Mortgage rates moved higher for the second day in a row yesterday as investors took profits and set up positions for the release of Non-Farm Payrolls data today. As a reminder, when mortgage-backed securities prices move lower, lenders are forced to offer higher mortgage rates. If MBS prices move higher, lenders can offer lower mortgage rates because they can sell loans in their pipeline of loans for a higher price.

Below is the chart I used earlier this week to illustrate this relationship...

GREEN is MBS prices and RED is mortgage rates

Today was a major event for the mortgage rates outlook.

For almost the entire month of December, the bond market  reflected a "worst is behind us" economic perception. Long term Treasury yields moved considerably higher, pushing mortgage rates over 5.00% again all while stocks  set new 2009 index highs.

The sustainability of the bias towards higher mortgage rates was however not confirmed by any strength in the marketplace because bond prices may have been distorted by  light (thin) trading conditions. Thus, the market did not provid a clear outlook for rates heading into 2010....it only provided hints. That is why the short term (early 2010) chances of rates holding steady at recent highs (or rising) and rates returning to the 5-month range were so close. 55% chance of holding steady or moving higher. 45% chance of rates moving back into the 3.27-3.50 range that moderated directionality from August to December. READ MORE ON THE OUTLOOK

Today's release of Non-Farm Payrolls aka the Employment Situation Report was the first chance for the market to confirm or reject the bearish sentiment towards mortgage rates exhibit for most of the month of December.

Last month's NFP release reported the fewest amount of job losses since December 2007, when the recession officially began. Adding more optimism were revisions to the previous two reports.  The October NFP job loss number was cut from -190,000 to -111,000 and the September report was trimmed from -219,000 to -139,000. That is 159,000 less job cuts!

IN TODAY'S RELEASE....

1. The number of jobs lost or created in December 2009: 85,000 job losses. Much worse than anticipated.

2. The official unemployment rate: unchanged at 10.0%. Most expected an uptick to 10.1%, so this was better than expected.

3. The average work week: unchanged at 33.2 hours. As expected!  If the average work week increases and so do average hourly earning, it would indicate the average worker is making more mone,  which they could spend. Good for the economy.

4. Average hourly earnings: +0.2% to $18.80. As expected!

The Bureau of Labor Statistics also announced that the November jobs report was revised for the better, from 11,000 job losses to 4,000 jobs created. The first month of job creation since December 2007.

Overall, while many of the metrics of the report were "as expected", the market was not anticipating 85,000 job losses in December. This report was WORSE THAN EXPECTED. AQ wrote a full story on the data: MND STORY.

WORSE THAN EXPECTED ECONOMIC DATA USUALLY MEANS IMPROVED MORTGAGE RATES RIGHT?

Usually it does, but not today.

Immediately following the release of data, Treasury yields improved and MBS prices rallied. That did not last long though, benchmark Treasury yields were soon rising and MBS prices falling. This occurred before most lenders published rate sheets and held throughout the day.

Reports from fellow mortgage professionals indicate lender rate sheets to be HIGHER after the Employment Situation Report.   While the par 30 year fixed conventional mortgage rate does remain in the 4.875% to 5.125% range for well qualified consumers, lender rate sheet pricing worsened which means it will cost you a few more discount points (basis points) to get to 4.875%. To secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.   If you are seeking a 15 year term, you should expect a par rate in the 4.375% to 4.625% range with similar fees.   You may elect to pay less in upfront charges but you will have to accept a higher interest rate.

If you have not locked in your mortgage rate yet, you're in a tough spot.

As pointed out already, today was a CROSSROADS EVENT for mortgage rates. We were hoping rising mortgage rates in December were not a function of shifting sentiment in the rates market. We were hoping that rising rates were over-dramatized by a slow holiday season marketplace. Today's WORSE THAN EXPECTED report on the labor market was a perfect opportunity for mortgage rates to correct from December weakness. It didn't happen.

Before the jobs report we provided an outlook that gave higher rates a 75% chance in Q1 2010. Here is what we said:

HOLD STEADY OR MOVE HIGHER: Rates could fall briefly only to rebound back to current levels or even higher. Either way, mortgage rates would bounce around a new, higher costing range. This would occur because economic perceptions were optimistic. This is a favorite for early 2010. After several months of choppy growth, the market is beginning to believe "the worst really has been avoided". If economic activity continues to show signs of improvement (even if its scattered), the bond market will take the "better than expected" side of the trade and mortgage rates would creep into the 5's and maybe even test the 5.50 level (at best). This is if the OPTIMISTIC perception grabs hold of headlines. This category also includes an outlook with no brief recovery.

55% chance in short run.  75% in Q1 2010

Based on the mortgage market's reaction to today's data...the above outlook is beginning to look more accurate.It seems like the hints provided by the market in December may have actually reflected the market's true bias towards higher rates.

While one day of trading, especially a Friday, is not enough to confirm that bias, we have to continue to base decisions on the current message being sent by the marketplace, anything else would be guessing. With that in mind, floating is very risky, I would still be locking my loans.

Until the market corrects and confirms a mortgage rates recovery, I will likely continue to advise locking...although there may be days where I recommend floating overnight, but nothing long term until the rates market shows clear signs of a correction.

HAVE A GREAT WEEKEND.