Oh The Humanity!

This week was bad for rates, really bad. If you are not in the industry, it is impossible to describe what happens when you see rate increases like we saw this week, so I will once again defer to history to illustrate what occurred.

“It’s fire and it’s crashing! It’s crashing terrible! Oh, my! Get out of the way, please! It’s burning, bursting into flames and is falling on the mooring mast, and all the folks agree that this is terrible. This is the worst of the worst catastrophes in the world! Oh, it’s crashing…oh, four or five hundred feet into the sky, and it’s a terrific crash, ladies and gentlemen. There’s smoke, and there’s flames, now, and the frame is crashing to the ground, not quite to the mooring mast…Oh, the humanity” (See the actual event.)

Yes, that was the Hindenburg and, as you might guess, rates jumped. Currently Fannie Mae and Freddie Mac conforming 30 Year Mortgages are averaging anywhere between 4.75% and 4.875% for optimal borrowers. While these are still amazing rates from a historical perspective, it is hard to reconcile this with the 4.25% available just a few months ago.

We were definitely expecting some degree of increase. Europe is beginning to stabilize with many countries, including the beleaguered Ireland, undertaking continued austerity measures. In the US, Congress has all but approved the extension of the Bush era tax cuts, as well as an extension of unemployment benefits for over 2 million Americans. Since this favors investment in equities, a negative impact on bonds would follow. The degree of the impact in the face of near 10% unemployment and continued weak economic indicators in the housing market, however, should have tempered movement.

A good number of economists have put forth that moves such as the recent Congressional plan add a monstrous amount to the deficit, which erodes confidence in Treasuries. Since Treasury pricing affects mortgage backed securities, mortgage pricing would follow suit. In short, we will have to pay the piper at some time and that time will not be pretty.

I will close by saying that this is a time for a very defensive strategy. In addition to significant increases, we are not seeing recovery from data that should provide respite. The abysmal jobs report from last week, for example, should have predicated a massive flight to safety bolstering bonds, but the bounce that we saw was almost non-existent.

I am recommending that my clients closing in 7 days or less LOCK. If closing in 7 to 30 days or less, there may be time to take advantage of a correction. LOCKING would be a very conservative way to go, but if your risk tolerance permits, you could FLOAT with a LOCK on ANY price improvements. For those closing in more than 30 days, I would suggest FLOATING with extreme caution.