Below is the benchmark used by us mortgage professionals to monitor mortgage bond movement.
(Provided courtesy of Mortgage Market Guide with their permission)
As you can see the price which started out up 22 basis points (1/100 of a percent) and is only up 3 basis points.
This blog is posted at 12:36 PST and based on this most lenders will probably issue a reprice for the worse of probably .125% to perhaps .25% in fee (or 1/8th to 1/4 of a discount point to the consumer in price). I suspect a reprice will come in 15-20 minutes ahead of this movement. However it will probably bounce back tomorrow so I am still advising a FLOAT position. If I am wrong, I will eat this on behalf of my clients.
Here is the news today for mortgage backed securities ahead of tomorrow's meeting:
- Mortgage Bonds are trading slightly higher this morning and are just above important resistance levels at the 50- and 100-Day Moving Averages. Stocks, however, are under some selling pressure on news that Germany's largest Bank, Deutsche Bank, reported its first quarterly loss in five years due to sub-prime related losses.
- Today kicks off the two-day Fed Meeting--with the monetary policy decision and statement being announced tomorrow. I agree with economists' expectations that the Fed will lower the Fed Funds Rate by .25%, making it an even 2.00%.
- As discussed with a great deal of my clients this week, the "language" in tomorrow's 11:15 PST FOMC meeting will tell the story for mortgage rates. A lot of brokers mistakenly tell their clients that when the FED cuts rates mortgage rates fall. NOT TRUE! When the FED cuts rates they are only controlling short term loans between member banks. The FED funds and the Discount rates controlled by the FED are only short term overnight loans between member banks.
- Mortgage rates are bonds and instead of being an overnight loan (obviously), mortgage bonds are typically 30 yr bonds.
- So if a mortgage is originated today at say 5.75% and the then tomorrow rates go to 6% due to say inflation talk in the news. The value of the mortgage bond that closed today at 5.75% is sold at a loss as the market is yielding 6%. In other words the bond price drops when mortgage rates rise and vice-versa.
- The enclosed candle stick chart shows this relationship as the Fannie Mae 5.50% bond {our current measuring stick for movement in mortgage rates} is dropping in price today. As the price (as shown by the candlestick) drops, mortgage rates rise.
- So... when the FED cuts short term rates to stimulate buying by consumers, if the sentiment is that the rate cut will stimulate too much borrowering or buying, thus becoming inflationary, the value of the mortgage bond will drop as rates rise on the market opinion that the rate cuts are going to create inflation down the road.
- This is a confusing thing for most consumers to grapple with. The media is also confused to boot. Just keep in mind that a mortgage is a bond and nothing kills the value of a fixed security like rising rates due to inflation.
For now, I recommend floating, but I will be watching the market closely and will let you know if the situation changes.
If the FED suggests it is done cutting rates tomorrow, you will see a mortgage bond rally with lower mortgage rates. Keep in mind that the media will report this event (if it happens this way) that the FED cut rates by .25% and mortgage rates declined. But . . . .You will know the real reason.
I hope this blog is viewed as useful to you and your business.
For more info...simply give me a shout
Mike 
Yes I love what I do
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