Pre-Holiday Rate Recap and Outlook

Pre-Holiday Rate Recap
Today ends the last full week of trading in 2010 and now heavy holiday vacations mean light mortgage bond trading which means even more volatility. Rates have recovered a bit since yesterday, and are just below 5% for 30yr fixed single family home loans up to $417k; condo loans and larger loan amounts have higher rates.

While we can’t count out a further selloff in bond markets that would drive rates higher, some think the reverse could happen. There is little inflation, and although the deficit is a huge long-term problem, the short-run economy isn’t breaking any records, unemployment persists, and housing market isn’t being helped by mortgage rates above 5%. As Banc of Manhattan’s economist put it: “From 3.50% on the 10-year Treasury, we believe an eventual return to 3.00% is more likely than an extended selloff to 4.00%.” The 10-yr is a benchmark for rate markets, so this implies mortgage bonds could to the same thing, and if it happened, rates would drop. But borrowers who are “waiting for better” should take note: rates rose .875% in the last 2 months. It’s very far fetched that we’d get all .875% back.

Refis Down 36.5% From Nov
Since mortgage rates hit record lows in early November, the MBA refi index has plunged 36.5%, and according to FTN Financial, the percentage of the agency mortgage market that can be refinanced has declined to approximately 49% from around 67% in early November. This translates to $1.2 trillion in agency MBS that is less refinanceable compared to a month ago, they calculated. Few in the business believe that the issues facing borrowers—tight credit standards, poor home valuations, and a weak jobs market—are going to entirely disappear in 2011.