near historic lows
  • (As always, please keep in mind
    that our talk of Best-Execution always pertains to a completely ideal
    scenario.  There can be all sorts of reasons that your quoted rate would
    not be the same as our average rates, and in those cases, assuming you’re following along on
    a day to day basis, simply use the Best-Ex levels we quote as a
    baseline to track potential movement in your quoted rate).

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Mortgage Rates Hit New All-Time Lows!

It’s happened before and it happened again today: Mortgages Rates
hit new all time lows today.  Please note, that the actual interest rate you would have been quoted last week and this week may not have changed, but based on raw data from more than 20 leading lenders as well as feedback from the MBS Live community, the average Best-Execution rate, before rounding to the nearest eighth, hit its lowest level on record, 3.81%.  Although 3.81% is closer to 3.75% than 3.875%, we won’t declare 3.75% to be the Best-Execution champ until the average from our lender survey falls to 3.75 or lower, and we’re not there yet.  (if the last paragraph is confusing, we went into some more detail on these methodologies in THIS POST).

 

Last week, we noted a high degree of stratification in rates as lenders responded to the bond market rally at different
paces.  This continues to be the case today, but perhaps to a slightly smaller extent.  When we say that rate offerings are more stratified, we’re
talking about various lenders offering increasingly different rates to
the same type of borrowers.  Among some lenders in our survey,
best-execution rates are still at 4.0%, while the bulk have moved down
to 3.875% and 3.75%.  The important point here is to not believe everything you read about mortgage rates these days, unless the source examines multiple lenders and offers the caveat that they can only report averages while individual experiences may vary. 

For instance, several lenders are priced WORSE today than Friday.  It’s far more important to be working with someone you trust in a process that is more likely to hit its deadlines than to go overboard in pursuing the lowest possible quotes.  In the current market, overfocus on lowest possible rates can lead to delays which can result in a higher rate than the one from which you were originally trying to avoid!

Today’s BEST-EXECUTION Rates

  • 30YR FIXED –  3.875% mostly, with a few lenders at 3.75%.  Less 4.0’s today
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.25%, some lenders venturing lower, some completely stuck at 3.25%
  • 5 YEAR ARMS –  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • There are technical reasons for that as well as fundamental reasons
  • Lenders tend to get busier when rates are in this “high 3’s” level
    and can throttle their inbound volume by raising rates or costs.
  • While we don’t necessarily think rates are destined to go higher,
    given the above facts, there seems to be more risk than reward regarding
    floating
  • But that will always be the case when rates
    operating near historic lows
  • (As always, please keep in mind
    that our talk of Best-Execution always pertains to a completely ideal
    scenario.  There can be all sorts of reasons that your quoted rate would
    not be the same as our average rates, and in those cases, assuming you’re following along on
    a day to day basis, simply use the Best-Ex levels we quote as a
    baseline to track potential movement in your quoted rate).

…(read more)

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Correspondent Investors: News, Volumes and Rumors; Government Turns Focus to HEMP

Sorry, did
I hit the incorrect letter? The Administration announced important enhancements
to the Making Home Affordable Program, including the Home Affordable Modification Program (HAMP) late last week. The
expanded program is expected to be available by May, but we should keep a few
things in mind. First, this is not the mortgage refinancing program that
President Obama mentioned in the SOTU speech (that referred to helping current
borrowers refinance into a lower rate). The HAMP update is a focus on debt
forgiveness modifications, and arguably impacts investors more than originators
and Realtors – the implications for
agency MBS investors seem limited but are very meaningful for non-agency
investors
. (Removing the 31% DTI constraint for HAMP eligible borrowers
could embrace about 800,000 potential borrowers, and the program will be
extended through 2013.)

Analysts suggest that the effect on
agency MBS prepayment speeds should be minimal
, since the vast majority of debt
forgiveness will be on delinquent loans, which are typically already bought out
of the agency MBS trust (if they are more than 120 days delinquent). The only
effect could be if underwater borrowers in agency MBS pools start going
delinquent on purpose to qualify for debt forgiveness, speeds will obviously
rise – hopefully unlikely. And only pools of loans originated before 2009
qualify for this program. FHFA Acting Director Edward DeMarco released a press
statement stating that “principal forgiveness did not provide benefits
that were greater than principal forbearance as a loss mitigation tool”.
Further, the press release noted that “FHFA’s assessment of the investor
incentives now being offered will follow its previous analysis, including
consideration of the eligible universe, operational costs to implement such
changes, and potential borrower incentive effects.” This suggests that
Fannie Mae and Freddie Mac may not adopt this program. The incentive to
investors for principal reduction in HAMP has been tripled (the range of 6-18
cent payout on debt reduction goes up to 18-63 cents) – a significant change
for various reasons and should result in higher modification rates. It is
important to note that the incentives for servicers are not any different now
than before (servicer strip dependence on the balance).

The President’s State of the Union address
suggested a new government effort to refinance borrowers but at this point most
expect it will be aimed at non-agency loans
, but more details should emerge in the near term. Total
borrower savings from such a refi effort would be at most $5-6 billion per year,
but in reality would be a small fraction of that amount. The program may
involve non-agencies refinancing into FHA loans and so expect the impact on the
agency MBS market to be modest, however. Total throughput of the program should
be low, given the challenges witnessed in agency HARP, lack of servicer
incentives, and rep/warrant hurdles. Recently a speech by HUD Secretary Donovan
sparked fears of a Ginnie refi program and while this program is likely
targeted at non-agencies investors continue to fear event risk in Ginnies,
possibly via a restructuring of MIPs at some point.

And while
we’re talking about residential MBS’s, agency (Fannie, Ginnie, Freddie) MBS prices have had a great run since
mid-December compared to Treasury prices
. Some now expect agency MBS
spreads to remain tight so long as the 10-year Treasury stays at current
levels.  Should the 10-year yield hit 2.5%, however, they would see those
spreads widen significantly. These projections are due in part to the Fed’s
announcement that they will likely keep short-term rates low until late 2014,
which both creates an ideal scenario for banks to buy up agency MBS and for
implied volatilities to decline, and to the fact that the Treasury has been
selling about $10 billion agency MBS monthly but that this should be drawing to
a close, leaving only $15 billion.  Additionally, the MBS sector is
attractively priced
compared to investment grade corporate bonds right now, so
the long-term “supply-demand technical” look good. In the event that the
10-year yield reached 2.5%, though, spreads would widen, a prediction assuming
that a selloff is caused by improving fundamentals of the economy, which
reduces the probability that the Fed’s QE3 involving agency MBS would diminish
significantly in a rates backup scenario.  Such a shift in rates would
also indicate that volatility had increased, which would likely lead to a
sudden increase in agency MBS, which of course skews that nice supply-demand
projection. There’s your dose of daily technical talk.

There is a lot of chatter about
investors out there, some of it factual, some of it rumored
. The most recent big move was from
Citibank, which, due to liquidity and market risk concerns, became the latest
major bank to stop the purchase of “medium” and “high risk” mortgage loans from
its correspondent originators. No one wants buyback requests appearing in their
mailbox, and Citi is no exception. And we know that these, if they can’t be
fought, are passed on to the company that sold the loan to the investor. So Citi is attempting to improve the quality
of the mortgages it buys
, a good thing, and told correspondent lenders
“to withdraw medium/high risk loans,” saying the bank could not
predict time frames for when the loans would be reviewed “if we are able
to review them at all.” Perhaps Citi’s pre-purchase review process (begun
in 2010) is still letting some potentially defective loans slip through.

While this
is a good goal, and should be done, for correspondent
clients it is more tough news since it comes on the heels of Bank of America
and MetLife’s exit from correspondent lending. Ally/GMAC has scaled back. And
rumors surfaced last week, and I repeat – rumors, that SunTrust will be
combining its wholesale and correspondent channels, and that PHH is also
contemplating scaling back operations.
(Of course wholesale reps love
calling on larger correspondent clients, but it doesn’t work the other way –
correspondent reps rarely want the opportunity to call on brokers. Certainly
the rep and warrants are different.) On the positive side, we have Wells Fargo being featured on the
Forbes cover
and recent results from Flagstar
showing that mortgage banking operations had strong revenues in the fourth
quarter. (Flagstar’s gain on loan sale income increased from Q3 totals to
$106.9 million, with a margin of 102 basis points. The firm reported
residential first mortgage loan originations of $10.2 billion in Q4, an
increase of $3.3 billion, or 47.1 percent, from third quarter totals.)

We’re
pretty much done with much of the earnings reports from the big
banks/servicers. Things don’t look too peachy as most took charges for
repurchasing soured loans, complying with federal mortgage servicing standards,
paying for an upcoming settlement with state attorneys general and resolving
significant foreclosure and litigation costs. Wells Fargo posted the strongest
fourth-quarter mortgage results but still had $300 million in costs related to
mortgage servicing and foreclosures. U.S.
Bancorp and PNC Financial Services both took charges in the quarter related to
the pending settlement agreement
with state attorneys general and to the
cost of complying with federal consent orders for past mortgage servicing
failures ($164 million and $240 million, respectively). Most lenders would
agree that mortgage banking profits are up and origination volume increased in
the fourth quarter, things are slower than a year ago. BofA’s mortgage origination volume dropped 77% from a year ago and
Wells saw a 6.2% decline from a year earlier in fourth-quarter mortgage
originations (to $120 billion). Chase’s mortgage origination volume dropped 24%
from a year earlier, and Citigroup’s fell 3%.
One investment bank noted,
“Solid organic loan growth is very difficult to achieve when consumers and
corporations are deleveraging (cutting back on debt in their lives) and
economic growth is moderate.”

MGIC (which injected $200 million into a subsidiary last
month to keep writing policies) announced that it posted its sixth straight
quarterly loss. MGIC said its risk-to-capital ratio will probably exceed the
maximum 25-to-1 allowed by some state regulators in the second half of this
year. The ratio was 20.3-to-1 on Dec. 31 compared with 22.2-to-1 on Sept. 30.

Friday saw our share of bank closures. In Florida First Guaranty Bank and
Trust Company of Jacksonville was enveloped by CenterState Bank of Florida, with
the help of the FDIC. Up in Tennessee, Tennessee Commerce Bank became part of
Kentucky’s Republic Bank & Trust Company and BankEast in Knoxville is now
part of U.S. Bank National Association of Ohio. And up in Minnesota Patriot
Bank Minnesota is now part of First Resource Bank of Savage, Minnesota.

Friday
also had news that the U.S. economy expanded less than forecast in the fourth
quarter as consumers curbed spending and government agencies cut back,
validating the Federal Reserve’s decision to keep interest rates low for a
longer period. GDP disappointed analysts. Remember – jobs and housing, housing
and jobs. “We’re going into 2012 with less momentum than people were thinking,”
said Michael Hanson, a senior U.S. economist at Bank of America. This week’s
Fed announcement that they would hold rates near zero for years was a stunning
admission that monetary policy has failed to stimulate the economy to anywhere
near the extent anticipated. And fiscal policy has had the same impact. So what
does the government have up its sleeve? Not much.

If that’s
the case, then we’re in for a weak 1st quarter here in the United
States, and we’re going to have to face the prospect that European debt needs
to be written off. At this point it is arguable how much of Europe’s coming
recession spills into the United States, but it will indeed have an impact.
And, more often than not, a slowing U.S.
economy leads to lower rates
(since there is less demand for capital) – unfortunately
for LO’s the lower rates have to be balanced against the higher fees,
documentation hurdles, and appraisal problems.

Our 10-yr
T-note closed Friday with a yield of 1.90%. One headline I saw this morning
noted that, “US stocks are poised to open lower Monday after the weekend came
and went without Greek leaders reaching an agreement on a debt-relief deal.” Is
that a surprise to anyone? In this country this morning we’ve already had Personal
Income +.5%, Personal Consumption was unchanged, the savings rate went to 4%,
and the Core PCE Price Index was +.2%. For the remainder of the week, the big
excitement will be Friday’s employment data. But rates continue to drop, and we find the 10-yr down to 1.83% and MBS
prices
are about .250 better.

An old man walks into the barbershop for a shave and a haircut, but he tells
the barber he can’t get all his whiskers off because his cheeks are wrinkled
from age.
The barber gets a little wooden ball from a cup on the shelf and tells him to
put it inside his cheek to spread out the skin.
When he’s finished, the old man tells the barber that was the cleanest shave
he’s had in years. But he wanted to know what would have happened if he had
swallowed that little ball.
The barber replied: “You’d just bring it back tomorrow like everyone else
does”.

If you’re
interested, visit my twice-a-month blog at the STRATMOR Group web site located
at www.stratmorgroup.com. The current blog discusses
residential lending and mortgage programs around the world. If you have both
the time and inclination, make a comment on what I have written, or on
other comments so that folks can learn what’s going on out there from the other
readers.

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AG Holder Announces Structure of MBS Fraud Unit

The formation of the Residential
Mortgage-Backed Securities Working Group
tasked with investigating mortgage
fraud is now official.  The new office,
which will be part of the Administrations Financial Fraud Enforcement Task
Force (FFETF) was first announced by President Obama in his State of the Union
speech on Tuesday.

At a press conference this morning (video below), Attorney General Eric Holder along with
Housing and Urban Development (HUD) Secretary Shaun Donovan, Securities and
Exchange Commission (SEC) Director of Enforcement Robert Khuzami and New York
Attorney General Eric T. Schneiderman, Holder outlined the mechanics of the working
group which will bring together the Department of Justice (DOJ), several state
attorneys general and other federal entities to investigate those responsible
for misconduct contributing to the financial crisis through the pooling and
sale of residential mortgage-backed securities. 
The group will consist of at least 55 DOJ attorneys, analysts, agents,
and investigators from around the country including the 15 civil and criminal
attorneys and 10 FBI agents already employed in the FFETF unit.  This team will join existing state and federal
resources investigating similar misconduct under those authorities.

Holder said that the goal of the group will be to hold accountable any
institutions that violated the law; to compensate victims and help provide
relief for homeowners struggling from the collapse of the housing market,
caused in part by this wrongdoing and to help turn the page “on this
destructive period in our nation’s history.”

Holder confirmed the principal staff that we identified here earlier this
week:  Schneiderman will chair the group
with co-chairs Khuzami, Lanny Breuer, Assistant Attorney General, Criminal Division,
DOJ; John Walsh, U.S. Attorney, District of Colorado; and Tony West, Assistant
Attorney General, Civil Division, DOJ. 
Schneiderman will lead the effort from the state level and will be
joined by other state attorneys general.

Schneiderman said, “In coordination with our federal partners, our office
will continue its steadfast commitment to holding those responsible for the
mortgage crisis accountable, providing meaningful relief for homeowners
commensurate with the scale of the misconduct, and getting our economy moving
again.  The American people deserve a thorough investigation into the
global financial meltdown to ensure nothing like it ever happens again, and
today’s announcement is a major step in the right direction.”

The new office has been the target of criticism from Wall Street since the
President’s announcement such as that from JP Morgan Chase CEO Jamie Dimon who said
the working group would “derail” the proposed settlement between the states and
major banks, and Jaret Seiberg,
Senior Vice President of the Washington Research Group who told CNBC that the
sole purpose of the group is to bring criminal charges against bankers.

Press Conference Video

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Mortgage Rates Sideways Ahead of Wednesdays Important Events

Mortgages Rates are steady to slightly improved today after rising for the first time in a month yesterday.  Although rates change slightly every day, those changes are usually small enough as to only effect the closing costs associated with a particular rate.  Because of this, we track “Best-Execution” as the actual interest rate benchmark, and we talked about it in significant detail yesterday (READ MORE).  So although we are able to report that the rate environment is slightly improved today, those improvements have been mostly relegated to minor decreases in borrowing costs for what will likely be the same rate you would have been quoted yesterday. 

Underlying markets have been fairly equivocal for the past two days with a majority of the damage to mortgage rates having occurred with last week’s market movements that lenders more fully priced into rate sheets yesterday.  Stocks, Bonds, and MBS (the “mortgage-backed-securities” that most directly influence mortgage rates) are all very close to where they were last night, seemingly in preparation and anticipation of several important events tomorrow. These include the FOMC Statement (Fed “rate decision,” although it’s the text of the announcement that is important as no change is expected to the discount rate), the first-ever release of FOMC members forecasts, a post-announcement press conference from Ben Bernanke, as well as the 5yr Treasury Note auction. 

Tomorrow’s events, taken in conjunction with tonight’s State of The Union address presents quite a bit for mortgage markets to digest.  The speech tonight may contain mention of new housing-related initiatives (some have suggested), and similar suggestions have been made about tomorrow’s FOMC Announcement (which would be a MUCH bigger deal as far as influencing mortgage markets).  Conversely, it’s possible that some recent levity for MBS vs Treasuries is due to the EXPECTATION that the Fed will add some extra MBS-Specific quantitative easing in the near future, meaning that rates could face some added pressure if MBS are NOT specifically mentioned, although that’s not likely to cause sufficient movement tomorrow for Best-Execution to rise.  Whatever happens tomorrow, it’s a high-risk set of events that could push rates higher OR lower, but we’ll hopefully come away from it with a clearer sense of whether or not rates will make it back down to a 3.875% Best-Execution any time soon.

Today’s BEST-EXECUTION Rates

  • 30YR FIXED –  4.0%, 3.875% still a contender
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.375%
  • 5 YEAR ARMS –  2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

  • Rates and costs continue to operate near all time best levels
  • Current levels have experienced increasing resistance in improving much from here
  • There are technical reasons for that as well as fundamental reasons
  • Lenders tend to get busier when rates are in this “high 3’s” level
    and can throttle their inbound volume by raising rates or costs.
  • While we don’t necessarily think rates are destined to go higher,
    given the above facts, there seems to be more risk than reward regarding
    floating
  • But that will always be the case when rates
    operating near historic lows

…(read more)

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