March 2, 2015
Mortgage rates rose fairly sharply to begin the new month as a large corporate bond sale indirectly hurt the bonds that dictate mortgage rates. When a company (in today's case, pharmaceutical giant Actavis) issues debt, it can hurt mortgage rates in two ways. First, and most basically, mortgages are ultimately "debt" as well. Although there are many nuances, generally speaking, after mortgages are packed into securities, investors buy those securities in order to earn interest. Quite simply, if mortgage debt has more competition from other debt (like this big corporate bond offering), prices and demand can fall as investors are enticed to buy the other offerings. Lower prices on mortgage debt mean higher rates for consumers.
An even more direct effect of the corporate bond offering is that the firm selling the bonds frequently locks in their rate of return by effectively selling Treasuries. Corporate bond yields are generally based on Treasury yields plus an additional margin, so selling Treasury securities guarantees at least that portion of the rate of return. This so-called "rate-lock selling" has an immediate effect on Treasuries, and Treasuries have a direct effect on trading levels for mortgage debt.
During these bigger moves in Treasuries, mortgage rates tend to fare a little better, but they still got hit hard today. What had been 3.75% on Friday is now 3.875% in terms of the most prevalent conventional 30yr fixed rates for top tier scenarios. With big-ticket events coming up later in the week, it's not safe to assume rates will be eager to snap back lower just yet.
Loan Originator Perspective
"Despite several economic reports coming in worse than expected, the selling pressure on bonds is continuing. As of noon, most lenders that didnt account for the weakness with the first rate sheets have repriced for the worse already. If you missed an opportunity to lock in this morning, i would look to float overnight. As is pretty common, lenders tend to take away much more than the price drop justifies. And as of 2pm eastern, MBS have already regained about a third of the morning losses. " -Victor Burek, Open Mortgage
"I'm not going to lie. I won't miss February 2015 for both the amount of snow we got or the uptick in rates. March arrives with a weak first day also, so we'll have to play wait and see. Todays cuprits are beginning of the month tradeflows and today we start leading up to Friday's Jobs report so personally I'm not sure we see the markets true direction until after Friday's number. But I'd think we'd be on the defensive/weak side for rates unless we get some really weak data or other news. So for now I think we're floating with a finger near the lock button on deals closing soon. Once we get by Friday I believe the market tells us where were heading from here." -Jeff Anderson, Loan Officer, Salem Five Mortgage, LLC
"Mortgage rates worsened some today. If you absolutely cannot afford or stomach the posssibility that rates may rise some more, you should lock your transaction today. With today's rise in rates, we're really testing the range and a move higher is a very real possibility. " -Brent Borcherding, brentborcherding.com
"Rates worsened a bit today as money poured out of the bond market and make it way into equity markets with the Nasdaq hitting 5000 for the first time in 15 years. Equities have been in over bought territory for quite some time now and are past due for a reversal. Once we see this reversal bonds should benefit and lower rates will be the result. If you have more than 2 weeks before your closing date float." -Manny Gomes, Branch Manager Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 3.875
- FHA/VA - 3.5
- 15 YEAR FIXED - 3.125
- 5 YEAR ARMS - 2.75 - 3.25% 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).