Today is Wednesday May 27, 2009 and it marks the single biggest drop in the price of mortgage backed securities in over 10 years. Today we lost 206 basis points in the price of mortgage backed securities, however the bleeding actually began last Thursday when the markets began to slide, and since then we've lost over 360 basis points.
Ok, Ok let me not get too technical..
I realize you don't watch the bond market everyday like I do, so you may be wondering what is a basis point and what does it mean to me? Basically it refers to the price of mortgage backed securities as they are sold to investors on the free market. If the bond price drops, interest rates go up. Typically we'll see movement in the price of bonds within a 50 basis points window, so a 300 point slide in a few days is huge and it correlates to about a 1% interest rate increase. The movement in today's market was so rapid that lenders couldn't keep their rate sheets current. One of my lenders issued 9 different rate sheets today, while others just closed their lock desk.
- So what caused this madness?
- Didn't the Fed just announce in March that they were buying mortgage backed securities so as to keep rates low and help the housing markets?
- So why this sudden about face with interest rates and more importantly what will rates do as we go into the summer months?
Todays bond market collapse began last Thursday when Bill Gross of PIMCO (one of the biggest buyers of mortgage securities) questioned the AAA credit rating of the US. The Fed then announced that it would slow its program for purchasing mortgage backed securities so they can extend the money (1.25 Trillion) allotted well into 2010. These items along with the better than expected Consumer Confidence report that came out yesterday and a slightly better Existing Home Sales Report today, and the notion that inflation could be a problem if the economy turns north, sent investors to an extreme selling panic today.
Again let me simplify. If the US bond rating gets down-graded it means that the cost of raising funds for the US will go up. With a 1 Trillion dollar budget deficit and the inability to raise funds it calls our solvency into question. And when they keep printing money (as the Fed has been doing) they're staging a foundation for high inflation. No matter how you look at it this, it's bad news for mortgages and the only solution (according to the Fed) is to keep doing more of the same. So what do you say Ben? Do you want to double down?
I don't know where rates will be later this summer. I do believe that we'll see a retreat from today's bond market lows, but I also know that we will not see rates below 5% again. (at least not in the short run)
So if you were planning to refinance at the proverbial 4.5% that was announced earlier this year, I'm afraid you may have just missed the boat. You may have one more chance at getting a rate in the low 5's but its only a matter of time before rates move back up into a more normal range of 6-6.5%. Buying down your rate with points might be a good option to lock a lower rate, but that advice needs to be handled on a case by case basis.
If you're buying real estate or if you're planning to refinance you need to take action while you still can.
President, SCV Loan Solutions
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