Hugh W. Page, M.B.A.
Senior Mortgage Consultant
(919) 8784-7557 Direct
(919) 595-9707 FAX
hpage@fmlending.com
www.fallsofficeloans.com http://www.fallsofficeloans.com/

Don Davidson
Senior Mortgage Consultant
(919) 747-5947 Direct
(919) 595-9727 FAX
ddavidson@fmlending.com
www.fallsofficeloans.com

FALLS OFFICE MORTGAGE CENTER MARKET UPDATE

Mortgage Rates: Running into Resistance

Friday, March 11, 2011 3:09 PM

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Consumer borrowing costs lost a very small amount of ground today.
Mortgage rates are still about aggressive as they’ve been since late
January though….

CURRENT MARKET: The “Best Execution” conventional 30 year fixed mortgage
rate is still 4.875%. For those looking to permanently buy down their
rate to 4.75%, this quote carries higher closing costs. The upfront cost
of permanently buying down your rate to 4.75% is not worth it to many
applicants, we would generally only advise the permanent floatdown if
you plan to keep your new mortgage outstanding for longer than the next
10 years. Ask your loan officer to run a breakeven analysis on any
origination points they might require to cover permanent float down
fees. On FHA/VA 30 year fixed “Best Execution” is still 4.75%. 15 year
fixed conventional loans are best priced at 4.125%. Five year ARMS are
best priced at 3.50%.

To illustrate the recent behavior of mortgage rates, we offer the chart
below. It graphs the average origination closing costs associated with
specific mortgage note rates as quoted by the five major mortgage
lenders.

If the note rate line is moving up, the closing costs associated with
that rate quote are rising. In December, closing costs rose rapidly.
Mortgage rates did improve from those levels, but then moved sideways
for 7-weeks. And then the range broke following the January Employment
Situation Report and consumer rate quotes rose back to their December
highs. As one can see, borrowing costs have steadily improved since
then but have more recently run into a wall near one-month lows. 4.75
is on the brink of being back in the game for consumers but hasn’t been
able to break below the 0.00% barrier since early December. We’ve run
into resistance! Again!!

Each line represents a different 30 year fixed mortgage note rate. The
numbers on the right vertical axis are the origination closing costs, as
a percentage of your loan amount, that a borrower would be required to
pay in order to close on that note rate. If the note rate graph line is
below the 0.00% marker, the consumer may potentially receive closing
cost help from their lender in the form of a lender credits. If the note
rate line is above the 0.00% marker, the consumer should expect to pay
additional points at the closing table to cover permanent buydown costs
and origination fees. PLEASE SEE OUR MORTGAGE RATE DISCLAIMER BELOW

GUIDANCE: The failure of the bond market to extend its recent rally
really serves to drive home a point we’ve been harping on for several
weeks now: WE’RE STUCK. If you’re floating, you’re doing so for
marginal improvements in UPFRONT COSTS ….not RATE. See disclaimer
below please. When it comes to the outlook for lower rates in the months
ahead, we’re still optimistic about that expectation but realize it will
require a steady drip of bond friendly (economy-unfriendly) news and
events . In the short-term, or at least until “the levy breaks” and all
hell breaks loose around the planet, we don’t expect lender rate quotes
to look much better than they do right now. The following comment hints
at the commitment required from bond market investors if we’re going to
see mortgage rates to move notably lower.

From: Mortgage Pricing Hits Wall. Loan Demand Declines…

“Lenders have moved the Best Execution 30-year fixed note rate as low as
they possibly can without drastically altering their pipeline hedging
strategies. This is a factor of what production mortgage-backed
security coupon is most liquid in the secondary mortgage market. On
conventional loans, the 4.50 percent MBS coupon is the hedging vehicle
of choice for lock desks. Home loans with note rates between 4.875 and
5.25% are generally used to fill 4.50 percent MBS coupon trades. Until
MBS investors demonstrate sustainable demand for 4.00 percent 30-year
fixed MBS coupons, lenders will not find it economically efficient to
quote 4.75 percent note rates without expensive permanent buydown costs.
From that perspective, if you are floating a conventional home loan
interest rate, you should not be expecting further improvements to your
actual rate in the short term. If the bond market recovery rally
continues, closing costs will improve, but on the whole, it will take a
sustained move higher in 4.00 percent MBS coupon prices for Best
Execution to dip below 4.875 percent.”

Plain and Simple: We’re going to need a sustained bond market rally to
see “Best Execution” break through the 4.875% barrier. Otherwise this is
as good as it gets.

“Best Execution” is the most efficient combination of note rate offered
and points paid at closing. This note rate is determined based on the
time it takes to recover the points you paid at closing (discount) vs.
the monthly savings of permanently buying down your mortgage rate by
0.125%. When deciding on whether or not to pay points, the borrower
must have an idea of how long they intend to keep their mortgage. For
more info, ask you originator to explain the findings of their
“breakeven analysis” on your permanent rate buydown costs.

Important Mortgage Rate Disclaimer: The “Best Execution” loan pricing
quotes shared above are generally seen as the more aggressive side of
the primary mortgage market. Loan originators will only be able to offer
these rates on conforming loan amounts to very well-qualified borrowers
who have a middle FICO score over 740 and enough equity in their home to
qualify for a refinance or a large enough savings to cover their down
payment and closing costs. If the terms of your loan trigger any
risk-based loan level pricing adjustments (LLPAs), your rate quote will
be higher. If you do not fall into the “perfect borrower” category, make
sure you ask your loan originator for an explanation of the
characteristics that make your loan more expensive. “No point” loan
doesn’t mean “no cost” loan. The best 30 year fixed conventional/FHA/VA
mortgage rates still include closing costs such as: third party fees +
title charges + transfer and recording. Don’t forget the intense fiscal
frisking that comes along with the underwriting process.

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