February 19th, 2010 9:36 AM by Richard T. Cirelli
Why Did Mortgage Rates Rise this Week?
I can't help writing about rates again this week. The anticipated rise in mortgage rates may have begun. Only time will tell whether it's a trend or an aberration but rates shot up by .125% - .25% over the past two days. I've been saying for months that mortgage rates have to rise as we near the expiration of the Government's Mortgage-Backed Security Purchase Program. But, that's not all that drove rates this week.
Here's a list of the contributing factors:
· The Fed's surprise announcement today to raise the Discount Rate - the rate they charge banks. This announcement actually came after the markets closed but it must have leaked out earlier to professional traders because the MBS markets did nothing but get worse as the day went on.
· Hotter than expected inflation news - The Producer Price Index (PPI) for January was released this morning. This report measures the cost of goods at the wholesale level. Tomorrow the CPI is released. This reports measures inflation at the retail level. If it's higher than expected, expect the Bond and equity markets to be worse tomorrow. Inflation is the arch-enemy of interest rates.
· Record amounts announced for next week's Treasury auction and lower foreign demand for U.S Treasury's during the past week. China and other country's were less willing to buy our debt. To entice them back into buying, we must offer higher rates. If Treasury rates rise, mortgage rates must rise too in order to compensate or the higher risk associated with MBS's vs. the "safer" investment in Treasury's.
· Stabilizing Stock Market. As the stock market rises it pulls money out of bonds and into stocks. As money flows out of bonds, including MBS's, it drives the price down and rates up.
· In the Minutes just released of the Fed's January meeting, some of the Fed Governors argued to change the Fed policy statement to suggest that they should to begin raising rates modestly. They didn't agree to do that which makes today's surprise announcement even more surprising.
· In their last meeting, some Fed Governors said that the Fed should begin to sell off their stockpile of Mortgage Backed Securities as the recovery gains strength. With the Fed buying program ending, and the Fed now potentially turning into a seller of MBS's.Bond prices will very likely come under more pressure.
It's not important that readers understand these points. But, what is important is to recognize how quickly the markets can and will turn on news - good or bad. And that is why it is so important to deal with a mortgage professional that understands the conditions that influence rates, watches how the markets react to the various stimuli, and acts to lock in his client's rates at the most advantageous time. We can't be perfect but we must do everything we can to provide the best terms possible to our clients.
I subscribe to four services that alert me to pending changes. As long as a client trusts me to work in their best interest I am almost always able to save them money. All lenders offer the same product at essentially the same rate. But that rate is continuously changing. And, as it changes, different lenders are faster or slower to adapt to those changes - creating an advantage or disadvantage between one lender and another. As a mortgage broker, I have choices and some lenders make better choices than others, particularly during volatile markets. A direct lender can't offer choices and therefore operates at a disadvantage. They offer their own rate and there's no flexibility to choose another.
Mortgage Rate Update:
Today was one of those days when most lenders re-priced for the worse 3 or 4 times during the day. I'm writing this at the end of the day and therefore the rates below are worse than they would have been first thing this morning. The release of tomorrow's CPI index for January will dictate the direction of tomorrow's rates. Let's hope it's a good report that suggests less inflationary pressure and contradicts today's PPI report. Please don't hesitate to contact me for an update.
BTW, Mortgage Rates are still very near historical 50-year lows. Don't get caught up in worrying about a .25% rise in rates. There are still lots of reasons to buy a house now while rates are low and home prices are low.