8/22/2019 | Casey Fleming | Mortgage rates dropped in late July and early August and have held quite steady since then. What happened, and what’s likely to happen next?
The Fed Dropped “Rates” – But What Does That Mean?
As I wrote on August 2nd, the Fed (The Board of Governors of the Federal Reserve, or the Federal Open Market Committee) lowered interest rates by 0.25% in their last meeting on July 30th. However, the Fed only controls short-term interest rates, not long-term interest rates such as mortgages. Nevertheless, interest rates dropped sharply after the Fed announcement. (See previous article for detailed discussion of why.)
Since then the market has been working to find a stable ground.
Take a look at the chart above. You’ll see that the yield on the 10-year Treasury bond (red line) dropped precipitously after the Fed announcement for a week or so. After that it began hunting (with a fair amount of volatility) for equilibrium. Think of this as the yield investors want to earn on safe investments.
You’ll also notice that the Fannie Mae 60-Day Yield (Blue line) followed the Treasury bond down for the first week, but once volatility set in it leveled off. The 60-Day Yield is akin to the wholesale cost of mortgage funds to mortgage lenders.
Meanwhile, the Freddie Mac Mortgage-Market Survey, a measure of the interest rates that borrowers actually got during the previous week, came down a bit but then stabilized at a point much higher than you might expect.
In other words, institutional investors were willing to take a lower yield, and the wholesale cost of funds to lenders followed cautiously and hit a floor while the investor yield continued to drop. Meanwhile, the loans offered to consumers dropped only a little and then held steady.
So, we would expect that the margin lenders are earning must have risen, right?
Mortgage Rates Held Up by High Margins
In this chart we can see that the margin lenders charge was quite low in 2018 when business was fairly slow and steady, and lenders needed all the business they could get. But margins began to rise in early December. They fell in the spring when business generally slows, but by late spring and early summer business exploded, and margins rose dramatically. (You don’t have a sale on mortgage rates if you don’t need more business.) Margins fell in early July as the late spring rush slowed down, but have started to rise again the last two weeks, as we would expect since wholesale rates have moved down. However, retail mortgage rates have not.
An interesting note is that a margin of 0.3% – as was the case in late 2018 – gives lenders enough margin to operate, or else it would never have gone down that far. This tells us that even if wholesale rates stabilize or even rise a bit, lenders have room to drop mortgage rates, and if business slows may even drop them aggressively.
There is a natural correction, however, when mortgage rates drop precipitously, because when business expands quickly lenders raise their margins again, as you can see. The trick is to be ready to lock your loan when they first drop the rates, before the rush.
Rates Could Drop Dramatically
If the yield investors look for as measured by the 10-year Treasury Bond stabilizes, we are very likely to see margins fall, especially if business slows. School has started in most of the country, which usually signals the beginning of a sharp slowdown in mortgage originations.
In other words, if you are waiting for a sign, this is it; get ready for lower mortgage rates right around the corner.
Mortgage Advisor, C2 FINANCIAL CORPORATION
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This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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