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.

There is good reason to seriously discuss rates right now as we have just surpassed the Ides of March and April is bearing down on us like a raging bear. No, it’s not that Easter ushers in higher rates but notice that I did say “bear” and not “bull”.  For the past year or so the Fed, sorry, THE Fed has been purchasing mortgage backed securities to the tune of 1.3 Trillion dollars in an effort to keep the credit markets afloat for mortgage loans until private buyers are willing to return to the market.  Well, the end of March also marks the end of the FOMC purchase party which will then mark the beginning of a new period of MBS bearishness.  You heard me right, these low rates we’ve had are the result of our government temporarily supporting the mortgage bond market and when they are through we WILL see a pull back on bond prices and because rates travel inverse of price we will see a spike in rates. There are two questions to be asked at this point:

1. How high will rates get?
2.  How long will they stay elevated? 

How high rates get will be determined by the attractiveness of the bond versus the equity market. Remember, bonds are considered a “safe haven” and the more risky equities appear, the more bonds benefit. My prediction is that we will see rates hit 6.5% to 7% by the end of this year and if the stock market continues to pick up steam we will likely see 8% by the end of 2011. I could be completely wrong as the Euro may crash sending the dollar through the roof which could help pull foreign dollars into the bond market and reduce rates again. Once rates are elevated they will stay elevated as long as the large institutional investors are willing to play equities over bonds for fear of a devaluation of the dollar.

If you don’t want to have to worry about what rates are going to do you need to have your rate locked before April 1st. Call us today @ 1-877-742-1500 or use our handy contact form below for a free rate quote customized for your situation.

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