Mortgage Rates moved sharply higher today after markets received additional indications that the European Central Bank, or "ECB," is intent on doing something to control unsustainable borrowing costs in beleaguered Spain and Italy. Global rates markets care a lot about those unsustainable borrowing costs at the moment as their seen as one of the leading indicators of an impending Euro zone collapse.
The prospect of that collapse is one of the key ingredients ingredients in the generally low and sideways interest rate environment that we experience here at home. This occurs because US Treasuries are a "safe haven" for investors wishing merely to keep their money safe and liquid as opposed to earning much interest on it. It filters down to mortgage rates because Mortgage-Backed-Securities (or "MBS," the most influential motivator of mortgage rates) tend to move in the same direction as Treasuries.
As you can imagine, the more dire the global economic situation is perceived to be, the greater the motivation for investors to merely "not lose money" can be. The sums of money changing hands in capital markets can't simply be deposited in banks, so investors seek financial vehicles that are similarly secured and that offer something analogous to what the FDIC offers US bank members in the form of some sort of insurance of their deposits.
In the case of Treasuries, that insurance is "the full faith and credit of the United States Government." That may mean different things to different people, but to investors, it's relatively iron-clad. Strong European countries are in similar shape, but being closer to the epicenter of the crisis, their yields have been pushed even lower (Germany recently hit 1.15% for 10yr yields). US Treasuries can be thought of as benefiting (and suffering) from the effects of "spillover" in supply and demand for those safe-haven European debt instruments.
So what happens when the situation seems less dire, or when news comes along that suggests something may soon happen that will ease tensions and lower funding costs for the vanguards of the crisis? What if that happens 3 days in a row with the 3rd day seeing outright confirmation that the president of the ECB will meet with the German Central Bank, who has been the most obstinate opponent of further ECB intervention?
In short, you get today. You get a day where markets observed the situation slide into greater and greater states of injury at the beginning of the week only to have a big "band-aid" discussed, rumored, ordered, and shipped over the ensuing 4 days. Today's news really tried to give the impression that the band-aid was in mail and so markets moved back into a stance that is slightly more tolerant of risk, which connotes higher interest rates across the board.
All in all, however, it's clear that today's big moves are only big relative to the recent uncanny level of stability. In the bigger picture, markets fully see the band-aid for what it is: a temporary fix that might or might not better facilitate the healing process. Whether or not that healing process will come is still a topic of great debate, but the risks today are that the "healing process" camp will "get a turn" to control market momentum recently dominated by that "safe-haven" demand that had been keeping rates nice and low.
This could be a phenomenon that disappears over the weekend or that is completely reversed by next week's important Fed policy announcement. But the risk is that the Fed makes no indication of further supporting domestic bond markets which would make for a one-two punch for mortgage rates. EVEN THEN, the low rate environment would be far from crushed. It's going to take a lot more out of Europe to reverse the general state of things in rates markets. BUT, it could be placed on hold for a short time. In the past, we've seen this play out over the course of about 30 days at most.
Bottom line, we're not yet scared enough of recent grumblings out of Europe or today's swift change in rates to fear the worst by any means. But as always, we want you to be aware of the possibilities. One possibility is that it takes longer than it recently has for rates to get back down as low as they were a few days in the past. That hasn't been much of a problem for most of 2012, but if the wrong things happen next week, we could be looking at an extended departure from all-time lows. As to the probability of those things happening, it's anyone's guess. What we do know is that for most lenders, rates are still very close to all-time lows. In many cases, Best-Execution simply continues to be 3.5% for conventional 30yr Fixed loans, whereas some lenders who were at 3.375% have now certainly moved up to 3.5%.
(Read More:What is A Best-Execution Mortgage Rate?)
Long Term Guidance: We'd continue to advocate against trying to "get ahead" of current market movements due to the high degree of uncertainty. In the past, we would have interpreted that advice as a suggestion to lock, but in the recently "low and sideways" environment, it's probably better-read as a suggestion to go with the flow of gradually lower rates until we see the pattern definitively break. It's a reasonably safe assumption that European concerns will generally continue to apply downward pressure on rates although there are no guarantees that the right piece of news or economic event couldn't mark "the turning point" at which rates bottom out. On any given day, rates have been at or near all-time lows and in the grand scheme of things, unable to move lower as quickly as Treasuries for example. So although there is potential gain from floating, it's still a historically excellent time to lock if you'd prefer to take the risk off the table.
Loan Originator Perspectives
Brent Borcherding, Capital M Lending
Yikes, today's move looked a bit scary but I bet Monday's rate sheets
are going to look worse than even the afternoon reprices. I think there
is still a little more worse in our near future, before we start to
improve back to previous levels. If you have 30 days, float 'em, but if
you're going to be locking in the next 3-4 business days...you may just
have to take your medicine now.
Victor Burek at Benchmark Mortgage
Mortgage rate suffered their worst day in several months today. My advice over the last couple months has been to lock if within 15 days of closing and float everything else. Today, I favor floating everything. Reason I have continually said to lock if within 15 days of closing is days like today. I definitely feel we will regain today’s losses over the next week or two. So if you were over 15 days yesterday, you have plenty of time to ride it out. Best rates remain ahead of us.
Julian Hebron, Branch Manager, Loan Agent, RPM Mortgage
The best blog headline I saw this week was today: "Market With A Draghi
Tattoo." Draghi is the Bernanke of Europe and his vow this week to help
Europe caused stocks to rally and MBS to sell off, pushing rates up the
past 2 days. Fundamentals supporting lower rates haven't changed, but if
consumers didn't lock rates up through Wednesday, they'll have to wait a
bit. Floating into the weekend, but very cautious going into a huge
week with home prices, inflation, a Fed meeting, and July jobs report.
Mike Owens, Partner with HorizonFinancial, Inc.
Well well...rates moved up and the locked loans are safe. Rates may
come back down since nothing has really changed from a global economy
standpoint, but what if they don't. What if we just saw the last of
3.5% and lower? Since my whole pipeline is locked I don't have to
worry about that scenario. Then again I do hope this is just a
headfake and we come right back down. But we live in a traders world
and they control the markets. I don't feel this is the sign of higher
rates to come, but then again who knows.
Today's BEST-EXECUTION Rates
- 30YR FIXED - 3.5%, Some Approaching 3.375%
- 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
- Current levels have experienced increasing resistance in improving much from here
- Rates could easily move higher or lower, but given the nearness to all time lows, there's generally more risk than reward regarding floating
- 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 improving.
- (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).