A Real Conversation About The Fed and Mortgage Rates

Mortgage rates jumped again today, moving to the highest levels more than a month ahead of tomorrow's hotly anticipated Fed Announcement.  Many lenders are now back up to quoting 4.125% on conventional 30yr fixed scenarios, though quite a few remain at 4.0%.  As I look out over the landscape of media coverage on "how the Fed rate hike will affect mortgage rates," I'm shocked out how frequently pundits seem to be getting this wrong.  So let's get a few things straight--just the facts.

First of all, I haven't seen anyone make a differentiation between Fed policy in general and the rate hike specifically.  Reason being: elsewhere in the Fed's current policy framework, they are choosing to maintain reinvestments from their MBS (mortgage-backed-securities) proceeds.  In other words, all the income they receive from all that MBS they bought is going right back into buying more MBS.  Over the past few cycles, that's been $24-26 billion dollars a month--a staggering amount that accounts for nearly every newly originated MBS.  If you're not already well aware of the implication, understand that these reinvestments do vastly more to push rates lower than the next 5 rate hikes could possibly do to push rates higher.

My next big problem with the prevailing assessment of what happens AFTER the Fed hike is that markets don't work like that.  Everyone knows the rate hike is coming.  It's not as if financial markets have been sitting on their hands, waiting for the Fed to confirm that they're actually going to hike when more than 90% of market participants believe it's going to happen.  Far from it, in fact.  Market participants always make trades that correspond with their best guess about the future.  If traders think rates are going higher, they trade rates higher well before the Fed hike confirms it.  This has obviously been a huge part of the pressure on rates in 2015, and failing to mention this current and ongoing effect of the Fed rate hike would be irresponsible.  In other words, the Fed hike has already pushed mortgage rates higher, even though it hasn't happened yet (the hike).

Then there's the more complicated topic of how direct an effect the Fed Funds Rate even has to have on something like mortgage rates.  The short answer is that the two can move in completely opposite directions, and they have!  Even in the most recent Fed rate lift-off in 2004, longer term rates like mortgages and 10yr US Treasuries were flat to slightly lower as the Fed began a series of hikes.  Of course those longer term rates had previously spiked in anticipation of the Fed's policy tightening, but there again, that's exactly my point in the previous paragraph.

The bottom line is that no one can accurately claim to know what the effect on mortgage rates would be for any given Fed scenario.  To do so would be to claim that one's own opinion/knowledge superseded the collective power of the entire financial market.  You can be sure the market has already priced mortgage rates to reflect all of its anticipations about the near term future.  Now, as always, the next move higher or lower will be driven by the things that the market did NOT see coming or that the market has NOT yet been able to account for.

Count on volatility tomorrow.  Or rather, count on the POTENTIAL for volatility being through the roof.  Even know we know what the Fed is going to do, we don't really have any idea how financial markets are going to react.  Plus, there are other components of the Fed's announcement that can have a dramatic effect on the longer term outlook.  Don't assume that you'll be able to lock today's rates tomorrow--for better or worse.

Loan Originator Perspective

"Rate markets waited warily today on Fed Statement Eve.  It's a foregone conclusion they will raise the overnight rate tomorrow, the bigger unknown is their verbiage on future rate hikes and domestic/international economic conditions.  The more bullish their tone, the more mortgage rates will rise.  I don't see any huge positive outcomes here, seriously doubt Fed will dispute strong recent economic data.  My loans are locked, and if they weren't, I'd be telling my clients they need to be aware there's a lot to lose here, with potentially a little to gain." -Ted Rood, Senior Originator

Today's Best-Execution Rates

• 30YR FIXED - 4.0%
  
• FHA/VA - 3.75%
  
• 15 YEAR FIXED - 3.25%
  
• 5 YEAR ARMS -  2.75 - 3.25% depending on the lender

Ongoing Lock/Float Considerations

• 2015 has been largely about rates rising unevenly from a long-term low brought about by the onset of quantitative easing in Europe.  In May and June, the Fed increasingly began telegraphing a 2015 rate hike.  At that point, the "rising rate environment" seemed like a sure thing, but the Fed's plans hit several snags.  Economic data began deteriorating at home and abroad, causing markets to rethink the higher rate rhetoric.  Mortgage rates hit 6 month lows at the end of October, just as the Fed surprisingly changed it's policy statement to specifically suggest December as a rate hike possibility (something they haven't done since 1999).
  

• In the bigger picture, rates had been at a crossroads, trying to determine if they would move back to 2015 highs or if the late summer swoon was merely the first wave of a longer campaign.
  
  
• While there is still plenty of room to be concerned about increasingly weak global economic growth, that's not a solid enough reason to float in this environment.  With the Fed almost certainly on track for a December rate hike, there is much  more risk that rates move quickly higher vs quickly lower.  The big picture global malaise can serve as the basis for long term hope, but in the short term, assume upward pressure on rates when formulating your strategy.
  
  
• As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, conventional 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.'  Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy.  It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).