December 20, 2013
Mortgage rates bounced back today, recovery the ground they lost in yesterday's move to 3-month highs. Today then, is the second worst day in 3 months, at least for those who don't need a long lock time frame (more on that below). 4.625% continues to be the most prevalently quoted rate for ideal, conforming 30yr Fixed scenarios (best-execution) for normal lock time frames.
So what's with this mention of "lock time frames?" It has to do with the recently announced increases to the Guarantee Fee imposed by Fannie and Freddie's conservator the FHFA. There seems to be a lot of confusion and even lack of awareness both in the consumer and originator communities about the very real damage this may have already done to your rate quote. Let's clear that up, or begin to anyway.
Fannie and Freddie have always charged a fee (Guarantee Fee or G-Fee) to lenders in order to guarantee the timely repayment of principal and interest. Historically, it's amounted to about 0.25% in terms of interest rate. Since the onset of the financial crisis and particularly during the last few years, the fee has risen such that it's now adding just under 0.5% to rates.
The actual amount of the G-Fee is not important for the purposes of this discussion. The only time a consumer will notice or care about G-Fees is when they CHANGE, and that's precisely what's happening right now. Written into the very legal definition of the G-Fee is the fact that it MUST increase by 0.10% (in terms of rate) on average each year. All things considered, a 0.10% increase per year isn't much, but it can be quite noticeable when it first takes effect.
Here's why: The FHFA (that's who oversees Fannie and Freddie) says the new, higher G-fee has to be collected on loans that Fannie and Freddie buy on or after April first. BUT THAT DOES NOT MEAN RATES WON'T FEEL THE IMPACT UNTIL APRIL 1ST! A loan that is purchased on or after April first would have to have been acquired by the lender in March or sooner, and such loans may have been at the closing table all the way back in February.
If we know that the G-fee may affect loans closing in February and March, and we know some loans lock for 60 or more days, that means that the new fee will be in effect for some loans RIGHT NOW if the lock time frame is long enough! This has already been announced by several large lenders and you can safely assume that more will follow shortly.
Here's what the difference looks like: Lenders tend to convey the change in terms of COST as opposed to rate. In most cases, it's around 0.7% of the loan amount such that a $200k loan would require an additional $1400 in upfront costs (.7% x $200k) in order to lock the same rate after the fee change. It has ALREADY HAPPENED that some borrowers considering a 60 day lock a few days ago would now be charged that higher amount to lock the same rate. For those borrowers looking at those time frames, that's unfortunate.
Most borrowers lock for 45 days or less these days. That's why it's so very important that you understand what's about to happen to your rate. I don't originate loans and I'm in no position to benefit from telling you this. There is no way you can avoid this increase in cost if you don't lock before it happens and there is no way the increase will not happen (unless the law happens to change very quickly). The fact that it has already happened for 60-day+ lock time frames at many lenders is proof positive that it will happen for 45 day time frames about 2 weeks later and 30 day locks 2 weeks after that.
Please keep in mind that this entire discussion on fees is independent of market movement. If rates happened to recover further, it's possible such a recovery could offset the fee hikes, but as you know, that's never a guarantee and certainly not something to plan on. Assume that rates can go higher or lower, but rest completely assured that there will be an automatic and unavoidable move higher in the near future for 45-day locks. Some lenders still haven't changed 60 day locks as well, but it would be shocking if it that doesn't happen next week.
Loan Originator Perspectives
"Small pullback and improvements like the one we have seen today are the ones I feel are prime opportunities to take the improvement in pricing and lock your loan. Unfortunately, today is essentially a Friday before a two week period of lightly staffed desks and what will certainly be an illiquid market at year end, so secondary departments will be hesitant to improve pricing, and if they do, it will likely be a minimal improvement. " -Stephen Chizmadia, Mortgage Advisor, American Capital Home Loans
"Moderate rate improvements today, a welcome respite from recent losses. The Fed's taper announcement has been received without much drama. As we look to 2014, however, LO's and borrowers need to beware the pending changes to Fannie/Freddie's risk based pricing adjustments that will soon affect the vast majority of loans. Rates are going up from these, even if MBS pricing remains the same. " -Ted Rood, Senior Originator, Wintrust Mortgage
"Surprise surprise. Maybe the beginning of tapering will usher in lower bond yields....what?? Wishful thinking, but one can have a dream. Still favor locking asap. Little pre-Christmas present. " -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).