Tuesday, October 28, 2008

The rate rollercoaster

Lately, watching the action in the mortgage backed securities (MBS) markets has been like watching a car full of screaming teenagers hang on through the peaks and valleys of a world class roller coaster. In other words, it's been wild ride.

Just since September, we have seen the 30yr fixed mortgage rate fluctuate nearly 3/4 1 percent - between 5.625% and 6.375% 6.5% (stay up-to-date with our free daily rates email).

In normal markets, one can often get a general sense of the direction. Fundamentals can be followed and trends can be observed. But what we're witnessing in MBS is not the gradual inclines or declines of a functioning market. We're seeing wild swings in prices and reversals that occur in a matter of days.

Yesterday, Bloomberg reported on the difference in yields on MBS vs. US Treasuries. Fannie-Freddie Mortgage Bond Spreads Hit Widest Since March. The recent increased spreads have been driving MBS prices down and rates up.

"Agency mortgage-bond spreads have fluctuated since their record drops on Sept. 8 after the U.S. seized control of Fannie and Freddie. The spreads have widened on days when concern mounted that buyers relying on borrowed money including banks and hedge funds will have less demand for the debt -- including the past five trading sessions. Spreads have tightened when investors heeded a government pledge to support the market."

Predicting the direction of mortgage rates with accuracy in a stable market is a difficult task. But in current conditions it's nearly impossible.

So how does how does this translate for consumers? If you have a purchase contract on a home and plan on closing within the next 60 days, go ahead and lock your rate. Waiting for a particular rate that may or may not come is not worth the risk to your plans or your deposit. And the same goes for those who plan to refinance within the next 6 months - take advantage of the current historically low rates. Keep in mind that the average 30yr fixed rate since 1978 is 9.5% (Freddie Mac)

I'm not trying to "talk up my book" (giving advice or making an argument that bolsters one's position). Just pointing out what I see.

Visual evidence:

FNMA 30yr

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