August 19, 2015
Mortgage rates dropped today--largely in response to the release of the Minutes from the most recent Fed meeting. The Minutes don't convey any policy decisions (i.e. no rate changes or bond-buying announcements). Rather, they serve as a more detailed recap of the Fed's 2-day discussion leading up to the official policy decision 3 weeks earlier. In this case, that was the July 28-29th meeting.
At the time, the policy announcement on the 29th wasn't too friendly for rates. So there was some cause for concern that today's more detailed recap would expound on the Fed's seemingly firm resolve to raise rates. (As a quick aside, when we talk about the Fed "raising rates," we're referring to the Fed Funds Rate, which doesn't always move in the same direction as mortgage rates, though that tends to be the case over time). Instead, the Minutes served as a chance for the Fed to show us a softer side. We were left with a more legitimate sense that the Fed would actually hold off on raising rates if economic conditions warranted it. While they've said this before, this was a more unified message--and one that arrives later in the game. After all, the very next Fed meeting is the one with the first real chance of a rate hike--an outlook that's been in place for many months.
Long story short, financial markets reconsidered the likelihood of rate hike at the next meeting. In terms of trading, this benefited bond markets, which dictate mortgage rates. It brings most lenders back in line with rates quoted at last week's best levels. The most prevalent conventional 30yr fixed quote for top tier scenarios is still 4.0%, but with a meaningful contingent at 3.875%. It doesn't take much more improvement from here for 3.875% to take the lead.
Loan Originator Perspective
"The FOMC meeting minutes were quite a bit more dovish than the market had anticipated, so bonds are rallying! This might indicate that a rate hike might come later rather than sooner. Lenders have definitely not passed along all of today's improvements, so I would recommend to float over night and evaluate your pricing in the morning. If the Philly Fed report is as weak as the NY Fed report was the other day, this rally could continue." -Victor Burek, Churchill Mortgage
"As always, when the Fed speaks (whether through Minutes or Statement), markets listen. Today's Fed Minutes indicated considerable doubt on economic conditions, and bonds rallied in response. Global economic outlook seems to be waning as well, and that bodes well for rates. I'm advising borrowers with some risk tolerance to consider floating, particularly since I monitor MBS and at least can anticipate intraday moves. As of 4PM EDT, 30 lenders issued improved PM rate sheets, and more may follow. Looks like a great day to be a borrower or a loan officer!" -Ted Rood, Senior Loan Originator
Today's Best-Execution Rates
- 30YR FIXED - 4.0%
- FHA/VA - 3.75%
- 15 YEAR FIXED - 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. Investors bet heavily the move lower in European rates and domestic rates benefited as well. But with those bets finally drying up in April and with the Fed seemingly intent on hiking rates in the US, May and June saw a sharp move back toward higher rates. The implicit fear is that global interest rates set a long term low in April, and have now begun a major move higher.
- July said "not so fast" to that potential "big bounce." Some of the data began to suggest the Fed is still a bit too early in talking about raising rates in 2015--particularly, a lack of wage growth or any promising signs of inflation. But Fed proponents maintain that low inflation is a byproduct of temporary trends in the value of the dollar and the price of oil, and that once these factors level-off, inflation will ultimately return. That side of the argument suggests that inflation could increase too quickly if the Fed hasn't already begun normalizing interest rates.
- With all of the above in mind, locking made far more sense for the entirety of May and June, and we were not shy about saying so. The second half of July saw that conversation shift toward one where multiple outcomes could once again be entertained. In other words, we went from "duck and cover!" to "let's see where this is going..."
- Bottom line, locking is always the safest bet and it was the only bet from late April through early July. Since then, there's been room for other points of view. We should know a lot more about how valid those points of view are as August and September progress.
- 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).