September 14, 2015
Mortgage rates are officially holding their breath ahead of Thursday's FOMC Announcement. It's not mortgages, specifically, but the entire bond market. In fact, a Fed rate hike doesn't necessarily have to be bad for mortgage rates or longer-term Treasury yields. It's the uncertainty that's causing the paralysis (or breath-holding, as the case may be). Financial markets will definitely become more active after Thursday's Fed decision. Simply put, most investors have a plan A and a plan B at the very least--one for a Fed hike, the other for 'no hike.' They don't want to get too far away from either plan until they know what the Fed actually does.
This has been going on for quite some time and it's the biggest driving force behind the absence of volatility in mortgage rates. To reiterate, it's not that a Fed hike necessarily means anything for mortgage rates--simply that the entire market is really on hold while we wait for the Fed. In terms of conventional 30yr fixed rate quotes on top tier scenarios, that means an ongoing range of 3.875% to 4.0%, with the latter being the most prevalent.
It's also good to consider that there is no guarantee that this paralysis will continue right up to Thursday afternoon itself. The significance of economic data begins increasing tomorrow, and investors could take cues from results that were much stronger or weaker than expected. For short term scenarios, the risk/reward for locking and floating remain minimal. That means there's likely less to gain or lose between now and Thursday, but be sure to lock before then if you're not interested in a very high-stakes roll of the dice.
Loan Originator Perspective
"Interest rates have been confined to a very narrow range. Floating in the range has proven to only be an incentive for closings that require a bit more time prior to locking for a specific period, not a direct incentive to the actual rate for the most part. Locking in your loans closing within 15-30 days is the right approach, regardless of the FED's decision on increasing the rate on FED funds. Loans within 45 days should also consider locking to avoid the drama that may unravel. Markets are way too volatile and we cannot make a call on how the FED's decision will impact interest rate immediately. The safe bet, as always, is to lock your rate." -Constantine Floropouos, Quontic Bank
"Bond markets enjoyed modest gains this morning, but they slipped away as the day progressed. My pricing was slightly better than Friday's, and I locked a couple of new submissions closing within 30 days. For better or worse, rates are at a near standstill until the Fed Statement hits Wednesday. I'd rather be wrong and locked, than wrong and floating when our eventual move happens, and am proceeding accordingly." -Ted Rood, Senior Originator
"With the much anticipated FOMC meeting this week, floating is highly dangerous. I could see rates rallying or selling off after the FOMC announcement later this week regardless of whether they hike rates or not. Only those that can afford to be wrong should float." -Victor Burek, Churchill Mortgage
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).