Mortgages Rates snapped an relatively long streak of stability, moving higher for the first time in a week after digesting today’s high-risk events. In many cases, Best-Execution remains at 3.875%, with the effects of today’s weakness merely seen in the form of higher borrowing costs. But some lenders are better priced at 4.0%. The lenders that were becoming viable at 3.75% yesterday have noticeably backed off today.
Additional reading: Previous post with more detailed discussion about Best-Execution calculations.
This brings up an interesting dynamic in the world of mortgage rates although it can be somewhat complicated to understand. When bond markets are moving higher in rate at anything but a slow pace, it is the LOWER end of the mortgage rate spectrum that tends to suffer the most. For instance, if available rates for a particular scenario are in the 3.75 to 4.0 range, on days like today, where the weakening is a bit more brisk, the 3.75 rate would experience a greater increase in associated borrowing costs than the 4.0 rate.
The underlying reasons for this would take too much space and are too complicated to adequately discuss here, but we can offer a cursory simplification. In short, when rates are moving up quickly in the broader bond markets, the lower coupon MBS (MBS are the “mortgage backed securities” that are comprised of pools of individual mortgages) are at a greater risk of NOT getting paid off in the time frame investors had been counting on. Naturally, if you have a 3.75% mortgage and rates keep moving up, there’s little incentive to refinance.
That aversion to refinance means that the investors holding the lower interest rate pools of mortgages are essentially “stuck” holding bonds that are paying a lower rate of return than the rest of the market. If the broader interest rate landscape is like a “boat,” this would be akin to getting left on shore of a desert island with no means of getting back on the boat. This isn’t a big problem if the same boat, or even other boats are expected to come back to the island with some frequency. But when rates are at all time lows, and the MBS coupon that’s stuck on shore was a pioneering effort in low rates in the first place, the fear of being left behind forever is a pretty big motivator to sell.
When investors in MBS are motivated to sell, prices fall, and falling prices mean higher yield or interest rates. And the lenders that are quoting mortgage rates on a day to day basis are observing the movements of these MBS in order to determine what rates they will offer. This entire phenomenon is known by short phrases in financial markets such as “negative convexity,” or by saying that MBS investors are afraid of “extension risk” (meaning that the length of time they’d have to hold onto low coupon MBS is at RISK of EXTENDING, thus sticking them with a lower-than-market rate of return).
I go into this level of detail tonight, not to suggest that this is necessarily happening at the moment, but rather just to serve as a reference piece to explain why the lower rates deteriorate more quickly on the days when rates or costs move higher. If it’s all a bit confusing, just remember that big investors are ultimately fronting the money for your mortgage. They like their investments to be A)profitable and B)liquid enough to get out of if they become less profitable. If an investment’s on the edge of the spectrum, it’s more susceptible to getting left on shore, aka losing liquidity, if the full spectrum moves in the other direction, and thus, is more susceptible to bigger market movements.
Today’s BEST-EXECUTION Rates
- 30YR FIXED – 3.875% back in control. Some 4.0% Some 3.75%
- FHA/VA -3.75%
- 15 YEAR FIXED – 3.25%, more 3.125% availability
- 5 YEAR ARMS – 2.625-3.25% depending on the lender
Ongoing Lock/Float Considerations
- Rates and costs continue to operate near all time best levels
- Current levels have experienced increasing resistance in improving much from here
- There are technical reasons for that as well as fundamental reasons
- Lenders tend to get busier when rates are in this “high 3’s” level
and can throttle their inbound volume by raising rates or costs.
- While we don’t necessarily think rates are destined to go higher,
given the above facts, there seems to be more risk than reward regarding
- But that will always be the case when rates operating near historic lows
- (As always, please keep in mind that our talk of
Best-Execution always pertains to a completely ideal scenario. There
can be all sorts of reasons that your quoted rate would not be the same
as our average rates, and in those cases, assuming you’re following
along on a day to day basis, simply use the Best-Ex levels we quote as a
baseline to track potential movement in your quoted rate).