Mortgage Rate Forecast: January 2009

My Lock Advice for Today:

If I were considering financing/refinancing a home, I would...

• Float if my closing was taking place within 7 days
• Float if my closing was taking place within 8 and 20 days
• Float if my closing was taking place between 21 and 60 days
• Float if my closing was taking place over 60 days from now

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any or all other borrowers.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.

Prices of Mortgage Backed Securities (MBSs) are lower this morning as the Fed's efforts to bail out Bank of America stimulated demand for riskier assets. Stocks opened higher while Treasuries and MBSs sold off. The Consumer Price Index (CPI) fell in December fueled (pun intended) by record declines for energy, gasoline and oil. University of Michigan's Consumer Sentiment index rose mainly due to retreating gas prices. Meanwhile, Industrial Production fell as factories reduced output and spending as exports slowed. The Feds purchased $23 billion in MBS last week, shifting focus to lower coupons, 15 yr notes and GNMAs.

There are a few things present that should prevent a big sell off of MBS which in turn would lead to higher mortgage rates. First, at the current price of MBSs, we should be seeing interest rates of 4.50% with no points. So, even if MBSs stays at their current levels, better pricing should eventually come from the lenders.

Next, the Federal Reserve began purchasing up to $500 billion in MBSs. Since the beginning of the year, the Feds have bought about $33 billion worth of MBS, so they still have another $467 billion available to spend. If MBSs start to sell off, the Feds can always step in as a buyer to keep the price of MBSs up and yeilds down. Remember, as the price of MBS moves higher, yields (and mortgage rates) go down.

Finally, most economic reports that came out the last couple of week have been favorable to MBSs. Inflation is low, unemployment is high. and most of us will agree that the economy is not doing very well. We are in a recession, and so long as there is no inflation or fear of inflation, then bad economic news generally leads to low mortgage rates. 

Rates on 30-year mortgages set a record for a fifth straight week by dropping to below 5 percent, the lowest mark since Freddie Mac started tracking the data in 1971. The average rate for a 30-year fixed-rate currently stands at 4.96% with an average 0.7 point for the week ending January 15, 2009.

This is a decline from 5.01% the previous week, and is the first time the rate fell below 5.0%. It's the 11th straight weekly drop, and is well below the average rate of 5.69% at the same time last year.

Freddie Mac's Primary Mortgage Market Survey showed that the average interest rate for the 30-year fixed-rate mortgage (FRM) broke another record in the 37-year history of the survey. Rates at are their lowest since the company started its survey in April 1971, Freddie Mac said. Frank Nothaft, Freddie Mac's chief economist, said mortgage rates have fallen as the Treasury Department and the Fed added more than $100 billion in liquidity to the mortgage market since September.

Mortgage rates have been dropping since just before Thanksgiving in November 2008. That's when the Federal Reserve announced it was going to purchase up to $500 billion in mortgage-backed securities in an effort to get banks to lend more money and to aid the ailing U.S. housing market.

The average rate on a 15-year fixed-rate mortgage rose to slightly to 4.65%. That rate was 4.62% the previous week, the lowest point since June 2003, Freddie Mac said.

While rates are at historic lows, they're getting more expensive. The rates do not include add-on fees known as points. The nationwide fee for 30-year and 15-year mortgages averaged 0.7 point for this week. To learn more, read my post on FNMA's new loan-level price adjustments (LLPAs).

Mortgage Backed Securities (MBS) are trading lower this morning with the 30 Year FNMA 4.5% coupon down 4/32 and at the low of the session.

The producer wholesale prices fell last month as demand for raw materials dropped. Meanwhile, jobless claims rose last week. This indicated that companies have stepped up the pace of firings as weak holiday sales and lack of credit prompt even more payroll reductions.

Foreclosure filings also jumped as falling home prices, tighter lending and deepening recession battered property owners at the same time as the 30 year fixed mortgage interest rates fell below 5.0% for the first time on record. MSB has been moving sideways this past week, and is moving sideways again today with a downward pressure on prices. Remember, on MBS, as the price goes up, the yield goes down - and mortgage interest rates go down with it. Conversely, as the price goes down, the yield goes up - and so do mortgage interest rates.

My Lock Advice for Today:

If I were considering financing/refinancing a home, I would...

• Float if my closing was taking place within 7 days
• Float if my closing was taking place within 8 and 20 days
• Float if my closing was taking place between 21 and 60 days
• Float if my closing was taking place over 60 days from now

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any or all other borrowers.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.

As the January Mortgage Backed Securities (MBS) coupons are no longer open for trade, we should begin to see the disconnect between MBS prices and lenders' rate sheets diminish as their funding lines are replenished. However, the Fed remains at the ready to prop up MBS prices if the rollover from the January to the February coupons does not lead to a progressive "spread tightening" by the lenders. Yesterday, the Federal Reserve was purchasing the higher yielding coupons - more specifically the 6% range.

In other news, a bill was reintroduced in the Senate last week aimed at amending the bankruptcy code to allow judges to modify mortgage contracts. This bill is being backed by Citigroup, and has sent tremors throughout the MBS market. Politicians such as Senator Dick Durbin have been proposing such changes for years. But now measures aimed at reducing foreclosures have more supporters - including President-elect Barack Obama. Legislation allowing the "cramdowns" as it is called was introduced both in the House and Senate yesterday.

"This is a breakthrough. Foreclosure is the cause of our economic problems and we have got to address that," said Democratic Senator Christopher Dodd, chairman of the Senate's banking committee.

Democratic Senator Charles Schumer said his office had contacted banking officials across the country and some said they would be supportive. "Citigroup's support means that the dam has broken across the banking industry. We now have a real chance to pass this legislation quickly," he said.

Currently, bankruptcy judges cannot change the size of the outstanding mortgage to allow a new, lower repayment plan. The bill in Congress would give a bankruptcy judge the right to unilaterally alter the terms of a bankrupt borrower's mortgage loan. The bill would also let the cour wipe out some mortgage debts. If such powers are given, then investors would either be less willing to finance the mortgage sector or require a higher premium to compensate for the risk.

Chris Flanagan, analyst at JPMorgan, said the bankruptcy cramdown may reduce foreclosures and stabilize housing prices, but that higher costs would be passed onto consumers. Increased bankruptcy filings could also increase losses on securities backed by credit cards and other consumer loans, he said.

The Securities Industry and Financial Markets Association and the American Securitisation Forum said the bankruptcy proposals "would have serious and negative consequences, increasing risk and uncertainty in an already challenging mortgage market and raising mortgage rates for future homeowners at a time when the availability of consumer credit is already severely constrained".

According to the Mortgage Bankers Association, it the bill passes, you can expect mortgage interest rates to be as much as 1.5 to 2 points higher! "If this proposal becomes law, it will amount to a new tax on homeowners, costing them hundreds of dollars more per month and thousands of dollars more per year," said MBA Chairman-Elect David Kittle in a statement. "The last thing potential homeowners, and those looking to refinance into new loans, need in this market is higher mortgage payments."

My Lock Advice for Today:

If I were considering financing/refinancing a home, I would...

• Float if my closing was taking place within 7 days
• Float if my closing was taking place within 8 and 20 days
• Float if my closing was taking place between 21 and 60 days
• Float if my closing was taking place over 60 days from now

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any or all other borrowers.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.

My Lock Advice for Today:

If I were considering financing/refinancing a home, I would...

• Float if my closing was taking place within 7 days
• Float if my closing was taking place within 8 and 20 days
• Float if my closing was taking place between 21 and 60 days
• Float if my closing was taking place over 60 days from now

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any or all other borrowers.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.

The number of applications for refinancing existing mortgages is rising as interest rates are falling. Mortgage applications have risen to a 5 year high. According to the Mortgage Bankers Association, the index of applications to purchase a home or refinance a loan rose to 1,245.7, the highest level since 2003.

In November 2008, the Fed announced a program to purchase up to $500 billion in mortgage backed securities to help reduce the cost and increase the availability of credit for homebuyers. Mortgage rates dropped on the annoucement just before Thanksgiving. The Feds began their MBS purchase program on January 5th of this year, and mortgage rates have dropped more since then.

The average rate for a 30-year fixed-rate mortgage dropped to 5.03 percent, the second-lowest level since records began in 1990. The average rate for a 15-year fixed mortgage dropped to 4.79 percent, the lowest level since March 2004.

You will see mortgage rates drop to historic lows, and lenders will be swamped with mortgage applications. I encourage you to apply for a mortgage somewhere - anywhere - now, and get the process started. You don't have to lock in a rate today - you can always float and lock in later. If you do, you'll be in a better position to lock in when the rates do drop again and not miss another opportunity for a great low rate.

My Lock Advice for Today:

If I were considering financing/refinancing a home, I would...

• Float if my closing was taking place within 7 days
• Float if my closing was taking place within 8 and 20 days
• Float if my closing was taking place between 21 and 60 days
• Float if my closing was taking place over 60 days from now

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any or all other borrowers.

Interest rates are based on numerous economic, financial and credit based factors that adjust daily. In addition, lenders can vary on qualification criteria from program to program. If you like the rate today, the safe bet is to lock. Even if rates improve, they wouldn't improve enough in the short term to make you cry about it. But if you are an ardent market bear, and accept the risk of negative mortgage headlines, and believe the economy will just get more bad news next week, and you have the money to risk, you may benefit from floating. Just remember, it always seems more painful to have not locked when you should have as opposed to locking and then watching rates get a little better.