Mortgage Rates Fall Again As The 10-Year Rallies



The mortgage application activity index

Every week, the Mortgage Bankers Association (or MBA) puts out an index of mortgage application activity. Mortgage applications are relevant to a number of industries, from banks to nonbanks, and from mortgage REITs including Annaly Capital Management, Inc.(NLY) and American Capital Agency Corporation (AGNC) to homebuilders such as KB Home (KBH), Lennar Corporation (LEN), and Toll Brothers Inc. (TOL).

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This series breaks down the various indices and helps you learn what insights you can glean from them. If you’re a bank, you’re looking at these indices and trying to determine whether you’re competitive in all the segments in which you want to be competitive. If you’re a nonbank, you might be looking to find out if you’re gaining share or losing share.

If you’re a mortgage REIT, you’re focusing on the refinance index and what it might mean for prepayments going forward. If you’re a homebuilder, you’re watching the purchase index as a way to gauge future demand.

Mortgage rates fall as bonds yields plummet

The average 30-year, fixed-rate mortgage fell 10 basis points, from 3.99% to 3.89%. The ten-year bond yield fell 17 basis points. Rates have been falling in the United States primarily because European investors expect further quantitative easing out of the European Central Bank, and the rally in Europe has pulled U.S. Treasuries along for the ride.

To put the current 1.87% yield on the ten-year into perspective, the German ten-year bond yields just under 43 basis points. Investors are willing to tie up their money for ten years by lending to the German government at less than 43 basis points. The global rally in sovereign debt has been absolutely breathtaking.

Mortgage originators get a new lease on life

The rally in bonds has been an unexpected gift to cap off what was otherwise a dismal year in mortgage banking. The refi (refinance) boom dried up in late 2013, credit has been tight, and the first-time homebuyer has been on the sidelines. If low rates are here to stay, we could see a good year for origination in 2015, which would help originators such as PennyMac (PMT) and Redwood Trust (RWT).


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