December 19, 2013
Mortgage rates continued higher today, reaching levels not seen since the week before the FOMC Announcement in September. Today's weakness owes itself completely to yesterday's news. While the Fed's decision to "taper" didn't cause an excessive move higher yesterday, it did confirm the significant move higher that began in May.
While we're not moving higher at the same pace seen in May and June of this year, the determination is as high as ever. In a real sense, the pace of the movement--in general--and the mass behind it, are glacial.
Against the backdrop of that overall gradual move higher, we have had, and will have our ups and downs. Some days will be flat. Some days we'll improve or deteriorate modestly, other days a lot. Today was a bit more than modest for most lenders, though some borrowers will only experience it in terms of closing costs.
That means that 4.625% remains intact as the most prevalently quoted rate for ideal, conforming 30yr Fixed scenarios (best-execution), but that it will be more expensive to obtain than it was yesterday. 4.75% is creeping up quickly.
If it seems like rates have been slow to move up recently despite talk of "higher rates," it's because the gap between rates (usually 1/8th or .125% increments) has gotten increasingly expensive in terms of PRICE (related in terms of percentage of the loan amount such as 0.75 = $750 on a $100,000 loan).
In the past, when we've discussed "affordable buydowns," that might look like .4 to .5 in terms of upfront cost to move between rates (i.e. paying to move an eighth lower in rate, or being charged less to move an eighth higher in rate). Those same costs are now closer to 1.0, meaning that it costs more to buy down to the next lower rate, but that there is also better insulation from being pushed up to the next eighth higher in rate or better compensation in terms of decreased closing costs if you do move to the next higher rate.
So will rates continue to go higher? Remember the glacial pace with ups and downs. There will always be pockets of correction and consolidation even within broad trends higher. The entire month of October was a great example. Whether or not we'll see another extended period of time like that in the near future is uncertain, but less likely than it was for two reasons.
First, the tapering corner has been turned. Even though markets will continue to speculate about whether or not each upcoming Fed Announcement will result in another $10bln reduction in bond buying, the biggest speculation as to whether or not the process will start, is in the books. Some have suggested that this calms volatility, and that may well be true, but it was volatility working in our favor that allowed October's little bounce back to happen.
The other incredibly important factor is the recently announced increases to the Guarantee Fee imposed by Fannie and Freddie's conservator the FHFA. This will raise rates by .25-.375% for many borrowers by the time the up-front cost changes are applied, and that's happening a lot sooner than most people realize.
In fact, at least one big bank has already applied part of the G-fee change to rate locks of 60 days. It instantly made those locks way more expensive than they were yesterday. Borrowers would either pay for it by moving up to the next eighth of a percent higher in rate, or by raising their up-front costs by around three quarters of a point (so $1500 on a $200k loan). If 60 day locks just took the hit, it will be 2 weeks or less before it affects 45 day locks. Time is ticking...
Not only does this put a big consideration on the horizon, but it also means that lenders aren't going to be too eager to put out lower rates between now and then because it's unprofitable and unwise for them to get locked into earning interest rates that aren't in line with the rest of the market in a few weeks' time.
Loan Originator Perspectives
"The same song and dance continues. Matthew Graham equated the recent trend in rates this morning to "glacial momentum higher in rates." I think this is a perfect analogy. It will take something big to break up the glacier slowly moving down the hill (or up in rates) at this point. I still think locking at or shortly after application is the best move for the foreseeable future." -Stephen Chizmadia, Mortgage Advisor, American Capital Home Loans
"More deterioration in MBS markets today as bond investors pondered the short and long ramifications of yesterday's Fed tapering announcement. As noted repeatedly, we're in a rising rate environment, even before new pricing adjustments from Fannie and Freddie kick in over the next couple of months. Mid-upper 4's may not seem like exceptionally appealing rates now, but rest assured in a few months we may be wishing they were still available." -Ted Rood, Senior Originator, Wintrust Mortgage
"The tourniquet seems to be applied stopping the slow bleed to weaker levels. Would be nice if the worst is behind after the first taper announcement, but that is wishful thinking. Floating in hopes of a meaningful drop is asking for pain in my opinion. " -Mike Owens, VP of Mortgage Lending Guaranteed Rate, Inc.
Today's Best-Execution Rates
- 30YR FIXED - 4.625%
- FHA/VA - 4.25%
- 15 YEAR FIXED - 3.5%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- The prospect of the Fed reducing its asset purchases weighed heavy on interest rates for the 2nd half of 2013, causing volatility and generally pervasive upward movement.
- Tapering ultimately happened on December 18th, 2013. Markets had done so much to come to terms with it ahead of time that it essentially just confirmed the the 6 month move higher in rates, but didn't make for another immediate spike higher.
- That said, we should assume that we're still in a rising rate environment on average.
- NOTE: Lenders will be adjust rate sheets at various times in December and January to account for the most recent hike in Guarantee Fees. This will unequivocally raise rates by at least an eighth of a percent for almost every borrower, and in most cases .25-.375%. Depending on the lender, those changes will take place overnight and have already begun.
- (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).