Mortgage rates have bounced around a lot lately, making it difficult to know where they are headed. Last week, they spiked to their highest levels since January. This week, they tumbled.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average fell to 3.5 percent with an average 0.7 point. (Points are fees paid to a lender equal to 1 percent of the loan amount and are in addition to the interest rate.) It was 3.65 percent a week ago and 4.06 percent a year ago.
The federally chartered mortgage investor aggregates rates from 125 lenders across the country to come up with national average mortgage rates. It uses rates for borrowers with flawless credit scores. It is important to note the rates quoted are not available to every borrower.
The 15-year fixed-rate average dropped to 2.92 percent with an average 0.6 point. It was 3.06 percent a week ago and 3.57 percent a year ago. The five-year adjustable rate average jumped to 3.34 percent with an average 0.3 point. It was 3.11 percent a week ago and 3.75 percent a year ago.
“Mortgage rates fell notably over the last seven days, an otherwise wild stretch marked by one-day swings that would usually unfold over weeks or months,” said Matthew Speakman, a Zillow economist. “About a week ago, signs of weakness and underlying fractures in financial markets led mortgage rates to rise sharply to multi-month highs, as cash-strapped traders looked to offload any assets possible in order to get cash to meet short-term obligations. This prompted the Federal Reserve to intervene with a historic influx of capital aimed at settling markets.”
As The Washington Post’s Heather Long reported Monday, the Federal Reserve’s decision to buy unlimited amounts of U.S. Treasury and mortgage-backed securities is “an extraordinary backstop for lending markets that goes much further than what the central bank did in the 2008-2009 crisis. Back then, the Fed injected nearly $4 trillion into the financial system over several years. Analysts say the Fed’s effort now could dwarf that in a matter of weeks, a testament to how much pain the coronavirus is causing the economy.”
The Fed’s unlimited spending on mortgage-backed securities will probably push mortgage rates down — after lenders clear their backlog from a couple of weeks ago when rates sank to record lows.
“The traditional methods of what drives mortgage rates, looking at the 10-year Treasury yield and prices of mortgage-backed securities, have gone out the window,” said Michael Becker, branch manager at Sierra Pacific Mortgage in Lutherville, Md. “These days rates vary greatly between lenders, from day to day and even hour to hour. Some lenders are forced to hike their rates due to capacity constraints and other issues. I locked a loan [Wednesday] that was 2 percent lower than my rate sheet had just last Friday.”
A mortgage-backed security, or MBS as it is often known, is a bundle of mortgages that is traded on a secondary market. It’s a lot like a Treasury. A mortgage rate is largely based on MBS prices. The higher the price, the lower the rate.
Now that the Federal Reserve is a major buyer in the MBS market, demand should increase, which could drive down mortgage rates. In 2008, when the Fed launched its first round of bond-buying during the Great Recession in an effort to stabilize the housing market and stimulate economic growth, mortgage rates dropped below 5 percent for the first time.
“Mortgage-backed securities are currently near their highest price levels of all times and while this would normally translate into the best rates ever, we simply aren’t seeing them on rate sheets of lenders,” said Jim Sahnger, mortgage planner at C2 Financial in Palm Beach Gardens, Fla. “As [the coronavirus] continues to impact us all, mortgage pipelines at lenders are maxed out. Couple this with an unprecedented number of people that will soon not be paying their mortgages on time and it becomes more difficult to adequately adjust for where to price rates today.”
All of this means locking in a mortgage rate isn’t as simple as it was a month ago.
“Some lenders are changing the rules on what is needed to lock a loan,” Becker said. “You may not be able to lock at loan application or origination. You may need a loan approval and appraisal to lock a rate moving forward. This is in response to liquidity issues in the mortgage financing world. … My best advice, if you are purchasing or refinancing a home, is to contact your loan originator, find out what is needed to lock, and, when you have those items and the rate makes sense, lock in and work to close that loan in a timely fashion.”
Predicting where rates are headed these days is difficult. Bankrate.com, which puts out a weekly mortgage rate trend index, found that half the experts it surveyed expect rates to remain about the same in the coming week.
“Good luck forecasting rates,” said Logan Mohtashami, senior loan officer at AMC Lending Group in Irvine, Calif. “The 10-year yield liquidation looks like it has ended. The increase in MBS purchasing should help [rates]. However, we should be at 3 percent or lower today, and, until we get a more fluid marketplace, we are at the mercy of all this drama.”
Meanwhile, mortgage applications dwindled last week when rates moved higher. According to the latest data from the Mortgage Bankers Association, the market composite index — a measure of total loan application volume — decreased 29.4 percent from a week earlier. The refinance index declined 34 percent, while the purchase index dropped 14 percent. Just as the spring buying season should be getting underway, purchase applications dropped to their lowest level since August. Compared with a year ago, purchase applications were down 11 percent. It was the first year-over-year decline in more than three months.
The refinance share of mortgage activity accounted for 69.3 percent of applications.
“A slight increase in mortgage rates, as well as widespread coronavirus-related containment efforts and economic uncertainty, led to a drop in refinances and purchase applications last week,” said Bob Broeksmit, MBA president and CEO. “Refinances were still a robust 195 percent higher than a year ago, but purchase activity fell behind last year’s pace for the first time in over three months. The ongoing economic and fiscal stimulus efforts by the federal government to boost the economy should help homeowners to refinance their loans, stabilize mortgage rates for home purchases and improve the short-term outlook during these difficult times.”