Rates Recap

Happy Thanksgiving. After a day off, Bond traders started slowly and then changed their mood, finishing the week with a late day rally in bond prices. Rates finished the week at the best level of the week, about 0.375% to 0.5% lower than we started on Monday. The Fed's decision to buy $500 Million of Mortgage Backed Securities on tuesday was the biggest catalyst to lower the rates.

Not so fast

Rates are holding most of yesterday's gains today with more dismal economic news.

History Repeat?

History Repeating Itself
Like everything else on Wall Street, mortgage markets are based on supply and demand. When demand outweighs supply, mortgage rates fall.
So, Tuesday, when the government unexpectedly announced a $500 billion budget for buying mortgage debt from Fannie Mae and Freddie Mac, the demand side of the mortgage market ballooned.
The surprise demand helped push mortgage rates to their lowest levels since January 22, 2008. 30-year fixed mortgage rates were down by as much as three-quarters of a percent Tuesday before retreating higher.
Not coincidentally, January 22, 2008, was the date of another unexpected government intervention -- a surprise 0.750 percent Fed Funds Rate cut that was meant to spur the economy forward.
Interventions like these are a big reason why predicting mortgage rates is tough business -- just when you discover the market's balance point, an outside force shifts that balance, creating tremendous amounts of uncertainty about the future.
Uncertainty on Wall Street is typically bad for mortgage rate shoppers because it leads to high levels of volatility. Look at the trading pattern from Market Open to Market Close yesterday:
8:30 AM ET: Markets open with rates falling on the news
10:00 AM ET : Rates fall more on momentum trading
12:00 PM ET : Rates level at their lowest levels of the day
2:00 PM ET : Rates rise as profit-taking begins
3:30 PM ET : Rates rise more on momentum trading
4:00 PM ET : Markets close with rates down by half
Again, not coincidentally, this is the exact trading pattern from January 22, 2008. On that day, rates were at their lowest about 3 hours into trading, and then consistently rose all the way into Market Close -- just like we saw Tuesday.
Unfortunately, in the 30 days that followed January 22, mortgage rates rose from a 3-year low to a 3-year high. And, it's not to say that the same thing will happen from now through December 25, but trading patterns have a tendency to repeat themselves over time.
Mortgage markets seek balance and when there's a dramatic shift, chaos can creates opportunity. Tuesday's $500 billion pledge added new demand and shocked the mortgage market system. Before long, it recovered to find balance.
As of today, mortgage rates are still hovering near their 3-year lows so if you haven't spoken to your loan officer about a refinance, consider calling today.

Looking ahead Nov 24th-26th

As the stock market retraced to its 1997 level, mortgage markets improved last week -- but not by much.

Mortgage rates closed out the week slightly lower, but the week wasn't without fireworks.

Calls of deflation grew louder
The automakers left Washington without a bailout
Citigroup's stock price fell to the equivalent of its ATM fee
Separately, each of these elements would have created confusion on Wall Street. Together, they created near chaos. Stocks traded at a pace last week that has never been equaled.

As a result, mortgage rates were volatile, too.

Over the 5-day workweek, multiple mortgage lenders issued 11 distinct rate sheets, meaning that consumer mortgage rates changed every 3 hours, 38 minutes on average last week.

This is why home buyers should rate shop quickly. Wait too long and the mortgage rate is gone. And this week doesn't figure to be any less volatile.

To start, it's a holiday-shortened week. Fewer traders will be working as the week moves forward, making the Price Discovery process more difficult. With fewer active buyers and sellers, wild price swings are likely and mortgage rates should feel the impact.

Next, markets will debate the Citigroup Bailout, wondering whether this will (finally) mark the market bottom. It's a conversation about which Wall Street never tires and with each bit of optimism, money should flow into stocks to the detriment of mortgage bonds and mortgage rates.

And lastly, there are 9 economic releases crammed into Monday, Tuesday, and Wednesday of this week, including two housing reports and an inflationary gauge behind which the Fed puts a lot of credence.

Signs of stabilization should buoy both stock markets and mortgage rates -- Wall Street is craving balance of some sort to carry it into the New Year.

There are no Fed speakers scheduled for this week so watch for data and market sentiment to lead the markets. For rate shoppers, this means more rate sheets.

(Image courtesy: The Wall Street Journal)

Things are still changing

There is still money to lend, but things are still changing with many lenders. Yesterday, Wells announced they were no longer going to approve second mortgages behind their interest only first mortgages. The previously announced that they were cancelling the 30 year fixed with the 10 Year Interest Only repayment feature.
Is this to protect consumers or themselves? The principal portion of your payment is used by the banks to lend out again, or today, to shore up their capital base. Interest only loans give the borrower the choice to pay principal or use that money elsewhere. Today, the banks are more interested in shoring up their capital bases than in the financial flexibility of the borrowers.