Extra Cheese For Your Bubble

We kind of assumed they would have to keep rates low, but now it’s official:

The Federal Reserve announced a major policy shift Thursday, saying that it is willing to allow inflation to run hotter than normal in order to support the labor market and broader economy.

In a move that Chairman Jerome Powell called a “robust updating” of Fed policy, the central bank formally agreed to a policy of “average inflation targeting.” That means it will allow inflation to run “moderately” above the Fed’s 2% goal “for some time” following periods when it has run below that objective.

The changes were codified in a policy blueprint called the “Statement on Longer-Run Goals and Monetary Policy Strategy,” first adopted in 2012, that has informed the Fed’s approach to interest rates and general economic growth.

“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”

Link to CNBC Article

Mortgage-Rate Differences

Today we should see another all-time-low record in mortgage rates!

What is the impact?

Here’s how it pencils:

If we just go back to the 52-week high of 4.75%, you could borrow $808,000 and pay $4,215/mo.

If you shopped around to get a 3.0% jumbo rate today, you’d pay a point or so, but you could borrow $1,000,000 and have a payment of $4,216 per month.

Within a 12-month period, the borrowing power has gone up from $808,000 to $1,000,000 with no change in payment!

This is why sellers don’t mind pushing their list prices – they want to share in the benefit!

Rates at All-Time Low (Again!)

From MND:

Mortgage rates were unchanged today for the average lender.  That means they remain at all-time lows that are even lower than the all-time lows seen during the previous 3 business days.  Even so, today’s underlying market movement might be a bit of a wake-up call for anyone waiting to lock an interest rate.

In general, the decision to lock or float a mortgage rate has had low consequences recently.  While that will likely continue to be the case until the coronavirus situation meaningfully improves, it doesn’t mean we should fall asleep at the wheel.  We need to remain vigilant for signs that the most recent all-time low mortgage rates are the last we’ll see for months or years.

Today served as a fairly non-threatening wake-up call in that regard–at least for those following the intraday movement in the bond market.  Mortgage rates are ultimately dictated by the bond market.  When yields move higher (and specifically when mortgage-backed bond prices are moving lower), we need to be on the lookout for mortgage rates to move up.  That was exactly the sort of market movement we saw this morning, and it forces some of the risk takers out there to question how many times they will push their luck before finally resigning to lock.

There is NO WAY to know when rates have finally bottomed.  So it’s best to decide a personal set of rules as to how you’ll approach the lock/float decision.

What can we know about the future?  That’s tough because coronavirus has changed the playbook to some extent.  In general, though, mortgage lenders are hesitant to drop rates very aggressively when they’re already at all-time lows.  I can also tell you that, outside of an apocalyptic scenario, mortgage rates are highly unlikely to drop by more than half a percent (which is still significant).  Even dropping by that much would require a significant deterioration in the covid narrative.

But how about we discuss this in a slightly simpler way.  People always ask me for predictions, and I always tell them why it would be silly for me to provide and for them to put any stock in such things.  What I CAN do is give you my sense of the most and least probable rate ranges within the next 3.5 months (presidential election will likely create new volatility for better or worse).

Most probable: 0.25 lower to 0.25 higher
Somewhat probable:  0.25 to 0.50 higher
Less probable: 0.25 to 0.5 lower OR 0.50 to 0.75 higher
Improbable: >0.5 lower or greater than 0.75 higher

Please keep in mind that this is as of July 8, 2020.  Things can and do change rapidly when it comes to pandemics and financial markets.  That said, if your takeaway is that we’re slightly more likely to see a 0.5% move higher than a 0.5% move lower, that is indeed what I am saying.  Again, it would take further deterioration in the covid narrative to reverse that order.  That’s totally possible, but it’s not a given as of today.


Rates & Bounce Back

The record-low rates probably haven’t helped the higher-end areas as much because the 30yr jumbo rate is higher – though you can pay to get into the mid-3s.  An excerpt from MND:

How much of the strength in the housing market is due to mortgage rates holding near all-time lows?

Unequivocally, rates are helping housing numbers reach higher than they otherwise would be, but keep in mind, mortgages are much harder to get for certain scenarios right now.  Beyond that, the home shopping process has challenges of its own that are keeping some would-be buyers sidelined for a bit longer.

The takeaway is that the bounce back in housing numbers is just like the bounce back in many other sectors of the economy.  Things got bad enough that there was simply plenty of room for improvement.

No one is saying “everything’s fine now… back to business as usual!”  Rather, many things are just quite a bit better than they were–so much so that we’re now in a position to debate whether the recovery narrative continues or cools off.  That’s a debate that will remain open as long as COVID-19 numbers are pushing back on states’ lifting of quarantine measures.


Rates with no points

Mortgage Rates Improved

Another good time to lock your rate. From MND:

Mortgage rates moved lower again today, with the average lender erasing a good amount of the weakness seen last week.  That’s good news considering rates hit all-time lows on the afternoon of June 1st (last Monday).  After that, however, rates rose at their fastest pace in several months, raising some concern that the bond market (which underlies rates) was shifting gears in response to stronger-than-expected economic data.

It remains to be seen whether these past 2 days constitute a reversal in a negative trend or if they’re merely a token correction to last week’s rate spike.  In other words, are things good or are they just noticeably less bad than they were?  We won’t be able to answer this until we see how things play out in the coming days.

Tomorrow’s Fed announcement is the biggest potential flashpoint for volatility in the bond market this week. The Fed will certainly continue to buy Treasuries and mortgage-backed bonds.  This is a key ingredient in keeping rates as low as they have been.  Within the scope of “still buying bonds,” the Fed has some leeway in terms of how much it buys and how much it promises to buy.  Some investors are looking for the Fed to firm up its bond buying commitment tomorrow, and that would likely help rates continue to calm down (as long as the promise is to keep buying as much as they have been).

Loan Originator Perspective

A big move back into the range for both treasuries and MBS today.  Days like today make people want to wait to see if rates improve further. Chances are rates have room to go lower, but what tomorrow brings is anyone’s guess. The recommendation is to lock in as early in the loan process as possible, as long as you have a clear Closing date in place.   –Gus Floropoulos, VP, The Federal Savings Bank

Bonds opened stronger, near their best levels ever this AM, before fading slightly following a weak treasury auction.  Today’s rates are at (or almost at) all time lows.  If you have the ability to lock at these levels, why not do so?  –Ted Rood, Senior Originator, Bayshore Mortgage

Seems bonds have tested the top end of range and have rallied nicely over the last couple days.  Based on my advice, my clients are taking advantage of today’s improved rate sheets and locking in.   – Victor Burek, Churchill Mortgage



Mortgage Rates Rising

Just like the price of gasoline, mortgage rates are very slow to come down, but they tend go up like a rocket – and with the surprising employment news today, we’ll probably get back into the mid-3s by Monday.  We’ll see if the lowest rates in history were the sole reason why showings rebounded so quickly. From cnbc:

What’s good news for the U.S. economy is suddenly bad news for mortgage rates. A far-better-than-expected May employment report only added to a growing sell-off in the bond market, pushing yields to the highest level since March. Mortgage rates loosely follow the yield on the 10-year Treasury.

Rates have been rising this week, after sitting around a record low for the last two weeks. Friday, the average mortgage shopper may see rates on the 30-year fixed as much as a quarter point higher, according to Matthew Graham, COO of Mortgage News Daily, which runs daily averages from lenders.

For those with top-tier credit and financials, they may only see an eighth of a point increase, but for those with lower scores and down payments, the jump could be as much as 0.375%.

“It’s going to be ugly,” said Graham. “Today is the first time since the Covid-19 market reaction settled down in March that interest rates truly have a reason to panic. Until further notice, this looks like liftoff.”

This is not, of course, the last word in a mortgage market that has been on a rate roller-coaster ride fueled by a massive spike in mortgage delinquencies, an initially confusing and risk-ridden government bailout, and an overstressed loan servicing system. The mortgage bailout has been clarified, with parts rewritten to help servicers, the number of borrowers in forbearance plans is shrinking and mortgage companies are on a massive hiring spree.


Lenders Pulling Back

It wasn’t a surprise to hear that smaller no-name mortgage companies were retreating from the marketplace due to the extreme volatility.

The mortgage business has become dependent upon the Fed’s support to backstop the agency market (Fannie/Freddie), which leaves the non-conforming (jumbo) lenders wondering what they will do with their funded loans in the coming weeks – can they sell them to somebody?

It’s another story when one of the big banks who have been the foundation of the jumbo market, Wells Fargo, Bank of America, and Chase, are starting to quiver as well. Seen on the internet this morning:

Several correspondent investors are exiting the business or are no longer accepting new applications due to volatile market conditions. Additionally, many wholesale investors have now fully suspended operations or temporarily revised guidelines, and correspondent jumbo investors are beginning to tighten credit requirements. Investor availability and guidelines are expected to change often as market volatility continues.

Notable non-conforming investor restrictions effective today, 3/27:

Wells Fargo Non-Conforming (Jumbo)

The following transactions will be ineligible on all new locks, relocks and renegotiations:

    • Cash-out refinances
    • Investment properties
    • LTV/CLTVs > 80%

You can’t blame Wells for being more conservative, but let’s hope they and other banks keep the jumbo loans coming.  The jumbo rates – which were about the same as agency rates a couple of weeks ago – have stayed since after the Fed bought enough agency MBS to bring down the conforming rates back into the mid-3s.  The jumbo rate is almost 1% higher:

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