September 16, 2015
Mortgage rates almost made it through the past two months without any major move higher (except those moves that were correcting the major moves lower following the China-inspired volatility in late August). They ruined their winning/stable streak yesterday as broader bond markets grew increasingly anxious over tomorrow's Fed decision. Apparently, bond markets only needed a day to express that anxiety as today has been extra calm by comparison. Unfortunately, that calmness began at the new, higher rate levels from yesterday afternoon. For most lenders that puts a conventional 30yr fixed at 4.0% for top tier scenarios.
But enough about today! The questions on everyone's minds revolve around tomorrow's Fed Announcement. Will the Fed raise its policy rate? What will the effect be on mortgage rates? At the risk of bursting any bubbles, neither question can be answered until after tomorrow's news. The TV and internet is awash in opinions on the topic--some of them seemingly passionate and well-reasoned--but these people are all guessing. This is a market scenario without a remotely similar precedent. Even the precedents being offered by much of the analysis are NOT in agreement about how tomorrow will end up for any given outcome. All we can really know is that the potential volatility is extraordinary, and it could merely be the beginning of a longer term move.
That means that anyone who's not interested in taking a massive risk in exchange for massive potential reward, should be locked already. While it's just as possible that rates could improve tomorrow (after all, if lenders already "knew" that rates were going higher, they wouldn't be wasting their time offering you lower rates today), the classic lock/float quip applies: it's better to lock when you should have floated than to float when you should have locked.
Loan Originator Perspective
"Tomorrow is the most important FOMC meeting announcement in a long time...well, at least until the next one. I doubt tomorrow will be a calm day, we should see some nice gains or heavy losses. Floating is risky and should only be done by those that can afford to be wrong." -Victor Burek, Churchill Mortgage
"The market has gained a bit of it's losses from yesterday, but not enough to cover any loses incurred from mid-day reprices yesterday afternoon. Tomorrow brings a major market moving event (potentially) and regardless of the outcome locking is the safe bet. The actual decision to hike or pause on a hike on rates by the FED is part of the potential market moving information the market is eagerly anticipating, but equally as important is the language moving forward. The volatility that may occur can be damaging to interest rates for loans closing in the near term (up to 60 days). Locking is the safe bet." -Constantine Floropouos, Quontic Bank
"Bonds were able to claw back some gains today. The tame CPI number helped but not as much as it normally would have if tomorrow did not bring the big ticket item for the month in the way of the FED decision. Those who locked earlier this week will be watching for confirmation of their decision (or regretting it). Tomorrow's move should be big but the direction is unclear to most if not all people and traders. If you have been floating I say roll the dice into the decision but have your loan officer on the phone with his finger on the lock trigger." -Manny Gomes, Branch Manager Norcom Mortgage
"Bonds remained at weaker levels today in anticipation of tomorrow's Fed Statement. Folks floating at this point won't lack for adrenaline when the news hits, as it could well set rates' direction for the next several months. We've seen dramatic market movement before, as recently as the "Taper Tantrum" of May 2013, when rates rose over 1% less than 3 months. It's no fun being caught floating in situations like that, which is why 100% of my loans are locked. I'd rather lock and be wrong than float and be wrong, I've seen too many loans die due to optimistic lenders/borrowers over the years." -Ted Rood, Senior 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).