Housing prices continue to slow and are hopefully reaching a growth rate in line with interest rates and income growth, but meanwhile the market is trying to determine what the recent weakness in US economic reports.

Retail sales, regional manufacturing and inflation are all off, leaving many wondering what the Federal Reserve will do and if it will officially bring QE3 to an end, as planned, at the end of October.

This week average 30-year mortgage rate dropped below the 4% benchmark. What does this mean?

Analysts with Sterne Agee say in a client note that with the 10-Year down precipitously over the last 5-10 days and mortgage rates again below 4%, mortgage oriented banks are already reporting a significant uptick in origination volume, but surprisingly, MBS values have yet to fully respond.

“We think this will change. We wish all of this were good for the first-time and credit-impaired buyer, but unfortunately what is plaguing these two subgroups is access to mortgage finance, not affordability,” a team of analysts from Sterne Agee wrote in a client note.

Last Monday, rates on 10 Year Treasuries fell, at one point to as low at 170 basis points, and have settled in at a level (2.15%-2.17%) that is ~28 bps below what the market saw a week ago Monday.

“We suspect that most pundits will begin calling the Fed's bluff regarding even the most limited prospects of higher rates and we could be looking for rates to stay low for a long time,” they said.

The analysts note the following: This week Quicken dropped its advertised rate on a 30-year fixed rate mortgage to 3.99% and PNC Financial dropped its rate on a 30-year mortgage to 3.98%. Wells Fargo is still holding out at 4.12%. Primary secondary spread jumped 18-20 bps this week, and they suspect other indicators of gain on sale margins will follow if rates hold this low.

As for the effect on refinancing, they had this to say.

“During this week's 3Q14 conference calls Fifth Third noted a 90% pickup in daily mortgage volume (from $20 to $38 million) and BB&T reported a 30% gain in daily production over the last two days. SunTrust reports today and it will be interesting to hear their perspective on current developments,” they wrote.
As for MBS spreads and MSRs, “So far MBS spreads have widened and related bond values have not yet fully responded to the change in the 10 Year. We are of the view that MBS related spreads will come in and that actual net payment rates will not move up substantially. It's a given that GAAP will demand in 4Q14 that values be written down by some large but (to us) arbitrary amount.”