WeeklyBasis 2/5/10: How To Lock Rates In An Extremely Volatile Rate Market

For the past three weeks, rates have closed market trading days within .25% of record lows. But the intraday rate swings have been dramatic as mortgage bond traders sort through economic data releases.

Case in point: how rate markets reacted to today’s Jobs Report. Stocks rallied and mortgage bonds (that rates are tied to) sold off on the initial reaction to unemployment decreasing from 10% in December to 9.7% in January. But the report also said that actual January job losses of -20k were greater than the 15k new jobs estimates called for, and December’s previously reported -85k job losses was revised up to -150k. Markets seemed to realize this as the trading day continued because stocks went negative and bonds rallied.

All told, mortgage bonds traded in a 68 basis point range today, which caused rates to trade in a .25% to .375% range as lenders issued new rate sheets throughout the day (Sidebar: can we still say “rate sheets” in this online era).

Markets justifiably didn’t quite know what to make of today’s jobs report, but ending market levels suggest a continued negative interpretation of the jobs situation. The end result was rates ultimately holding to low levels.

But if a home buyer or refinancer is looking to lock a rate, this kind of movement can be gut wrenching.

And we can expect that the volatility will continue as markets struggle to interpret economic data. It’s also reasonable to expect an upward rate trajectory as we move toward and past the March 31 end of the Fed’s mortgage bond buying program. They’re 94% into their $1.25t budget that began in January 2009 with the purpose of bidding up mortgage bond prices, which drives rates down. Conversely, rates will rise if the end of the Fed program dampens mortgage bond demand.

So how should a borrower lock a rate in this wild environment?

They need to work with their mortgage advisor to set a price target based on current trading ranges and expected economic data releases, and they need to be ready to make a lock decision based on those rate expectations. If it looks like rates will trade above that target, it’s time to lock. Making the process more complicated than this just adds stress.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 5.0% (5.13% APR)
5/1 ARM: 3.625% (3.74% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT
30 Year: 5.125% (5.24% APR)
FHA 30 Year: 5.125% (5.28% APR)
5/1 ARM: 4.5% (4.64% APR)

JUMBO RATES ($625,500 – $3,500,000) – 1 POINT
30 Year: 5.875% to 6.25% (6.02% to 6.37% APR)
5/1 ARM: 5.25% (5.43% APR)