May 21, 2014
Mortgage rates held almost perfectly steady today, despite the potentially important release of last month's meeting minutes from the FOMC (aka "The Fed"). That said, markets arguably had already reacted to some of today's information during yesterday's trading session when NY Fed President William Dudley alluded to it. The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains 4.125%, but many lenders remain better-priced at 4.25%. "Better-priced" in this context, means that the combination of closing costs and contract rate (the actual interest rate at the top of a mortgage quote) presents better bang for the buck.
One of the factors helping mortgage rates stay historically low over the past few years is the Fed's direct purchase of Mortgage-Backed-Securities (MBS). Simplified to the extreme, this means the Fed is fronting the money for all new Conforming mortgages. Individual mortgages comprise MBS, and the Fed buys MBS, thus providing constant demand and liquidity in the mortgage market. Because people make payments on mortgages every month, the Fed is receiving income on their mortgage holdings every month. Currently, they reinvest all of that income back toward buying more MBS.
In 2011, the Fed laid out a loose framework for how they might begin to back out of their supportive role when the time was right. The first step at that time was to stop that practice of reinvesting the monthly income, assuming the outright purchases had already been wound down. But just yesterday, Fed's Dudley suggested that framework might need to be revisited, and perhaps the Fed should look at raising it's key policy rate before it decreases it's MBS reinvestment. This also complemented recent statements from other Fed members regarding the questionable health of the housing market.
In other words, the Fed is concerned about housing, and they want to make sure they're doing enough to support what they see as a vital cog in the recovery. Long story short, if markets are led to believe the Fed will reinvest money into the bond market for a longer period of time than previously thought, it's positive for the bond market. When something is positive for the bond market, it helps bond prices move higher and rates move lower.
We definitely saw some of this yesterday after Dudley. Bond markets "bought the rumor" that the Fed was considering a change in their exit strategy. Then today, when the Minutes were released, that rumor proved to be true, but in a way that was as anticlimactic as possible. There was no change to the strategy, but the Minutes did indicate that the Fed was discussing it. As such, markets didn't really learn anything new, and thus had very little reaction today to the news they'd already begun accounting for yesterday.
Loan Originator Perspectives
"Some small knee jerk reaction to the FOMC minutes released this afternoon, but after the dust settled, we were virtually unchanged from prior rates. It's nice to hold onto the improved pricing from yesterday, and also good that Fed Minutes confirmed no looming rate hikes and mentioned tame inflation. Looks like rates are comfortable in their current range. My bias remains float for now if closing is 30 days+, consider locking if less than 30 days." -Ted Rood, Senior Mortgage Planner, tedroodteam.com
"The FOMC minutes didn't offer really any surprises, but we did get our customary volatility following the release of the minutes. I am continuing the same advice for rate shoppers, if within 15 days of funding, its probably best to lock up now as rates are holding near the best levels seen in quite some time. Longer term closings, I would float to see if we can break through the current range to lower rates. Even if we don't, if you can float to a 15 day lock, that will render you the best pricing terms." -Victor Burek, Open Mortgage
"Fed minutes revealed while a rate hike is on the discussion table there will be no action for quite some time. This should be bullish for bonds and I expect the current trend lower in rate to continue. Keep floating but do continue to be cautious of market volatility." -Manny Gomes, Branch Manager, Norcom Mortgage
"LOCK--Until we see a sustained move lower in rates, remain at the bottom of the range and the greatest risk is to the upside. If you're evaluating the odds, you have to presume there is a significantly greater chance rates rise in the next 5 days than move lower." -Brent Borcherding, www.brentborcherding.com
Today's Best-Execution Rates
- 30YR FIXED - 4.125%-4.25%
- FHA/VA - 3.75-4.0%
- 15 YEAR FIXED - 3.25-3.375%
- 5 YEAR ARMS - 3.0-3.50% depending on the lender
Ongoing Lock/Float Considerations
- The Fed has stayed the course on their $10bln per meeting reduction in bond buying, though markets have handled it relatively calmly compared to the days of "coming to terms with tapering" in 2013.
- Rates fell significantly in January, leveled-off in February and took choppy steps higher in March. From there, they settled into a flat range mostly consisting of 4.375 and 4.5%, but with occasional forays to 4.25 and 4.625%.
- While the bias had been very slightly toward higher rates, it reversed course in April and rates returned to the lower end of the range by May 1st. As the "weather effects" fall out of the spotlight, market participants are seeing a bit more organic weakness in the economy than they'd expected.
- Earlier in May, the focus looked to be returning to economic data, but that proved short-lived as prospects for European central bank easing overwhelmed some of the incoming data, pushing rates lower while data suggested a move higher.
- As of the third week in May, rates were as low as they've been since June 2013, more than confirming a break below the 2014 range.
- Looking back at recent movement, it's had a disconcertingly small amount to do with 'normal stuff' like economic data and Fed policy. Temporary and unpredictable factors currently account for too much of the movement to make firm bets on rates moving either direction in the short term.
- (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).