May 12, 2015
Mortgage rates moved disconcertingly higher again today, despite the fact that underlying market levels actually improved during the day. Guaranteeing rates in such a volatile environment is expensive for lenders. The result is yet another high for 2015. The average lender is quoting conventional 30yr fixed rates of 4.0% on top tier scenarios. Just a few short weeks ago, the average rate was 3.625%. That makes this the most abrupt move higher in roughly 2 years, with the last notable example being the mid-2013 'taper tantrum.'
Motivations are different this time around. While much of the media attention is on the prospects for a Fed rate hike, the recent volatility has much more to do with Europe. That's a rather esoteric and illogical topic for many rate-watchers in the US, but that makes it no less real. Europe has been having a significant impact on domestic rates at various times for the better part of 5 years when the first leg of the Greek drama surprised markets. Greece is still a factor in Europe's woes to this day, but the bigger issue is overall European economy and the role of the oh-so-new European quantitative easing program.
Rates fell around the world (but especially in Europe) throughout 2014 as markets prepared for the likelihood that the European Central Bank would embark on a Fed-style quantitative easing program. Even after QE began in Europe, rates continued to fall. In short, markets hadn't quite accounted for the full effect of the bond buying. But now that European rates seem to have bottomed out in April, market participants are wondering if that will be the big bounce.
If it is indeed the big bounce, it spells doom for US mortgage rates in the 3's. Of course mortgage rates aren't determined by Europe, but they are determined by the prices of mortgage-backed securities (MBS). The problem is that MBS take heavy cues from US Treasuries and US Treasuries can't help but be affected by their interdependent role with other big players in global bond markets, and collectively, Europe is the biggest player apart from the US. In other words, there's a clearly-delineated domino effect leading from Europe to mortgage rates in the US, and although other factors are contributing, that's the primary reason we're back into the 4's.
If Europe's trajectory changes, and somehow manages to get back on it's previous track, our fortunes stand their best chance of changing as well. Even if our fortunes don't change in the long term, there can still be short term pockets of correction that provide great opportunities to lock rates. Unfortunately for now, every day is a good day to lock rates simply because we don't have any recent track record of stability. Every 'tomorrow' could see a big move higher in rates, and that will continue to a bigger risk than normal (because there's ALWAYS SOME risk that rates will rise tomorrow) until the current trend changes.
Loan Originator Perspective
"Mortgage Rates improved slightly today, but there is not enough evidence to consider this a reversal of momentum. For the last 2 weeks, rates have been rising at a very quick pace and this could very simply be a pause in that action. I'm going to be watching the treasury auctions this week, closely, to determine if we've found some solid ground and to see if rates might start to improve. Until we have confirmation, though, I think locking is the smartest decision." -Brent Borcherding, brentborcherding.com
"More pricing swings today as rates opened worse, improved, and then rose again. The changes were so abrupt that some lenders were repricing better even as others repriced worse, as shown on MBS Live. It's times like this that can drive lenders, borrowers, and secondary departments batty. We ended up with 4 sets of rate sheets yesterday, which essentially makes quoting rates to prospective client a guessing game. While it's nice to see SOME pricing improvement, it's still far too early to assume rates will improve. Float at your own risk, if you dare." -Ted Rood, Senior Originator
"The trend is not your friend, the trend is not your friend. Floating is highly risky. Only float if you can afford to be wrong." -Victor Burek, Open Mortgage
"lately it feels like you can't go to lunch without risking a potential negative reprice. In this environment locking is often a must until a top for rates is put in place. Judging by today's trading it is still too early to say this is occurring but I was encouraged by a solid Treasury auction. If the remaining auctions this week are as strong the tide may finally be turning in our favor." -Manny Gomes, Branch Manager Norcom Mortgage
Today's Best-Execution Rates
- 30YR FIXED - 4.00%
- FHA/VA - 3.75
- 15 YEAR FIXED - 3.125-3.25
- 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 was Europe and the introduction of European quantitative easing.
- It's a highly uncertain time for global financial markets. On the one hand, some believe we're in the midst of a race among world central banks to devalue currencies and lower interest rates. Others believe that the global economy is turning a corner and rates will grind higher. That had been creating a lot of volatility, which made for uncertain fluctuations from day to day. But those periods of volatility have been interspersed by utter indecision where rates are effectively drifting sideways with no conviction and no desire to get off the fence
- With European QE having now begun, we're on high alert for a big picture bounce in European economic data, sentiment, growth, and rates. The more it looks like such a bounce is taking hold, the greater the risk that domestic bond markets and mortgage rates will also experience a big bounce higher. There was a possibility that the bounce occurred in February, but European bonds got back to the task of improving in March. This helped calm the domestic bond market's move toward higher rates. April's weak employment report helped solidify it.
- Unfortunately, this didn't result in a strong move past the year's previous lows. In fact, rates at home and abroad hit a floor of sorts and flat-lined. They've begun moving higher at a quick pace, and we're once again forced to confront the possibility that this will be a bigger, longer-lasting correction. Until such a thing can be ruled out, Locking makes far more sense.
- 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, conventional 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).