January 25, 2013
Mortgage rates skyrocketed to their highest levels since August on Friday, both as a part of an ongoing move higher that began yesterday and more specifically in reaction to overnight events in Europe. Strong economic data in Germany sent interest rates initially higher overnight, but the bigger surge followed an ECB announcement detailing the 278 of 523 European banks that had already begun paying back 3-year loans made by the ECB in late 2011. MBS (the mortgage-backed securities that most directly influence rates) opened in much weaker territory and continued to sell-off throughout the day.
When MBS "sell-off," prices are falling, meaning investors are paying less for mortgages. This causes closing costs, rates, or both to move higher. Depending on the lender and the particulars of the scenario, many borrowers will be looking at actual adjustments higher in RATE today, whereas most days simply see fluctuations in COST. Best-Execution for 30yr Fixed, Conventional loans is in transit between 3.5% and 3.625% at the moment, after being closer to 3.375% to begin the week. We haven't seen 3.625% Best-Ex since QE3.
(Read More:What is A Best-Execution Mortgage Rate?)
As we've sometimes discussed in the past two years, European market events can definitely have an impact on interest rates in the US. Last night's news was significant because it constituted an acid test of the short-term funding stability in the Euro-zone, something that's at the heart of push to all-time low rates in 2012. Markets new that the ECB would be announcing details about repayments but the number of banks as well as the €137 billion total repayments were higher than markets expected.
We know that US Treasuries have been a major beneficiary of the "safe-haven" demand stemming from fears of a Euro-zone collapse. And we've seen a volatile, but noticeable shift away from that safe-haven demand over the last 6 months. Mortgage-backed-securities have been relatively more insulated from that shift due to the mid-September QE3 announcement when the Fed began buying MBS outright (again). Treasuries carry lower risk and thus lower yields, but the Fed's support via QE3 got mortgage rates closer to Treasury yields. Still, there's only so much room for that gap to close before mortgage rates are forced to follow Treasury yields higher.
That gap or "spread" as it's referred to in bond market jargon was already in the process of adjusting after QE3 and by the new year, it was clear that mortgages weren't going any lower relative to Treasuries. Ipso facto, a big shock for Treasuries--one that moves yields significantly higher--is also a big shock for mortgage rates.
We've experienced those big shocks both at home and abroad, but it's the combination of the two that's posed the most insidious risk to the interest rate outlook. Not only did the European news hurt rates overnight, but yesterday's strong Jobless Claims report (2nd week in a row) causes concerns about next week's bigger Employment Report as well as the Fed policy statement on Wednesday. The Fed policy statement currently includes employment thresholds, leaving nothing to doubt as to labor markets being a lynchpin for policy changes. If markets think that employment will continue to improve, they'll view the Fed as less likely to continue Quantitative Easing, which is a major driver of low mortgage rates.
Because of that, there could be an extra bit of defensiveness baked into interest rates as we head into the weekend. The positive eventuality would be that the Fed stands firm in their accommodative resolve and that Friday's jobs report is weaker-than-expected. The downside is that the fears markets may be defending against, are realized if either (or both) of those things don't happen. In that second situation, rates could easily continue higher, but in any event should be rather volatile next week.
There's no two ways to say it... It sucks to be forced to lock a rate after a big move higher. We don't know where rates will open up on Monday, and historically, big moves like today's tend to get a few brief instances of respite even if rates ultimately continue higher. It could even be the case that today's rates are the highest we'll see for weeks to come. But most importantly, we'd note that the aforementioned instances of respite don't always happen, and when they don't, things tend to move in the other direction in a big way. Please be aware that this is a risk in floating at the moment, should you be considering trying to take advantage of any potential pull-backs.
Loan Originator Perspectives
"We broke our recent trading range today, and borrowers who've been procrastinating on locking or starting their loans will be in for a surprise when tbey talk to their loan officers. Even if you don't want to lock based on this week's losses, get your loan going now so you can be ready to pull the trigger when the time is right." -Ted Rood, Senior Originator, Wintrust Mortgage.
"Rates started January by rising .125%, then rebounded for a short period, and have now resumed their upward trend. I've been saying since last week that rate shoppers holding for better may be disappointed. That's the case today as a sharp MBS selloff has sent rates up another .125%. Rates are still quite low but the time for complacency is ending. I explain why here." -Julian Hebron, Branch Manager, RPM Mortgage.
"Today is U G L Y----" -Bob Van Gilder, Finance One Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 3.5% - 3.625%
- FHA/VA - 3.25% (varies more between lenders than conventional 30yr Fixed)
- 15 YEAR FIXED - 2.875%
- 5 YEAR ARMS - 2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations
- Rates have risen moderately from their all-time lows, making for relatively increased reward for floating at the expense of greater risks of loss.
- Rates could easily move higher or lower, and unscheduled, unexpected events can ultimately have the most say in the direction.
- Near term risks in 2013 include the upcoming debt-ceiling debate in Washington as well as the Fed's policy outlook regarding securities purchases.
- Prospects For Extending The Debt Ceiling Deadline currently seem to be preventing a move back down in rate. Passage of such legislation could further support a rising rate environment.
- (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).