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Interesting Week for Interest Rates Coming Up

4/2/2018 | Casey Fleming | This could be a very interesting week for interest rates in general, and mortgage rates in particular.  As you recall if you are a regular reader, interest rates are driven in the long run by inflation, but in the shorter term they often react to stock market volatility.  The week could be a highly volatile one in the stock market, so it could be an interesting one for interest rates.

Interest rates and mortgage rates

One thing to keep in mind is that “interest rates” and “mortgage rates” are not the same thing, and although over time they tend to track each other closely, they do not always track exactly.  Stock market volatility tends to drive some institutional money into bonds, such as U.S. Treasury bonds and mortgage-backed securities, driving down those interest rates.

However, mortgage lenders have to be very concerned about volatility because it takes a while to process and close a loan, so there is a lag between the time a loan is priced and when it is ultimately sold off to Fannie Mae, Freddie Mac, or a Wall Street hedge fund.  Higher volatility means greater risk, so when volatility drives bond yields down, retail mortgage rates take some time to follow.  In fact, sometimes they actually go up for a while, rather than down.

Performance over the last week

Three interest rate trackers

Are interest rates about to head down?

Looking at the chart above you can easily see the principle in action.  The 10-year U.S. Treasury Bond (red line) was fairly stable from about mid-February through the beginning of last week, but you can see that for the last two weeks or so we’ve seen a downward trend.  The Fannie Mae 60-day yield (blue line) is starting to follow in the last week or so.  But the Freddie Mac Mortgage Market Weekly Survey (green line) shows very little downward movement – lenders are waiting to see if the trend holds before following.  My guess is when the Freddie Mac index is updated this coming Thursday we’ll see a very slight dip in the green line.

Because of this we would expect to see lender margins (the spread between their wholesale cost and the rate they offer borrowers) rise, which it has as you can see in the chart below.

Lenders mortgage rates

Lender margins have risen as lenders hesitate to improve rates

Lenders need to keep their pipelines full, however, so competition will always eventually drive margins back down to wherever the current equilibrium is.  So what should we expect this week?  If stock market volatility continues, and especially if stocks fall, we should see bond yields continue to drop and by the end of the week some improvement in mortgage rates.

Economic Calendar for week of April 2nd

Monday, April 2nd brings us the ISM Manufacturing Index, a measurement of manufacturing activity.  It is expected to be down slightly from previous months, and by itself is not expected to be a major market-mover.  Construction Spending, on the other hand, could be an early indication as to whether the 2017 construction boom is still going strong.  A reading outside of expectations could move markets.

Tuesday brings Light Vehicle Sales for March – a measure of new car and light truck sales.  A survey of economists suggests that March sales will be slightly lower than February.  Anything but a large surprise is not likely to move markets.

Wednesday brings the ADP Employment report for March, a measure of new (private industry only) hires for the month.  New hires have held pretty steady in recent months, but a survey of economists suggests it will be down a little this month.  A strong surprise could be a market-mover, but it is only the second-most important announcement of the day.

At 2:00 PM (Eastern) the FOMC will release the minutes from their last meeting.  While they have already announced their major decisions from the meeting and held a news conference, the minutes often contain details about the individual thinking of the board members.  Since this was the first meeting chaired by Jerome Powell, this release will be closely watched.  Investors will look for stability and consistency.  Minutes that hint at significant changes in Fed thinking or policy moving forward could roil the markets, potentially sending both stocks and bonds down.

Wednesday day also brings Factory Orders for February, which are expected to go positive after a negative month in January.  Anything other than a huge surprise on the upside is not likely to push stocks higher, but a surprise to the downside could bring stocks down and push bonds up.

Thursday brings Weekly Jobless Claims which have been running on the low side, and are expected to slide up just a little.  This might surprise on the downside, which could push stocks up.  The Trade Deficit for February also arrives Thursday morning.  Given all the talk of trade wars lately, this will be more closely watched than usual.  Since it’s a reading for February, however, it’s old data and should not be too significant.

Friday brings the Employment Report for March, a BLS report on new job growth, unemployment and wages.  New job growth is expected to be neutral at 167,000 new jobs created, and the unemployment rate is expected to slip very slightly to 4.0%.  These estimates are likely to match expectations pretty closely and so are unlikely to move markets.  Wages, however, are more difficult to forecast.  Will the Tax Act bonuses still be factored in?  Will wages actually have risen, beyond the one-time bonuses?  The wage report will be very closely watched and may move the market.

Update

I’m finishing this article up on Monday morning (a bit late) and the stock market is off considerably this morning, bonds have rallied a little and mortgage-backed securities are off a little.  While long-term interest rate trends are always driven by inflation, in the short-term they can be tossed around by more temporal factors, such as global politics.

When this happens, we might see interest rates improve but will rarely see mortgage rates improve (significantly, anyway) in the short term.  Lenders are loathe to improve pricing in highly volatile markets, and this week looked from the beginning like it could be a bit of a roller-coaster, and is turning into a wild, E-ticket ride.

Margins have already been rising leading up to this week, so if bond yields drop you could see a little improvement in mortgage rates, but it is most likely lenders will not improve pricing much until the market stabilizes.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527

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.

Fair use and redistribution

This article is copyrighted and may not be used or reprinted without permission.  However, we encourage you and freely grant you permission to reuse, host, or repost this article and any images used therein, provided that when doing so, you attribute the authors by linking to LoanGuide.com or this page, so that your readers can learn more about this topic.  Your link must be a “dofollow” link.

For any other use, please contact us at LoanGuide@Outlook.com 

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Have Interest Rates Stabilized?

3/22/18 | Casey Fleming | It’s been a while since I’ve written about this topic, and I’m sure you’ve noticed that the market has been on an uphill climb until recently.  It’s time to talk about the future and let’s make an educated guess as to whether or not interest rates stabilized this month.

Feds raise interest rates

Did the feds raise interest rates last week?

What the Feds did

The Feds (more accurately the Board of Governors of the Federal Reserve Bank) decided last week to raise the target rate for federal funds – the range of interest rates that banks charge each other to borrow overnight – by 0.25%.

You may read ads for mortgages imploring you to get your mortgage now because rates are going up, and that notion will be supported by knee-jerk media reaction to the Fed move.  While it’s true that the Fed’s move will raise the interest rate you pay on your existing credit cards and equity lines, and any car loan you get in the near future, it tends to have exactly the opposite effect on mortgage rates, which is the strongest argument that interest rates have stabilized.

More importantly, the Feds noted in the statement that although the job market remained tight that inflation has remained very tame, and consumer spending moderated from its increased pace in the last quarter of 2017.  Since interest rates are inexorably intertwined with inflation, the statement itself was good news for mortgage rates.  (See The Feds Raise Interest Rates in Order to Lower Them)

Mortgage rates are headed lower?

Not necessarily.  There are many factors involved in the interest rate market, but this takes a lot of pressure off of interest rates for the time being.  So, as a consumer, if you hear lenders panicking trying to get you to apply now, just remember they are trying to get you to call; the reason they give isn’t necessarily true.

So, have interest rates stabilized after the Fed move?

It’s too soon to tell, but let’s examine what they did up to the end of last week.

the feds raise interest rates but mortgage rates stabilized

Interest rates have actually been stable for a few weeks now

Looking at the chart above, you can see that interest rates move up sharply from late December until about mid-February.  10 year U.S. Treasury bonds (the red line,) which is the easiest to track in real time, show that investors demanded higher and higher yields while the stock market was running up to new record highs, but once treasury yields hit a certain level (about 1.75% in this case) the market settled down and interest rates stabilized.

Demand for mortgage-backed securities (see the blue line) stayed volatile for a little while longer, but have pretty much stabilized too.  You can see both of these indices tracked up slightly in the days leading up to the Fed announcement, because when the Fed speaks, people listen.  Investors sell off a portion of vulnerable securities, like bonds, before any major news event that could push them in the wrong direction.

The interest rates that people actually locked at (green line) have moved only very slightly in the last four weeks.

In the meantime, let’s remember that wholesale rates are not the only factor driving what lenders decide to charge.  Lenders need to keep operating at close to maximum capacity to make money, so pipeline volume also matters a great deal, and lenders will raise margin when their pipelines are full and their operations are stretched, and lower them when they are operating below capacity.

Have interesr rates stabilized? Perhaps for now.

Lender margins are creeping down, but can only go so far

This year total loan volume is down, and lenders would rather lower their margins than layoff staff that they have spent good money to hire and train.  (At least for now.)  Looking at the chart above, you can see that lenders are starting to lower their margins to compete for your business.  The blue line measures daily activity and is thus prone to wild swings as lenders chase the market.  The red line is a 30-day moving average and so smooths out the trends.

You can see lenders have reduced their margin about 0.10% in interest rate from a year ago, when they were all quite busy.  This represents roughly a 25% reduction in their profit margin, so it isn’t insignificant.

Where will interest rates go this week?

With Easter weekend coming up we are likely to see lender margins come back up slightly, as they are likely to have staff out on vacations for Spring break with the kids.  Plus, the bond markets are closed on Good Friday, so the risk associated with setting interest rates and then having three days go by before you can re-set them is rather high.

As for economic reports, it will be a moderately busy week come mid-week.  Monday brings only the Chicago Fed National Activity Index, a composite of other indices that have already been published.  We expect no surprises, and therefore nothing to drive the market.  Barring unexpected news in the market, mortgage bond yields should remain stable, and with lenders loathe to reduce margins this week retail rates should be the same or slightly better than they were this last Friday.

On Tuesday the Consumer Confidence index for March will be released.  Consumer confidence has been running very high, and with many companies offering tax-plan bonuses (even if they are only one-time and come with strings) consumers are in a confident mood.  So, this number should not move interest rates in a negative way because we already expect consumer confidence to be high.  The only way it would move the markets would be if the number dropped, and this is very unlikely.  Again, bond yields and retail rates should move very little, if at all.

Wednesday brings us the 2017 4th Quarter GDP report – a closely-watched index that tells us how much the economy expanded in the last quarter of last year.  A survey of economists projects a 2.8% growth rate, and that isn’t likely to be far off.  A substantially higher figure (say 3.0% or more) could roil the interest rate market and push rates up.

Wednesday also brings pending home sales which is important, but again very unlikely to surprise the market because the data are already pretty much known.  However, lenders are likely to push margins up a little on Wednesday, because…

Thursday is a big day, with Weekly Jobless Claims, Personal Income (February,) Consumer Spending (February,) Core Inflation* (February,) and Consumer Sentiment (March) being major reports that can move the market if any of them surprise to either side.  Thursday morning we will see a broader range of retail prices than normal as lenders try to divine which way the bond markets are going to go, and then tighten up in the afternoon as a clear trend is established.

*Why is inflation important?

If you want to lock your loan this week, you probably want to lock before Thursday unless you like taking chances for a possible big win, should bonds rally strongly then.

Friday is Good Friday and there are no economic reports being released, and the bond markets will be closed.  Lenders will still issue pricing, but do not expect it to be an improvement on wherever we land on Thursday afternoon.

And then there’s the whole administration thing

The wildcard this week will be what the stock market does in response to the administration’s moves on trade wars and actual wars.  Recent personnel moves by the administration and confusing public announcements have created a lot of volatility in stocks; stock market volatility tends to move investment money into bonds.  However, bonds hate instability even more than stocks, and lenders are loathe to narrow margins when markets could turn on a dime with the next Tweet.

On the other hand, institutional investors can’t just park their money in a mattress, and lenders can’t let their pipelines empty out and their operations sit idly by.  So, there will be a lot of tension in the market this week and moving into April.

It looks to me that interest rates stabilized in March, and my bet is that when the dust settles interest rates will be about where they are now in a month, but with some pretty interesting swings between now and then.  The trick is always catching the dips.

Get your popcorn out.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
NMLS 344375 / BRE 00889527

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.

Fair use and redistribution

This article is copyrighted and may not be used or reprinted without permission.  However, we encourage you and freely grant you permission to reuse, host, or repost this article and any images used therein, provided that when doing so, you attribute the authors by linking to LoanGuide.com or this page, so that your readers can learn more about this topic.  Your link must be a “dofollow” link.

For any other use, please contact us at LoanGuide@Outlook.com 

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New Conforming Loan Limits for 2018 are Higher Than Expected

11/29/2017 | Casey Fleming |  The Federal Housing Finance Agency – the FHFA – disclosed the new conforming loan limits for 2018 yesterday, and they went up further than most analysts expected!  It’s great news, as it opens the door to homeownership to more people.

Historical Context

Fannie Mae and Freddie Mac (the agencies) were created to purchase mortgage loans from lenders in order to inject funds into the housing market to support home ownership throughout the country.  Then they borrow money from institutional investors (insurance companies, pension funds, etc.) by selling bonds through exchanges such as the New York Stock Exchange.  The bonds are secured by the value of and income on the mortgages that they have “pooled.”

The federal government (meaning taxpayers – you and I) have always in one way or another guaranteed that the money would be paid back to the institutional investors, whether the mortgage pool performs or not.  This guarantee incentivizes investors to accept a lower yield when bidding on these bonds, and that lowers the mortgage interest rate for all borrowers.

Because of the taxpayer-backed guarantee the agencies have to be prudent – the loans have to be made in a responsible manner.  They publish guidelines for the types of loans that they will purchase.  Loans that are written to these guidelines are called conforming loans, because they conform to Fannie / Freddie guidelines.

The conforming loan limit is the maximum loan amount that the agencies will buy.  In the past, Each year they published a new conforming loan limit which reflected increases in housing prices across the nation.

Modern Day Conforming Loan Limit

After the financial crisis, home prices didn’t rise – in fact, they fell.  Rather than lower the conforming loan limit, which would have significantly diminished the availability of mortgages, they kept the conforming loan limit at the same level as 2007 – $417,000.

In 2009 they went one better, and created a second category of conforming loans written to guidelines for the new high balance conforming loan limit.  This category recognized that in certain areas of the country with high-cost housing the conforming loan limit was too low to finance most of the homes in the area.  Therefore, in counties identified as high-cost areas the high-balance conforming loan limit would be set at 125% of the median home price in the county, or a certain dollar limit, whichever was lower.

From 2008 through 2015 the conforming loan limits were kept at the same level, since home values had not yet recovered from the financial crisis.  The conforming loan limit was $417,000, and the high-balance limit was a maximum of $625,500.

Beginning in 2016 the limits were raised for the first time in 8 years, to $424,100 and $636,150 respectively.

So today there are two categories of conforming loans, and two conforming loan limits – one a nationwide figure, and then a second one that depends on your county.

Yesterday the FHFA (the parent agency of Fannie Mae and Freddie Mac) announced that the conforming loan limits for 2018 would be $453,100 and $679,650, a jump from the 2017 limits that was much higher than expected.  This reflects the very high home price appreciation we have experienced nationwide over the last year.

What this means to you is that the best possible pricing in the market is now available for loans up to $453,100, and very close to the best rates will be available up to whatever the high-balance conforming loan limit is in your county.  To find out the limit for your particular county, go here, or just call me – I’m glad to help.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
Follow me on Twitter for interest rate updates: @TheLoanGuide
NMLS 344375 / BRE 00889527

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.

Fair use and redistribution

This article is copyrighted and may not be used or reprinted without permission.  However, we encourage you and freely grant you permission to reuse, host, or repost this article and any images used therein, provided that when doing so, you attribute the authors by linking to LoanGuide.com or this page, so that your readers can learn more about this topic.  Your link must be a “dofollow” link.

For any other use, please contact us at LoanGuide@Outlook.com

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Interest Rates Settle Down in August

I’ve written many times that interest rates jump up and settle down.  What I mean by that is that when news spooks the market investors and lenders immediately seek a higher yield to compensate for a sharp increase in perceived risk.  But when markets stabilize, competition invariably pushes interest rates down.

August has given us the clearest example yet of that phenomenon.  Some unsettling national and international issues contributed to a stalled stock market.  As Investors pulled money out of equities looking for safe-haven investments, much of that money flowed into bonds, driving yields down.

The money flow was not driven by a single event, however, but rather investors making small portfolio adjustments because they are worried about whether the stock market might correct.  That yielded a slow, steady progression down in rates.

Interest rates settle down

Yields – and interest rates – settled down in August

Taking a look at the chart above, you can see by the U.S. Treasury Bonds (red line) and mortgage-backed securities (blue line) that yields have steadily declined over the last 7 weeks.  More importantly, however, is how stable and steady the decline has been, compared to the volatility since the election.

I’ve written many times that the market loves stability, and here we see interest rates once again approaching 2017 lows not as a result of a panicked flight to bonds, but as a result of a steady flow into debt instruments.

The Freddie Mac weekly mortgage market survey (green line) shows that lenders have been carefully following the interest rates down since the end of July.

Margins rise, however, as yields settle down

Lender margins rose slightly in August

Lender margins rose slightly but may yet settle down

Looking at our next chart, we see that lender margins slid in early-July (when origination volume was quite low), and has risen since then because mortgage origination volume has picked up, partly for the summer purchase market and partly because the word is spreading that interest rates are falling.

If underlying yields remain low (and, in particular, stable) we are certain to see interest rates at the retail rate begin to fall once families turn their attention to the new school year and a return to work.

Will rates settle down more?

What does the last week of summer hold in store for us?  Well, it turns out this is a busy week for economic reports.

There are no major economic reports due out on Monday, August 28th.  On Tuesday we will see the August Consumer Confidence Report, which is expected to remain very strong.  Strengthening confidence from an already high level seems unlikely, so if there’s a surprise in store it would probably be to the downside.  We will also see the Case-Shiller House Price Index for June, which is widely anticipated to be very positive.  Again, it would have to be remarkably positive to surprise on the upside, so it’s more likely to be neutral.

Wednesday brings us the ADP employment report.  Summertime is normally a time of expanding jobs, so a small uptick in new jobs is not likely to move the market.  A large jump, which is unlikely, or a large drop, which is even less likely, could move markets.

Wednesday also brings the first run a GDP growth for the 2nd quarter.  The Board of Governors of the Federal Reserve would love to see growth in the 3-4% range, but we’re probably not there yet.  A survey of economists projects growth in the 2.8% range.  Anything over 3% could send the stock market up and the bond market down (thus pushing interest rates up.)

Because the Wednesday reports are both potentially market-moving reports, it’s unlikely lenders will lower rates significantly before Wednesday regardless of what underlying rates do.

On Thursday we have lots of reports, the most important of which are the Weekly Jobless Claims (233,000 expected), Personal Income, Consumer Spending, and Core Inflation.  All of these are closely-watched indices that give us a hint at what the future might hold for inflation, and thus directly impact bond prices.  If rates have not moved down in response to Wednesday’s reports, they will probably stay up for another day.

On Friday we learn about Non-Farm Payrolls, the Unemployment Rate, Average Hourly Earnings for August, Consumer Sentiment and Vehicle Sales.  Again, this is a lot of reports, all of which could move markets.  Since Friday is the day leading in to a long holiday weekend, significant interest rate improvement would be unusual.

With a week this busy don’t count on large improvements in retail rates, barring at least a few of the reports showing signs of a weakening economy.  A good outcome (from our perspective anyway) would be that the reports consistently show a slowly expanding economy with some notable risks to continued growth.  That mix of elements would continue to put downward pressure on interest rates, and combined with slowing mortgage originations (due to the time of year) would almost certainly lead to some real improvements in rates in September.

Stay Tuned.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527

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.

This article is copyrighted and may not be used or reprinted without permission.

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Why Congress Can’t Sell Fannie Mae and Freddie Mac

8/5/2017 | Casey Fleming | Politicians make a lot of hay talking about privatizing Fannie Mae and Freddie Mac.  These formerly private companies were taken over by the government under the Bush administration shortly after the financial crisis began.

Depending on whom you believe, the purpose was either to put a halt to irresponsible lending practices and to backstop the inevitable coming losses, or to provide political cover to those who deregulated Wall Street and thus allowed the dangerous lending practices that led to the collapse.

Winners and Losers

Through the government take-over, the private investors who owned stock in Fannie Mae and Freddie Mac lost hundreds of millions of dollars when their investment became essentially worthless.  However, the taxpayers did make good to the institutional investors (Wall Street hedge funds) who had lent money to the Government-Backed Enterprises (GSEs) through the purchase of mortgage-backed securities.

But that’s all history now.  Since then (for the last 9 years) politicians have been making lots of noise about privatizing the GSEs (so as to get taxpayers “off the hook” in case of a collapse again.)  So why don’t they?  (Besides the fact that they don’t really ever get anything done?)

Fannie Mae

Fannie Mae and Freddie Mac are “The Agencies”

It turns out Fannie and Freddie are wickedly profitable now, and have been for many years.  Who gets the profit?  The taxpayers, sort of.  The profits from both companies go directly to the Treasury.  This money is then put into the general fund to be spent by Congress.  It is “off books” in the sense that the money doesn’t come from any form of taxation that can be used to illustrate how high our taxes are.  Neat, right?

How much are we talking about?

Originally the government “bailed out” the GSEs to a combined total of about $187 billion, $71 billion of which went to Freddie Mac.  This money went into a reserve fund to make sure that the GSEs never depleted all of their reserves.  (They did not.)  Since then, Freddie Mac has returned $110.2 billion, or close to 140% of its original bailout.  Fannie Mae’s numbers are similar; stay tuned for another post.

The United States Treasury

U.S. Treasury – Your Money!

In other words, taxpayers made a killing on this deal

In the second quarter of 2017 Freddie Mac made a net profit of $1.7 Billion, and will pay another dividend of $2 Billion to the Treasury next month.

          Side note: How do you send someone $2 Billion?  Do they take a check?  Bitcoin?

Treasury Secretary Mnuchin insists that cutting Fannie and Freddie loose is a priority of the Trump Administration.  Congress, however, has not even begun to act on it.

However, this may not be a bad thing.

Real estate scammer

Wanna buy a wholesale mortgage agency?

In the past, when government-operated organizations were privatized they were usually given away in a sweetheart deal, making billions for Wall Street investment bankers and hedge funds.  Where did Mnuchin come from?  Mnuchin was a long time executive at Goldman-Sachs until he left in 2002 to found several hedge funds.  In 2008 one of his funds bought the infamous Indy-Mac in one such sweetheart deal, and riding the wave of the recovery made Mnuchin a billionaire.

In the meantime, Freddie Mac is delivering $2 Billion to the Treasury for the second quarter of 2017 alone.  They do pose some taxpayer risk in the event of another financial meltdown, but keep in mind that after the worst financial crisis since the Great Depression, the taxpayers made money on the collapse of the enterprises.

Hanging on to the GSEs until we have an administration that will privatize them responsibly doesn’t seem like a bad idea.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527

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.

This article is copyrighted and may not be used or reprinted without permission.

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Mortgage Rates Rise Before the Thunder Moon

7/8/2017 | Casey Fleming  Last week I predicted that rates would remain generally stable for the rest of the week, barring unexpected news.  Well, we had some unexpected news leading into the week of the Thunder Moon.

The Thunder Moon is the full moon in July when thunderstorms are common in the United States.  It is also known as the Full Buck Moon because that is when a buck’s antlers are in full growth mode.

Swing and a miss

Good Effort?

On Friday July 7th the June Nonfarm Payrolls report showed that new non-farm payroll hires jumped from 152,000 in May (and an expected consensus of 180,000 for June in a survey of economists), to 222,000.  In addition, previous months’ reports were revised upward.  As I’ve written before, it’s surprises that move the market, and the report pushed money from bonds to stocks, driving bond yields and interest rates up.

Are rates moving up?

Rates ticked up before the Thunder Moon

Looking at the chart above we can see that the 10-year U.S. Treasury Bonds (red line) moved up sharply the last two days of June, paused Monday and Wednesday, and then moved up a little on Thursday and sharply again on Friday.

Mortgage-backed securities followed, and the Fannie Mae 60-day yield (blue line) as you can see rose sharply as well.

As I mentioned last week we would see the rates consumers actually got over the last week (green line) rise.  This is a backward-looking report covering rates locked Thursday through Wednesday, so it lags the more real-time indices.  Next week we can expect to see another bump.

Is that the end of low rates?

Probably not.  Remember that there are three broad categories of factors that drive interest rates:

  1. News about inflation: since an investment must outperform inflation, any news that indicates inflation is either increasing (or decreasing) will affect the yield investors want to earn.
  2. The amount of money in circulation: the more money chasing investments the greater the competition for that investment. For investors lending money (through bond investments, like mortgage-backed securities) the greater the competition the lower the interest rate they will have to accept, and vice-versa.
  3. Stock price trends: in the short run, stocks and bonds are generally competing investments. When money flows into one in short-term movements, it usually comes out of the other.  So, when stocks jump, bonds tend to sell off, driving interest rates higher.  There are times when there is a disconnect, but they are relatively rare.

So, when positive economic news represents a surprise it affects interest rates in two ways: stock prices tend to rise, pulling money out of bonds, and the perception that inflation might soon rise may increase, which motivates investors to demand a higher return.

This week’s movements in stock and bond prices occurred in a holiday-shortened week on very low trading volume.  Movements under those circumstances often reverse quickly.  This coming week is where reliable trends will be established, so this week is worth watching.

Review of July 3rd through 7th

As I said last week it was a pretty light week for economic reports.  Monday a couple of June manufacturing indices held steady and May construction spending was flat – it was expected to rise.  Motor vehicle sales came in flat as well.  Tuesday was our holiday, and no new reports were released.

On Wednesday May Factory Orders showed a noticeable decline of -0.8% from April.  However, the minutes of the June 13-14 meeting of the Federal Reserve were released, and the big news was that “several members” of the Open Market Committee were in favor of beginning to sell off the Fed’s holding in Treasury Bonds and Mortgage-Backed Securities in “a couple of months.”  This wasn’t unexpected, but seeing it in print made it more real, and Thursday morning bonds opened up lower, driving rates higher a bit.

Thursday June’s ADP employment report came out at 153,000 new private-sector jobs created (note how this conflicts with non-farm payrolls), which was much lower than May’s 230,000 new jobs, and lower that the consensus forecast of 180,000.  This was not a positive report in any sense.  All other reports for Thursday came in as expected, and generally flat.

Friday is when the non-farms payroll we discussed earlier came out with a surprise, and other reports on Friday were quite tame.

On the whole, last week’s reports show the same as they have for some time – a modestly expanding economy with generally tame inflation risk.  We might conclude that the movement in interest rates was reactive, and could reverse.

What does the Thunder Moon hold in store?

Monday, July 10th will be a quiet day for economic reports.  However, corporations will begin issuing their quarterly reports.  These have been closely watched lately.  With stock prices at historically high levels, investors want to see evidence that their confidence in publicly-traded companies is justified.  Strong reports over the next two weeks could push money into stocks and away from bonds; weaker-than-expected reports would do the opposite.  The risk / opportunity factors when it comes to interest rates are higher in the next two weeks than normal.

Tuesday we are treated to the NFIB Small business index, job openings for May and May wholesale inventories.  These are important indices, but not likely to be game-changers.

Wednesday carries some risk of market movement, as Janet Yellen will be testifying before Congress.  Ms. Yellen speaks carefully so as not to roil the markets, but the Congressional circus always carries some risk as she is grilled by lawmakers trying to make news for themselves.

Wednesday also brings us the Beige Book report, a closely watched overview of the health of the economy.

On Thursday we learn what Producer Prices have been doing, and will again see the Weekly Jobless Claims report.

Friday brings the Consumer Price Index which will tell us what inflation did in June, and the Consumer Sentiment Index for July, which will tell us how confident consumers are in spending their hard-earned money, and a slew of other reports that could all impact the market.

Thunder Moon!

July’s Thunder Moon will bring changes in interest rates

Monday, in my opinion, is likely to bring slightly better rates than did Friday, but there is too much risk in the week ahead for rates to improve much.  We may have to wait a week to see better rates.

Happy Thunder Moon!

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527

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.

This article is copyrighted and may not be used or reprinted without permission.

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Anticipation: Will the Feds Raise Interest Rates?

6/13/2017 | Casey Fleming

Last week I wrote that we were almost certainly going to see the Feds raise short-term rates when they meet this week on Wednesday, June 14th. I predicted that mortgage rates would rise starting Thursday in anticipation of what the market would do in response to whatever action the Feds took.

Rates ticked up at the end of last week

If you look at the chart above, you’ll see that interest rates did, indeed, start rising on Wednesday, actually, but the rise in rates was extremely small. This tells me that investors were already pricing in whatever risk they thought any possible move by the Feds could pose, and that they are confident that the market for rates will continue to be favorable after the announcement.

Very small rise in interest rates

In fact, the U.S. 10-Year Treasury Yield (the red line) rose 0.04% on Wednesday, 0.01% on Thursday, 0.02% on Friday, and has held steady so far this week. These are incremental hedging adjustments, not corrections in the market by any means.

Meanwhile, the Fannie Mae 60-day yield (blue line) rose by 0.009% on Wednesday, 0.036% on Thursday, 0.04% on Friday, and 0.014% on Monday. These are larger moves than Treasury Bonds, but still incremental, not significant. For mortgage bond-buyers, clearly the risk is a little greater than for Treasury Bond investors as we get close.

The Freddie Mac weekly survey, (green line) which measures rates actually locked by consumers over the past week, doesn’t reflect market changes yet as it measures Thursday through Wednesday activity. Expect next week’s report to show a small bump up.
The bottom line – rates are up very slightly this week so far, and if the investors are right, should move back down after the Feds announcement Wednesday afternoon, possibly under our 2017 lows.

Meanwhile, lender profit margins rise

Margins rise as interest rates fall – for a while

Let’s take a look at my other favorite chart, the yield spread premium that lenders charge over the wholesale cost of funds. You can see that the margin has been rising since mid-May, about the time interest rates started moving steadily down. This makes sense – lenders tend to follow market yields, but with a lag. They want to make sure the trend is sustainable before jumping in and finding themselves writing loans at interest rates the market suddenly doesn’t want. So, for now, while their cost falls, their pricing falls, too, but lags behind, giving them a higher margin – for now.

Overall, though the margin has held fairly steady for the last four months, after making a strong move down in early February. Expect this trend to hold, barring major market surprises.

Economic Calendar – Feds Raise Interest Rates

We already know that Wednesday brings the Fed meeting and a statement at 2:00 PM Eastern, with a Janet Yellen news conference afterward. The question of whether the Feds raise interest rates or not might not be as important as their statement and Yellen’s press conference, as they are likely to address questions about adjusting their balance sheet by cutting back on purchases of Treasury Bonds and Mortgage-Backed Securities.

They will no doubt approach the rebalancing initiative very slowly and carefully so as not to upset the market too much. The statement will give investors some insight into how hawkish or dovish the members of the Federal Open Market Committee are feeling, however.  Aggressive movement would not be welcomed by investors, while a measured approach will be welcomed.

Wednesday also holds several other potential market-moving reports, including the Consumer Price Index, Retail Sales and Business Inventories.

Thursday has a couple of important reports, too, with Jobless Claims having more visibility after the very weak jobs report a couple of weeks ago, plus the Philadelphia Fed Survey and the Empire State Manufacturing Report, both measures of business strength in their regions.

Friday is quieter. Housing Starts and Building Permits don’t usually surprise the market, but the University of Michigan Consumer Sentiment Index can, and could move markets. The risk there, however, is more for rate improvement, rather than worsening.

Quiet after the storm

Next week is a different story, as it will be a very quiet week for economic reports. Thursday’s Leading Economic Indicators for May is the only major report due that contains a high risk for interest rates, and since it follows this week’s Fed Minutes it seems less likely to create anxiety-driven market movements.

A quiet week next week could be just what the doctor ordered when it comes to interest rates, as it will give investors time to digest the Fed action. If the Feds raids interest rates by 0.25% as most think they will and announce more details about adjusting their balance sheet, investors should feel comfortable moving money into bonds, driving down interest rates.

Fun week!

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527
This article represents the opinion of Casey Fleming, and not necessarily that 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.
This article is copyrighted and may not be used or reprinted without permission.

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Interest Rates at 2017 Lows

6/5/2017 | Casey Fleming

In April I wrote that interest rates had slid down to their lowest point in 2017. After a short, small, steady move up they have slowly settled back down to April levels. What’s happening?

What drives interest rates?

As a reminder, long-term trends in interest rates tend to move according to expectations of inflation, since any investment must return greater than the inflation rate, else the money you get back from the investment is able to purchase less than what you had before the investment.

Short-term trends, on the other hand, tend to be driven by stock market movement and current news stories. The stock market drives interest rates because bonds – the investment instrument that is used to invest in loans – are seen as an alternative investment to stocks. When investors believe that stocks might sell off, they sell stocks and buy bonds, thereby putting more money into the lending pile. The more money there is to lend, the lower interest rates go.

The relationship between stock prices and bond prices is not always consistent, but regarding short-term movement, most of the time when stocks go down, interest rates go down, and vice-versa.

Slow trickle down

Treasury bond yield falls. Fannie Mae yield follows. Mortgage rates are falling.

Mortgage rates are slowly falling

Looking at the chart above, you can see that starting in about mid-March the 10-year U.S. Treasury bond (red line: our best proxy for mortgage rates that can be tracked real-time) started moving down, meaning money was flowing into bonds. Why is that timing significant?

Let’s take a look at the chart below. This tracks the Dow Jones Industrial Average for the last six months. You’ll see that in December it jumped up to a historically high level – just below 20,000 points – and held that for a couple of months. Then, from late February through mid-March it rose steadily up to 21,000 points. At the same time, going back to the top chart, bonds sold off and the yield rose.

Dow Jones Industrial Average

Mortgage rates are tracking stock prices closely this spring

Then in mid-March the stock market peaked and even back slid a bit, but came back up to the 21,000 point level in early May, and has been idling there ever since. Meanwhile, the top chart shows that bond yields have been slipping ever since early May. Clearly, investors are nervous about a correction, and are buying bonds as a hedge against a possible stock market correction until a clear direction in stocks is established.

You’ll notice that the Fannie Mae 60 day yield (the blue line, essentially the wholesale cost of conforming A-paper mortgages) has tracked the treasury bonds closely. The Freddie Mac weekly mortgage market survey (green line, the actual rates that consumers locked at during the preceding week) has also followed, albeit with a bit of a lag.

Lenders are taking a smaller cut

The profit margin lenders charge

Mortgage rates fall when lenders reduce their margin

Finally, let’s look at the relationship between wholesale and retail costs. In this chart we look at the margin lenders are asking for above the yield Fannie Mae requires for the same loans. You’ll notice that the margin has been dropping most of this year, which is to be expected because industry volume is down significantly, and lenders are hungry and the need business. The margin ticked up just a bit the last half of May, but that’s just a function of rates moving down and lenders lagging behind, since they can’t be certain the trend will hold.

(This is why rates jump up, but settle down.)

Inflation and Mortgage Rates

We can see how the short-term factors have moved the market; what about the long-term factors? Specifically, what is happening that might influence inflation in the coming months?

Last week we had a number of interesting economic reports. The two most important showed a jump in weekly initial unemployment claims from previous months and a sharp decline in the number of new non-farm hires for the months of May. Together, these two reports could indicate that the labor market is softening, which of course would ease up any pressure on inflation.

However, the unemployment rate remained at a very low 4.3%. This means that 4.3% of workers who are participating in the workforce are unemployed. When that number is too low employers may have to start bidding up wages to compete for workers, which would be inflationary down the road. So why are interest rates staying low when the unemployment rate is so low?

It turns out that the participation rate – the percentage of those able to work – has remained very low for the last three years, and decreased in May to 62.7%. In other words, 37.3% of able-bodied residents of the U.S. in the working age range are not even bothering to work or look for work. So, if the labor market gets so tight wages begin to rise, there are idled workers who could fill the gap to relieve pressure on wages.

Add to that the fact that many folks who are employed are employed in part-time positions – not because they so desire, but out of necessity. So, there are more partially-idled workers available.

Overall, it appears inflation is well under control, so investors can afford to park money in 10-year instruments at a paltry 2.15% today.

This week is a quiet week for economic reports, but the following week (week of June 12th) could be a doozy.

Monday will be quiet.

Tuesday’s big report is the Producer Price Index. Generally inflation has been tame, but with some pressure on wages (even if mitigated a bit) you can be sure this report will be closely watched.

On Wednesday the Consumer Price Report will come out and tell us exactly how inflation has been doing. This is a big kahuna when it comes to the bond market. Retail sales and business inventories could also move expectations that day, but in all likelihood will be overshadowed by:

The Federal Reserve Open Market Committee

The Board of Governors of the Federal Reserve meets every six weeks, and this is the week. Among other things they will be discussing whether to raise short-term interest rates or not. I’ve written before how the short-term rates they control have little or no influence on mortgage rates, but folks get nervous anyway. This time, don’t. HOWEVER, their statement (issued at 2:00 PM EST) may contain opinions that could generate a sell off or a rally in bonds, and Janet Yellen will hold a press conference at 2:30 PM.

You can bet that investors will sell off some bonds starting this Thursday or Friday as a hedge for what might happen when the Feds do whatever they do next week, and lenders will raise margins slightly for the same reason.
So, barring big unexpected news (say, starting a war) we should expect mortgage rates to begin rising again at the end of this week, and then begin to settle down or rise further after Janet Yellen speaks next Wednesday, depending of course on the nature of the Fed comments and her press conference.

Thursday and Friday of next week are no slouches, by the way. Economic reports due out on Thursday include Weekly Jobless Claims, which will be more closely watched because of the outsized number last week, the Philadelphia Fed Survey, the Empire State Manufacturing Index and Capacity Utilization, all of which could give insight into the state of the economy and the risk of inflation.

Friday brings the Consumer Sentiment Index, which could foretell how strong retail sales will be for the rest of the year.
Overall, we have a couple of quiet days before we smack into another wild ride. Think of now until Friday as that calm, easy part of the roller coaster before you hit the top and fall off a cliff. Woo-hoo!

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527
This article represents the opinion of Casey Fleming, and not necessarily that 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.
This article is copyrighted and may not be used or reprinted without permission.

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The Feds Mentioned the Elephant in the Room

4/7/2017 | Casey Fleming

As I wrote last weekend the Federal Open Market Committee (FOMC) of the Federal Reserve (The Feds as they are known in the hood) was going to release the minutes of its March 14th meeting yesterday, April 6th, and the contents could move the market.  As it turns out, there was something very significant in the minutes – something they haven’t been talking very openly about before now.

I’ve written before about the “hidden” quantitative easing program.  In the initial program the Feds printed money to purchase Treasury bonds to inject money into the economy.  That didn’t work very well, so they started buying mortgage-backed securities, effectively flushing the mortgage system, thus putting money into the pockets of consumers in the form of lower monthly payments, hoping they would spend it.  They did, and the economy finally started to recover.

In December of 2013 the Feds announced an end to the Quantitative Easing program.  They slowly tapered off buying new securities.  With less fanfare, however, they continued a policy of reinvestment.  The securities they had purchased threw off billions of dollars in cash every month in the form of interest payments and payoffs.  While they no longer printed money to buy securities, they did use the cash flow from the securities they still owned to keep buying more, thus continuing to drive down mortgage rates.

And it was rarely discussed publicly, or at least got almost no media attention.

And now the Feds have spoken

The minutes of the March 14th meeting were by and large unremarkable, but one thing stood out.  “Provided the economy continues to perform about as expected, most participants anticipated that…a change to the Committee’s reinvestment policy would like be appropriate later this year.”

They didn’t say they were taking away our toys tomorrow, but we’ve always known it has to end sometime, and that sometime is now defined, and coming soon.

What happens if the largest buyer in the marketplace for mortgages suddenly disappears?  Logic (and the laws of economics) would dictate that interest rates will rise to a new equilibrium, unless private buyers start buying in significantly larger numbers.  So, the question is how much demand is there for mortgage-backed securities in the private market?

Private buyers are stepping up

According to Housing Wire, a real estate-related wire service, the demand by private institutional lenders for mortgage-backed securities has, in fact, increased a bit in 2017, due primarily to the higher yields today’s mortgages are offering.

That’s encouraging, but there’s a long way to go to make up for the demand for mortgage-backed securities that will be lost when the Feds ease out of reinvestment.  On the other hand, the Feds did say they would back out of the market very slowly so as to avoid major economic disruption, and demand for mortgages is way down anyway due to the higher interest rates.

How lower rates could happen

There are only three visible paths to lower interest rates in our future:

If institutional investors suddenly find mortgage-backed securities very appealing because they are convinced inflation is under control and the yield is more attractive than Treasury Bonds, money could move into MBSs, driving mortgage rates down.

If the economy collapses investors would likely shift investment dollars from equities into securities, driving mortgage rates down.  (Especially true if there is a major correction in the stock market.)

If there is a world-wide crisis (economic collapse or war) where the U.S. still looks stable, international institutional investors would probably shift dollars into U.S. Treasuries and mortgage-backed securities.

How higher rates could happen

If the economy continues with moderate growth and the stock market continues gaining value, investors will stay away in droves from mortgage-backed securities until the yield (which equates directly to the interest rate you pay) is high enough to be attractive compared to equities.

If the economy overheats and inflation jumps, investors will not purchase fixed-income securities unless they are outperforming inflation.  So, mortgage rates would have to increase in order the make mortgage-backed securities attractive.

If our economy falters and we have high inflation (think back to the late 1970s) international investors are very unlikely to continue buying U.S.-denominated securities.  With two major players out of the market, yields would have to be very high to attract any buyers at all, and mortgage rates would probably soar.  (In 1981 mortgage rates were in the high-teens.)

There are a million other moving parts to the economy and to the market for mortgage lending, but these are important factors that are all possible in the next year or so.

The essential point today is that the largest buyer of mortgage-backed securities in the world just said that they would consider withdrawing from the market before the end of 2017.  We should be concerned about that.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527

This article represents the opinion of Casey Fleming, and not necessarily that 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.

This article is copyrighted and may not be used or reprinted without permission.

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Are Interest Rates Coming Back Down?

Mortgage interest rates rose rapidly beginning the week before the Board of Governors of the Federal Reserve met on March 14th and 15th.  As expected, the Feds raised short-term rates, and that spurred a rally in mortgage interest rates almost immediately.

They had come up a long way, however, so they had a long way to come back down.

Interest rates peaked, then began to drop

Did mortgage rates peak after the Fed Announcement?

Looking at the chart above, the red line shows that the yield on the U.S. Treasury 10-year bond rose a lot the last week of February and the first two weeks of March.  The blue line tracks the Fannie Mae 60-day yield – essentially the wholesale cost of mortgage funds to lenders.  Immediately following the Fed announcement, wholesale rates tumbled briefly, and then recovered.

Lenders are slow to react on the downside, however, because they know a dip could be temporary (as this one was.)  The green line, which tracks retail rates – the rates lenders quote and you pay – did not notch downward until the week of the 20th.  They are now moving down.  Will that continue?

As everyone with an opinion has said for years, interest rates will inevitably rise.  Of course, we’ve been wrong so far, except for the Trump bump after the election.  Nevertheless, it is still very likely to happen.

Margins on mortgages are rising again

Note the margin jumped leading up to the Fed announcement

For now, however, let’s look at the chart above.  This tracks the margin that lenders charge over and above the wholesale rate of funds.  Notice that the margin has been steadily declining since last summer, when lenders were so busy they couldn’t manage all the loans in their pipeline.  When lenders are hungry they are willing to work on thinner margins.

In 2017 total industry volume is way down, and not surprisingly margins have been dropping since the beginning of the year.  However, they jumped up a couple of weeks before the Fed meeting as lenders were trying to figure out where the market would take the inevitable news that short-term rates were going up.

Now that it is clear that investors in long-term bonds are happy with the Fed’s determination to fight interest rates, lenders are more confident that there will be a market for mortgages at today’s interest rates – and maybe even a bit lower.

So, in terms of this one factor, interest rates could continue dropping.  What else might impact them?

This week’s economic calendar is not likely to produce any drama.  Bond yields generally follow the stock market in quiet weeks, so if stock prices go up, rates should rise a little too, and if they fall rates should follow.

Next week, however, looks a bit more volatile, with many more reports due out, a number of which have the potential to signal economic growth that is overheating, and thus could contribute to inflationary pressure.  I would expect interest rates to rise toward the end of this week and the beginning of next, and then settle down if the economic news is friendly to inflationary concerns.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / BRE 00889527

This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. 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.

This article is copyrighted and may not be used or reprinted without permission.

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