Historic, low home loan rates have been about the only thing stable in the economy these days. This low level mark breeds complacency, especially with the buzz in the air that rates may go even lower. But the question hangs in the air like humidity on a southern summer day – will rates go lower? And if there is a chance, should you wait and see or move forward now?

More Quantitative Easing
The buzz that began earlier this fall stemmed from talk coming out of the Federal Reserve that they were considering another round of Quantitative Easing in an effort to stimulate the sluggish economy.

What is Quantitative Easing? Here is what Wikipedia says:

The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

“Quantitative” refers to the fact that a specific quantity of money is being created; “easing” refers to reducing the pressure on banks.

During the first round of quantitative easing, implemented during the credit crisis, the Federal Reserve bought Mortgage Backed Securities (MBS) which helped drive home loan rates lower. Lower rates resulted from these purchases because of supply and demand. When there is more demand, prices move higher and yields (interest rates), which move inversely to prices, move lower.

The Federal Reserve announced their new bond-buying program at their monetary-policy meeting on November 3 and they will be purchasing $600 billion in Treasuries through June 2011. This second round has been dubbed by the media as QE2.

Here’s the Difference
With the new program, the Federal Reserve will only be purchasing Treasuries. Both Treasuries and MBS are bonds and compete for the same investment dollar. There is a natural spread between Treasuries and MBS. If the yield of Treasuries goes down because the Federal Reserve is buying $4 billion to $5 billion in Treasuries per day, it would likely help MBS move down in yield (interest rates) and up in price as well to remain competitive. This natural spread is the reason many anticipate mortgage rates improving.

Another camp speculates that MBS may get disappointed by QE2, like a jealous suitor, and sell off. A sell off would mean price deterioration, resulting in higher yields (interest rates). An old-time trader’s saying goes something like this, “Buy on the rumor and sell on the news.” Since all this QE2 talk began, the bond market has (for the most part) had a small party. Could this be the “buy on the rumor” behavior? If so, then that would take us down the path of thinking that “sell on the news” will follow.

But How Low Can They Go?
Assuming the market responds favorably and MBS improve, it is probably unlikely that rates will move significantly lower than they are today. For lenders to be able to offer a mortgage rate around 3.625% to 3.75%, it would require significant trading by Wall Street investors in the 3.0% coupon. This coupon has seen very little activity.

In addition, lenders have been slammed with refinance volume and are running at, or over, capacity. Also, processes have slowed due to new government guidelines and lenders increased attention to compliance. With processes moving slower, lenders are requiring longer lock periods which impact interest rate pricing. They may look to further manage capacity by regulating their volume through the interest rate offered.

“Wait and See” is full of risk. If MBS improve, and if lenders pass on the price improvements to the borrower, it is highly likely the benefit in interest rate will be incremental. That’s a lot of “if’s” to hold onto for a hope of small gains.

The downside risk is far greater than the upside potential for rates to improve. If QE2 is not well received, the bond market would sell off and mortgage rates would suffer. History shows us this can happen much more quickly than any improvement.

With these incredibly low interest rates, there may not have ever been, nor ever be again, a better time in our history to purchase or refinance your home.

I’ve approached the question from several angles. The “double-dip” great recession option is still on the table. That means we can’t rule out the idea that benchmark Treasury yields might return to record lows and take mortgage rates along for the ride. That theory doesn’t hold much water in my opinion though, this is largely due to technical data surrounding the securitization of mortgages. But there’s a wild card we haven’t talked about in while: If the economy does “double-dip”, the Federal Reserve has made it clear they will “act accordingly” to prevent the spread of contagion. With the Fed essentially out of conventional policy bullets,  the door is open for more quantitative easing, aka more MBS purchases.

If that scenario played out, the “best execution” 30 year fixed mortgage rate could move as low as 3.875%. The one hang up I have with this outlook is the fact that we already experienced an environment like this and mortgage rates failed to move lower than current levels. Remember last year when the Fed was buying MBS and benchmark Treasury yields were at record lows?

One reason why this time might be different:  A loan pricing war amongst the major lenders…

Let’s say mortgage rates don’t decline further and refinance demand eventually exhausts itself. If this were to happen and purchase activity didn’t pick up enough to offset the production slowdown, lenders would be looking for ways to stimulate activity and the Fed would be looking for ways to redistribute wealth around the economy. A new wave of refinances would occur if mortgage rates fell to 4.00%. Two birds, one stone?

This seems like a logical option, unfortunately there is a major mismatch between the credit/collateral demanded by lenders and the credit/collateral supplied by borrowers. So unless we find a way to reduce the risks of origination, many borrowers will remain locked out of the refinance market, even if rates fall to 4.00%. 

With that in mind, we have to start thinking about the idea of another attempt at HARP & DU REFI PLUS. Perhaps we might see the Fed launch some variation of a privately-funded, streamline refinance program that includes a de minimis government guarantee on the loan paper?  Either way the government will still be involved in some capacity. One of the biggest reason mortgage rates have been so resilient lately is their implicit/explicit government guarantee. Mortgage-backed securities have benefited from their own “flight to safety”, especially from overseas investors.

That’s where we go full circle on my “rates going lower” theory. I suppose the first step of this scenario coming true is the “double-dip”. Some folks say the deflationary spiral has already taken hold, others say we’re dealing with a crisis of confidence and the underlying economy is actually building momentum. Working in the housing market I am exposed to excess amounts of negativity, but I also see evidence of a bottom. Either way, I know the Federal Reserve is standing “at the ready” if conditions take a turn for the worse.

The best 30 year fixed mortgage rates remain in the 4.375% to 4.625% range. The “best execution” rate for a well-qualified borrower is still 4.50%, for both conventional and FHA/VA.   Refinance your Texas Home Loan today and save tens of thousands.

At 9:00 this morning the DJIA futures was trading -158, the 10 yr note +29/32 at 3.27% -10 BP and mortgage prices were +8/32 (.25 bp). At 9:30 the DJIA opened -170, the 10 yr +30/32 at 3.26% -10 bp and mortgage prices +10/32 (.31 bp).

The debt problems in Europe are not improving; the perception now is that there is no consensus in Europe on what to do next. The various sovereign countries appear to be divided about how to proceed and markets are increasingly more concerned that debt failures and possibly restructuring of the EU may drag that regions economies down. Europe is the weakest region in the larger global picture as other regions have managed better recoveries, now with the uncertainty increasing global and US economic futures are in play. Europe has had a month now to work out a solution but other than the $960B bank bailout there has been no progress—-at least that is how markets are seeing it now. Concerns are flaring that Greece’s deficit will spark a credit contagion and slow the global economy.

More data at 10:00; April leading economic indicators were expected to have increased 0.2%, fell 0.1% implying the economic outlook has cooled in the last month; LEI in March was up 1.4%.

At 10:00 the May Philadelphia Fed business index was expected at 21.3 it was 21.4 frm 20.2 in April; the sub components were soft however. The employment component declined to 3.2 frm 7.3, new orders declined to 6.1 frm 13.9 ion April and the price component fell to 35.5 frm 42.7 on lower energy costs. Not a good report and in line with current negative outlook for the economy; no initial reaction to the report (any index over zero is considered expansion, minus reads are contractionary.

April producer price index and consumer price index both declined for the first time in over a year leading investors to find value in longer dated maturities. With no concern of any inflationary increases now or on the longer term horizon, the economic outlook being scaled back, and the Fed likely to keep interest rates low for longer than was generally expected a month ago; investors are eyeing 10 yr and 30 yr notes and bonds and also high grade corporates. Mortgage rates are now the lowest since last August.

Very low mortgage rates have so far not generated the response we want to see; once the tax credit ended new applications for purchase fell 27% in one week. Re-financing is where the action is; with unemployment high and not likely to improve much through the rest of the year consumers are reluctant to step up to the best housing market in years for purchases.

US stock and bond markets are trading solely on the European debt problems; the perception being that Europe’s problems will slow US growth forecasts that had in many ways out run the likely realty. Europe brought investors around to looking for less growth than had been built into markets over the last few months. Both US bond market and US stock markets are at extremes on overbought (bonds and mortgages) and oversold (stock market), however with the sentiment now so locked in that equity markets remain over-priced and with the prospect of inflation completely off the table these technically over-extended markets can keep on going.

After the aid package over the weekend for Greece yesterday was a relief rally in US equities and some covering of safe haven trades in treasuries. This morning after a day of pondering markets are still unconvinced that Spain and Portugal won’t default. Markets are looking at the potential of the contagion spreading to those countries and possibly Ireland. The consensus for the moment is that there will be debt defaults in Europe that may spread into other mid-major economies.

Another rally point today; China’s manufacturing sector is slowing rapidly. Chinese officials have been moving to slow down the growth that would lead to inflation. Their equivalent to the US ISM manufacturing report released yesterday showing the best growth since 2004; in China today their index fell to 55.4 from 57 in March, signaling government attempts to cool the world’s fastest-growing economy are working.

At 9:00 this morning the DJIA is falling fast, down 87 points; the 10 yr adds to its improvement as the stock indexes fall. At 9:00 the 10 yr +16/32 to 3.63% -6 bp and mortgages +10/32 (.31 bp). At 9:30 the DJIA opened -150, the 10 yr +19/32 3.61% -8 bp and mortgage prices +10/32 (.31 bp).

At 10:00 this morning two data releases; Mar factory orders were expected to have declined 0.2%, orders increased 1.3% and Feb was revised from +0.6% to +1.3% Ex transportation orders, orders were up 3.1%. Manufacturing is gaining momentum. The second and final data today; March pending home sales were expected up 5.0%, as reported up 5.3% and up 21.1% from March 2009. Both releases were better than expected but no improvement in the stock indexes or softening in treasuries—-but mortgage prices have drifted off their best levels at 9:30.

Market volatility remains high and will likely continue to be that way with the debt default concerns and still thoughts that the stock market is still overbought and due for a correction which so far has not occurred. The DJIA and other key indexes are being ripped hard right on the open this morning, fueling safety moves to treasuries and in turn firming mortgage prices. Mortgages will lag treasuries however, but will move better as treasuries work higher in price.

This Week; Treasury borrowing but the economic data will provide economists a lot of ammo to think about. Monday has Mar personal income and spending and the April ISM manufacturing report. There key data points each day this week, but the big one markets will be setting up for comes on Friday with the March employment report. The early estimates are for non-farm payrolls to have increased about 200K with the unemployment rate unchanged at 9.7%. With the Greek loan worked out over the weekend, the stock market should have a decent day on Monday and the bond and mortgage markets should start weaker as safe haven trades are unwound. Interest rate markets will likely continue in their respective narrow and directionless pattern with not much change by the end of the week. We do expect some increased volatility early this week based on economic releases and continuing news coming from the EU over the debt problems in Europe; Spain, Portugal and Ireland and Greece are still unresolved in the longer run. The Goldman-Sachs civil suit and now a possible criminal charge will also get attention from investors and traders this week.

The DJIA opened +40 this morning, at 9:30 the 10 yr note -11/32 at 3.72% +4 BP and mortgage prices -5/32 (.15 bp) frm yesterday’s close. Prior to 9:30 mortgage prices were off 8/32 (.25 bp) so morning pricing may be worse than where markets are trading at 10:00.

It appears that the stock markets may fall further, which should help boost bond prices throughout the day. I would not be surprised to see the major stock indexes move lower than current levels sometime today. If this is accurate, the bond market should benefit as investors seek safety from the volatility and I would not be surprised to see mortgage rates revise lower sometime this afternoon.

March’s Housing Starts was posted early this morning, showing that new construction starts rose 1.6% last month. This was a larger increase than was expected, giving us a sign of housing sector strength. However, this data is not considered to be highly important to the markets or mortgage rates and has not influenced this morning’s rates.

The second report of the day came from the University of Michigan who announced that their Index of Consumer Sentiment fell to 69.5 this month. This was well below forecasts of a 75.0 reading, meaning that consumers felt much worse about their own financial situations than many had thought. That usually translates into consumers delaying making a large purchase and helps limit economic growth. This is good news for the bond market and mortgage rates.

Next week is moderately busy in terms of relevant economic data being released. There are a couple of important reports scheduled, including a very important inflation index. Unlike most Monday’s there is data being posted Monday that may influence mortgage pricing. March’s Leading Economic Indicators (LEI) will be released late Monday morning. Look fo r more details on this report and the rest of next week’s events in Sunday’s weekly preview.

If I were considering financing/refinancing a home, I would…. Float if my closing was taking place within 7 days… Float if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.