17. October 2010 by admin.

Posted to: Mortgage Rate Watch
Friday, October 15, 2010 4:23 PM

Ok so record low mortgage rates stayed around for about a week. But they’re gone now.

Did you get it while the gettin was good?

Since last Friday, par loan pricing offered by lenders has worsened by nearly 1 point. 

1 point = 1% of your loan amount

If your loan amount is $200,000. 1 pt= $2,000. Consumer borrowing costs increased by about $1,000 for every $100,000 in loan amount this week.

I could go through all the economic data and attempt to tie a rational explanation to the bond market’s every move,  because data does matter, but I think we can break it down in a much more simple manner. I hope…

Plain and Simple: Energized, Exuberance, Over-Exuberance, Exhaustion, Uncertainty

Energized: Another Federal Reserve “Quantitative Easing” (QE) program

Exuberance: Think of “QE” as a strategy employed by the Federal Reserve to force the economy into a sustained recovery. This strategy might include large scale open market purchases of Treasury debt or MBS (Bernanke has indicated MBS purchases were possible). If that scenario played out, it would be very supportive of  mortgage rates touching 3.75% again.

Over-Exuberance:  Too many investors piled onto the same side of the bond market. When investors learned the Federal Reserve was seriously considering the idea of another QE program, they upped the ante by purchasing more government bonds, which pushed Treasury prices higher and higher and Treasury yields lower and lower. This is what led mortgage rates to new record lows last Friday.

Exhaustion: Mortgage rates touched new lows and bond prices touched local highs last Friday, but when the market came back from a long holiday weekend on Tuesday, investors wanted more details on the next QE program. Without further details, the bond rally stalled and the trading environment turned stale. We had three ugly Treasury auctions withthe ugliest of all on Thursday. That was the straw that broke the camels back. Lender repriced for worse late yesterday.

Uncertainy:  The Fed Chairman spoke today. He was the primary motivation of the bond market’s behavior. Investors needed to hear more details about the Fed’s preferred QE strategy, specifically the tools they would utilize and the timing of such a program, unfortunately nothing of the sort was offered by Bernanke. In fact, Ben made it seem like the Fed might not buy Treasuries and he gave a great deal of attention to “nonconventional policy approaches”, which raised several skeptical eye brows in the bond market.  That sentiment combined with the “pain trade” (see over-exuberance comments above) pushed benchmark Treasury yields to levels not seen since late September, which consequently led mortgage-backed securities prices slowly lower. Lenders repriced for the worse this morning, and then again this afternoon.  Mortgage rates have moved off record lows.

And here we are…

Now do you see why last night I wondered if  maybe we’ve gotten too comfortable with record low mortgage rate quotes?

NOW WHAT?

The best par 30 year fixed mortgage rates remain in the 4.000% to 4.250% range for well-qualified consumers. 3.75% is gone, 3.875% is very hard to find, 4.00% is available but the points/buydown structure is not homeowner friendly, and 4.125% is really where it’s at for a perfect borrower.  3.75% was on the board last Friday. Did you get it while the gettin was good?

Mortgage Rate Disclaimer:  Loan originators will only be able to offer these rates to borrowers who have perfect credit profiles and enough equity in their home to qualify for a refinance. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the “perfect borrower” category, make sure you ask your loan originator for an explanation of the characteristics that make your loan a riskier investment. (investment properties and second homes are a riskier investment )

If you’re riding the float boat and starting to get a little sea sick, I don’t feel now is the time to jump overboard. The Fed is planning another QE program and they’ve made it clear they intend to keep monetary policy extremely accommodative. The environment might get a little choppy over the next two weeks, but in the end I believe the Fed will announce a program that will be supportive of record low mortgage rates. 

November 3, 2010 will be the date….if the Fed is to keep their credibility.

PLAY THE RANGE UNTIL BERNANKE PLAYS YOU

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17. October 2010 by admin.

Posted to: The Garrett Watts Report
Friday, October 15, 2010 8:36 AM

I’m not a naysayer and just like everybody else I’ve been rejuvenated by the stellar year the industry is having. Most of our clients are making boatloads of money on refinances today,  but rates will eventually rise from these historic lows and mortgage bankers will once again become the proverbial  “deer in the headlights”.

We’ve all been down this road before but I think we need to remind ourselves what happened in the past so we’re prepared for a potential shift in business models. Let’s take a look at how the environment might shift….

If history repeats itself, the first thing to happen will be tighter primary/secondary loan pricing spreads. Lenders will deploy aggressive pricing to help maintain current production levels. Without thinking about margins and return on capital, some operators will reduce margins in order to maintain volume.  Rather than cutting expenses, most will accept a compromise on earnings.  The companies that started the ball moving will start dragging more and more players into this strategy.  Eventually, we will see margins decrease industry wide. 

Another bi-product of higher rates might be a modest comprise on loan quality.  You would think after what we all went through over the past three years that no one in the business would originate any less than stellar quality loans. However, in order to keep production rolling in, we might see a few players start approving and closing loans that are a bit outside the lines.  Again, after one major player starts this tactic, more players might follow just to keep production rolling in.  

The problem with both of these strategies is that aggressive pricing and underwriting is not going to help.  Rates will eventually rise and the overall market will still shrink.  We ask the CEOs of every company we review today the same question:  What is plan B?  What will you do if and when rates rise and volume drops by 50%?  What is your breakeven production number? 

Today more than ever, managers should be generating granular reports on branches, loan officer and employee performance to determine were the cuts can be made. Marginal branches and loan officers will not survive in a tough market.  Review employee productivity to help determine employees you need to keep when production declines.  Ditch the deadwood quickly when the market turns. 

Our industry is cyclical and we need to be reminded of the need for a “Plan B” quite often.  When things are really good, chances are they will turn ugly sooner than you think. Don’t get complacent, be prepared and have a plan when rates turn higher.

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