Today was not only light on the type of economic data that can move markets, but also on the breaking news headlines that have been dictating the direction of mortgage rates recently.  Trading activity was low, as were overall price shifts in the Secondary Mortgage Market.  Still,  mortgage-backed securities prices were slightly lower on the day, resulting in slightly higher consumer borrowing costs.

CURRENT MARKET: The "Best Execution" conventional 30-year fixed mortgage rate is 4.875% after falling to 4.75% briefly last Wednesday (not universally, but in some cases).  For those looking to permanently buy down their rate to 4.75%, this quote carries higher closing costs but given the recent availability of 4.75% as a Best Execution rate, these costs may be lower than they previously were.  Still, the upfront cost of permanently buying down your rate  to 4.75% is not worth it to every applicant, we would generally only advise the permanent floatdown if you plan to keep your new mortgage outstanding for longer than the next 10 years.  Ask your loan officer to run a breakeven analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is back to 4.75%. 15 year fixed conventional loans are best priced at 4.125%. Five year ARMS are best priced at 3.50%, but there is much more stratification in this sector with higher or lower rates making equally as much sense depending on the lender and on the amount of time you intend to keep the loan.

CURRENT GUIDANCE: In the absence of major headline news, the risky technical developments we mentioned yesterday prevented the bond market from making  positive progress today. No change to our recent stance that favors locking for short term/sensitive outlooks and allows for longer term/less urgent outlooks to wait for an additional recovery in mortgage rates. Tomorrow should be a busier session as it contains more economic data. READ MORE: Event Exhaustion Leaves Bond Market Waiting for Guidance

Edward J. DeMarco, speaking to the 12 Annual Risk Management Convention, said, however, that the characteristics of the government's role in housing and the reform framework that is eventually put in place will define the degree of certainty market participants have regarding their own risk exposure in housing finance.

"The credit policies and guarantees put in place during the GSE reform process will ultimately dictate private investor demand for mortgage-backed securities", says MND's Managing Editor Adam Quinones. "That in turn will determine the level of mortgage rates relative to benchmark yields."

Despite their conservatorship status, DeMarco said, the government sponsored enterprises (GSEs) Freddie Mac and Fannie May remain at the center of the country's housing finance system, but that will have to change.  The longer the future structure of the system remains uncertain, the more the operational risks of conservatorship will continue to emerge.   Improving and simplifying the operations of the GSEs is part of FHFA's duty to preserve and conserve assets and is consistent with the notion of their "wind down," but the ultimate transformation of the GSEs and their market functions will largely depend on actions of Congress and the Administration.  This leaves FHFA with the responsibilities of conservatorship while the long term course is determined. 

Edward J. DeMarco, speaking to the 12 Annual Risk Management Convention, said, however, that the characteristics of the government's role in housing and the reform framework that is eventually put in place will define the degree of certainty market participants have regarding their own risk exposure in housing finance.

"The credit policies and guarantees put in place during the GSE reform process will ultimately dictate private investor demand for mortgage-backed securities", says MND's Managing Editor Adam Quinones. "That in turn will determine the level of mortgage rates relative to benchmark yields."

Despite their conservatorship status, DeMarco said, the government sponsored enterprises (GSEs) Freddie Mac and Fannie May remain at the center of the country's housing finance system, but that will have to change.  The longer the future structure of the system remains uncertain, the more the operational risks of conservatorship will continue to emerge.   Improving and simplifying the operations of the GSEs is part of FHFA's duty to preserve and conserve assets and is consistent with the notion of their "wind down," but the ultimate transformation of the GSEs and their market functions will largely depend on actions of Congress and the Administration.  This leaves FHFA with the responsibilities of conservatorship while the long term course is determined. 

The session started with lenders offering improved loan pricing vs. yesterday's quotes, but as the day wore on mortgage-backed securities prices slowly slipped lower and lower. This forced many lenders to reprice for the worse. The damage was minimal though. For the most part closing costs barely budged. The Best Execution 30-year fixed was unchanged.

CURRENT MARKET: The "Best Execution" conventional 30 year fixed mortgage rate is 4.875%.  For those looking to buy down their rate to 4.75%, this quote carries higher closing costs. The upfront cost of permanently buying down your rate  to 4.75% is not worth it to many applicants. We would generally only advise the permanent floatdown if you plan to hold your new mortgage for longer than the next 10 years.  Ask your loan officer to run a breakeven analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is still 4.75%. 15 year fixed conventional loans are best priced between 4.125% and 4.25%, but 4.25% is more efficient in terms of the floatdown breakeven cost. Five year ARMS are best priced at 3.625%.

NEW GUIDANCE:  It turns out we were right to be nervous about the market's true directional bias because yet again today we were unable to confirm  an extension of the recent mortgage rates rally. The modest amount of positive progress we made yesterday afternoon was essentially erased today.  And day trader strategies continue to distort the true bias of bond investors.....keeping us in a defensive state of mind. Remember: 4.875% is as good as it's gonna get unless you have the cash on hand to permanently buydown your mortgage rate to 4.75...which is currently very expensive to do! SEE CURRENT MARKET ABOVE...

A "flight to safety" happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate their money into risk-free government guaranteed U.S Treasury debt to provide a safe-haven AND an investment return. As benchmark Treasury yields fall on "flight to safety" buyer demand, prices of mortgage-backed securities move higher in unison. This allows lenders to reprice their rate sheets for the better and gives originators an opportunity to offer fence-sitting borrowers lower mortgage rates or more competitive closing costs.

Conflict in Libya and the potential for a spillover into other oil producing countries has energy traders nervous about shrinking oil inventories. The chance for a supply/demand driven spike in energy prices is seen as a threat to the already sensitive U.S. economic recovery.  Many economists believe rising energy costs would squeeze disposable income on Main Street and hurt consumer spending, which would slow the economic recovery.  This "headline risk" pushed stock prices lower and moved money into safe haven assets like U.S. Treasuries and mortgage-backed securities. This ultimately led the Best Execution 30 year fixed mortgage rate lower not one but two times this week.

NEW GUIDANCE:  No real change. The bond market is still in limbo in terms of an extension of the recent rally. Approach floating from a defensive posture, especially after Best Execution improved to 4.875% this week because it's going to take a sustained rally in the bond market before Best Execution reaches 4.75%. That means current market is likely as good as it gets at least for the next week. If you don't have more than a week to float your loan, you should be locking very soon. As you can see in the chart above, it's been almost a month since rates were this aggressive. And we wouldn't be surprised one bit to see the market push back against the recent mortgage rates rally. Profit taking is a naturally occuring event whenever interest rates move lower. READ MORE: IN-DEPTH BOND MARKET BREAKDOWN

A "flight to safety" happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate their money into risk-free government guaranteed U.S Treasury debt to provide a safe-haven AND an investment return. As benchmark Treasury yields fall on "flight to safety" buyer demand, prices of mortgage-backed securities move higher in unison. This allows lenders to reprice their rate sheets for the better and gives originators an opportunity to offer fence-sitting borrowers lower mortgage rates or more competitive closing costs.

Conflict in Libya and the potential for a spillover into other oil producing countries has energy traders nervous about shrinking oil inventories. The chance for a supply/demand driven spike in energy prices is seen as a threat to the already sensitive U.S. economic recovery.  Many economists believe rising energy costs would squeeze disposable income on Main Street and hurt consumer spending, which would slow the economic recovery.  This "headline risk" had led stock prices lower and pushed money into safe haven assets like U.S. Treasuries.

The flight to safety continued in the bond market today. Treasury yields fell and mortgage-backed security prices rose as a result. This allowed lenders to reprice for the better.  These loan pricing improvements were large enough to push the "Best Execution" 30-year fixed mortgage rate lower!

UPDATED CURRENT MARKET: The "Best Execution" conventional 30 year fixed mortgage rate has fallen to 4.875%.  For those looking to buy down their rate to 4.75%, this quote carries higher closing costs. The upfront cost of permanently buying down your rate  to 4.75% is not worth it to many applicants. We would generally advise the permanent floatdown if you plan to hold your new mortgage for longer than the next 10 years.  Ask your loan officer to run a breakeven analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is still 4.75%. 15 year fixed conventional loans are best priced between 4.125% and 4.25%, but 4.25% is more efficient in terms of the floatdown breakeven. Five year ARMS are best priced between at 3.625%.

PREVIOUS GUIDANCE:   The market is certainly THINKING about shifting back into a more rate-friendly stance, but that remains up-in-the-air to a certain extent. 

NEW GUIDANCE:  No new guidance.  The bond market is still in limbo in terms of an extension of the recent rally. Approach floating from a defensive posture, especially after Best Execution improved to 4.875% today because we think it's going to take a sustained rally in the bond market for Best Execution to improve to 4.75%.  Remember what happened in January? Remember the expensive buydowns between 4.875% and 4.75% No?.....LEARN MORE.....Mortgage Rates: 4.875% is Best Execution. 4.75% Buydown is Expensive