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How Long Will Low, Flat Mortgage Rates Last?

So many questions have been raised by the surprising state of affairs in the world of mortgage rates this year.  Why did rates move in the opposite direction from broad-based expectations to start the year?  Why have rates continued to hold their low ground in such a stable way?  Why have rates been able to push to year-over-year lows despite ever-stronger economic data?  Why do we now seem ‘stuck’ at those lows while Treasury yields have continued to fall?  And most importantly, how long will this relatively favorable environment stick around?

Mortgage rates are driven by movements in financial markets–most directly by MBS (mortgage-backed-securities, which actually dictate how much mortgage debt is worth to investors).  MBS are always trading with some level of correlation to broader bond markets where 10yr Treasuries are one of the best big-picture reference points. 

As is always the case when it comes to financial markets, there’s rarely ever a single answer that explains why things are the way they are.  This is certainly true of the current situation with mortgage rates.  That said, if we had to pick one predominant answer to all of the above questions, the only obvious candidate would be–in a word–Europe.

European market considerations have taken US markets on several wild rides since 2010.  This came to a head in 2012 with the 2nd Greek debt crisis.  That wasn’t just about Greece though.  Because the Eurozone countries share a currency, if Greece defaulted on its obligations, it would affect the currencies value, making it significantly more likely that the next weakest country would share a similar fate.  From there, the fear was that an irreversible domino effect would wreak havoc on the global economy and financial system.

That Greek drama ushered in all-time low rates in the US, because in 2012, it coincided with a time in the history of domestic monetary policy where markets saw the Fed’s only two choices as “hold steady” or “more easing.”  In other words, QE and other easy money policies were at no risk of being reversed.  The Fed’s foot never left the vicinity of the gas-pedal.  Treasuries hit all-time lows and Mortgage rates fell into the low 3’s.

It wasn’t until mid-2013 that the Fed’s metaphorical foot moved to the vicinity of the brake pedal and the conversation opened in earnest about the circumstances that might result in hitting the brakes.  The “taper tantrum” ensued, but for all the wailing and gnashing of teeth, the Fed did a reasonable job of snapping investors’ mindsets back to reality.  Investors, themselves, did a brutally efficient job of bracing for the expected slow-down in Fed accommodation. 

They did such a good job, in fact, that when the slowdown in accommodation finally got underway, rates had moved high enough already that there was no additional selling pressure.  The paradoxical improvements in rates in early 2014 were a result of expectations being so widespread that rates would go higher.  When everyone in the room is taking the same side of a bet, no one makes money.  So the entire month of January was spent moving sharply lower in rate–effectively resetting a new baseline for 2014.

And oh what a baseline it was!  Compared to the volatility of 2013, rates were barely budging in 2014!  There was no reason for them to move in either direction until inspiration of one form or another came along.  It finally did in early April.  That was when a Friday jobs report came out in line with expectations–something that rarely results in an abrupt improvement for rates–yet rates IMPROVED ABRUPTLY.  The culprit was news that had come out around the same time suggesting the the European Central Bank (ECB) had begun modelling a €1 trillion QE program. 

Europe hasn’t done QE yet–at least not in the same way we’ve done it in the US.  So this was big news.  The European economic weakness that brought about this news wasn’t nearly as relevant as the potential presence of an extra €1 trillion in the global monetary system.  If we’ve learned anything from the various instances of domestic QE, it’s that these big injections are worth something in and of themselves when it comes to trading levels.  As such, they’re immediately worth something to rates.

Of course, this was only the first phase of real QE consideration in Europe, but the ensuing weeks and months would show they were indeed serious about it.  Even as recently as this past weekend, the ECB President had reiterated the council’s commitment to “do what it takes,” and promised that work was continuing on their asset purchase program. 

In short, this has created tidal momentum in global rates markets, and it has made no sense for domestic bond markets to try to swim against it any more than they already are.  The benchmark European 10yr government debt is currently trading around 0.94%!  Compare that to US 10yr Treasuries at 2.40%!  These rates are no longer simply reflecting that “good old stuff” from days past (economic outlook and inflation), but are now serving as tactical betting tables for Central Bank policy. 

In other words, investors are not buying and holding German/European debt because they want to earn 0.94% interest over time.  They’re buying it because the trend is for that rate to move lower as European QE becomes more of a reality, and any drop in rate tomorrow or beyond equates to solid short-term profit for investors that buy those bonds today (as rates fall, the PRICE of the bonds rises, so investors are essentially buying low to eventually sell high).

US Treasuries don’t get nearly as much benefit from this phenomenon, but their movement certainly correlates heavily with European debt.  For Treasuries, this is really the only big-ticket inspiration in town in 2014.  So they’ve moved lower in rate despite improvements in economic data and stocks.  MBS are yet another degree removed from European influence.  They benefit, to be sure, but not as much as Treasuries.

Those benefits for domestic bond markets have been compounded by geopolitical risk in Ukraine (which incidentally also drives demand for core European bonds, further helping rates fall).  Geopolitical risk also has a distinct tendency to benefit sovereign debt markets over things like mortgage-backed-securities–offering yet another reason for Treasury rates to be falling faster than mortgage rates. 

To conclude, Europe is a wet blanket on domestic interest rates.  The proportions may not be epic, but they’ve been utterly persistent.  The nature of the degrees of separation between the source of the market movement and MBS has meant that US mortgage rates have only managed to trickle modestly lower in the last few months.  But the good news is that until something changes about the situation in Europe, it would be very hard for rates to embark on any significant move higher.  That’s a really long way of saying that the best 30yr fixed rates are in the low 4’s until they aren’t any more.  On the upside, it also leaves the possibility open for an ongoing trickle to get us back into the high 3’s.  This isn’t necessarily likely, but it’s possible, and that’s a lot more than we might have hoped for 9 months ago when the threat of moving out of the 4’s instead meant “low 5’s.”


U.S. Fed seen moving slowly after first rate hike in second quarter 2015: Reuters poll


The U.S. Federal Reserve is expected to move in baby steps when it starts to bump up borrowing costs from a record low, but it won’t do so until the second quarter of next year, according to the latest Reuters poll of economists.


Recent data on employment, manufacturing and services suggest the economy is on a firm footing, but the Fed has said monetary support is still needed given what it calls the “significant” slack in the labor market.


The central bank has held the overnight federal funds rate near zero since December 2008, and is close to winding down a lengthy program of bond purchases that will have swelled its balance sheet to more than $4 trillion.


But it is not likely to raise the fed funds rate until the second quarter of next year, most likely in June, according to the median forecast of 74 analysts polled in the past week.


That projection, unchanged from a survey last month, suggests a somewhat earlier move than predicted by a smaller sample of the Wall Street primary bond dealers who deal directly with the Fed, in a poll earlier this month. [FED/R]


Interest rate futures are pricing the first rate hike in the third quarter of next year.


When the Fed does get moving, it will proceed cautiously.


“There’s quite a few worries for them still in the cards. That should keep them hiking rates quite a bit slower than we’ve seen in previous hiking cycles,” said Gennadiy Goldberg, a strategist at TD Securities in New York.


The latest survey showed that rates would be at 1.00 percent at the end of next year, 2.25 percent at the end of 2016 and 3.25 percent a year after that. The Fed sees 3.75 percent as appropriate for the economy over the longer run.


Yet all anecdotal evidence suggests that Fed Chair Janet Yellen is in no hurry to raise interest rates, preferring to fight inflation than another economic downturn.


The poll also found analysts had grown more optimistic about U.S. economic growth in 2014 after a strong second quarter, with forecasts for the year rising to 2.0 percent from 1.7 percent in July.


The median projection for 2015 remained at 3.0 percent but the forecast for 2016 dipped to 2.9 percent from 3.0 percent.


Growth in non-farm payrolls was seen averaging around 210,000 jobs per month over the rest of this year and 215,000 per month during the first half of next year before slowing slightly. So far this year, payroll growth has averaged 230,000 per month.


The unemployment rate for 2014 was forecast at an average of 6.2 percent, where it stood last month and unchanged from last month’s poll. It was seen falling to 5.7 percent in 2015 and to 5.5 percent in 2016, unchanged from the previous poll.


The survey projected inflation as measured by the consumer price index would run close to 2 percent across the forecast horizon, with core inflation rising to 2.1 percent in 2015 and 2016. The Fed targets 2 percent inflation, although it focuses on the PCE prices index, which tends to run below the CPI.


Despite the unemployment rate falling and inflation rising toward the Fed’s target, Yellen has in the last six months managed to shift investors’ attention to stagnant wage growth.


But a majority, 32 of 41 economists who answered an extra question, said the Fed will proceed to hike its interest rate even if wage growth does not accelerate as expected.


“While the Fed would like a faster increase in wages, if all other indicators are showing sustained health in the labor market and substantive reductions in labor market slack, the FOMC would be hard put to find a reason not to hike rates,” said Terry Sheehan, economic analyst at Stone & McCarthy.


Mortgage Rates Continue Benefiting From Overseas Risks

Mortgage rates moved moderately lower today as bond markets benefited from overseas risks.  These risks take several forms at the moment, ranging from the risk of further economic deterioration in Europe to the geopolitical risks associated with several armed conflicts around the globe.  In general, bond markets benefit (meaning rates move lower) in response to increased risk.  Unfortunately for the secondary mortgage market, it’s US Treasuries that see the lion’s share of benefit from such periods of waxing risk, but mortgage rates have been able to tag along to some extent.

The most prevalently-quoted conforming 30yr fixed rate for flawless scenarios is now back to 4.125%, though 4.25% remains nearly as common.  In general, MBS (the mortgage-backed-securities that govern rate changes) have been unwilling to return to late-May and late-June levels to the same extent as US Treasuries.  As such, they’ve been holding in an excruciatingly narrow range just above the lows of the year.

Mortgage Rates Recover After Jobs Data

Mortgage rates were able to recover some of the ground lost this week after the important Employment Situation Report showed slightly less job creation than expected.  Had the report been stronger, rates could have easily continued the week’s strong move higher.  As it stands, we’re settling down very close to Monday’s levels, which is a major victory based on the tenor of the past 3 days.  The most prevalently-quoted conforming 30yr fixed rate remains at 4.25%, but 4.125% is much more viable than it was yesterday.

Today’s victory is very important in that it thwarts what could have been a much bigger move higher.  While there’s never any guarantee that such a move couldn’t simply be delayed, we can still glean some reassuring clues from recent activity.  Chief among these is the role of European markets in US rate movements.

Mortgage rates are most-closely tied to the movement of mortgage-backed-securities or MBS.  MBS, in turn, tend to move in close concert with certain US Treasuries, especially 10yr Notes.  Taking the correlation one step further, Treasuries also tend to move in the same direction as European bond markets, though the size of the movements can vary quite a bit.

Those variations in size have allowed European borrowing rates to reach all time lows this week.  Naturally, rates in the US did not hit all time lows, but we continue to see a situation where rates in the US experiencing downward pressure from Europe.  It’s reasonable to assume that Europe would have to turn a profound corner if rates in the US are to jump significantly higher.

Making the determination of a “turned corner” in Europe is the sort of thing that can only be confirmed gradually.  For now, that process has yet to even begin.  Keep in mind, this doesn’t mean that rates at home can’t go higher simply because Europe’s rates are moving lower.  Rather, it can be viewed as an extra weight, preventing what might otherwise be bigger moves higher.

Mortgage Rates Unchanged to Start Important Week

Rates didn’t move much to start the week, with a nearly equal number of lenders moving both higher and lower.  On average, rates were just barely higher.  Even then, the actual rates being quoted are the the same today versus Friday with the only differences seen in the form of closing costs.  The most prevalently quoted conforming 30yr fixed rate remains at 4.25% for flawless scenarios with 4.125% available to a lesser extent.

As the week progresses, so should the movement in the world of interest rates.  Mortgages and Treasury yields alike have been bumping around at the lower end of their ranges in 2014.  There’s a decent chance that this week’s events will either help break those ranges, or prompt a bounce back toward higher levels.  Bottom line, rates have been low and sideways, but they should look more like they’re choosing a direction by the end of the week.

The first major chance for this increased volatility is on Wednesday.  There will be several pieces of key economic data as well as a Fed Announcement in the afternoon.  As is always the case when we’re expecting more volatility, the risks and rewards of floating are increased.  That said, rates haven’t shown much willingness to move below levels seen in late May.  Until/unless they do, and with rates near long-term lows, it’s safer to plan on that range continuing.

Mortgage Rates Rise at Fastest Pace in Weeks

Mortgage rates moved higher today at the fastest pace since July 3rd as bond markets began backing away from more anxious levels associated with last week’s geopolitical headlines.  Such headlines (Malaysian airliner and Gaza invasion) can motivate investors to seek safe-havens such as Treasuries and MBS (the mortgage-backed securities that influence mortgage rates).  Since last week, bond markets have been relatively on edge but never moved any lower than the initial move on Thursday.  If there has been one day since then that “undoes” the flight-to-safety, today is the best candidate.

This isn’t for any particular reason either.  Sometimes when it comes to financial market movements, “it’s just time.”  A few caveats here though…  First of all, the movement wasn’t exceptionally large in a historical context.  Sure, it’s the biggest move up in 3 weeks, but only because the past 3 weeks have been historically narrow and generally moving lower.  Secondly, there were other reasons for rates to weaken today, including strong economic data overseas and at home.

There was also one very weak piece of economic data in the US today as New Home Sales were much lower than expected, but because of the prevailing trend this morning, it merely served to stem the tide of rising rates as opposed to reverse it.  Ultimately, the most prevalently-quoted conforming 30yr fixed rate moved back to 4.25% today, though some lenders remain at 4.125%.  Some borrowers will be quoted the same rate today as yesterday, but generally with higher closing costs.

From a strategy standpoint, today’s weakness constitutes a vote being cast for the first time this week on our recent run of lower rates.  In other words, we moved abruptly lower last week and have held very steady–waiting for the next move.  Today delivered that move.  The fact that it was higher suggests increased risks in floating as such days run the risk of being the start of a new trend.   There’s no way to know this for sure, of course.  The important point is that risk/reward is no longer as muted as it had been this week.  It continues to be the case that next week has infinitely more potential to cause big movements in rate.

MBS Day Ahead: Waiting on Geopolitical Risk; Dangerous Game for Bonds

Although economic data had some small role to play in yesterday’s strong bond market rally, the day was really all about geopolitical risk.  If we’ve learned anything about geopolitical risk as a market mover, it’s to not rely on it as a long term guidance giver.

Even after the risk merely levels off, markets usually bounce back.  Maybe not today, maybe not tomorrow…  Maybe not even soon, but on the other hand, it could be soon!  Point being: don’t take the newfound move of 10yr yields into the 2.4’s for granted.

Heck, we can’t even take the same low-rate pleasure in 2.4+ 10yr yields as we did in late may because MBS have been lagging Treasuries so much.  Thankfully though, that SHOULD put us in a better position going forward–one where MBS is more willing to keep pace with any additional rallies and less compelled to keep pace with Treasury weakness if we go the other direction.

If we do happen to turn a corner today or Monday, the implications are pretty depressing from a technical standpoint.  Such a bounce would not only end up contributing to a long term inflection range from 2.40 to 2.51, but it would also introduce new technical signals with longer term implications.

One of these would be a “bearish divergence” in RSI.  RSI, or the “Relative Strength Index” is one of the most popular momentum indicators around.  When its line is moving up or down, momentum is increasing in the direction of the movement.  When the line hits either horizontal level at 30 or 70 (it’s always 0-100), the security is overbought or oversold, which basically means it’s ripe for a correction as soon as it crosses back over the horizontal line heading the other direction.

A bearish divergence occurs when momentum is telling a different story than the charted security–in this case, 10yr yields.  Note in the chart below that (IF we bounce higher in yield soon) that yields will have bounced at lower lows than those seen in late June, yet the RSI line will be bouncing at higher lows.  The conclusion is that underlying momentum doesn’t support the the increasingly aggressive rally.

2014-7-17 tsy techs

Keep in mind, that’s just one technical study.  It wouldn’t necessarily doom rates to a an epic sell-off.  But it does serve as a reminder of the ephemeral nature of geopolitically-motivated rallies, and would be one more mark against the sustainability of current levels.

Whether or not things play out in this manner remains to be seen.  Markets are essentially reduced to headline watching today as the event calendar is light.  One thing to keep in mind is that geopolitical risk often undergoes significant change over the weekend, so it’s less safe than normal to assume Monday’s rates will be close enough to Friday’s.

That’s a double-edged sword though.  A bigger flare up in risk could make for bigger improvements.  Simply put: more risk, more reward when it comes to floating, but if recent history and technicals are an indication, “risk” is probably still edging out reward if the rally doesn’t continue in spades today.

Mortgage Rates Slightly Higher, Ending Last Week’s Streak

Mortgage rates rose modestly today, ending last week’s streak of 5 days without an increase.  The movement wasn’t enough to unseat 4.125% as the most prevalently-quoted conforming 30yr fixed rate for top tier scenarios.  That means today’s changes came in the form of increased closing costs for the same rates as Friday.  Expressed in terms of rates, the hike is equivalent to 0.03%.

As we discussed on Friday, the sorts of winning streaks seen last week become progressively less likely to continue after the 5-day mark, even if the pull-back is only temporary.  Whether or not today’s pull-back proves to be temporary will likely have something to do with tomorrow’s significant events.  Earlier in the morning, the Retail Sales report could cause some movement in the bond markets that most directly affect mortgage rates.

The main event will be Fed Chair Yellen’s first day of congressional testimony.  If markets are still feeling negative about rates after that, it would go a long way toward establishing a short term trend toward higher rates.  Above all else, it bears repeating that the recent range has been exceptionally narrow, with over 2 months spent at either 4.125% or 4.25%.  Until that’s no longer the case, risk and reward for locking or floating is low enough that a case can be made for either.

Turning Denials into Approvals !

Your Mortgage application get’s denied, I see it every day. When it happens to you, you can give up the dream of home ownership, or take an approach and cure the cause of the denial.

When a lender turns down a loan application, they are required to explain why and issue a denial letter. This letter also gives you the information you need to strengthen your overall ability to obtain a mortgage.

Employment stability is a big part of the picture when you are asking someone to trust you with a 30 year mortgage. If you’ve been at your current job for less than two years but have been in the same industry for a longer period, be sure to note that in your application.

Before you apply for a loan, get copies of your credit report from each of the three reporting bureaus, (since they contain different information). Check it for inaccuracies and outdated information. It can take 30 days or more to correct errors, so start early or call a reputable credit SOLUTION company.

If extraordinary circumstances like a job lay-off or medical emergency have created temporary bill-paying problems in the past,  explain this to the loan officer.

It’s crucial to provide documentation that the lender asks for as soon as possible. If you’re too busy to get the paperwork together and answer whatever questions the lender has, it CAN ALSO be a good idea to wait until you can do what it takes to MOVE the application through.
Lenders have three days from the day you file your application to give you a Good Faith Estimate of the fees that will be due at closing. If you fill out an application and then don’t give the lender the necessary information right away, he or she may have no choice but to close the application process.

First, you should know how the basic process works. When you apply for a mortgage, here’s what to expect:
You will receive an approval or rejection within 30 days of submitting a completed application.
If your application is denied, your lender must tell you, in writing, specifically why you were not approved (or give you have 60 days to ask the reasons for the rejection). It’s not enough for lenders to say “you didn’t meet our standards.” They must provide details such as “not enough time on the job,” or “your income is too low.” Once you know where your financial weaknesses are, you can focus on fixing the problems.
Your mortgage may have been approved, but on less favorable terms than you originally applied for. In that case, lenders must tell you why you didn’t qualify for better terms (if you ask), but only if you turn down the counter offer, according to the Federal Trade Commission.
If your mortgage was rejected because of something in your credit report, the lender is required to tell you how to contact the credit bureau that issued the report. If you ask within 60 days, the bureau will provide you with a free copy of your report. Plus, under the Fair Credit Reporting Act, all consumers are entitled to receive one free report each year.
If there is inaccurate information in your credit report, the credit bureau must investigate if you file a dispute. The company that provided the inaccurate information must also reinvestigate your claim and report the findings. If, after the investigation the inaccurate information remains and you still dispute it, include a summary of your position in your credit file.
A poor appraisal may be the reason for your mortgage denial. Ask the lender for a copy and check it for inaccuracies such as age, location, and dimensions of the home. Also verify that there was no illegal component to the appraiser’s decision, such as the racial makeup of the neighborhood. The appraiser works directly or indirectly for your lender, so if there are factual errors, or illegal information in the appraisal, point these things out to your lender and ask him or her to contact the appraiser.
Depending on the reason for the mortgage denial, it may just be a matter of time, or you may need to take action. If you’ve made a habit of job hopping, settle down and stick with one employer long enough to develop a stable history. If your credit history is shaky, stop opening new accounts and make a concerted effort to pay down the ones you have. Keep balances on all accounts low, since part of your credit score depends on how much of your available credit you are using. Pay bills on time. If you have old credit accounts with zero balances, don’t close them or you could negatively impact your credit score. Keep them open and cut up the credit cards.

Barring unforeseen circumstances such as a medical emergency or a job lay off, anyone can become creditworthy with time and diligence.

Mortgage Rates at 1-Month Lows; Volatility Ahead

Mortgage rates moved lower again, with the best options available in the morning hours.  After that, bond markets including MBS (the mortgage-backed-securities that most directly affect mortgage rates) moved back into weaker territory on the day, prompting some lenders to raise rates in the afternoon.  The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains at 4.125%, with most borrowers seeing today’s improvement in the form of lower closing costs.  Expressed in terms of ‘effective rate,’ the drop in closing costs amounts to 0.02%.

Even after the afternoon reprices, today’s rates are still the best this month and very close to being the best this year.  Only 2-3 days were better at the end of May.  Any time rates are at a periodic low like this, it’s never a bad decision to lock in the improvements.  While we could see modest gains from here, the risk is rapidly increasing that the recent trend of improvement will take a breather, or even reverse next week.  If you’re not able to lock today, or not interested, just be aware that the prospects for volatility will be increasing after Monday night.