October 17, 2013
Mortgage rates fell significantly today, returning in line with the lowest levels seen in recent weeks for some lenders. Not every lender experienced the improvement in the same way, however, with some still not back to last week's best offerings. Whatever the case, the average top-tier Conforming 30yr fixed rate is back to 4.25% (best-execution). Interestingly enough rates the most comparable day for rate sheets is just before the start of the government shutdown.
Despite our analysis suggesting rates didn't care about fiscal drama as much as they cared about economic data, and despite rates making it right back to pre-shutdown levels, the past week had seen them move higher than they otherwise might if they truly didn't care about the fiscal drama. And now they've moved significantly lower due to the fiscal drama subsiding, one might wonder what gives.
Rates actually did quite a fine job of holding steady during the first part of the shutdown, and the sense that markets were more concerned with economic data and Fed policy was reinforced. Indeed, the shutdown itself was of little concern for rates. The approach of the debt ceiling, however, had a domino effect that ended up doing some damage.
To understand the damage, we need to understand something that rarely comes into play in a discussion of mortgage rates but is always operating silently behind the scenes: the short term funding market. This simply refers to the shortest term borrowing and lending that takes place in massive quantities each day in financial markets. These are the transactions that have shorter time windows than the 2yr Treasury notes, and range all the way down to "overnight" maturities.
This is the lifeblood of all other lending, and it never usually makes the news because it's never stirring the pot in the same way it just did. Of course market participants assumed that the risk of a default would take a toll on these short term funding lines, but the toll ended up being much bigger than expected. If we consider 1-month Treasury bills, for example, the very worst of the 2011 budget battle brought those yields to 0.25%. By comparison, Tuesday night saw them hit 0.50%.
It was by far the biggest spike in short term funding costs we've seen since the onset of the Financial Crisis and it dealt an unexpected blow to the longer term debt market. That means that securities such as the 10yr Treasury and the Mortgage-backed-securities (MBS) that dictate mortgage rates were noticeably affected. Were it not for this short term debt market surprise, longer term rates like mortgages may well have not budged much at all.
Now that the debt deal has been reached, those short term debt markets have thawed quickly, and mortgage rates have been able to correct accordingly. In addition to that, Fed speakers have been unified in suggesting that this fiscal uncertainty and the unknown impact on the economy from the shutdown likely means that any decrease in Fed asset purchases is on hold for the next few meetings (meaning tapering gets pushed into 2014). This only adds to the momentum lower in rates, making the snap back to the best recent levels especially quick.
While it's nice to see rates back at their recent lows, none of the above guarantees a prolonged move just yet. One thing that was true before the shutdown continues to be true now: markets need to see the economic data before they know how to plan for changes in Fed policy! We now know that the important Employment Situation Report will be released on Tuesday, and we can continue to assume this will be the biggest real source of motivation for rates in the near term. Until then, we're right back where we started, with rates locked in a narrow range, waiting on data (though they're at the lower end of that range right now).
Loan Originator Perspectives
"From float cautiously to float undoubtedly. Today's movement is a reminder of the violent swings that occur, fortunately today is in our favor. With the 10 year bond at the low end of the range (2.58-2.75), I would look to lock at these levels. there is a good possibility with additional data the bond market may continue to help us, however that is a risk that most borrowers should NOT take. The range has been clearly defined and in previous weeks the market was not willing to entertain sub 2.60 yields on the benchmark 10 year US Treasury. If technicals say anything, they are saying to LOCK. Based on how things unwind over the next few days, we may see better rates......however the risk vs reward may not merit floating today in most cases." -Constantine Floropoulos, Quontic Bank
"Continued MBS rally today helped rates, although rate sheets may have room for further improvement. It can take several days of continued gains for secondary desks to pass along better rates. We're returned to the low end of our recent range, would be nice to see further gains, but at a minimum, rates are near lows since early July. Going with a short term float bias to see how far this rally will take us, assuming (as always) that borrowers' loan officers are MBS savvy and readily available for pricing questions." -Ted Rood, Senior Originator, Wintrust Mortgage
"Can kicking is good for rates. If you floated overnight, this mornings pricing is better but in my opinion no where near where it should be. MBS have improved by over 100 basis points and most lenders I have reviewed have only passed along just over 1/2 those gains. I continue to favor floating to allow lenders time to pass along gains. " -Victor Burek, Open Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 4.25%
- FHA/VA - 4.0-4.25%
- 15 YEAR FIXED - 3.375-3.5%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- Uncertainty over the Fed's bond-buying plans and more recently over Fiscal Policy has been making for a tough interest rate environment.
- A lack of data due to the government shutdown caused rates to experience moments of paralysis while headlines suggesting the shutdown might/might-not end, as well as a seizing-up of short term funding markets caused unexpectedly high volatility--enough to be felt in longer term rates like mortgages.
- After a deal was reached to avoid going over the debt ceiling, funding markets thawed and rates returned to the same 'wait and see' range that existed before the Fiscal drama.
- Markets continue to be most interested in economic data and it's suggestions about the longer term trajectory of the economy. This will shape expectations for Fed policy in the coming months, and thus inform the direction of interest rates.
- The stronger the data the more likely the Fed is seen as reducing asset purchases. Rates would rise under this scenario, but the most recent FOMC Meeting (and more importantly, the Fed's decision to hold off on tapering, suggests that they'll attempt to keep the pace of rising rates moderate as long as inflation isn't adversely affected.
- (As always, please keep in mind that our Best-Execution rate always pertains to a completely ideal scenario. There are many reasons a quoted rate may differ from 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).