The Day After….

by Victor Burek

Posted May 28 2009, 12:40 PM

What a day we had yesterday in the mortgage industry. Mortgage backed securities (MBS) suffered their 2^nd worse losing day in history losing 2 full points in price which led to lenders moving mortgage rates up almost a full half percent. If you would like to know why we suffered such a loss, click here. Today, we should see par 30 year fixed rate mortgages in the low 5% range. The question of the day, are sub 5% mortgages gone for now? What is your opinion?

In a nut shell, the sell off yesterday is being driven by investors belief that the end of the recession is here and we are entering a phase of economic growth. The fear is that the economic growth is going to lead to higher than welcomed inflation and as stated many times, inflation is the biggest enemy to mortgage rates and other fixed income investments. Think about it, your mortgage is a debt to you but it is an investment to an investor. If you borrow money at an interest rate of 4.5% but inflation is at 5%, isn’t the investor losing money. Yes, they are making a 4.5% return off of you but if inflation is increasing the price of everything they buy by 5%, they are losing money. Currently, inflation is not a immediate concern but investors do fear higher inflation down the road due to the huge deficit and the increasing government spending. Offering us no help with inflation is oil’s continuing climb higher currently trading over $64 a barrel.

We have the last round of Treasury auctions, for this week. Today the Department of Treasury will be auctioning off $26billion in 7 year treasury notes at 1pm eastern. The added supply will place pressure on treasury yields to move higher to attract buyers. The 2 prior auctions this week were received very well with above average demand but the pending amount of future treasuries to be auctioned is weighing heavy on fixed income investors. Might we get an announcement today from the Fed expanding their treasury purchases? This will be the biggest impacting item on the day barring any headline announcement.

Early reports from fellow mortgage professionals are indicating that the par 30 year fixed rate mortgage today is at 5.25%. In order to qualify you must have a FICO credit score 740 or higher, a loan to value at or under 80% and be willing to pay all closing costs including 1 point loan origination/discount/broker fee. So far this morning, MBS are slightly above yesterday’s closing level but not close to a level that would spark lenders to reprice for the better. Things will probably be quiet this morning in anticipation of the auction in a few hours. The benchmark 10 year treasury note which closed above 3.72 is currently trading lower at 3.66 and the stock market which was in positive terroritory prior to the release of the new home sales data is currently moving lower and is down 32 points. The only winner today which by the way also was also the only winner yesterday is oil as it is continuing its move higher and is up .60 cents per barrel, let’s all hope that changes.