January 7, 2015
Mortgage rates moved slightly higher today, but remained close to the lowest they've been since May 2013. The only day with any lower rates since then, was yesterday. The pull-back was a bit better than random, as we'd just seen our 7th straight day of improvements culminating in the biggest move on the final day. When that happens, it becomes increasingly likely that the next day will send rates back in the other direction.
With that in mind, today's rise in rates was fairly modest--much more so than the pull-back seen after the last similar example on October 15th. Conforming 30yr fixed rate quotes for top tier borrowers are still in the 3.625-3.75% range, though 3.75% is much more prevalent. Even for scenarios with some 'hits,' it can still make sense to pay more upfront in exchange for a lower rate. For instance, a borrower being quoted 4.0% for a no closing cost loan might find that paying points to drop the rate to 3.875% or 3.75% is cost-effective at the moment. This depends greatly on personal preference, but those buydown costs are historically low at the moment. It would take less than 5 years to break even in most scenarios.
The exception today's ground-holding is government loan rates. After today's announcement regarding a reduction in FHA mortgage insurance premiums (MIP), investors shunned the bonds that back those loans. This happened because the drop in MIP suggests current versions of those bonds will have shorter lifespans as borrowers are more enticed to refinance. The shorter the expected life of those bonds, the less they're worth to investors, and they demonstrated that today by offering lower and lower prices. The lower the price of those bonds, the more pressure lenders are under to raise rates, and many did just that. The interesting part is that most of the changes were specifically to the affected programs. In many cases, lenders IMPROVED rates for conforming loans while FHA pricing deteriorated. Unfortunately because FHA and VA loans are backed by the same type of bond, VA took a hit as well, even though it wasn't part of the announcement.
Loan Originator Perspective
"No surprises from the FOMC minutes released this afternoon. Europe continues to struggle which should keep mortgage rates low. I continue to favor locking short term loans, and floating all others." -Victor Burek, Open Mortgage
"Great start to the new year for rates, even with the slight pull back from the lowest rates in 20 months. U.S. bond markets are along for the ride, focusing on global issues rather than domestic. It’s hard to not lock, in my opinion, since a renegotiation would be possible if rates drop further."-Michael Owens, VP of Mortgage Lending, Guaranteed Rate
"All things considered today is a good day for bonds even though rates ticked higher, as we expected a pull back here. Yields have stayed tame, below 2% all day on the 10 YR Bond, and we may see another leg down to come. Profit taking is expected, but with all the negative economic buzzing abroad, rates may be poised for even better days to come. Floating may pan out to be the most lucrative/beneficial over the course of the next few weeks, but locking in at these levels can not be deemed foolish." -Constantine Floropoulos, Quontic Bank
"After a pretty nice run mortgage bonds had a down day. The losses however were not to bad but more could be on the way especially with it being jobs week. I would be locking in at this point and not taking unnecessary risk. There is more to loose than gain at this point " -Manny Gomes, Branch Manager Norcom Mortgage
"Small pullback today in pricing as markets seem to pause now in anticipation of the Jobs Report on Friday. Although other weaker data in Europe and the Oil story has been driving trends lately Jobs always have the potential to move things and frequently in a bigger than expected way. So pay attention closely. I'm still recommend locking up short term closings to take advantage of some of the best rates we've seen in some time and floating cautiously beyond that. " -Hugh W. Page, Mortgage Banker, Seacoast Bank
Today's Best-Execution Rates
- 30YR FIXED - 3.625-3.75
- FHA/VA - 3.25
- 15 YEAR FIXED - 3.0-3.125
- 5 YEAR ARMS - 3.0 - 3.50% depending on the lender
Ongoing Lock/Float Considerations
- The hallmark of 2014 was a narrow range in rates. Too many market participants bet on rates going higher in 2014, and markets punished that imbalance with a paradoxical move lower. This continues to serve as a reminder that prevailing beliefs about where rates will go won't necessarily be correct simply because they're the most prevalent.
- 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.
- Much of 2014 could be considered "sideways to slightly lower" in terms of mortgage rates. All things considered, it actually has been a remarkably gentle drift lower. Things became less gentle in mid October when rates briefly broke into the high 3's. They came back for a more gradual, determined push into the 3's in December. Some of the late-year strength was chalked up to an epic slump in oil prices. This drags inflation expectations lower, which is a net-positive for interest rates, but it could be debated as to whether oil prices were a chicken or an egg in the global growth story.
- 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).