WeeklyBasis 7/31/09: Rates Down On Bond Rallies, New Disclosure Rules Start Today

RATE/MARKET UPDATE
Rates on conforming loans up to $417k and super-conforming loans up to $729k continue to trade up and down as much as .5% per week but as of today we’re about .125% lower than last week. Rates on Jumbos from $729k to $3.5m are competitive for borrowers with strong down payments, income and credit profiles, but borrower scrutiny—even for the most stable borrowers—is intense so borrowers should expect to provide full financial documentation to obtain financing.

This week S&P Case Shiller home prices for May showed a -17.1% decline, but the fourth straight month where declines shrank. GDP for 2Q2009 was -1% vs. -6.4% for 1Q2009, making this the fourth straight quarter of declines, something that hasn’t happened in 62 years. The decrease in GDP loss from 1Q to 2Q is due mostly to a +5.6% increase in government spending, rather than the consumer who typically accounts for two-thirds of spending. Also this week we had about $100b in Treasury auctions (this is how the government raises money to spend). Some attribute better rates to well-received Treasury auctions that benefit Treasury and mortgage bonds, but it’s the negative economic news that is the more likely factor behind a move toward bonds this week.

When bond prices rise on a rally, yields (or rates) drop. Bond oversupply issues are what led to the .75% rate spike in June, so while homebuyers are subject to rates at the time they get into contract, refinancers should take gains like we see now while they can. The Treasury bond issuance won’t stop and markets will get spooked by this again soon, which will push rates up.

NEW DISCLOSURE RULES
As of today, a new rule requires lenders to provide borrowers three full days (Sundays excluded) between signing loan rate/fee disclosures and the time they can order an appraisal to begin a transaction (Example: if you sign Monday, you can’t order an appraisal until Friday). There are other provisions of the regulation, but this is the most important because a loan cannot be approved without an appraisal. So borrowers need to be aware that, while this rule is intended as consumer protection, it adds confusion to the lender shopping process.

For homebuyers that expect to perform on a traditional 30-day purchase contract, they need to have their lender selected on or before the day they’re in contract or they will risk being in breach of their contract or missing a rate lock—because the lender disclosure rules (and appraisal rules) add at least 5 days to the process. Same goes for refinancers: if you’re hedging competing lenders for rate, you will risk losing rates you’re offered by either one. The reason is because, under the new regulations, if a signed rate/fee disclosure changes by more than .125%, the lender must re-disclose new terms for new signatures and a new three-day waiting period begins. Here again, a rate lock may then expire during this added time.

Given the rate volatility discussed above plus the new disclosure and re-disclosure rules, shopping around for .125% rate gains can result in an overall worse outcome. So be very careful, make sure your lender knows the relationship between market movement and disclosure rules, and make your lender selection process early enough not to create unintended rate consequences for yourself.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT
30 Year: 4.875% (4.96% APR)
FHA 30 Year: 5.0% (5.18% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT
30 Year: 5.25% (5.37% APR)
FHA 30 Year: 5.25% (5.43% APR)

JUMBO RATES ($625,500 – $3,500,000) – 1 POINT
30 Year: 6.375 % (6.55% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 5.25 % (5.43% APR)