Rate Shopper Capitulation

This MBS chart* shows the sharp rate spike since last week. It’s three months of the Fannie Mae 30yr 3.5% coupon that lenders use as a benchmark for pricing consumer rates. Each candlestick is one day, and rates rise when MBS prices drop.

Note the massive drop yesterday that capped off (a volatile) multi-day selloff that’s pushed rates up about .25%. Also note today’s slight rally.

Fannie35_3mo

These two factors—a huge selloff plus a slight recovery—have scared fence-sitters into locking rates. My friend Rob Chrisman touched on this rate shopper capitulation earlier today:

Traders report that there has been “little resistance to higher rates.” What does that mean? Mortgage banker origination has been heavy (hitting over $3 billion yesterday. So locks appear to be decent – but we all know that is illusory. Lock desks have seen it for many years: rates shoot up, borrowers and LOs are pushed into panic locking, shaking the low-hanging fruit off the trees, and then rates stabilize or even slide back down and locks dry up. Not only that, but in many cases the new locks are from loans that are either not ready to lock or are for loans that are even tougher to close, resulting in slightly lower pull through or renegotiations/extensions in the future.

Volatility in recent weeks is enough to convince most that a modest rally like today’s can be fickle. The trend isn’t our friend here. MBS take cues from the 10yr Note yield, and just two weeks ago, technical support for the 10yr Note was at 1.94%. Today support is 2.25% (and currently it’s trading at 2.15%), meaning there’s still more room for a further selloff in Treasuries and MBS, which would push rates higher. Here’s a look* at that trend in the 10yr Note:

52913tsy
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*Used with permission from MBS Live, which has more on this rate spike.

$TNX $TLT $TBT