Mortgage Rates Stay the Course, July 9, 2010

Journey on a switchback trail

 

The shortened holiday week saw big swings in the stock market and sharp changes in direction in

mortgage-backed securities (MBS) pricing. Consequently there were numerous changes in mortgage pricing throughout the week; but, when all was said and done, little actual change in rates.

 

For the past several months we have been witnessing what some market analysts call a “trader’s market”. Such a market exists when there is little consensus about the long term direction of the economy and traders make decisions to buy or sell certain investments (stocks, bonds, MBS) based on the latest economic report, news story or earnings report. This produces great volatility, which traders like, because they make money by trading, regardless of the direction.

 

This week was dominated by the stock market. Following last Friday’s major market losses many analysts projected a Tuesday recovery. The opposite occurred and MBS prices increased enabling two rounds of mortgage rate improvements. Wednesday brought two rounds of mortgage price increases after the stock market finally saw the anticipated rally. Thursday brought us slightly improved pricing and today we held yesterday’s results. Back and forth we went throughout the week to finish only slightly better than where we began

 

Differentiated pricing a reality in the near future?

 

For many years there has been discussion within the mortgage industry about a move to “differentiated pricing”. Simply put, each borrower would receive a custom mortgage rate based on their unique underwriting characteristics. Since the advent of Fannie Mae and Freddie Mac, the government-sponsored enterprises that enable most loans to be sold off by their originators, we have had what has been called “tiered-pricing” for mortgage loans. Essentially, these secondary market organizations have standardized underwriting guidelines into a few broad tiers better known to consumers as “A”, “A –“, and “sub-prime” loans. Loans meeting the A criteria received the best pricing, A – loans were priced higher and sub-prime loans still higher.

 

In this post “mortgage-meltdown” world in which underwriting guidelines have been scrutinized and tightened, and in which Fannie and Freddie may cease to exist (or at a minimum exist in a diminished capacity), will we finally see true differentiated pricing? The US Congress is expected to take up the issue after the congressional elections in November. Will new, public or private secondary market organizations be developed?  Will investors in MBS demand greater transparency regarding the quality of the loans that make up their investments? We will see. The potential impact on the mortgage industry and for consumers is dramatic.

 

Next week

 

Next week begins “earnings season” when companies report their financial results for the second quarter and issue guidance for the last half of 2010. Most analysts believe that earnings will be strong across the sectors of our economy as productivity gains and reduced labor costs (due to previous layoffs and downsizing) will result in increased profits. However, it is more important how companies expect to perform in the third and fourth quarters that will ultimately move the markets and mortgage rates.  Positive guidance could result in increased mortgage rates, while negative guidance will likely keep rates stable at historic lows or, possibly, lead to even lower rates.