Mortgage Rates remain at record lows, both in terms of the Best-Execution interest rate as well as the costs involved in obtaining that rate.  Although the Best-Execution rate has been at 3.875% for several days, associated borrowing costs involved to obtain that rate inched slightly lower to reach a new all-time low on Friday.  The lenders who had been the most aggressively priced saw no improvements today whereas some of the middle-of-the-pack lenders lowered costs marginally, closing the gap somewhat between themselves and the market-leading lenders.

Longer-dated US Treasuries continued to rally today in incredibly light volume, pushed around more by European headlines than the one piece of domestic economic data that showed Homebuilder Sentiment improving.  Despite a healthy amount of economic data, a few more Treasury auctions, and some relatively important news anticipated from Europe, market volumes are understandably expected to be a bit low this week with the impending holidays already removing more than few market participants from their desks.  Those that remain are cognizant of this and will generally wait until all the players get back on the field before continuing the game.

Please make sure to read the "important rate disclaimer" at the bottom of the page in considering what "all-time lows" means.  The issue of "buckets" as described in the lock/float considerations below, remains a factor that may prevent rates and/or fees from moving significantly lower in the short term.

Today's BEST-EXECUTION Rates

• 30YR FIXED -  3.875%
  
• FHA/VA - Back firmly to 3.75%
  
• 15 YEAR FIXED -  3.375%, Approaching 3.25%
  
• 5 YEAR ARMS -  2.625-3.25% depending on the lender
  

Lock/Float Considerations

The expectation for this week's low volume, combined with record levels in loan pricing is a potential risk factor.  The lower a market's volume, the more weight carried by those who participate meaning that it takes fewer trades/less money to move things around.  With respect to benchmark Treasuries, it seems traders are more willing to ride the wave of lower rates as opposed to swim against it.  Buyers outnumber sellers, but in an environment where volume is this low, that can change fairly rapidly, and if it does, Mortgage-Backed-Securities could take some damage. 

Beyond that, the incentive to float with rates at all-time lows is fairly limited, especially considering that further improvements are likely to be hard-fought and slow in coming due to the MBS Buckets considerations discussed in last week's posts:

Keep in mind that a huge factor in how low mortgage rates can go is the underlying Mortgage-Backed-Securities market.  A vast majority of loan products offered by lenders end up as part of MBS pools.  Even many of the loans that don't end up as MBS are originated at interest rates and guidelines that would allow them to be pooled into MBS "buckets" later in life. 

Without MBS, rates wouldn't be as low as they are and funding for mortgage loans would not be as plentiful.  The reasons for this are complicated and numerous, but the important concept to understand is that there has to be AN ACTIVE ENOUGH MARKET in a particular mortgage-backed-security in order for lenders to be able to offer rates at levels that coincide with that particular MBS.  Think of these like "buckets." 

For a long time, the 4.0 bucket was the lowest MBS coupon for Conventional 30yr Fixed mortgages.  We spent a good deal of time writing about the gradual shift to 3.5 MBS, the next bucket down, over the past 5 months.  The average interest rate of loans in the 3.5 bucket is around 4%, with a range from 3.75% to 4.25%. 

If lenders are to offer rates below 3.75% that make any sort of sense (lower rates are already technically available, but the closing costs required to buy those rates usually doesn't make much sense from a "break-even" standpoint.  In other words, "cost to buy rate down" > "sum of monthly savings over the period of time you plan to have the loan") it would mean that an entirely new bucket of MBS (3.0's) would have to gain enough of a market share for lenders to safely be able to offer such rates.  This has never happened before, and although it COULD happen in the future, it's not happening now. 

We feel that a pick up in the activity in 3.0 MBS would be the first sign of a potential shift lower in rates from current levels.  Until then, 3.875% and 3.75% at best, are sort of the new "wall" in 30yr Fixed rates.