Mortgage Rates Return To All-Time Lows

By: Matthew Graham • Tue, Sep 18 2012, 1:25 PM

Mortgage rates moved slightly lower again today. Much like yesterday, not all lenders' rates were better and a few were priced marginally worse. In a departure from yesterday, today's overall improvement was good enough to move the average rate offerings to NEW all-time lows. The difference between today and July 23rd is minimal at best, however, and the prevailing best-execution rates continue to straddle 3.375% and 3.5%.

The extent to which the underlying markets have been calm in the first two days of the week is impressive considering the level of volatility seen on Thursday and Friday. Rather than continue to pitch and roll in decreasing magnitudes with each passing day, the secondary mortgage market seems to have merely had two wild days and settled right in to a familiar range around all-time lows.

See Rates from Lenders in Your Area

This is either very promising or very ominous depending on how you look at it. It's promising in the sense of Mortgage Rates not being overly fond of volatility. When underlying markets are stable--particularly MBS (The Mortgage Backed Securities that most directly influence rates)--lenders can afford to pass along more of the recent market improvements. When volatility is higher it makes it more expensive for lenders to manage mortgage-related cash flow, thus preventing them from passing on as much of the benefits from improved market conditions as they otherwise might.

Beyond the simple factors of market levels, as rates hover near all time lows, demand at lenders increases, stretching capacity to the point where lenders' rates follow market improvements less and less in order to lessen the demand to more manageable levels.

The "ominous" potential is owing to the possibility that eerily calm markets near historically extreme levels often precede an extreme movement. The silver lining to this cloud is that the movement can be in either direction, but even if underlying interest rates managed to improve, the aforementioned capacity constraints tend to make it harder for mortgage rates to improve as quickly.

Temporary Note On G-Fee Hikes: This is something that's happened before and is something we know will continue to happen (read more HERE), but it doesn't make the effects on rate sheets seem like any less of a shock when they arrive. Lenders have been adjusting their pricing policies more quickly in response to this most recent hike and it has generally been enough to push most scenarios up to the next .125% higher in rate. In our view, this is a MUCH bigger consideration than trying to time highly uncertain financial markets. Bottom line, if you can unequivocally confirm that you're working with a lender who has not yet priced in the Guarantee Fee increase, and that your loan is on a timeline that risks being affected by it, we'd certainly favor locking in those scenarios (not to mention making sure your lender has everything they need to get your loan done without the need for a lock extension, because those are getting much more expensive in some cases if they cause the time frame on the file to cross into the higher Guarantee Fee territory).

Long Term Guidance: While the recently high degree of uncertainty remains very much intact, the Fed's decision to specifically target Mortgage-Backed-Securities in a third round of Quantitative easing provides a supportive undertone for mortgage rates. We'd still advocate not trying to get too far ahead markets. In other words, we wouldn't try to guess how low or how high rates might go before changing course. For now, the trend is supportive and positive for rates, but we're watching it closely for the same sort of paradoxical responses that occurred in 2010. Things look different this time around, but a lot of that has to do with Europe. Rates remain near all time lows and risks of volatility remain high. Those factors suggest that you stay vigilant regarding the day-to-day swings in mortgage rates. If you're floating, set a limit as to how high rates would have to go before you cut your losses and locked. Similarly, set a target of how low rates would have to get before you lock.

Loan Originator Perspectives

Victor Burek, Benchmark Mortgage

I would definitely recommend locking any loan within 15 days of closing. This Friday, several lenders are adding the new gfee increase to lock terms for 30 days or less. So, make sure you are locked up by Friday if you are within the 30 days of closing.

Ted Rood, Senior Originator, Bank Star

Seeing great rates today, not all time lows but close enough. I'm constantly surprised by some borrowers with rates in 5's who procrastinate because dropping their rate by 1.5%- 2% just isn't enough. Whether you get in at all time bottom or not, 80% of something (doing new loan with awesome rate) is way better than 100% of nothing (staying at high rate in case current rates improve someday)!

Jeff Statz, Network Funding L.P.

I'm advocating locking with loans <30 days to close. We may get little improvements here and there in the meantime, but the risk isn't worth the reward.

Today's BEST-EXECUTION Rates

30YR FIXED - 3.375% - 3.5%
FHA/VA - 3.25% - 3.5% (varies more between lenders than conventional 30yr Fixed)
15 YEAR FIXED - 2.75% - 2.875%%
5 YEAR ARMS - 2.625-3.25% depending on the lender

Ongoing Lock/Float Considerations

Rates and costs continue to operate near all time best levels
Rates could easily move higher or lower, but given the nearness to all time lows, there's generally more risk than reward regarding floating
But that will always be the case when rates operate near all-time levels, and as 2011 showed us, it doesn't always mean they're done improving.
(As always, please keep in mind that our talk of Best-Execution always pertains to a completely ideal scenario. There can be all sorts of reasons that your quoted rate would not be the same as our average rates, and in those cases, assuming you're following along on a day to day basis, simply use the Best-Ex levels we quote as a baseline to track potential movement in your quoted rate).