What do Interest Rates and Birds have in Common?

Rates are headed up

Well for starters, I can tell you what they don’t have in common. Birds are not at  the  whim of the economy necessarily while rates don’t have feathers and wings.
Now for what they do have in common. 

Right now, birds of all kinds have started migrating from their winter havens and are heading back north to the fertile feeding grounds of their youth. Mortgage rates have also started their trek northward as the government feeding trough has been pulled away as of March 31st. Rates have been held artificially low over the past year and a half on a Treasury backed plan to purchase 1.3 Trillion in mortgage backed securities to ensure that the waning private demand in these debt instruments didn’t cause a catastrophic run on the bond market. With so many investors leary of any investing into the mortgage industry, the government felt forced to come to the rescue. Now the big question is this, will the private investors come back to the market and if they will, how much of a correction do they need to see before bonds hit a floor?

If I knew the answer to that question, I probably wouldn’t be a mortgage broker. Many of the large bond traders have vocalized that they feel bonds are too high right now. PIMCO, a massive bond buyer, recently announced that bonds were 50 bps overpriced (That was almost 150 bps ago). Since the 23rd of March we have witnessed a almost 200 bps slide with the FNMA 4.5% coupon which has fed the quarter point rate increase we’ve seen since that time. My bond quote service is telling us to be in full lock mode, leave nothing floating and lock as soon as possible. If you’ll remember I prognosticated on this subject when I talked about The Future of Interest Rates, and guess what, so far I’ve been right on the money.

Now for another prognostication that, if you’re a mortgage customer will have an impact on your loan process, or if you’re a loan officer will have an impact on your reputation and pocketbook. We’ve been spoiled the last two years with rates in a seemingly downward spiral and an endless amount of clients “riding the fence” waiting to lock at just the right interest rate. As a LO I’ve had the luxury of flipping a loan from one lender to the next if Lender A didn’t like the loan and receiving no penalty with regards to rate from Lender B. Extensions and relocks have been free for the majority of the past year as pricing seemed to always be a little better than when I locked the loan.  Boy are we in for a rude awakening. No more of that funny business anymore. Lenders will be savagely charging all they can for extensions and re-locks and if Lender A turns a loan down it won’t be any fun losing money to send the loan to Lender B at the same rate.

Here’s some more food for thought, there are many major lenders that have also been riding this gravy train and have not hedged their pipeline very well and are now needing to unload millions of dollars of loans without closing them. That may sound counterintuitive but it could cost them far more to close these loans than it would to turn them down. If you are a mortgage customer you need to be sure you are working with a high quality loan officer that knows how to put together a clean file. Ask your LO what his pull-through ratio is and the higher the percentage the greater. I don’t mean app to close pull through, I mean processing to close pull through. How many loans do they submit compared to what they close?  If you are a mortgage professional, I shouldn’t have to tell you that now is not the time to be sloppy. Be an i dotter and a t crosser, nitpicky is the newest fad and you better get good at it.

Lastly, for all you fence sitters that have been waiting to refinance. You better jump now if your ever going to do it. Look at the numbers and be prepared to make a decision now, not when rates get better, because they probably aren’t for a while.

Tags: FED, FOMC, Mortgage Backed Securities, Mortgage Rates, Rate Hike

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