Rate Continue to Climb Higher...

Mortgage rates are again under pressure today as the mortgage backed securities market sells off, currently down 10 ticks on the day...

We seem to be caught in a catch-22, equities posts gains, we sell off, equities sells off, mortgage backed securities posts gains. This back and forth ping pong match is making lenders nervous, and we're seeing it in their rates sheets as they hedge expecting losses, regards of which way the market moves.

In fact hedging is something lenders have become very good at and is the only real factor that is controlling wide price swings on published rate sheets.

That's not necessarily a good thing for those of us in tune with the secondary market. Hedging ultimately leads to more profitability for the funding bank. This profitability comes at a cost that the consumer ends up paying through higher terms. Of course what we are discussing here is an invisible factor that is never really discussed; be that as it may it is still taking place.

Can the underlying borrower do anything about hedging? Sadly no... hedging has and will always take place to some degree, after all the price difference between secondary market delivery and what the borrower secures in terms of rate defines the fund lenders profit for that funded loan (I'm not going to get into servicing here).

The only real cure, if you can call it that, for the hedging epidemic we're experiencing is a stable, and somewhat predictable market. If one can accurately predict, with some degree of deviation of course which one would expect, market movement, one does not need to plan for the worst and can price more aggressively not having to worry about eating their shorts on a strong shift against them.

Believe it or not, historically lenders were very good at predicting market movement and trends... after all, interest rates typically do not shift in yield like we've seen recently...

So while interest rates remain low, historically speaking, they could be lower if the market would settle. Now I don't expect this to happen, the world is on fire... so we're stuck with hedging banks, trying to protect their profits. Can't really blame them... what we can do is everything in our power to position ourselves to take advantage of rates when they present themselves.

Strategic locks, similar to trading is all about market timing. Rather than lock at the time of submission, you lock when the market is trading at a high point in the established range. Doing so will mean securing the best possible terms in a volatile market.

For this reason it is crucial your lender has access to secondary and understands the momentum and trends currently operating there.

This blog of course addresses these markets and is a peek inside my mind as a professional and practicing mortgage broker.