The West Coast has a phenomenon called the green flash. It happens at sunset. The density of the air refracts the light… blah… blah… blah …anyway…it’s really cool. While sunsets over the Pacific are gorgeous, you sometimes get a bonus of a green flash. That’s what the conforming mortgage markets feel like today. I advised everybody to lock-in loans at application, before Labor Day, and rates got a little bit better- I’m still advising clients to lock-in their loans at application. We had a little “green flash” last week. While the world believes that the Federal Reserve Bank will cut interest rates next week, optimists are starting the think that the cut may be as much as a half percent rather that the consensus quarter point. That thought is the “green flash” or bonus. Here’s how it happened:
1- The sub-prime, Alt-A mortgage fiasco is infecting Europe– Who knew the Germans and French owned Bobby Ray’s loan? This may curb foreign in investment in the mortgage-backed securities market.
2- More people are out of work than we expected. The dreaded “R” word, recession, is starting to be bandied about. That can mean much lower interest rates.
3- Barbie and Chairman Mao are doing battle. Higher prices of cheap Chinese goods are threatening to steal Christmas from the kiddies. Now, morally, I’m not so sure that’s a bad thing. Deemphasizing the materialistic nature of the holidays may cause us to rediscover the real meanings of Chanukah, Christmas, and Ramadan. While it is ironic that a religion-free country may force that rediscovery on us, it is, apparently, an economic mess. If the Chinese dig in and refuse to trade with us, the R word may move from economic chat rooms to the marquis of CNBC.
There’s your “green flash” if you’re getting a loan- bad economic news leads to lower rates. Why, then, am I so insistent upon locking loans at application? It’s a matter of risk. I believe that the exuberance in the bond markets is irrational. The traders believe the Fed will aggressively cut already. Any cut less than a half a point will be met with disappointment and higher rates. In short, the risk of mortgage rates that are .375% higher on September 20th is greater than the chance they may fall .125% by then.
Locking loans at application is still the prudent call.
Rates for Monday, September 10, 2007:
Program Rate APR
Annual ARM 5.625% 5.693%
3/1 ARM 5.750% 5.866
5/1 ARM 6.000% 6.070%
30 Year Fixed 6.000% 6.040%
Rates subject to qualification and market conditions. Equal Opportunity Lender.