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Mortgage Rates Match All-Time Lows; "Wall" Begins Cracking

Mortgage Rates continued a recent trend of moderate improvement fueled indirectly by political turmoil in Europe.  The gains bring rates in line with all-time lows with some lenders priced slightly better and some priced slightly worse than than February’s record offerings.  The current rate environment is causing the longstanding “wall” at 3.875% to begin to crack.

The Conventional 30yr Fixed Best-Execution Rate is, for the first time since February, edging down to straddle 3.75% and 3.875%.  Some lenders’ rate sheets are structured such that 3.75% is clearly Best-Execution, though a majority remain at 3.875%.  But even among those lenders, 3.75% is an increasingly viable quote (read more about Best-Execution calculations)

We’re finally reaching a point of capitulation in secondary mortgage markets.  Whereas lenders have been reluctant to rely on something like European turmoil as a stable enough justification to improve rate sheets beyond recent levels, rates in the broader fixed-income market are so low that such forays into new territory are becoming a risk that’s slightly easier to manage.  

What does all that mean?  The bottom line is that mortgage-rates are several degrees of separation removed from the drama in Europe.  That drama has a very direct effect on European government debt (raising rates in the weaker countries and lowering rates in the stronger countries).  For instance, the Eurozone’s strongest economy, Germany, has seen several successive record lows on it’s sovereign debt.

US Government debt benefits from the spillover of demand for safe-haven investments focused on European government debt.  Mortgage-backed debt (“mortgage backed securities” or “MBS,” which most directly influence lenders’ rate sheets) is another degree removed from Treasuries.  

So as the chaos in Europe makes waves for its own sovereign debt, those waves are mere ripples by the time they have a chance to affect lender’s mortgage rate sheets here in the US.  This process has been going on long enough, and the waves big enough, that the aforementioned “ripples” are starting to carry us into the uncharted territory of the lowest mortgage rates in history.

You can either look at this phenomenon as extremely tenuous due to the volatile nature of the underlying cause, or you could view Europe (and particularly Greece) as being in such deep trouble that it constitutes some sort of tacit guarantee that rates will move lower still.  The latter continues to feel like a bit too big of a leap for us to take, but it’s absolutely a possibility. 

A very telling time is upon us.  We see two diametrically opposed forces pushing and pulling on mortgage rates here at these key levels.  We’ve explained the underlying structural constraints in the Secondary Mortgage Market that are largely responsible for lenders’ rates getting so sticky at 3.875% Best-Execution (in other words, the whole “hard to get much lower than this” phenomenon), though we’ve also said it CAN happen given enough time and motivation.

Now the question becomes: WILL IT HAPPEN due to the less-than-ideal motivation of “European Turmoil?”  We’d feel a whole lot better about hoping for lower rates if we were in an environment where the underlying motivation is stable and long-lasting.  But because we’ve seen big, fast, unexpected market shifts courtesy of European headlines, we have a hard time banking on the longevity of that situation.

Investors in the secondary mortgage market have demonstrated that they tend to feel the same way, having clearly avoided a quick move down into uncharted territory with respect to the “buckets” on the secondary mortgage market.  Read more about “buckets” HERE.  Without a more stable motivation for low interest rates, we’d expect ongoing progress in creating a market for even lower rates to continue to be slow and small.  

Loan Originator Perspective With Rates At All Time Lows

Aaron Meyer, First Bank Financial Centre

Despite the fact Europe is in the drivers seat helping push mortgage rates comfortably under 4% Wall St is waiting for the least bit of positive news to rally. It is conceivable to lose .125% overnight.

Ted Rood, Senior Mortgage Consultant, Wintrust

As we’ve been saying for some time, it’s all about Europe and it’s just getting worse (for them), meaning better rates for the US mortgage markets. Still locking most loans, but this rally has legs, don’t fear imminent pricing increases.

Kent Mikkola, MM Mortgage

Lender submissions increase when we are at all time lows.  When submissions increase dramatically, lender turn times increase or they increase their rates to slow submissions.

Jason York, Vice President of VA Operations at Prime Mortgage Lending, Inc

It’s getting harder not to lock when you have a customer that is in a position to be able to lock. There seems to be a tough ceiling to crack for MBS, and even though we seem to be getting better, lenders seem reluctant to pass along pricing that should correspond to the levels we are at. MBS might be having a good day, but lenders might open up with pricing that is worse then the day before. Take what you can get, before you lose what you have!

Victor Burek at Benchmark Mortgage

Today’s rate sheets are as good as any we have ever seen. That said, there is very little benefit for consumers to float in this market. If more bad news continues from across the pond, rates might stubbornly inch lower, but any good news will unwind this rate improvement very quickly. Always remember, rates rise much faster then they ever fall.

 

Today’s BEST-EXECUTION Rates 

  • 30YR FIXED –  3.875% edging down to 3.75%
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.125 edging down to 3.00%
  • 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
  • Rates could easily move higher or lower, but given the nearness to all time lows, there’s generally more risk than reward regarding floating
  • But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn’t always mean they’re done improving.
  • (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).

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