January 20, 2015
Mortgage rates were truly mixed today, with some lenders improving while others moved higher. More than a few were unchanged or close to it. All this despite the fact that broader interest rate benchmarks like 10yr US Treasuries were unequivocally in stronger territory.
While not common, these divergences between Treasuries and mortgage rates can happen for several reasons, and we're seeing the two most common reasons today. The first issue is the sheer level of improvement so far in 2015 (not to mention the improvement already underway in the past few months of 2014. Such a strong winning streak forces investors to reconsider how they're assigning value to mortgage-backed-securities (MBS). If a big drop in rates means that recently originated loans are more likely to refinance, those loans become less valuable because they're not expected to live as long as they might have in a flatter market.
A related issue occurs primarily at the lender level and is driven by volatility. The higher the volatility, the greater the chances that MBS prices will be something other than flat. Zero volatility = zero market movement. High volatility can happen in either direction, and mortgage lenders have to account for it. The higher the volatility, the more costly it is for lenders, and the effects are seen in the form of higher rates relative to what the rest of the bond market is doing.
The net effect of this mixed underperformance is that the most prevalent conforming, 30yr fixed rate quote remains 3.625%.
As far as root causes for the volatility are concerned, Thursday's announcement from the European Central Bank is the leading candidate. Risk and reward are elevated when it comes to locking and floating, but the volatility is limiting the reward potential in the short term.
Loan Originator Perspective
"Not much happening in rate markets today. Although MBS improved during the morning, they gave the gains back by early PM. Most lenders stayed with their AM rate sheets, which were marginally worse than Friday's. Float with caution, should you chose to float." -Ted Rood, Senior Loan Originator
"We had hoped and expected a bounce today and we got it. Not as big or strong as recent movements, but we weren't expecting anything dramatic prior to the ECB announcement later this week. I favor floating into the announcement, day to day things may change, but floating makes sense to me if you are attempting to obtain a better rate. I am only locking loans closing within 10 days or less." -Constantine Floropoulos, Quontic Bank
"Mortgage Bonds improved today yet many lenders did not reflect these changes on their rate sheets and some even had worse pricing today than the end of the day last Friday. I see rates possibly worsening before they improve. Thursdays ECB decision will be huge and will move the markets. It may not be a bad idea to lock in ahead of the decision and spare yourself the potential market swings." -Manny Gomes, Branch Manager Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 3.625
- FHA/VA - 3.25
- 15 YEAR FIXED - 3.0
- 5 YEAR ARMS - 3.0 - 3.50% depending on the lender
Ongoing Lock/Float Considerations
- 2015 began with a strong move to the lowest rates seen since May 2013. The catalyst has been and continues to be Europe.
- European bond yields trended constantly lower in 2014, thus playing a prominent role in keeping US rates lower than they otherwise might be. Many feel that Europe will continue to slide until their central bank engages in US-style quantitative easing. Some see this happening in early 2015. In any event, we're looking for a turn in Europe, first and foremost, before worrying about the longer-term trend in bond markets being at serious risk of reversing.
- It's impossible to know when Europe will turn a corner, and even then it's only the sort of thing we'll be able to observe in hindsight. That means every head-fake toward higher rates runs the risk of developing into a longer term rise, even if those risks vary greatly in terms of probability. Clients with longer term time horizons and who otherwise don't mind losing some ground in exchange for the chance at locking even lower rates are the only ones who should float. Clients who must close by a certain date or who can't afford to lose any ground on rates should generally be locking even though the longer term trend has been in their favor for over a year now.
- As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.' Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy. It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).