WeeklyBasis 12/10/07: End Of Year Rate Overview

My alert to lock last week proved effective, as extreme volatility continues. Fixed and ARM rates opened this week .375% to .5% higher than last week. Last Wednesday, mortgage bond yields (that lenders use for rate pricing) were at 2-year lows, and today bond yields (and ARM but not fixed rates) are at the highest levels since the peak of the credit freeze in late-August-all of this in 4 trading days. Because of this and reasons I discuss below, I think the rates below will drop.

When the Fed announces their rate decision tomorrow at 2:15 Eastern, I think they’ll cut the Discount Rate, a 1-to-30-day rate the Fed charges global banks for short-term loans in times of distress, by 50 basis points (.5%). This will bring the Discount Rate to 4.5%, which should finally start to mean something to cash-strapped money center banks (like UBS, Citi just this week) that continue to post bad-debt write-offs in the billions. Until now, the Discount Rate hasn’t been low enough to be better than other options, and at 4.5%, it may be.

The Fed Funds Rate, a rate Federal Reserve banks charge each other for overnight loans, will likely be cut 25 basis points (.25%) to 4.25%, although many believe it could be a 50 basis point (.5%) cut given Fed Chairman’s November 29th acknowledgement that “current stresses in financial markets make the uncertainty surrounding the [economic] outlook even greater than usual.”

But bond trading, which takes cues from Fed rates, certainly doesn’t show expectations for 50 basis points. Friday’s jobs report showed the steepest wage growth in 2 years, which stoked inflation fears and led to a bond selloff that continued into today. This Thursday and Friday, there are 3 critical inflation reports. If the Fed Funds cut is 50bps and inflation comes in higher, fasten your seatbelt and get ready for some steep ups and downs.

When a deal is close to being real (a ratified purchase contract, or a committed refi), I give definitive quotes. But on actual execution of rate locks, I’m taking more of a trader’s approach to capture opportunities amidst the volatility. With day-to-day rate swings of .25% or more, and economic fundamentals that point to lower rates over the next 25-60 days, I can (and do) capture rates on any single trading day that are better than any 25 to 200 day moving average rate. Especially lately, I’ve been able to capture better than the quoted rate.

A client told me Saturday night that a couple he knows – Jumbo A-paper borrowers with 20% equity, perfect credit, and high-paying jobs – were adamantly defending the stance that they’ll qualify to get their 5yr ARM from 2004 frozen. This profile couldn’t be further from qualifying, but it proves how confusing and disruptive to lender underwriting operations this rate freeze will be. You multiply this couple by thousands who will clog up the system “just to see” if they can qualify, and it spells trouble.

In short, I think it’s mostly political rhetoric that has just enough credibility to come in handy during an election year. Picture your candidates stumping, and referencing the one case their assistant dug up as a success story. It might get headlines and votes, but it doesn’t unwind this housing correction any faster. I’m certainly sympathetic to borrowers who are in distress; I’m in the trenches with them daily. But government intervention in free markets is unwise and will probably prove to prolong this correction.

If you want terms of the rate freeze plan and good reporting, see Kathleen Pender’s coverage of it in the San Francisco Chronicle, especially this story.

Happy Holidays…

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.25% (6.39% APR)
5/1 ARM: 6.25% (6.39% APR)
7/1 ARM: 6.625% (6.775% APR)

Jumbo ($417,001 – $650,000) – NO POINTS
30 Year: 6.875% (7.015% APR)
5/1 ARM: 6.625% (6.775% APR)
7/1 ARM: 6.75% (6.9% APR)

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