September 18, 2013
Mortgage rates surged lower today following the long-awaited policy announcement from the Federal Reserve. Conforming, 30yr Fixed rates fell to 4.5% with some of the more aggressive lenders still competitively priced at lower rates (best-execution). This doesn't mean that 4.25% at one lender would be equivalent to 4.5% at another lender in terms of closing costs--simply that the 4.25% scenario may be worth looking into to see if the extra cost makes sense for you.
Financial markets have been eagerly waiting to see if the Fed would move to reduce the amount of Treasuries and Mortgage-Backed Securities it purchases each month in conjunction with QE3 (the third round of "quantitative easing" announced in September 2012). Those purchases have played a key role in keeping interest rates grounded, and just the expectation that they'd be curtailed, has been enough for a relatively meteoric rise in rates since those expectations began ramping up in earnest 4 months ago.
The Fed only meets 8 times a year and only 4 of those meetings boast the full slate of events that include updated economic projections from Fed governors and the press conference with the Fed Chairman. While every meeting ends with a policy announcement, the specific task of adjusting asset purchases is seen as coinciding with one of the meetings where the Chairman can further discuss the decision in the press conference.
When the Fed abstained from cutting asset purchases in the June meeting, markets generally accepted that today's meeting would be the most likely opportunity to announce such a thing. Not everyone agreed. Detractors cited early warning signs that the economy wouldn't grow as quickly as the Fed expected (if at all) in light of interest rates that had risen "too fast." That logic notwithstanding, fears remained that the Fed wouldn't have enough hard evidence to make the same determination, and today remained the consensus for a tapering announcement.
But the Fed Didn't Taper!
Even without as much hard evidence as they might have liked, we saw a change in tone from the Fed today--one that respected the possibility that rising rates may have already had consequences that simply hadn't shown up in the longer term economic data yet. While it almost seems to indicate the Fed is responding to markets more than the economy (bad), the economic data would still have to justify their hesitation (good). If it doesn't, then tapering expectations will simply increase again ahead of the next meeting, to whatever extent economic metrics are also improving.
One of the key reasons that tapering expectations detached somewhat from economic data (stronger economy = more likely to reduce purchases) is the perception that the Fed was feeling like they'd left accommodation in place for too long and for some reason were in a hurry to get out of the market. If inflation rises or their presence in markets causes unforeseen disruptions, they may still end up in such a position, but today's announcement shows that they're not feeling that sense of urgency yet.
If you had been wondering "how could the Fed do something that would raise rates even more when rising rates have so clearly damaged the mortgage and housing markets they've admitted are central to the recovery?" then this is a refreshing instance of logic prevailing. While today, in and of itself, isn't enough to declare the "rising rate environment" defeated, it's the first, best chance at a significant correction/consolidation in four months.
Loan Originator Perspectives
"It was Christmas in September today as the Fed surprised markets and pleased loan officers by not tapering. MBS, treasury, and stock markets all rallied broadly as the prospect of QE Infinity. While it will take severe economic malaise or international drama to rally us back to last spring's levels, it's safe to say we'll be enjoying lower rates for some months. Lock desks no doubt less than thrilled with the prospects of renegotiating existing rate locks, most lenders have at least some recourse for improving pricing on locked loans, given sufficient market improvement." -Ted Rood, Senior Originator, Wintrust Mortgage
"I don't think there was much more we could have asked for from the Fed today. The vast majority of economists and experts expected the Fed to taper purchases of treasuries and MBS, but that didn't happen. The economic conditions didn't further improve to warrant this action, so rates rallied. If you were brave enough to float overnight, you were greatly rewarded today with the biggest rally in quite some time. I favor floating all loans overnight. As always with rallies, lenders are very slow to pass along the gains so even if your lender repriced better there is still plenty of price improvement to be passed along. Thank you Ben and Federal Reserve Open Market Committee. " -Victor Burek, Open Mortgage
"Taper off/ rally on! Hopefully you fell off the fence! If not, be prepared to do so before year end." -Bob Van Gilder, Finance One Mortgage
"Couldn't ask for anything more. Although we have to consider that eventually the taper will occur and borrowing costs will go higher, we live to see historic lows for a while longer. This is an excellent opportunity to lock in, and for fence sitters to get back in the game. Remember, here today gone tomorrow, that's how rates work, don't take today's movement for granted." -Constantine Floropoulos, Quontic Bank
Today's Best-Execution Rates
- 30YR FIXED - 4.5%
- FHA/VA - 4.25
- 15 YEAR FIXED - 3.625%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- Uncertainty over the Fed's bond-buying plans is causing immense volatility in rates markets and generally leading rates quickly higher
- Expectations for "tapering" (a reduction in "QE3" asset purchases) mounted over the summer and September 18th was seen as the most likely day for a potential tapering announcement
- But the Fed decided to keep a change in QE amounts on hold until the economy could more convincingly show that rising rates (which had been rising because markets expected the Fed to taper!) wouldn't be too big an impediment to further improvement.
- That brings us to a more uncertain situation than we've been in recently. It's too soon to declare the "rising rate environment" defeated, but September 18th marks our best recent opportunity for an extended hiatus.
- The extent to which that remains true relies on incoming economic data. Strong data will increase the speculation that the next Fed meeting will contain a reduction in purchases
- (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).