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November 2004
Index of all
past
Affiliate Corner columns
The mortgage rate roller coaster:
How to survive the ride.
By Ryan Urbach,
Legacy Funding
For the past couple of years, REALTORS®, mortgage professionals and buyer/borrowers have been taken a ride on a "mortgage rate roller coaster."
We saw a 30-year fixed rate as low as 5.375 percent with no origination or discount points in June of 2003, then saw it suddenly rise to 6.00 percent just one month later. Rates dropped back down to a 5.5 percent, 30-year fixed rate in April of 2004 and have been going up and down ever since. This has buyers and borrowers asking, "What is driving these rates? Is it when Greenspan speaks or when we go to war or WHAT?"
The answer to these questions is, "It depends which week you are talking about. Some cases have been Greenspan and the Federal Reserve's economic outlook and other weeks it depends on monthly economic reports and their results." All of these economic reports and Federal Reserve Board meetings have buyer/borrowers teetering, or as we say, "on the fence" about locking their rate. Poor economic reports may come out one week and rates decrease but the next week there could be strong economic reports and higher mortgage rates.
According to ratelink.com, "When a borrower's loan is floating, there is a 67 percent chance that the outcome will not be desirable."
The prudent person locks in when the numbers are acceptable to everyone involved in the transaction. There are three things that can happen following the lock: rates can fall, rates can stay the same, and rates can rise. If rates fall, everybody loses. If rates stay the same, everybody wins. If rates rise, everybody wins. Two of the three possible outcomes are positive.
Let's look at the same situation without locking. If rates fall, everybody wins. If rates rise, everybody loses. If rates stay the same, everybody loses because they wasted time, energy, sleep, and other valuable resources worrying about what interest rates were going to do.
Three pieces of the puzzle must be analyzed in order to make good float/ lock decisions.
- You must have access to mortgage backed security information.
- You must know what the mortgage backed securities have done since pricing was set.
- You must know what economic news or world events are coming out the following day that could cause the bond market to react.
www.ratelink.com
The first two pieces of the puzzle deal with monitoring mortgage-backed securities. Mortgage-backed securities are pools of mortgages that are bought and sold by major bond and security holders, which include big name corporations such as Chase and Citibank, and some private entities. To monitor mortgage-backed securities, one must have access to the secondary markets, which are typically offered by subscription. Those who don't want to buy a subscription may watch the 10-year bond yield for additional good information; although there is not a direct correlation between the 10-year bond and mortgage-backed securities, the 10-year bond is an excellent indicator of how rates are reacting during the day. For example, if the yield on the 10-year bond is falling, typically (but not always) mortgage rates will follow suit and decrease.
The third piece of the puzzle, economic news and world events, have a major impact on mortgage rates. Each week, monthly economic reports provide the previous month's strengths and/or weaknesses in the economy. Some of the more important economic reports are: Consumer Pricing Index, Consumer Confidence, Unemployment Report, Federal Reserve Board Beige Book, Home Sales and Home Building, and Payroll reports. The results of these reports, compared with top economists' predictions, can affect the direction of mortgage rates. If expert economists predict a factor for a certain report and the report comes in better or worse than the prediction, rates can adjust dramatically. Each of these reports is carefully watched by bondholders. A "worse than expected" report, meaning the economy has worsened by more than experts' predictions, will cause bondholders to purchase more bonds and mortgage-backed securities, thus driving the price of bonds up. As we all remember from Bonds Class 101, if a bond's price increases, the bond's yield (or rate) will decrease and mortgage rates will decrease.
These reports give a great indication of what rates are going to do in a given week. It is up to mortgage professionals to know when and what reports are due and what the expectations are. Knowledge of this information helps mortgage professionals provide more insight to REALTORS® and buyer/borrowers who are worried about when to lock in a rate...or, as we say, "Get off the fence."
This information is also important to keep REALTORS® updated as to what is going on in the market in relation to mortgage rates. Buyers tend to ask REALTORS® about mortgage rates and what rates have done lately. The more informed a REALTOR® is, the more credible he or she is in the eyes of their buyers. REALTORS® can also use this information to write more accurate contracts in regards to the rate. It can also be used to get those "on the fence" buyers out looking to purchase a home. The simple threat of increasing interest rates can create a sense of urgency for those buyers to start looking for a home.
How does one come across this wealth of information? Those who want to know the outcome and impact of a report can visit numerous financial market websites, such as www.bloomberg.com, and www.money.cnn.com. These websites offer information determined in certain reports, and show how that report is affecting the 10-year bond yield and therefore mortgage rates. Those who want to go a step further and know what reports are due out in a given week and when can subscribe to certain agencies that provide this service for a monthly or annual fee.
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