January 4, 2013
Mortgage rates continued higher today, reaching their worst levels since before the Fed announced the specific buying program of Mortgage-Backed-Securities (MBS) referred to as QE3. MBS are the tradable securities that have the most direct effect on lender's mortgage rates. Simply put, yesterday's news showed a less unified ideology among members of the FOMC ("Federal Open Market Committee," or simply, the Fed, which votes on the policies that dictate the MBS purchases). Markets aren't concerned that the Fed will cease MBS purchases in the near term future, but the extent to which opinions differ on the FOMC board, caused market participants to adjust their assumptions about the timing and certainty of the Fed's easing policies.
These considerations won't have any bearing on the actual purchases of MBS any time soon, but the adjustment in the longer term outlook caused a present day adjustment in MBS Prices. When prices of MBS fall, rates rise, and the same is true for Treasury rates. US Treasuries are also currently a part of the Fed's easing efforts and they trade with more liquidity overnight than the MBS that affect mortgage rates in the US. With that in mind, Treasuries continued to weaken in the overnight session, coming into the US hours in significantly weaker territory (in this context, "weaker" means "higher rates").
As trading got underway for MBS, prices opened up at levels not seen since before the QE3 announcement in mid September. That resulted in this morning's mortgage rates at the highest levels since before that announcement. In terms of a best-case scenario 30yr Fixed, Conventional loan, we're looking at a shift from 3.25% during the best days of December to 3.5% today. Lenders vary in pricing and in the cost of "buy-downs" to move between the normal .125% increments in rates. That means that 3.25% is still available, but it would be significantly more expensive than it was on Wednesday--in some cases, as much as 1% of the loan balance in fees (or deduction from rebate). That means that the most efficient combination of rate and fee (or rebate), or Best-Execution, is 3.5%
(Read More:What is A Best-Execution Mortgage Rate?)
There are two tremendously valuable points of view in the "Loan Originator Perspectives" section below. The remarks do an excellent job of representing cases for both an optimistic and defensive approach in the upcoming week. As Mr. Burek notes, many lenders did indeed offer improved rates in the afternoon, but Mr. Rood correctly points out that this still leaves rates at multi-month highs. The question is: will the positive bounce back continue in the upcoming week or is this afternoon merely the eye of the storm? There's no way to know ahead of time, so your level of defensiveness or optimism is a matter of personal preference and tolerance of risk versus reward. Rewards for floating a rate are relatively higher than they were when Best-Execution was 3.25% to 3.375%, but the risks to further weakness are relatively larger as well.
Loan Originator Perspectives
"Rates stabilized today, albeit at the highest levels since late summer. The monthly unemployment report was largely a non-factor as bond markets continued to focus on the Fed minutes released Thursday. We've conclusively broken recent trading ranges in MBS, and it's doubtful we'll regain them soon. If you're floating your rate, look at your pricing options to lock now, don't lament over what might have been had you locked before yesterday." -Ted Rood, Senior Originator, Wintrust Mortgage.
"FOMC minutes really blindsided the markets causing a sharp jump in rates. But at the end of the day, nothing has really changed. Already today we have recaptured over half the losses but lenders are being quite slow to pass along the improvements. As i stated a few days back, the ride may get bumpy and if you can tolerate it, float over the weekend." -Victor Burek, Open Mortgage.
Today's Best-Execution Rates
- 30YR FIXED - 3.375 - 3.5%
- FHA/VA - 3.25% (varies more between lenders than conventional 30yr Fixed)
- 15 YEAR FIXED - 2.875% - 2.75%
- 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.
- (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).