At the end of October, early November, Mortgage Bonds reached ridiculous highs which pushed rates to equally ridiculous lows. Let me explain a little on what price means to rate in the terms that you have and will continue to read here on this blog.
- First of all, price acts opposite of yield and yield is tied to offered rates. So as MBS (Mortgage Backed Securities) rise in price, mortgage rates offered to consumers drop.
- Second; there are various bonds offered at different note rates, 3.5, 4.0, 4.5, 5.0, and so forth. At any given time one coupon will be more efficient to track in terms of determining what interest rates will be offered. For example, I am currently tracking the 4.5% bond as that is the heaviest in terms of trade volume and consumer rates offered. 4.5% doesn't mean that is the rate available as the costs of doing business are baked into what rate the consumer sees, usually 1/2% above coupon is where the consumer rate will fall. Sometimes a little more, sometimes a little less.
So back to October/November situation.....the FNMA 4.5% hit a price of 105.75 (I was actually tracking the 3.5% at the time but I'm using the 4.5% example to compare to our current market.) Offered rates at that point in time were 4.25% for a 30 year fixed rate loan, no points. AMAZING......
As anyone who applied for a mortgage refinance or a purchase money mortgage anytime mid November on will tell you, that was no where close to the rate they were quoted. Many factors were involved but for the sake of brevity, the market got tilted to say the least. Bonds started a dramatic fall in prices as rates rose steeply, sometimes with 3, 4, and as many as 5 reprices over the course of just one day. When the selling starts at that sort of a pace, selling leads to more selling and a cycle is started that may or may not be "justified" and that's when we start looking for a correction back to some level of "normal behavior" for lack of a better way to put it. This is when I started to quote what rate was available and then immediately provide my opinion on where rates would go once a correction was set in motion. To my credit, I was correct and never locked any of the 5.375% rates that would have been on the table in mid December. My borrowers that trusted me on the option to float ended up locking in and closing in the 4.75% range.
Things leveled out for a little while and then around January 28th another cycle of sell offs hit and it hit hard, by 2/9/2011, the price on the FNMA 4.5% had reached 100.00 even. (575 bps down from the high of 105.75 seen just 3 months prior.) The offered rate based on 100.00 was again back to 5.25% on a 30 year fixed rate mortgage. So that, as it did last time, lead me to believe there would be some correction on the horizon and starting on 2/10 that correction began.
This past week, bonds were a little volatile but over all we finished the week fairly strong and picked up 100 bps from the low see on Wednesday of last week. As of yesterday, 4.875% was back in play with no points on a 30 year fixed rate mortgage. So lets quickly review where mortgage rates have been just in the last 3 months.
These rates are assuming the exact same borrower with the exact same loan amount on the exact same property. In other words, this takes into account any Loan Level Pricing Adjustments and makes it an even comparison. It's the best way I can "generically explain" the volatile state of mortgage lending as far as interest rates offered to the consumer is concerned.
11/4/10- 4.25%
12/16/10- 5.375%
1/10/11- 4.75%
2/9/11- 5.375%
2/18/11- 4.875%
Pretty amazing isn't it? In 1 month, rates increased by 1.125%, proceeded to drop .625% over the next 3 weeks, increased yet again by the same amount over the next 3 week time frame, and then drop by .5% in the last week and a half. What this should tell you is very simple even if you have no clue what I have been talking about up until this point.....If you are "shopping" for your mortgage, your line of questioning should not be "what are your rates today?" The conversation should be "What causes mortgage rates to increase/decrease? What is the next piece of economic news that will impact rates? Where do you see the interest rates being at some point between now and when I close on my loan?" The answers to those questions will tell you very plain and simply whether or not you are talking to a professional or if you are talking to the guy or gal that fills desk space and takes applications at your bank. We are talking about the biggest and most investment/asset that most people will ever own and therefore do you want to put that in the hands of the lowest bidder? I personally don't and anyone that is concerned with the long term financial security of themselves and their family wouldn't either.
I'm not insinuating that "rate is not important" because it most certainly is important. I'm just saying if you were to get a quote on November 4th of 2010 at 4.25% but "shopped it" and by the time you got back to the Loan Officer that gave you the quote a few days later, you were hearing 4.625%....so you go back to the phone....and then you hear 5%.....and you go back to the phones.....and you then get 5.375%......so now you're in total disbelief and if it's a purchase, you have a deadline and therefore you act on fear, lock in the rate only to hear rates have fallen a couple weeks after you close. Had you asked the right questions on day one, you would have jumped on board with the loan officer and saved TONS of money. It also means that to accurately shop on rate, you need to have a conference call with all lenders you are speaking to and get them to all at once quote rate....good luck with that!
My point, to close this up, is that I follow the market with an eagle eye and I study trends. I keep my ear to the ground in the financial markets and I make educated decisions on what my personal opinion is in reference to market direction and I propose different options to my borrower. We make a decision together to either lock or float and then we don't look back. This method has been more successful than you would ever imagine and it leaves me satisfied with the job I've done but more importantly it makes the process transparent for my borrower and they are part of the process on pricing and decision making which ultimately leaves them pleased beyond belief at the rate, term, and structure that they have on their new home loan.
It's the biggest reason why over 75% of my business is made up of repeat borrowers and borrower referrals. Come see the difference and you won't go back to the bank or the broker shop that you used before because you'll be part of my family of borrowers and my relationship with clients doesn't end at the closing table, that's when it truly begins.
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