Mortgage rates moved lower yet again on Wednesday. Given that yesterday's average rates were already inching into ALL-TIME low territory, today's improvement resulted in most lenders offering their most aggressive rate sheets ever. For many, that means best-execution rates at 3.375% though for some lenders, Best-Ex remains at 3.5% for 30yr Fixed Conventional Loans.
(Read More:What is A Best-Execution Mortgage Rate?)
After the fed announced an MBS-Specific Quantitative Easing plan last week, prices have risen significantly, and held in strong territory compared to the US Treasuries that normally correlate fairly well. MBS, or Mortgage-Backed-Securities are the tangible and tradable components of what mortgage loans eventually turn into by the time they're ready to be traded in financial markets. Because the Fed announced they will be buying even more MBS than they already were, this has a vastly positive impact on the PRICE, and as prices move up, yields or INTEREST RATES, move down.
But the extent of the MBS rally certainly hasn't been a "one to one" relationship with a drop in mortgage rates--not even before the QE3 announcement. We frequently discuss lenders' capacity constraints as one of the reasons that rates can lag behind improvements in MBS and Treasuries. Certainly, the lower the rates, the greater the demands on capacity, and rates are at all time lows today.
In addition, we've touched less frequently on the topic of volatility. It's equally as important as the capacity issues, but even harder for lenders to solve. Here's what we had to say about it roughly a year ago:
if rates get low too quickly, lenders may lose commitments from borrowers who now seek a lower rate. But the lender has already "accounted for" that new mortgage in their pipeline when you locked your loan (meaning they've promised to sell into the MBS market using your loan as part of that MBS). When that happens, it costs them more money to readjust and consequently will cost future borrowers more money in the form of slightly higher rates.
With several important reasons to avoid dropping rates too quickly, you should expect this phenomenon to continue. That doesn't mean that rates cannot or will not get lower, but simply that the pace of those improvements will definitely continue to be slower than the pace at which the market's underlying securities improve. This shouldn't be viewed as some enigmatic surprise, but rather a perfectly logical fact of life.
Temporary Note On G-Fee Hikes: This is something that's happened before and is something we know will continue to happen (read more HERE), but it doesn't make the effects on rate sheets seem like any less of a shock when they arrive. Lenders have been adjusting their pricing policies more quickly in response to this most recent hike and it has generally been enough to push most scenarios up to the next .125% higher in rate. In our view, this is a MUCH bigger consideration than trying to time highly uncertain financial markets. Bottom line, if you can unequivocally confirm that you're working with a lender who has not yet priced in the Guarantee Fee increase, and that your loan is on a timeline that risks being affected by it, we'd certainly favor locking in those scenarios (not to mention making sure your lender has everything they need to get your loan done without the need for a lock extension, because those are getting much more expensive in some cases if they cause the time frame on the file to cross into the higher Guarantee Fee territory).
Long Term Guidance: While the recently high degree of uncertainty remains very much intact,
the Fed's decision to specifically target Mortgage-Backed-Securities in a
third round of Quantitative easing provides a supportive undertone for
mortgage rates. We'd still advocate not trying to get too far ahead
markets. In other words, we wouldn't try to guess how low or how high
rates might go before changing course. For now, the trend is supportive
and positive for rates, but we're watching it closely for the same sort
of paradoxical responses that occurred in 2010. Things look different
this time around, but a lot of that has to do with Europe. Rates remain
near all time lows and risks of volatility remain high. Those factors
suggest that you stay vigilant regarding the day-to-day swings in
mortgage rates. If you're floating, set a limit as to how high rates
would have to go before you cut your losses and locked. Similarly, set a
target of how low rates would have to get before you lock.
Loan Originator Perspectives
Ted Rood, Senior Originator, Bank Star
Trickle down economics in play on today's rate sheet as lenders start passing along recent MBS gains. Priced a 30 year FHA fixed at 3.25% just now. Biggest mystery is why every borrower over 4.5% isn't on the phone with a loan officer today!
Today's BEST-EXECUTION Rates
- 30YR FIXED - 3.375% - 3.5%
- FHA/VA - 3.25% - 3.5% (varies more between lenders than conventional 30yr Fixed)
- 15 YEAR FIXED - 2.75% - 2.875%%
- 5 YEAR ARMS - 2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations
- Rates and costs continue to operate near all time best levels
- Rates could easily move higher or lower, but given the nearness to
all time lows, there's generally more risk than reward regarding
- But that will always be the case when rates operate near all-time
levels, and as 2011 showed us, it doesn't always mean they're done
- (As always, please keep in mind that our talk of Best-Execution
always pertains to a completely ideal scenario. There can be all sorts
of reasons that your quoted rate would not be the same as our average
rates, and in those cases, assuming you're following along on a day to
day basis, simply use the Best-Ex levels we quote as a baseline to track
potential movement in your quoted rate).