August 15, 2014
There were numerous headlines swirling mid-morning concerning military violence between Ukraine and Russia. Financial markets responded in a big way with stocks losing quit a bit of ground by noon and US Treasuries falling to their lowest levels since June 2013. MBS, however (the mortgage-backed securities that dictate mortgage rates), were not able to experience quite as much benefit, essentially meaning that Mortgage rates didn't improve nearly as much as other sectors of the bond market.
Part of this underperformance in the mortgage market is a simple fact of life when the rest of the financial world is responding to unexpected geopolitical headlines. Treasuries will always glean the most benefit when investors are seeking safe-haven demand amid risks of war, and other serious events around the globe. And while lenders clearly weren't able to pass on as much of the improvements as they otherwise might, we still saw enough of an improvement to bring rates to their best levels since late May.
Today's improvements further solidify 4.125% as the most prevalently quoted conforming 30yr fixed rate for flawless scenarios. 4.25% is starting to fade from view at this point, and 4.0% wouldn't be out of the question if we see just a bit more improvement (though it has a ways to go before challenging 4.125% in terms of prevalence.
So with all the improvements over the past week now adding up to what are effectively the best rates of the year, what should you do if you're considering locking/floating? First of all, it's much better to regret a bad float decision vs a bad lock decision. Beyond that, it's all about setting rules for yourself. There's no question that we have some pervasive momentum toward lower rates at the moment, but there is a question as to how far it will run before turning course. It's not a horrible decision to see if you can keep riding this wave of improvement as long as you commit to locking at a loss if the market moves against you by a certain amount. For instance, if your rate quote rose by .125%, all other things being equal, that might be your limit. Others might have more risk tolerance.
The major word of caution is that all the recent improvements have been extremely hard-fought. We're seeing mortgage rates have a very hard time moving lower at any sort of reassuring pace. The only reason we can say rates are the best in over two months is the combination of an excessively narrow range, and slow, steady improvements that finally crossed their last line in the sand with Today's rally. Bottom line: the trends that have taken rates lower are still intact, but it's never a bad idea to lock when rates are near their lowest levels in over a year.
Loan Originator Perspective
"More improvement today on the heels of more geo-politicall events and a little bit of weaker economic data. I've been cautious through this entire rally to lower rates for short term closings and I remain so. It really won't take much for a reversal and you don't want to be caught short. Again, for longer term closings the 'trend is your friend" theme remains but you need to assess your risk tolerance level before heading out on the float boat for longer than a day or so." -Hugh W. Page, Mortgage Banking Officer, Seacoast National Bank
"Well, we've finally broken lower and due to this I think floating into Monday is the best option. There is certainly some risk, as this move appears to be predicated on the military conflict between Ukraine and Russia. That, of course, means if news comes out over the weekend that implies that there is no more immediately on the horizon, we may see rates rise. That said, there's enough padding that on Monday pricing should be no worse than the same, but has the potential for improvement." -Brent Borcherding, brentborcherding.com
"Lender rate sheets are noticeably better today as a result of weak economic data and news of the conflict increasing between Ukraine and Russia. Current rate sheets are the best we have seen since the end of June, but the benchmark 10 year note was at 2.50 then while currently it is in the lower 2.3's. MBS have a lot of room to catch up or a lot of cushion if treasuries weaken. It is unlikely that the situation in Ukraine improves over the weekend. With lenders slow to pass along the improvements, I think floating all loans over the weekend is worth the risk." -Victor Burek, Open Mortgage
"The Russian "aid convoy" has been a looming threat to create international drama for a week or so, and today that turned to reality. Rate markets reacted with a dramatic rally as both bond and mortgage rates improved. It remains to be seen whether tensions will intensify or wane, but the guess here is intensify. Close to closing? Your pricing has improved and you may want to book the gains. Those with more time before close and attentive, responsive LO's may want to float carefully to see where the drama takes us." -Ted Rood, Senior Mortgage Planner, tedroodteam.com
Today's Best-Execution Rates
- 30YR FIXED - 4.125
- FHA/VA - 3.75%
- 15 YEAR FIXED - 3.25%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- The hallmark of 2014 so far has been a disconcertingly narrow range in rates. Too many market participants bet on rates going higher in 2014, and markets have punished that imbalance with a paradoxical move lower.
- As of June, rates were officially lower year-over-year, but that's due to rates' path higher in 2013. The current path in 2014 remains sideways.
- European markets continue to play a nagging role in the background, generally helping rates in the US remain lower than they otherwise might be.
- From a wider point of view, we're in limbo, waiting for the first significant move away from the narrow range. A rally into late May stood a chance to act as this break, but rates have since returned to what were previously the lower limits of the 2014 range.
- As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.' Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy. It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).