In remarks made Thursday to the Senate Banking Committee this week, Federal Reserve Chair Jerome Powell said he expects some U.S. banks to fail in the coming months because of declining values and defaults in their commercial real estate loan portfolios.
According to reporting by multiple outlets, including The Hill, Powell indicated that the risk is tied to small and midsized banks, and there is no systemic risk to the banking sector posed by the potential collapse of major institutions.
“We have identified the banks that have high commercial real estate concentrations, particularly office and retail and other [property types] that have been affected a lot,” Powell said. “This is a problem that we’ll be working on for years more, I’m sure. There will be bank failures, but not the big banks.”
Powell’s remarks came about a month after U.S. Treasury Secretary Janet Yellen expressed similar concerns to the Senate Banking Committee. Yellen told lawmakers that bank regulators are working to address risks tied to rising vacancy rates and lower valuations for office buildings in major cities.
These stressors are tied to the post-pandemic increase in remote work, as well as higher interest rates that have made it difficult to refinance commercial real estate debt.
“I hope and believe that this will not end up being a systemic risk to the banking system,” Yellen said in February. “The exposure of the largest banks is quite low, but there may be smaller banks that are stressed by these developments.”
Although commercial mortgage debt is propelling these concerns, the possibility of failure for a federally insured bank has implications for the residential mortgage sector. According to the Federal Deposit Insurance Corp. (FDIC), banks held $2.78 trillion in residential mortgage debt as of first-quarter 2023.
Community banks — commonly defined as those with less than $10 billion in assets — accounted for nearly $477 billion (or 17%) of the total debt. And the FDIC reported that home loans are the largest lending segment by dollar volume at more than 40% of community banks.
New York Community Bancorp (NYCB) is one institution that is facing a “confidence crisis” related to commercial real estate, primarily multifamily loans. NYCB, one of the largest U.S. residential mortgage servicers, received an equity investment of $1 billion earlier this month that is designed to strength the bank’s balance sheet.
In the wake of last year’s failures of First Republic Bank, Silicon Valley Bank and Signature Bank, smaller U.S. banks moved away from commercial real estate lending. Data from MSCI Real Assets showed that after originating a record-high 34.2% of all commercial mortgages in Q1 2023, regional and local banks trimmed their share of originations to 25.1% in Q2 2023. The latter figure represented a 53% year-over-year decline.
Still, small banks are more exposed to commercial mortgage debt than larger banks. Federal Reserve data from September 2023 showed that commercial real estate accounted for an average of 44% of the portfolios at small banks, compared to 13% at the country’s 25 largest banks.
Funding a potential bailout could be another concern for banks. When the FDIC rescued Silicon Valley Bank and Signature Bank in March 2023, the price tag was $22 billion. The regulator recouped $16 billion of that through a special assessment on more than 100 of its institutions.
At a recent congressional hearing, Treasury Secretary Janet Yellen said that U.S. regulators are monitoring risks stemming from nonbank mortgage lenders, cautioning that a failure of one of them is possible due to market strains and a lack of access to deposits.
The Community Home Lenders of America (CHLA), which represents small and mid-sized nonbank independent mortgage banks (IMBs), appreciates the concerns regulators have about the so-called “shadow banking system” – nonbanks carrying out traditional bank financial activities. Failures of large cryptocurrency firms have harmed consumers and caused some economic panic. Firms that offer risky financial products should receive appropriate supervision like banks do.
But mortgage lenders simply don’t merit the alarms they seem to be generating. Last March, CHLA released a comprehensive report: rebutting the myths about nonbank IMBs being risky and explaining how IMBs’ business model of originate and sell significantly reduces risk.
Without risky assets on their books, turmoil in mortgage markets does not result in significant IMB losses. Instead, IMBs’ financial struggles have largely been focused on bringing down operating expenses to match a significantly reduced revenue based in response to the volume collapse in the mortgage refi business. Notably, if an IMB lender goes out of business, the main impact is — wait for it — the firm simply won’t be around to originate more mortgage loans.
As a result, we assume that FSOC’s concern is not mortgage lenders per se, but about a small handful of mega mortgage servicers. Mortgage servicers do hold assets on their books — mortgage servicing rights (MSRs) — that could decline in value. Moreover, servicers have financial requirements to advance funds to mortgage pools when a borrower does not make a mortgage payment. FSOC’s concerns are that nonbanks don’t have access to deposits (like banks do) to carry out this function.
The answer is not to clamp down on IMB lenders or servicers, but to create credit facilities commensurate with what banks enjoy, to enable servicers to perform this banking-like function.
So, in January 2023, CHLA wrote a letterto Ginnie Mae, asking Ginnie to expand its PTAP program, to increase liquidity for Ginnie servicer/issuers experiencing increases in advance responsibilities. Note we are not calling for a bailout — just a liquidity facility for this function.
And in October 2022, CHLA wrote a letter to FHFA asking that the Federal Home Loan Bank (FHLB) system use its advance capabilities to do the same for advances for Fannie Mae and Freddie Mac MBS. Both these actions would do far more to reduce risk than any more draconian actions FSOC might be contemplating for servicers.
CHLA is also asking regulators to be precise about IMBs and risk. Regulators should clarify that risks are limited to only a very small handful of mega servicers, and not to the much larger universe of nonbank IMBs. Regulators should publicly explain that the limited risks that do exist are not predominately a risk of financial loss, but a liquidity risk, arising from servicers’ obligation to effectively act as a banker to borrowers that don’t make mortgage payments.
We would also point out that an excessive focus on nonbank mortgage lender risk could divert attention from the more significant financial risks we confront. As nonbanks were on the receiving end of alarms over their financial strength, last March’s Silicon Valley Bank fiasco was followed by last week’s turmoil around New York Community Bank. While some are focused on the risks of single-family loans, the true threats to our financial stability are in the trillions of dollars of commercial real estate loans held by banks.
But the ultimate risk is that federal policy makers and members of Congress get caught up in the echo chamber of false myths about nonbank IMB lender risks — and pursue unnecessarily draconian policies which harm IMBs’ strong homeownership record. All of this comes at a time of the unparalleled twin challenges to homeownership affordability of skyrocketing mortgage rates and home prices still at near-record levels.
As our recent annual CHLA IMB Report chronicles, IMBs now originate over 80% of all new mortgage loans, demonstrably outperform banks in loans to minorities, and consistently do a much better job of access to mortgage credit for underserved first-time homebuyers than banks.
IMBs welcome scrutiny of both their finances and their performance in serving consumers’ mortgage needs. They just ask that a good narrative doesn’t get in the way of the facts.
Scott Olson is Executive Director of the Community Home Lenders of America (CHLA), the only trade group exclusively representing non-bank IMBs.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
Banks increasing their acquisitions According to a Bloomberg report, the resurgence in acquisitions comes amid a rise in deposits, prompting banks to seek avenues to deploy this influx of capital. With traditional lending options constrained due to subdued loan demand and increased defaults resulting from two years of interest rate hikes, banks are turning to … [Read more…]
As 2023 ended, independent mortgage banks could be forgiven for saying “good riddance.” Last year accelerated a trend of skyrocketing mortgage rates, making it harder for families to buy a home and collapsing the market for refinances.
But there was also reason for optimism heading into 2024. A year-end bond rally brought mortgage rates down from 8% to 7%. And most IMBs have now downsized expenses to fit reduced loan and revenue volumes caused by the collapse of the refi market.
This recap of 2023 is just one of the subjects addressed in the “CHLA 2023 IMB Report,” just released by the Community Home Lenders of America (CHLA). As the only national association that exclusively represents IMBs, CHLA has for almost a decade released this report annually, with a primary goal of educating Congress and federal officials about the critical role IMBs play in ensuring access to mortgage credit for first-time, minority, and other underserved homebuyers.
This year’s report leads off with key takeaways for federal mortgage policy makers. Number one on the list is CHLA’s call for the Federal Reserve (and the GSEs) to buy mortgages, to reduce historically excessive spreads between mortgage rates and 10-year Treasuries — a key to homeownership affordability.
Another takeaway is CHLA’s request for action on our “Consumer Mortgage Bill of Rights.” Consumers should be protected from the abusive practice of trigger leads, where a consumer is bombarded with texts, phone calls, and emails just because they are initiating a mortgage application. Consumers should be served only by mortgage loan originators that are fully licensed and qualified. And quasi-monopolistic pricing should be scrutinized – like FICO credit scores, whose costs have increased by 500% in just 13 months.
Another key takeaway is just how important IMBs have become for the mortgage and home buying process since the 2008 housing crisis. In fact, IMBs now originate 81% of all new mortgages. And IMBs dominate the most critical programs for first-time, minority, and underserved borrowers – originating 90% of FHA and VA loans.
CHLA’s IMB Report cites a myriad of statistics and reports confirming that IMBs outperform banks in lending to minority and underserved borrowers. For example, a 2022 Urban Institute report concluded that “banks substantially underperformed nonbanks in serving borrowers and neighborhoods of color.“
Fortunately, when it comes to mortgage policies that help IMBs and the consumers they serve 2023 was a good year. The year started with an FHA premium cut, and with excessive VA loan fees expiring. The year ended with Fannie and Freddie starting to replace loan repurchase demands, which hurt both lenders and borrowers, with an indemnification option.
Going into 2024, our IMB Report lays out a detailed policy agenda that prioritizes access to mortgage credit to address significant affordability challenges for borrowers facing high mortgage rates.
The final objective of CHLA’s report is to rebut false, but persistent, myths about IMBs. Many people would be surprised to learn that mortgage borrowers have substantially more consumer protections when they get a mortgage loan through an IMB than when they get a mortgage loan through a bank.
Every IMB is subject to supervision from the Consumer Financial Protection Bureau (CFPB) – while 97% of banks are exempt from CFPB supervision. Every mortgage loan originator that works for an IMB is licensed (SAFE Act test, independent background check, and continuing education) – while bank loan originators are exempt from all these requirements.
The other pervasive – but completely false – myth is that IMBs are risky. This canard is pulled out whenever there is a crisis – like COVID or the Silicon Valley Bank demise last March. But these prophesies of doom are always proved wrong, as they ignore the realities of the IMB business model.
As this year’s IMB Report explains, IMBs overwhelmingly originate federal agency mortgage loans, then sell them to diversified investors through securitization or sell them to aggregators. As a result, even if there are mortgage loan losses or declining mortgage asset values, IMBs are very much insulated.
The simple truth is that if an IMB loan originator goes out of business – which some did last year – the only real impact is that the lender is no longer around to originate new loans. And, for IMB mortgage servicers, there is virtually no taxpayer or systemic risk, except for a handful of mega-servicers.
Mortgage interest rates inched up this week, following nine straight declines totaling a decrease of 118 basis points (1.18%).
The average 30-year fixed rate mortgage (FRM) rose from 6.61% on Dec. 28 to 6.62% on Jan. 4, according to Freddie Mac.
“Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds,” said Sam Khater, Freddie Mac’s Chief Economist.
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Will mortgage rates go down in January?
Mortgage rates fluctuated significantly in 2023, with the average 30-year fixed rate going as low as 6.09% on Feb. 2 and as high as 7.79% on Oct. 26, according to Freddie Mac.
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The range can be largely attributed to the Federal Reserve’s ongoing fight against inflation, juxtaposed with uncertainty in the banking sector sparked by Silicon Valley Bank’s collapse. However, with duress permeating the financial market and the fallout from U.S. debt ceiling talks, the Fed may continue making hikes to bring interest rates down.
With the economy likely heading into a recession, it’s possible we’ve already seen the peak of this rate cycle. Of course, interest rates are notoriously volatile and could tick back up on any given week.
Experts from CoreLogic, Home Qualified, Realtor.com and others weigh in on whether 30-year mortgage rates will climb, fall, or level off in January.
Expert mortgage rate predictions for January
Craig Berry, branch manager at Acopia Home Loans
Prediction: Rates will moderate
“As inflation is the no. 1 item on the Federal Reserve’s radar right now, the Feds may choose not to lower the federal funds rate until inflation comes down. And, while Fed rate cuts aren’t a must-have in order for mortgage rates to come down, interest rates are affected by the federal funds rate.
The Feds continue to seek a balance between inflation and maximum employment so as not to cause significant damage to the economy which could trigger a recession. Recent momentum has been positive, and as long inflation cooperates, mortgage rates may see a slight decline in January. However, it isn’t likely that we’ll see significant drops to longer-term rates until we get further into 2024.”
Ralph DiBugnara, president at Home Qualified
Prediction: Rates will fall
“Rates finally shifted down some in December and stabilized lower. U.S. payrolls came in lower than anticipated, unemployment was up and building of new homes was down. These are good signs that inflation may have reached its peak and could trigger a lowering of rates. I expect the Fed to stay neutral for the time being and possibly through the first quarter of the year with possible cuts coming only if we see a drastic shift in the economy. For January, I believe the average 30-year fixed will land at 7.125% and the 15-year fixed will be 6.75%.”
Selma Hepp, chief economist at CoreLogic
Prediction: Rates will fall
“Mortgage rates should continue to decline, albeit very gradually and given there are no surprises with inflation. We should see rates fall below 7% mark.”
Hannah Jones, senior economic research analyst at Realtor.com
Prediction: Rates will fall
“If inflation and employment data continue to show signs of slowing, mortgage rates are likely to ease in January, though at a slower clip than in recent weeks. As incoming data confirms that the economy is indeed cooling, the upward pressure on mortgage rates will continue to let up and buyers will enjoy lower rates than in recent months.
However, if inflation or employment data come in stronger than expected, we could see rates pick up steam once again. Investors expect the Fed to hold steady at the current target rate in next week’s meeting, which would signal the Committee’s confidence in the current policy stance to bring inflation down to the target 2%. As inflation reaches the target level, mortgage rates will continue to drift lower.”
Jess Kennedy, COO at Beeline
Prediction: Rates will fall
“We expect rates to continue to ease as we kick off 2024. You can see the signaling of a rate cut from the Fed in many ways. For example, it is harder to find long-term CDs at the higher interest rates we were seeing 45-60 days ago). Publicly traded companies are also seeing their stock prices move higher on the expectation of rate relief in 2024. All these signs signal rates start to tick down even ahead of an official rate cut.”
Odeta Kushi, deputy chief economist at First American
Prediction: Rates will fall
“In light of favorable trends in inflation and labor market data, the Federal Reserve appears to be on a path towards its goals, although achieving its 2% inflation target will take some time. Consequently, the Fed is expected to maintain a restrictive stance, which will keep mortgage rates elevated. However, given slowing inflation and a cooling labor market, and barring any unforeseen developments, modest reductions in mortgage rates are possible in January.”
Rick Sharga, CEO at CJ Patrick Company
Prediction: Rates will fall
“With inflation moving in the right direction, wage growth slowing, and the jobs market softening a bit, it seems likely that the Federal Reserve has finished rate hikes for this cycle. That, coupled with weakening bond yields, should create an environment where mortgage rates can start a gradual, but steady decline throughout 2024. January rates for 30-year fixed-rate loans will probably straddle 7% — ranging from 7.1% to about 6.9% as the market finds its footing to begin the year.”
Mortgage interest rates forecast next 90 days
As inflation ran rampant in 2022, the Federal Reserve took action to bring it down and that led to the average 30-year fixed-rate mortgage spiking in 2023.
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With inflation gradually cooling, the Fed adjusted its policies with smaller and skipped hikes. Additionally, the economy showing signs of slowing has many experts believing mortgage interest rates will gradually descend in 2024.
Of course, rates could rise on any given week or if another global event causes widespread uncertainty in the economy.
Mortgage rate predictions for 2024
The 30-year fixed-rate mortgage averaged 6.62%% as of Jan. 4, according to Freddie Mac. All five major housing authorities we looked at project 2024’s first quarter average to finish above that.
The National Association of Home Builders sits at the low end of the group, predicting the average 30-year fixed interest rate to settle at 7.04% for Q1. Meanwhile, Fannie Mae had the highest forecast of 7.6%.
Housing Authority
30-Year Mortgage Rate Forecast (Q1 2024)
National Association of Home Builders
6.77%
Wells Fargo
6.85%
Fannie Mae
7.00%
Mortgage Bankers Association
7.00%
National Association of Realtors
7.50%
Average Prediction
7.02%
Current mortgage interest rate trends
Mortgage rates came down for the ninth consecutive week.
The average 30-year fixed rate increased from 6.61% on Dec. 28 to 6.62% on Jan. 4 The average 15-year fixed mortgage rate fell, going from 5.93% to 5.89%.
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Month
Average 30-Year Fixed Rate
December 2022
6.36%
January 2023
6.27%
February 2023
6.26%
March 2023
6.54%
April 2023
6.34%
May 2023
6.43%
June 2023
6.71%
July 2023
6.84%
August 2023
7.07%
September 2023
7.20%
October 2023
7.62%
November 2023
7.44%
December 2023
6.82%
Source: Freddie Mac
After hitting record-low territory in 2020 and 2021, mortgage rates climbed to a 23-year high in 2023. Many experts and industry authorities believe they will follow a downward trajectory into 2024. Whatever happens, interest rates are still below historical averages.
Dating back to April 1971, the fixed 30-year interest rate averaged around 7.8%, according to Freddie Mac. So if you haven’t locked a rate yet, don’t lose too much sleep over it. You can still get a good deal, historically speaking — especially if you’re a borrower with strong credit.
Just make sure you shop around to find the best lender and lowest rate for your unique situation.
Mortgage rate trends by loan type
Many mortgage shoppers don’t realize there are different types of rates in today’s mortgage market. But this knowledge can help home buyers and refinancing households find the best value for their situation.
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Which mortgage loan is best?
The best mortgage for you depends on your financial situation and your goals.
For instance, if you want to buy a high-priced home and you have great credit, a jumbo loan is your best bet. Jumbo mortgages allow loan amounts above conforming loan limits, which max out at $ in most parts of the U.S.
On the other hand, if you’re a veteran or service member, a VA loan is almost always the right choice. VA loans are backed by the U.S. Department of Veterans Affairs. They provide ultra-low rates and never charge private mortgage insurance (PMI). But you need an eligible service history to qualify.
Conforming loans and FHA loans (those backed by the Federal Housing Administration) are great low-down-payment options.
Conforming loans allow as little as 3% down with FICO scores starting at 620. FHA loans are even more lenient about credit; home buyers can often qualify with a score of 580 or higher, and a less-than-perfect credit history might not disqualify you.
Finally, consider a USDA loan if you want to buy or refinance real estate in a rural area. USDA loans have below-market rates — similar to VA — and reduced mortgage insurance costs. The catch? You need to live in a ‘rural’ area and have moderate or low income to be USDA-eligible.
Mortgage rate strategies for January 2024
Mortgage rates displayed their famous volatility in 2023. Uncertainty in the banking sector led to downtrends, but ongoing inflation battles, Fed hikes and a hot job market drove growth.
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At its September and November meetings, the central bank held off on a rate hike, preferring to see if the economy would keep cooling organically. In December, the FOMC skipped a hike and projected cuts for 2024. As always, the committee said it would adjust its policies as necessary — which could mean additional hikes or possibly none at all.
Here are just a few strategies to keep in mind if you’re mortgage shopping in the coming months.
Be ready to move quickly
Indecision can lead to failure or missed opportunities. That holds true in home buying as well.
Although the housing market is becoming more balanced than the recent past, it still favors sellers. Prospective borrowers should take the lessons learned from the last few years and apply them now even though conditions are less extreme.
“Taking too long to decide to make an offer can lead to paying more for the home at best and at worst to losing out on it entirely. Buyers should get pre-approved (not pre-qualified) for their mortgage, so that the seller has some certainty about the deal closing. And be ready to close quickly — a long escrow period will put you at a disadvantage.
And it’s definitely not a bad idea to work with a real estate agent who has access to “coming soon” properties, which can give a buyer a little bit of a head start competing for the limited number of homes available,” said Rick Sharga.
Buyer demand is lower than a typical year, but the market usually heats up in spring and summer. Being decisive (and prepared) should only play to your advantage.
Shopping around isn’t only for the holidays
Since interest rates can vary drastically from day to day and from lender to lender, failing to shop around likely leads to money lost.
Lenders charge different rates for different levels of credit scores. And while there are ways to negotiate a lower mortgage rate, the easiest is to get multiple quotes from multiple lenders and leverage them against each other.
“For potential home buyers, it’s important to get quotes from multiple lenders for a mortgage, as rates can vary dramatically, especially during such a volatile period,” said Odeta Kushi.
As the mortgage market slows due to lessened demand, lenders will be more eager for business. While missing out on the rock-bottom rates of 2020 and 2021 may sting, there’s always a way to use the market to your advantage.
How to shop for interest rates
Rate shopping doesn’t just mean looking at the lowest rates advertised online because those aren’t available to everyone. Typically, those are offered to borrowers with great credit who can put a down payment of 20% or more.
The rate lenders actually offer depends on:
Your credit score and credit history
Your personal finances
Your down payment (if buying a home)
Your home equity (if refinancing)
Your loan-to-value ratio (LTV)
Your debt-to-income ratio (DTI)
To figure out what rate a lender can offer you based on those factors, you have to fill out a loan application. Lenders will check your credit and verify your income and debts, then give you a ‘real’ rate quote based on your financial situation.
You should get three to five of these quotes at a minimum, then compare them to find the best offer. Look for the lowest rate, but also pay attention to your annual percentage rate (APR), estimated closing costs, and ‘discount points’ — extra fees charged upfront to lower your rate.
This might sound like a lot of work. But you can shop for mortgage rates in under a day if you put your mind to it. And shaving just a few basis points off your rate can save you thousands.
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Mortgage interest rate FAQ
What are current mortgage rates?
Current mortgage rates are averaging 6.62% for a 30-year fixed-rate loan and 5.89% for a 15-year fixed-rate loan, according to Freddie Mac’s latest weekly rate survey. Your individual rate could be higher or lower than the average depending on your credit score, down payment, and the lender you choose to work with, among other factors.
Will mortgage rates go down next week?
Mortgage rates could decrease next week (Jan. 8-12, 2024) if the mortgage market takes a cautious approach to a possible recession. However, rates could rise if lenders account for the Federal Reserve taking measures to counteract inflation or if a global event brings economic uncertainty.
Will mortgage interest rates go down in 2024?
If inflation continues to dissipate and the economy cools or goes into a recession, it’s likely mortgage rates will decrease in 2024. Although, it’s important to remember that interest rates are notoriously volatile and are driven by many factors, so they can rise during any given week.
Will mortgage interest rates go up in 2024?
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023. However, if the U.S. does indeed enter a recession, mortgage rates could come down.
What is the lowest mortgage rate right now?
Freddie Mac is now citing average 30-year rates in the 7% range. If you can find a rate in the 5s or 6s, you’re in a very good position. Remember that rates vary a lot by borrower. Those with perfect credit and large down payments may get below-average interest rates, while poor-credit borrowers and those with non-QM loans could see much higher rates. You’ll need to get pre-approved for a mortgage to know your exact rate.
Will there be a housing crash?
For the most part, industry experts do not expect the housing market to crash in 2023. Yes, home prices are over-inflated. But many of the risk factors that led to the 2008 crash are not present in today’s market. Low inventory and massive buyer demand should keep the market propped up next year. Plus, mortgage lending practices are much safer than they used to be. That means there’s not a subprime mortgage crisis waiting in the wings.
What is the lowest mortgage rate ever?
At the time of this writing, the lowest 30-year mortgage rate ever was 2.65%. That’s according to Freddie Mac’s Primary Mortgage Market Survey, the most widely used benchmark for current mortgage interest rates.
Should I lock my rate now or wait?
Locking your rate is a personal decision. You should do what’s right for your situation rather than trying to time the market. If you’re buying a home, the right time to lock a rate is after you’ve secured a purchase agreement and shopped for your best mortgage deal. If you’re refinancing, you should make sure you compare offers from at least three to five lenders before locking a rate. That said, rates are rising. So the sooner you can lock in today’s market, the better.
Is now a good time to refinance?
That depends on your situation. It’s a good time to refinance if your current mortgage rate is above market rates and you could lower your monthly mortgage payment. It might also be good to refinance if you can switch from an adjustable-rate mortgage to a low fixed-rate mortgage; refinance to get rid of FHA mortgage insurance; or switch to a short-term 10- or 15-year mortgage to pay off your loan early.
Is it worth refinancing for 1 percent?
It’s often worth refinancing for 1 percentage point, as this can yield significant savings on your mortgage payments and total interest payments. Just make sure your refinance savings justify your closing costs. You can use a mortgage calculator or speak with a loan officer to crunch the numbers.
How do I shop for mortgage rates?
Start by choosing a list of three to five mortgage lenders that you’re interested in. Look for lenders with low advertised rates, great customer service scores, and recommendations from friends, family, or a real estate agent. Then get pre-approved by those lenders to see what rates and fees they can offer you. Compare your offers (Loan Estimates) to find the best overall deal for the loan type you want.
What are today’s mortgage rates?
Mortgage rates are rising, but borrowers can almost always find a better deal by shopping around. Connect with a mortgage lender to find out exactly what rate you qualify for.
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1Today’s mortgage rates are based on a daily survey of select lending partners of The Mortgage Reports. Interest rates shown here assume a credit score of 740. See our full loan assumptions here.
By comparison, agency net MBS issuance in 2021, when interest rates were half of what they are today, came in at $870 billion, according to Amherst. Net issuance in MBS represents new securities issued less the decline in outstanding securities due to principal paydowns or prepayments.
Spread expansion
Adding to the woes in the agency MBS market are outsized spreads, with the spread between the 30-year fixed mortgage and the benchmark 10-year Treasury hovering around 2.9 percentage points in early December, when historically that spread has ranged between 1 to 2 percentage points. That wide spread has squeezed margins on agency MBS, with 6% coupons at yearend 2023, for example, trading at a fraction of a percentage point above par, down from nearly 10 points above par at the end of the first quarter of last year.
Amherst Chairman and CEO Sean Dobson said the shrinking margins in the agency MBS sector are a byproduct of an over-supply of paper and a greatly reduced investor balance sheets for absorbing the debt. A major purchaser of agency MBS until last year was the Federal Reserve, he explained, which is now allowing up to $35 billion of MBS to roll off its balance sheet each month.
The reduced role of the Fed and other investors in the agency MBS market is acting as a type of governor on rates, preventing them from getting much downward traction. As origination volume increases, and related MBS issuance goes up, so does the supply of MBS for sale in the market — creating downward pressure on prices, assuming buyer demand remains repressed.
Andrew Rhodes, senior director and head of trading at Mortgage Capital Trading, said a loan originator is trying to estimate where their end investor is going to be buying the loan, “so whether it’s the whole loan or the securitization, they are trying to figure out exactly what that price is going to be.”
“Then the independent mortgage bank (IMB) can originate the loan to that level because that’s how they’re really managing that margin,” he added. “And if all of a sudden, your investor that you thought was going to be spending 103 or 104 [for that loan or MBS] is now at 102, that’s a big hit to that origination volume that you thought was going to be getting a point or two higher in price.”
Dobson said heading into the end of 2023, the securitization market “is structurally impaired right now because the normal sponsor [investor] base is absent.”
“Some of them are gone forever, and some of them are basically going to have to rebuild capability,” he said. “…This is speculative to a certain extent, but should rates go down, and should a lot of [new MBS] supply get created because of refinancing activity, the market is going to have a really hard time with that.
“…So, now the question is, what’s the new level that gets it [MBS] to clear when the normal sponsors [investors, such as the Fed] are offline, and that new level is an excess return that’s now something like 50 basis points wider than corporate bonds.”
Amherst projects that in 2023, the pull-back of the Federal Reserve as well as the banking sector from the agency MBS market will result in a combined $425 billion in excess MBS that will need to be absorbed by other investors, such as money managers and foreign investors.
“I think the Fed will not sell MBS but rather is prepared to keep letting the portfolio run off, even if they start cutting rates,” said Richard Koss, chief research officer at mortgage-data analytics firm Recursion.
“The Central Bank has expressed its interest in reducing its role in the mortgage market and would rather cut rates more if needed, rather than slow down the process of reducing its holdings of MBS,” Koss added.
Bank contraction
In addition to the reduced role of the Fed in the MBS market, the banking industry and other investors also have pulled back from MBS purchases in the wake of financial pressures sparked by rising rates — as well as plans by regulators to tighten bank capital-reserve rules.
“The problem is … the benchmark of fair [MBS] value was set when the GSEs [government-sponsored enterprises, Fannie and Freddie] could buy [MBS], when the banks could run huge balance sheets, when the REITs [real estate investment trusts] could run big balance sheets, and when the regional banking system wasn’t [impaired],” Dobson said.
Over the past year, a number of large banks have collapsed — among them Silicon Valley Bank, Signature Bank, First Republic Bank and Signature Bank.
“I think there are seven or eight banks total that exited warehouse lending this year, [such as Comerica and Fifth Third Bank],” said Charley Clark, a senior vice president and mortgage warehouse finance executive at EverBank (formerly known as TIAA Bank). The unit does warehouse and MSR lending “and really anything that relates to lending to IMBs [independent mortgage banks],” according to Clark.
The top 15 warehouse lenders as of the end of the third quarter of this year had extended nearly $80 billion in warehouse line commitments, representing about 80% of the market, according to an Inside Mortgage Finance report.
“We were not part of this, but there were definitely funding and liquidity issues [for banks this year], not only just liquidity issues in general, but the cost of funding on the margin,” he added. “So, it was not only hard to find deposits, but they’re expensive.
“And if you look at something like warehouse lending [to IMBs], the spreads are very tight. If you’re a bank that’s having liquidity and funding issues, what are you going to cut? You’re going to go to the lower spreads to cut, right?”
Other sectors
The narrative is similar for the private-label residential mortgage-backed securities (RMBS) market.
A yearend forecast report by the Kroll Bond Rating Agency (KBRA) projects that RMBS issuance in 2023 will come in at about $52 billion, down nearly 50% from 2022 and $10 billion below KBRA’s original projection for the year issued in November 2022. KBRA includes prime, nonprime, credit-risk transfer transactions and second-lien offerings in its RMBS analysis.
“[Reduced] mortgage volumes and continued spread volatility in a rising rate environment contributed to a meaningful issuance decline [in 2023],” KBRA’s recent forecast report states.
Ben Hunsaker, portfolio manager focused on securitized credit for Beach Point Capital Management, said for real growth in the housing market to occur, mortgage originations need to increase substantially along with higher securitization volumes, “and it doesn’t seem like that’s highly likely right now.”
“In the case where the Fed cuts [the benchmark rate by] 250 basis points, I’m not sure that’s necessarily a scenario where housing volumes are great and housing prices are strong because that would probably be pretty correlated with a really weak consumer or some recessionary-type outcome,” he added. “And then you have to have wider spreads [due to increased risk], which means the value of creating those mortgages and securitizing them is again hampered.”
If there was one bright spot in the secondary market in 2023, it was the mortgage-servicing rights (MSR) sector, which performs better in rising-rate environments because mortgage prepayment speeds slow to very low levels and returns from parked escrow deposits also rise — both of which help to pump up the value of MSRs. Trading volume in the MSR sector in 2023 is on track to slightly exceed 2022’s $1.1 trillion mark, according to Tom Piercy, chief growth officer at Incenter Capital Advisors(previously Incenter Mortgage Advisors).
“For 2022 [on MSR trading volume], my numbers were right around 1.1 trillion, and I expect 2023 to be slightly greater than that,” Piercy said. “However, I think it [trading volume] was front-end loaded over the first six to seven months of the year … but we continue to see the capital commitments to invest in MSR both from your traditional bank, and nonbank servicers, as well as the MSR investors.
“And so, I’m still quite bullish on where we are today, as we forecast the capital and the ability to absorb the MSRs in the market.”
If you’re looking for holiday reading or listening, look no further. Follow me as I break down:
The most-read articles on The Best Interest in 2023.
And the most-listened-to podcast episodes of The Best Interest Podcast in 2023.
The Best of the Blog
The Best of the Podcast
The Best Interest Podcast is available on all podcast players, including Apple, Spotify, etc.
This year’s best episodes are below (both the episode numbers and titles) so you can find them on your own preferred podcast app.
Episode 50, The Banking Collapse in Simple Terms – on the Silicon Valley Bank collapse
Episode 54, Choosing FI, with Brad Barrett – on financial independence and the “4% rule”
Episode 57, Does the Debt Ceiling Affect Your Finances? – on the Federal debt ceiling, and whether you should care
Episode 60, Are You Saving Too Much, with Nick Maggiulli – packed with interesting tips, including Nick’s #1 finance tip (which has nothing to do with money!)
Episode 62, The Reality of Retirement Beyond the Numbers, with Fritz Gilbert – a must-listen for retirees
Episode 66 – Marriage, Kids, and Money, with Andy Hill – a must-listen for parents
Episode 68 – Minimalism: How Much is Enough?, with Rose Lounsbury – how to simplify our spending and our lives
Episode 69 – 529 Plans Aren’t Worth It?!, with Sean Mullaney – packed with fantastic tax advice
Episode 70 – The 7 Sins of Investing, with Jeremy Schneider – keep your portfolio simple…or else!
Thank you all for the time you’ve spent here in 2023. I couldn’t do this without you. Here’s to more “investing in knowledge” in 2024!
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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LOS ANGELES – Rep. Maxine Waters held a town hall meeting on Saturday where she pointedly asked executives from City National Bank, PNC Financial Services and Wells Fargo & Co., if they would each open a branch in her district. She said she wanted to hold the banks accountable for promises made in recent merger agreements or consent orders.
The town hall meeting at Inglewood High School got fiery at times as Waters pressed the three bank executives to answer questions from constituents in her 43rd congressional district in South Los Angeles. Waters, the ranking member of the House Financial Services Committee, said she invited all the top banks to attend but was turned down by Bank of America, Citigroup, JPMorgan Chase and U.S. Bancorp.
Next week, the Senate Banking Committee plans to hold an annual oversight hearing with executives from the nation’s top banks. Waters said she was disappointed that Republicans in the House would not hold a similar hearing. Her town hall, she said, would try to fill in the gap.
When Jeffrey Martinez, executive vice president and head of branch banking at PNC Bank, described how the Pittsburgh bank was upholding its pledge to invest an eye-popping $88 billion in local communities over four years as part of its 2020 acquisition of BBVA, Waters asked specifically if PNC was coming to her neighborhood.
“When are you going to open up a branch in my district?” Waters said. “We have a problem with branch banking not being available to us in all of our communities in the way they should be. We call them banking deserts.”
Martinez responded: “That’s a great question, it’s an important one and one of the things we’ve slated even though we’re new to California.”
“We would like to help you find a location,” Waters said, to thunderous applause and laughter from the crowd of about 300. “I’m so looking forward to establishing” a branch here, she added.
Waters then described how City National Bank in Los Angeles had agreed in January to pay $31 million to settle redlining allegations brought by the Justice Department. As part of the agreement, City National has promised to open one branch in a majority-Black and Hispanic neighborhood in L.A. County.
“Can you discuss where you might be opening the branch?” Waters asked. “Where are you with all of this?”
David Cameron, City National’s executive vice president of personal and business banking responded, “That is a great question,” drawing laughter from the audience.
“I don’t have any announcement on where we’re going to put that branch.”
To which Waters replied: “Oh, we’ll help you,” to further applause from the audience.
City National plans “to go above and beyond,” the agreement to invest at least $29.5 million in a loan subsidy fund for residents of majority-Black and Hispanic neighborhoods in Los Angeles County, Cameron said. The bank has hired more than 20 loan officers to support the initiative to provide grants of up to $15,000 each to first-time homebuyers.
Waters also questioned why City National did not have a mortgage loan officer at a local branch on Crenshaw Boulevard in Los Angeles.
“You’ve done well at that branch, are you going to expand that branch and put a loan officer there?” Waters said. “Can you do these things?”
Waters skillfully thanked each of the bankers for showing up to the town hall meeting, while also hitting them hard on consent orders.
“I really thank you for coming today. I know that you know we have a lot of questions for you, based on the fines that you received and all of that,” she told Cameron, and then asked the audience to give him a round of applause.
She also asked Colleen Canny, Wells Fargo’s executive vice president and national head of branch banking, why the San Francisco bank has been closing so many branches, which Waters estimated at 2,000 branch closings over many years. She cited the Wells Fargo 2016 fake accounts scandal that led the Federal Reserve to impose an asset cap on the bank.
“First tell us, why did you close those branches?” Waters asked.
Canny said that customer transactions through branches have fallen 50% over the past three years as more banking is done online, through mobile apps or ATMs.
“We still think branches are important and we continue to look at our branch footprint to ensure we have the proper coverage,” Canny said.
Waters lamented that banks are closing branches in inner cities where seniors who may not necessarily use a cell phone to bank still prefer to go to a branch in person.
“I want to tell you something that is a cultural discovery for everybody,” Waters told the bankers and the audience. “We like to go to a teller as we put our money across the counter. We like this kind of interaction with the people that we do service with and this is the kind of cultural consideration that the bank should take into account.”
At the town hall, which lasted for four hours, constituents asked a wide range of questions including why there were long lines at their local branches and why they were not able to get small business loans or even speak directly to the same banker on each visit. CFPB Director Rohit Chopra, who spoke after the bankers, answered a range of questions on reverse mortgages, digital redlining and junk fees.
Waters also lambasted the banking industry generally for Republican-led efforts in the House, which voted on Friday to nullify the Consumer Financial Protection Bureau’s small-business data-collection rule. Despite the bill’s passage in a 221-202 vote, President Joe Biden has vowed to veto the bill and uphold the rule.
The head organizer for Rise Economy, the consumer group formerly known as the California Community Reinvestment Coalition, asked the bankers generally why they did not support the Consumer Financial Protection Bureau.
“Your industry trade groups are attacking the CFPB, they’re attacking fundamental consumer protections … and very basic data on small business lending that we fought hard for for nearly 10 years,” said Jyotswaroop Kaur Bawa, chief of organizing and campaigns at Rise Economy. “We want you to tell us specifically how many Black and Hispanic-owned businesses you make loans to and at what rate—that’s what the fight is about.”
The small-business lending rule is expected to be used by the CFPB to identify discrimination, though the bureau exempted more than 2,000 community banks and small businesses from the rule. The coalition sued the CFPB in 2019 for taking so long to issue the rule, which Dodd-Frank’s Section 1071 mandated.
The 1071 rule was about wealth-building and closing the wealth gap, Waters said.
“The Senate Republicans put up a great fight against getting the rule, the data that we needed to determine why we can’t get small business loans — they fought us very hard, and they said they represented the banks,” Waters said. “Republicans won on trying to kill that rule that would give us information that would show that Blacks, Latinos, women and LGBTQ would not be getting small business [loans.]”
Water did commend one bank: First Citizens BancShares, which acquired the failed Silicon Valley Bank and last month announced an agreement to invest more than $6.5 billion in California and Massachusetts communities through an updated community benefits plan. The agreement, Waters said, paved the way for a branch to be opened in Watts.
Waters characteristically played to the audience by rattling off the various programs created after the pandemic including loans that banks delivered via the Paycheck Protection Program.
“You’re wondering, if there’s all this money around, why haven’t we been able to get some of it,” Waters said.
The stratification of rate offerings between lenders is very high due to rapid changes over the past few days and weeks. On average, top tier conventional 30yr fixed rates have fallen more than 3/8ths of a percent since Tuesday afternoon.
You’d have to go back to the days following the failure of Silicon Valley Bank in March to find a bigger drop in mortgage rates over a 48 hour time frame. That is quite something and perhaps even a bit of a puzzler given the underlying data and events driving the current move.
To be fair, we can talk about several important reasons for the rate movement, but suffice it to say that if we had to guess how the underlying events would affect rates without actually getting to see the move in rates, our guess would have been much smaller.
All of that may be at moot point because Friday’s jobs report will now serve as a deciding vote on whether the rate rally was/is overdone. At least it CAN serve as that deciding vote if the numbers come in far enough from forecasts.
The bond market (which dictates rates) has a long history of volatile reactions to certain economic reports and the jobs report is certainly the most reliable in that regard. Although the unemployment rate is the easiest number in the report to understand from a logical standpoint, it’s actually the count of nonfarm payrolls (NFP) that carries the most weight.
Economists expect NFP to come in at 180k. Sometimes the consensus is very close to reality. Other times, reality can “beat” or “miss” by 100k or more. In the case of a big miss (NFP under 100k), it’s fair to expect the recent rate rally to hold its ground or go even farther. In the opposite case (NFP closer to 300k), much of the progress seen over the past 2 days could be wiped out in a matter of minutes.
Of course there are “thread the needle” outcomes in between where rates actually don’t move much. All we can know ahead of time is that the potential for volatility is high.
No one can predict the future of real estate, but you can prepare. Find out what to prepare for and pick up the tools you’ll need at Virtual Inman Connect on Nov. 1-2, 2023. And don’t miss Inman Connect New York on Jan. 23-25, 2024, where AI, capital and more will be center stage. Bet big on the future and join us at Connect.
Economists are scratching their heads and housing industry leaders are venting their frustrations as mortgage rates continue a relentless climb to new heights not seen in more than two decades, chasing yields on government debt that are being pushed higher by factors beyond Federal Reserve tightening.
The Optimal Blue Mortgage Market Indices, which track daily rate lock data, show rates on 30-year fixed-rate conforming loans hitting a new 2023 high of 7.59 percent Tuesday — an all-time high in Optimal Blue records dating to 2017.
At 7.95 percent, rates on jumbo mortgages that exceed Fannie Mae and Freddie Mac’s loan limits looked poised to push through the 8 percent benchmark, as paper losses mount at banks that fund most jumbo lending and Treasury yields rise.
National Association of Realtors Chief Economist Lawrence Yun vented his frustration with Fed policymakers, who have telegraphed their intention to implement at least one more rate hike this year.
“The Fed is overdoing the rate hike,” Yun said in a LinkedIn post Wednesday. “The economy is measurably slowing. Even the lagging indicator job gains are coming in light.”
Yun said he’s worried that rising interest rates could actually fuel inflation as would-be homebuyers throw in the towel, fueling more demand for rentals, and making housing more scarce as builders balk at paying higher rates on construction loans.
A weekly survey of lenders by the Mortgage Bankers Association (MBA) showed that applications for purchase loans were down a seasonally adjusted 6 percent last week when compared to the week before, and 22 percent from a year ago.
Joel Kan
“The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market,” MBA Deputy Chief Economist Joel Kan said in a statement.
With rates on 30-year fixed-rate conventional loans rising for the fourth consecutive week to the highest rate since 2000, Kan said some borrowers searching for ways to lower their monthly payments are turning to adjustable-rate mortgage (ARM) loans.
Although ARM loans accounted for 8 percent of mortgage applications last week, they had an even bigger share when mortgage rates made a similar surge last fall. During the second week of October 2022, ARM loans accounted for 13 percent of applications, the highest share since March 2008.
Appearing on CNBC’s “Squawk Box,” Yun noted that rates on ARM loans aren’t much lower than those for more traditional 30-year fixed-rate conventional loans (according to the MBA survey, rates on ARM loans averaged 6.49 percent last week). “My advice right now is go into the 30-year fixed, because even with that, one can always refinance once the interest rate goes down,” Yun said. “The mortgage rates are topping out now — hopefully there is some downward drift in the upcoming months.”
MBA CEO Bob Broeksmit expressed similar sentiments on CNBC Wednesday, urging the Fed to “be clear that they’re done with rate increases” and to also “make clear that they’re not going to sell mortgage-backed securities off their balance sheets.”
Jumbo mortgage rates spike
Homebuyers seeking jumbo mortgages exceeding Fannie and Freddie’s conforming loan limits — $726,200 for one-unit properties in most areas of the country — have been hit particularly hard by recent rate increases.
At this time last year, rates on jumbo mortgages were about half a percentage point less than for conforming loans. Now the situation has reversed, with the “spread” between jumbo mortgages and conforming loans widening to nearly 40 basis points on Wednesday, according to Optimal Blue rate lock data.
Conforming loans are largely financed by investors who buy mortgage-backed securities guaranteed by Fannie and Freddie. But jumbo mortgages are mostly provided by banks that hold the loans on their books. Stresses on regional banks sparked by the failures of Silicon Valley Bank, Signature Bank and First Republic Bank have made jumbo loans more expensive and harder to come by this year.
This week, Rocket Mortgage began offering some relief by pricing mortgages of up to $750,000 as conforming, in anticipation that Fannie and Freddie’s 2024 loan limits will go up by at least 3 percent on Jan. 1 to reflect home price appreciation over the last year.
Mike Fawaz
“The market has changed a lot, and jumbo pricing isn’t as favorable as it used to be,” Mike Fawaz, executive vice president of Rocket’s wholesale channel, Rocket Pro TPO, told Inman.
Banks that have large holdings of Treasurys are seeing the value of those assets decline as interest rates rise, helping push unrealized losses on bank balance sheets up by 8.3 percent during the second quarter, to $558.4 billion, according to the Federal Deposit Insurance Corp.
10-year Treasury yields at highest since 2007
Yields on 10-year Treasury notes, a barometer for mortgage rates, surged to a new 2023 high of 4.80 percent Tuesday, a level not seen since August 2007 on the eve of the subprime mortgage crisis.
While the Fed has tight control over short-term interest rates, rates on long-term assets like Treasurys and mortgage-backed securities (MBS) that fund most home loans are dependent on investor demand. When investors are eager to put their money in bonds and MBS, that pushes rates down. But when investors lose their appetite for those assets, that drives rates up.
The recent surge in long-term Treasury yields has defied many forecasters’ expectations, and economists are searching for reasons.
Last year’s rise in long-term rates was driven “by market expectations of higher short-term rates as the Fed tightened policy and by investors’ demands for extra compensation to hold longer-dated assets because of fears of higher inflation,” The Wall Street Journal’s Nick Timiraos reported Wednesday.
With inflation seemingly cooling and the Fed signaling that it’s done, or will soon be done, raising short-term rates, economists suspect flagging demand for Treasurys by foreign investors, U.S. banks and investment managers could be factors in the sustained rise in long-term rates, Timiraos reported.
Even if long-term rates have peaked, there’s increasing uncertainty over whether they’ll come down next year, as many economists and investors had been anticipating.
“What we’re seeing is a reappraisal of how the bond market prices uncertainty itself,” PGIM Fixed Income economist Daleep Singh told Timiraos. “The compensation required to underwrite potentially the new structural regime with more volatile growth and inflation and fewer predictable sources of demand to absorb record amounts of government debt issuance has clearly risen.”
Another factor crimping demand is that the Fed, which bought trillions of Treasurys bonds and MBS during the pandemic to bring borrowing costs to historic lows, is now letting those investments roll off its books.
Fed has trimmed $1 trillion from balance sheet
Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis
The Fed’s Treasury and MBS holdings peaked at $8.5 trillion last year, but a shift to “quantitative tightening” has allowed the central bank to trim its assets by more than $1 trillion by allowing $60 billion in maturing Treasurys and $35 billion in MBS to roll off its books each month.
Broeksmit said that the spread between 10-year Treasury yields and 30-year fixed-rate mortgages is about 125 basis points higher than its historic norm and that the Fed is partly responsible.
“I still think some of the increase in the spread between the Treasury and the mortgages is a fear that the Fed would actually sell [MBS] in the open market,” Broeksmit said on CNBC. “So if they were to make clear that that’s not on the horizon, I think that that would help and the bank demand will, I think, come back. We’ve seen some increase in supply with some of the failed banks MBS being on the market, but I think that’s mostly been resolved.”
Where rates are headed next
Futures markets tracked by the CME FedWatch Tool put the probability of one or more additional Fed rate hikes this year at 37 percent, but see a one-in-five chance (19.6 percent) that the Fed will bring rates back down below current levels by March before the spring homebuying season kicks off.
The upcoming Nonfarm Payrolls report to be released Friday by the U.S. Bureau of Labor Statistics is likely to play a factor in determining where rates are headed next, as Fed policymakers see tightness in the labor market as a key driver of inflation.
Tuesday’s release of the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) report seemed to panic bond market investors, sending yields on 10-year Treasurys up 12 basis points.
The JOLTS data, which showed job openings increased by 690,000 at the end of August, to 9.6 million, “was startling, but the data are very noisy and are subject to large revisions,” Pantheon Macroeconomics analysts said in their U.S. Economic Monitor report Wednesday.
“We don’t take JOLTS seriously, but the surge in yields and plunge in stock prices after the release of the data yesterday says a great deal about the pervasive nervousness of investors,” Pantheon economists Ian Shepherdson and Kieran Clancy wrote.
Bond market investors “appear to be taking seriously the Fed’s collective assertion that rates will stay higher for longer, despite the abundant evidence that the Fed’s interest rate forecasts are rarely correct,” they said.
‘Dot plot’ reflects Fed’s ‘higher for longer’ rate strategy
Fed policymakers voted unanimously on Sept. 20 to keep the central bank’s target for the short-term federal funds rate at 5.25 to 5.5 percent.
But looking at the Federal Open Market Committee’s latest “dot plot” — projections of where policymakers think the short-term federal funds rate will be in the future — most see the need for one more rate hike this year. By the end of next year, however, some think it will be as low as 4.375 percent or as high as 6.125 percent (hawkish Federal Reserve Governor Michelle Bowman could be the outlier on the high end).
That is an “enormous” spread of 1.75 percentage points, Shepherdson and Clancy wrote, “but markets for now are interested only in the upside risks.”
Betting that Treasury yields have peaked “seems extraordinarily risky,” the Pantheon economists concluded. “But unless you think the U.S. economy can grow at a real 2 1⁄2 percent pace forever, untroubled by the Fed, 10-year yields can’t be sustained at the current level. The market won’t flip, though, until the data shift, and Fed officials acknowledge the change.”
In the meantime, Pantheon economists say, “yields could overshoot further.”
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