Mortgage Rates Slightly Higher from 2014 Lows; Big Week Ahead

Mortgage rates continued slightly higher today.  This had more to do with a market-based continuation of yesterday’s momentum than it did with any of today’s data and events.  Lenders’ rate sheets are most directly affected by trading of Mortgage-Backed-Securities (MBS), which are part of the broader “Fixed-Income” or simply “bond markets.”

Trading in bond markets has recently grown more exciting than it had been from February through April.  As May draws to a close, we can look back and see more clearly that much of the positivity was (and still is) a factor of expectations for the European Central Bank (ECB) to embark on some sort of asset buying program, similar to the Fed’s QE.  The ECB is also expected to cut its policy rates.

That’s the sort of big-picture development that global bond markets have a hard time ignoring.  If one, small, individual nation were considering such a thing, no big deal.  But the EU, collectively, is massive, and the trends in European bond markets have a clear and consistent effect on US bond markets.

Right now, the expectation for this stimulative move has made it very unfashionable for the likely beneficiaries to act as if they won’t benefit.  More simply, the safest European debt along with US Treasuries would certainly benefit from the potential policy announcement (meaning rates would fall).  Because markets are reasonably sure at least some of the potential changes are coming, they’re already out ahead of them (meaning that rates have fallen in anticipation of having reason to fall next week).

In short, this anticipation is what has kept the lid on any major correction toward higher rates over the past two months.  Indeed, that’s been a frequent point made in this daily commentary.  There is another factor however, and it’s one I talk about much less because it’s an even more abstruse concept than all this Central Bank business.   It has to do with the sorts of bets that traders are making on the direction of interest rates.

To simplify this point greatly, there was a lopsided consensus for rates moving higher into 2014.  Of course rates didn’t move higher and those traders were forced to make offsetting bets for rates to move lower.  But the same dynamic has repeated itself on several occasions!  Traders bet on higher rates, markets punish them, they get neutral, and then go right back to betting on higher rates again!

The reason I bring all this up today is that we’re FINALLY starting to see those bets among traders reach more of an equilibrium.  Combine that with the fact that markets are already pricing in expectations of something fairly impressive from the European Central Bank next week, and the risk for a more serious reversal is as big as it has been recently.  Please understand, this is not a prediction for rates to move in either direction, simply a warning that one of the potential scenarios is for quicker movement to higher rates.

For now, however, rates remain very close to the best levels in nearly a year, with only The past two days offering anything better.  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains at least as low as 4.125%, with some lenders closer to 4.0%.  Many borrowers will see today’s weakness in the form of higher closing costs vs yesterday.  Expressed in terms of effective interest rates, the increase equates to 0.03%.

New Home Sales Rise to Slightly Less Depressed Levels

The U.S. Census Bureau and the Department of Housing and Urban Development said today that the sales of new single family homes in April were at a seasonally adjusted rate of 433,000, an increase of 6.4 percent from March sales of 407,000 (revised from 384,000).  The April figure is 4.2 percent below sales in April 2013.

The revised March number, while still lower than sales in February, cuts the month-over-month loss from the 14.6 percent originally reported to 9.4 percent.

 

 

On a non-seasonally adjusted basis there were 41,000 new homes sold in April compared to 39,000 in March.  There were 192,000 homes available for sale at the end of the reporting period, a 3.5 year high, and a 5.3 month supply compared to 191,000 units in March, a 5.6 month supply.

The median price of a new home sold in April was $275,800 and the average price was $320,100.  One year earlier the median and average prices of home sold were $279,000 and $337,000.

New home sales in the Northeast were down dramatically, 26.7 percent lower than in March and 31.3 percent below sales one year earlier.  In contrast, sales soared in the Midwest, 47.4 percent above the previous month and 35.5 percent higher than in April 2013.  Sales in the South increased 3.1 percent month-over-month but fell 9.6 percent below the level the previous April.  Sales in the West were unchanged from April and 6.1 percent lower than the earlier period.

Inventory Shortage Makes for Competitive 2014 Housing Market -Redfin

Sales, prices, and inventories all showed some signs of life in April.  Redfin said today that median home prices were up in all markets on an annual basis, a national increase of 9.4 percent.  While home sales are down by 7.6 percent year-over-year, sales did improve by 12.4 percent over their weak sales performance in March.  There were 5.2 percent more homes for sale in April 2014 than in the previous April and 3.7 percent from the prior month.  This means, Redfin said, that buyers have more options in some markets.

While home prices have risen for 28 straight months, the size of the increases has steadily diminished from the 20 percent annual gains that were happening in late 2012.  From March to April the median sale price rose 3.6 percent.  During the same period in 2013 the gain was 4.6 percent.  Redfin called the annual increase in April, 9.4 percent, strong and healthy and one that was more consistent across cities.  “When some cities have 25 percent price gains while other cities are flat or down in price, it can lead to difficulty for buyers, sellers and even banks financing mortgages,” the Redfin report says.  “If all cities share stable and sustainable housing price appreciation, the whole economy stands to benefit.”

 

 

The April gains in home sales were geographically uneven.  Atlanta and Oakland had sales that were more than 4 percent higher than in the previous April and Tacoma was up slightly but nine metro areas had double-digit annual declines in home sales, notably Las Vegas which was down 16.4 percent, Philadelphia, 16.3 percent, and Long Island, 15.2 percent lower.

 

 

While the inventory of available homes was up nationally Redfin said the situation does not look great across many markets.   Markets with the highest demand have seen inventory tighten further.   In Denver the inventory is off 18.6 percent and in San Francisco 16.0 percent.  Austin, Portland, Oregon and Raleigh-Durham have also seen a tightening of 5 to 10 percent.

Redfin said that with half of all markets experiencing a year-over-year decline in homes for sale, things are still difficult. Buyers and potential sellers who want to trade up are asking, “Where is all the inventory?”  The tight inventory, rising prices, and higher interest rates are all contributing to home affordability challenges. While the balance of power has recently shifted a bit to the buyer side, Redfin said 2014 still looks like it will present a competitive housing market.

Mortgage Rates hit New 2014 Lows

Mortgage rates fell today as the European Central Bank looks increasingly ready for a new round of easing in June.  More accommodative monetary policy in Europe makes European government debt more attractive.  Germany is the benchmark for EU government debt and when demand rises, US Treasuries benefit as well.  When demand for US Treasuries rises, the bonds that underlie the mortgage market also improve, resulting in lower rates.  In short, there’s a domino effect leading from anticipated easy money policies in Europe all the way to mortgage rates in the US.

Because they’ll be the most direct beneficiary, European markets move the most at times like this.  Treasuries move a bit less, and Mortgage rates a bit less than Treasuries.  Even so, the improvement in bond markets was enough to push mortgage rates to new 2014 lows–also the best levels since October 2013.  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) is now centered on 4.125%.  Some borrowers will see the improvements in the form of lower closing costs or higher lender credits.  In terms of effective rates, that drop in closing cost equates to a drop of 0.05%.

Today is important in that it’s the first clear instance of the broader US bond market breaking its contained 2014 range.  For instance, 10yr Treasury yields hadn’t been below 2.57 at all this year, but fell to 2.525 at their lowest levels today.  While Treasuries don’t dictate mortgage rates directly, their trends are almost always moving in the same direction.  This big break from a longer sideways trend is a positive development in the bigger picture.  It still makes sense for those with shorter-term time horizons to favor locking, but those following the market over the longer now have one less reason to abandon hope for mortgage rates to return below 4%.

Mortgage Rates Pull Back After Impressive Run

Mortgage rates rose today, pulling back just slightly after spending 6 of the last 7 days in an aggressive move to the lowest levels in more than 6 months.  There were no significant events for markets to consider, leaving this bounce to stand as more of a correction to the previous strength.  In other words, today’s higher rates are a product of normal market behavior and are not ‘event-driven.’  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains split between 4.125% and 4.25%.  Today’s move equates to an effective increase of 0.03%.

When it comes to mortgage rates, it’s good to remember that we’re dealing with numbers that are directly related to movements in financial markets.  Prices of Mortgage-Backed-Securities, or MBS are the key determinant in lenders’ rate sheets.  MBS tend to move in close proximity with other fixed-income investments like Treasuries, though not in perfect lock step That proximity is why many believe Treasuries dictate mortgage rates.  In a way, Treasuries actually do determine mortgage rates, but only when MBS are moving in close proximity.  There are days (and sometimes weeks and months) where MBS will move in a different direction and by different amounts.

Because of that relationship, and because Treasuries speak more to the broader momentum in the world of interest rates, we can observe certain behaviors that give us more info about how mortgages might behave in the coming days and weeks.  Recently the most widely traded benchmark for longer term rates–the 10yr Treasury–has been having a tough time getting under the 2.57-2.60 area.  That’s like the ‘warning track’ in the 4 month range of 2.60-2.80.  It coincides with mortgage rates at 4.25%.

The fact that rates have pushed into 4.125% to some extent is indicative of broader bond markets pushing more aggressively on that longer term range.  10yr yields spend more time trading under 2.60 this week than they have all year.  But until and unless rates are convincingly breaking lower–until they’re clearly past that warning-track that goes to 2.57, it makes sense to stay cautious about a common market phenomenon: a correction.

Corrections can be large or small and can serve to ‘correct’ strong movement in the long or short term.  Mortgage rates have had a strong move over the past two weeks.  Today’s increase is a short term correction to that move.  But rates (both mortgages and Treasuries) have also had good improvements over the past month and a half as well.  If today’s smaller correction is the beginning of a broader correction for that longer time frame, it would make even more sense to be locking now as rates might not be back this way for weeks.  And that’s another wonderful thing about financial markets…  there’s never any guarantee that rates would come back at all, though there are plenty of experts on both sides of that debate.

New Foreclosures Fall to Lowest Level Since 2006

Amid renewed concern about weak housing demand, there’s this bright spot: the number of mortgage on which lenders initiated foreclosure in March fell to the lowest level in 7½ years, according to a new report.

Banks initiated foreclosure on 88,000 properties in March, down more than 27% from a year ago, and well below the high of more than 316,000 in March 2009, according to data from Black Knight Financial Services, a mortgage research firm.

Foreclosures should continue to trend down because the share of mortgages that are behind on their payments is also declining, according to Black Knight. Around 2.1% of all loans were in some stage of foreclosure in March, the lowest level since late 2008, and another 5.5% of all borrowers were 30 days or more past due on their loans but not yet in foreclosure, the lowest since late 2007. Both of those are still well above pre-crisis levels but they are down sharply from a few years ago.

The report also found that one in 10 borrowers is underwater, or owes more on their mortgage than their home is worth. That’s still high, but consider: one in three borrowers was underwater at this point four years ago. The share of underwater borrowers has dropped, first as more homes went through foreclosure, but more recently, as home prices have rebounded strongly.

More than half of all loans in the foreclosure process haven’t made any payments in at least two years. Foreclosure processes have taken longer in states where banks must go to court to proceed with foreclosure. Mortgage companies have struggled in certain states to provide the proper paperwork, or to meet new court requirements, to process foreclosures. On average, a loan that completed foreclosure in March had been delinquent for 955 days.

Four years ago, housing was in a world of pain because it faced a glut of foreclosed and other distressed properties hitting the market at a time when demand was weak. Eventually, low home prices and low interest rates, which depressed returns on other investments, led to aggressive appetite from investors to buy homes that could be fixed and resold or converted into rental properties.

Sales have slowed in recent months as investors have stepped back from the market and as the volume of distressed properties coming to market has dropped considerably. The good news: housing no longer appears to have an oversupply of properties.

This is one reason why, even if housing demand stays weak, the market isn’t likely to face the same kind of trauma that it did a few years ago. Prices could soften if more traditional sellers list their homes for sale, but there are few signs for now of another foreclosure-induced pummeling. That’s good news for housing.

CFPB Proposes More Mortgage Rule Tweaks

The Consumer Financial Protection Bureau (CFPB) is again proposing a few minor modifications to its new mortgage rules, suggesting changes designed to eliminate hurdles some nonprofit organizations might encounter in providing access to credit and servicing and slightly easing one regulation regarding high-priced mortgages .

The Bureau issued proposed amendments late Wednesday and each seems to address limited instances of unintended consequences arising from the larger rules.  One proposed amendment would apply to some small servicers which, while exempt from new mortgage servicing rules because they service 5,000 or fewer loans, also service loans for a fee from associated nonprofit housing providers and may not be able to restructure their overall activities to meet the small servicer exemption.  The new proposal offers an alternative definition of small servicers which would apply to certain 501(c) (3) nonprofit organizations and will allow them to consolidate servicing activities and maintain their current exemption from some servicing rules.

A second proposed change would apply to an existing exemption from the Ability-to-Repay rule for organizations that make fewer than 200 mortgages a year.  The change would apply only to certain 501(c) (3) nonprofits groups such as Habitat for Humanity and would allow them to extend certain interest-free, forgivable loans or “soft seconds” without regard to the 200-loan limit

Under the Ability-to-Repay rule a consumer cannot be charged points and fees on a Qualified Mortgage that exceeds 3 percent of the loan principal.  If a lender finds it has mistakenly charged in excess of that amount a third proposed change lays out limited circumstances where the excess can be refunded to the consumer and still allow the loan meet the legal requirements of a Qualified Mortgage.  The change specifies that the refund must occur within 120 days after the loan is made and the lender must maintain and follow policies and procedures for reviewing the loans and providing refunds to consumers. CFPB said the change is designed to encourage lenders to provide access to credit to consumers seeking loans that are at or near the points and fees limit.

“Our mortgage rules are now helping to protect consumers all across the country from debt traps, runarounds, and surprises,” said CFPB Director Richard Cordray. “Today’s proposal would maintain those strong protections, while making minor changes to ensure consumers have access to credit. This includes helping nonprofits that provide working families with important pathways to affordable homeownership.”

CFPB is seeking public comment on the changes which can be review in their entirety here.   It is also seeking input on other questions relating to the impact of the Bureau’s rules, including their effect on larger lenders that do not meet the definition of small creditor.

One stakeholder immediately expressed satisfaction with the change allowing refunds of excess fees.  David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA) called them a positive development for consumers which would expand access to safe, sustainable Qualified Mortgages.  “As is being considered,” he said, “if a lender believes it has offered a QM loan but later discovers the points and fees exceeded 3 percent of the loan amount, the excess could be refunded to the borrower and the loan could still meet QM requirements. MBA looks forward to commenting on this proposal and working with the CFPB to ensure that these proposals work to benefit consumers to the greatest extent possible.”