Mortgage Interest Rates Rise

It has begun... interest rates associated with home loans have begun their inevitable and perpetual climb up. Yesterday was the worst day in 2010 for the mortgage backed securities market, losing 26 ticks on the day, interest rates climbed from 4.75% to 4.875% and moving towards 5.000 for conforming products (historically speaking this is still an incredible rate). Jumbo conforming is climbing faster due to less liquidity in secondary for these products which causes their pricing to react more sharply to the MBS; we were at 4.875% for jumbo conforming, rates have now climbed up to 5.125%.

The problem is right now there is no reason for Mortgage Backed Securities to return to previous levels (if you have read any of my previous posts, you know this is something we have been expecting and why I have been screaming lock your rate now). After all in just a couple of days the Fed is pulling out completely from the MBS market, and will be concluded their 1.25 trillion dollar MBS purchase program designed with the intention to keep rates low.

Yesterday as we watched the firesale in secondary it should be noted that the Fed was still active, spending approximately 2.5 billion in funds buying MBS as it fell against a rising treasury yield. Considering yesterday brought us 26 ticks lower, with the 4.5 note closing at 100.02 suggests private investors (everyone else but the Fed) see no support for current levels of the MBS. Moreover with the 10 year treasury yield pushing 3.85%, our primary competition is looking that much more attractive right now. This is interesting considering we have another treasury auction today, this one for the 7 year, which everyone is eagerly awaiting the results for - published 10am PST - and is probably the primary reason we have not seen more activity in the MBS market this morning. This auction today will only bring more liquidity into the treasury market and unless recieved strongly will force treasury yields up further putting even more pressure on mortgage backed securities.

All things considered I am not anticipating a strong auction today which will hurt our market further forcing rates up higher. If I am right we will see a continuation of yesterdays sell off. With the Fed leaving our market at the end of this month, this sell off could be nasty (remember my prediction was rates would increase by about half a point in a short period of time with the Fed exit). The problem is exasperated by the fact that their does not seem to be any other investors willing to pick up the slack of the Fed. China for example seems quite, lending institutions that people thought would be buying excess supply are relatively quiet protecting their balance sheets, insurance companies are sidelined as well.

We are now through the eye of the storm and it is time for everyone to batten down the hatches again. Remember how you felt in 2008... our economy in question, housing in peril... well get ready for round two; this time however the Fed does not have any money to throw at the problem, and our market along with the rest of the economy is going to be forced deal with the real problem without the option of buying it off.

If you have not already refinanced your adjustable rate mortgage into a fixed program, do it now. I assure you, you will thank me for this recommendation down the road. Rates will continue to rise, how high no one can say, but look to our history and you can see fixed rates as high as 18% during Jimmy Carters Presidency. It can happen again....