Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
All eyes will once again turn to the Federal Reserve this week as they meet to discuss the next steps with interest rates and economic policy. Specifically, will they raise rates above their current 23-year high? Or will they keep them steady following a series of disappointing inflation reports at the start of 2024? After all, rate cuts that seemed promising at the beginning of the year now seem off the table, possibly for the rest of the year.
And while the Fed doesn’t directly dictate rates for loans like mortgages, personal loans and other borrowing products, what they ultimately decide will greatly affect what rate lenders are willing to offer. Homebuyers will then follow this week’s meeting carefully. After coping with the highest mortgage rates since 2000, buyers are looking for relief — or signs of rate relief to come.
To that point, many are wondering if mortgage rates will rise after this week’s Fed meeting. That’s what we will break down below.
See what mortgage rate you could lock in before a potential increase here now.
While no one knows with certainty what will happen after the Fed meeting, set for April 30 and May 1, the chances of a rate cut are minimal. Thanks to sticky inflation and a target inflation rate goal of 2%, more work must be done (the current inflation rate is 3.5%). So rate cuts look out for this week. While a rate hike is possible, it’s also unlikely to happen until more data about the fight against inflation becomes available.
With those scenarios accounted for, then, it’s likely that the Fed will keep its benchmark interest rate unchanged at a range between 5.25% and 5.50%. But what will that mean for mortgage rates?
It won’t be particularly positive. While a rate pause is better than a rate hike, even a hint at an extended pause — or the potential for rate hikes in the months to come — could cause mortgage rates to rise in anticipation. So what Fed chairman Jerome Powell says this week will go a long way toward cooling rates — or making them rise further. However, if homebuyers were hoping for a rate cut, as some were predicting at the end of 2023, that’s not likely to happen, at least for now.
See what mortgage rate you could secure before the Fed announces its rate decision.
While the sub-3% mortgage rates of 2020 are unlikely to return anytime soon (or ever again), that doesn’t mean homebuyers still can’t get a lower mortgage rate now. It will just require a bit more work and strategic planning. Here are three ways buyers can get a lower mortgage rate now:
The strong potential for mortgage rates to rise again this week, even if the Fed keeps rates unchanged, could be a motivating factor for buyers to lock in a rate now. That said, there are still effective ways to get a below-average rate, ranging from buying mortgage points to adjustable-rate mortgages to simply shopping around for the best rates and terms. None of these strategies will bring back the record-low mortgage rates of recent years, but they are all worth carefully considering until the Fed finally starts cutting rates again.
Source: cbsnews.com
The average for a 30-year fixed-mortgage is 7.34% today, up 0.02% over the last week. The average rate for a 15-year fixed mortgage is 6.74%, which is a decrease of -0.02% from the same time last week. For a look at mortgage rate movement, see the chart below.
Because inflation data hasn’t been improving, the Federal Reserve has been pushing off rate cuts. Though mortgage rates could still inch down later in the year, housing market predictions change regularly in response to economic data, geopolitical events and more.
Mortgage rates change every day. Experts recommend shopping around to make sure you’re getting the lowest rate. By entering your information below, you can get a custom quote from one of CNET’s partner lenders.
About these rates: Like CNET, Bankrate is owned by Red Ventures. This tool features partner rates from lenders that you can use when comparing multiple mortgage rates.
Each mortgage has a loan term, or payment schedule. The most common mortgage terms are 15 and 30 years, although 10-, 20- and 40-year mortgages also exist. With a fixed-rate mortgage, the interest rate is set for the duration of the loan, offering stability. With an adjustable-rate mortgage, the interest rate is only fixed for a certain amount of time (commonly five, seven or 10 years), after which the rate adjusts annually based on the market. Fixed-rate mortgages are a better option if you plan to live in a home in the long term, but adjustable-rate mortgages may offer lower interest rates upfront.
The 30-year fixed-mortgage rate average is 7.34% today. A 30-year fixed mortgage is the most common loan term. It will often have a higher interest rate than a 15-year mortgage, but you’ll have a lower monthly payment.
Today, the average rate for a 15-year, fixed mortgage is 6.74%. Though you’ll have a bigger monthly payment than a 30-year fixed mortgage, a 15-year loan usually comes with a lower interest rate, allowing you to pay less interest in the long run and pay off your mortgage sooner.
A 5/1 adjustable-rate mortgage has an average rate of 6.74% today. You’ll typically get a lower introductory interest rate with a 5/1 ARM in the first five years of the mortgage. But you could pay more after that period, depending on how the rate adjusts annually. If you plan to sell or refinance your house within five years, an ARM could be a good option.
Over the last few years, high inflation and the Federal Reserve’s aggressive interest rate hikes pushed up mortgage rates from their record lows around the pandemic. Since last summer, the Fed has consistently kept the federal funds rate at 5.25% to 5.5%. Though the central bank doesn’t directly set the rates for mortgages, a high federal funds rate makes borrowing more expensive, including for home loans.
Mortgage rates change daily, but average rates have been moving between 6.5% and 7.5% since late last fall. Today’s homebuyers have less room in their budget to afford the cost of a home due to elevated mortgage rates and steep home prices. Limited housing inventory and low wage growth are also contributing to the affordability crisis and keeping mortgage demand down.
Most housing market experts predict rates will end the year between 6% and 6.5%. Ultimately, a more affordable mortgage market will depend on how quickly the Fed begins cutting interest rates. The central bank could start lowering interest rates in the fall, but it will depend on how the economy fares in the coming months.
Mortgage rates fluctuate for many reasons: supply, demand, inflation, monetary policy, jobs data and market expectations. Homebuyers won’t see lower rates overnight, and it’s unlikely there will ever be a return to the 2-3% mortgage rates we saw between 2000 and early 2022.
“We are expecting mortgage rates to fall to around 6.5% by the end of this year, but there’s still a lot of volatility I think we might see,” said Daryl Fairweather, chief economist at Redfin.
Every month brings a new set of inflation and labor data that can influence the direction of mortgage rates, said Odeta Kushi, deputy chief economist at First American Financial Corporation. “Ongoing inflation deceleration, a slowing economy and even geopolitical uncertainty can contribute to lower mortgage rates. On the other hand, data that signals upside risk to inflation may result in higher rates,” Kushi said.
Here’s a look at where some major housing authorities expect average mortgage rates to land.
Getting a mortgage should always depend on your financial situation and long-term goals. The most important thing is to make a budget and try to stay within your means. CNET’s mortgage calculator below can help homebuyers prepare for monthly mortgage payments.
Though mortgage rates and home prices are high, the housing market won’t be unaffordable forever. It’s always a good time to save for a down payment and improve your credit score to help you secure a competitive mortgage rate when the time is right.
Source: cnet.com
Mortgage Bankers Association vice president and deputy chief economist Joel Kan said the report indicated “a little less strength than expected,” and said the slowdown would likely ease upward pressure on service sector inflation. Payroll employment increases by 175,000 in April; unemployment rate changes little at 3.9% https://t.co/ZwrVfLviqL #JobsReport #BLSdata — BLS-Labor Statistics (@BLS_gov) May 3, 2024 … [Read more…]
The bond market–which dictates interest rates–had a generally favorable response to yesterday’s update from the Federal Reserve. While the Fed didn’t cut rates, and while they’re increasingly acknowledging that rate cuts are moving farther into the future, they still think data will evolve in a way that results in the next move being a cut as opposed to a hike.
Positive momentum continued today, in spite of several economic reports that argued the opposite case. Had these reports been top tier market movers, the counterintuitive victory would have been highly unlikely.
Friday is a different sort of day in terms of economic data. The big monthly jobs report is in a league of its own when it comes to labor market data, and while it may not currently be the most important report on any given month, it’s a consistent 2nd place behind CPI. After the jobs report, we’ll get a strong 2nd tier contender in the form of ISM’s service sector index.
These two reports have the power to accelerate or reverse the friendly tone seen in rates over the past 2 days. As for today, the average lender inched just barely to the lowest levels since April 12th. This wasn’t the case in the first half of the day, but as bonds improved, many lenders were able to issue mid-day reprices.
Source: mortgagenewsdaily.com
Housing experts say mortgage rates are likely to hover in the 7 percent range in May, amid elevated inflation that is keeping the Federal Reserve from reducing borrowing costs.
The high cost of home loans may keep buyers at bay as they await the decline of rates before they can make the leap toward homeownership.
Read more: Find the Lowest Rates From Top Mortgage Lenders
The Federal Reserve raised interest rates starting in March 2022 to its current two-decade high of 5.25 to 5.5 percent, a move geared to fight soaring inflation. This contributed to the push-up of borrowing costs, including for home loans. Inflation is still struggling to cool down to the 2 percent central bank target, which has forced policymakers to retain the high interest rate environment.
The 30-year fixed rate, for the week ending April 19, rose for the third week in a row to 7.24 percent—the highest level since November 2023.
Economic data, particularly around inflation, have come in higher than expected over the last few weeks. In March, inflation jumped to 3.5 percent on a yearly basis, up from 3.2 percent the prior month.
Unless inflation surprises in the coming weeks, mortgage rates are likely to stay in the 7 to 7.5 percent range, according to Realtor.com’s chief economist Danielle Hale. Fed policymakers are set to conclude their latest meeting on May 1, and they are unlikely to change their current stance on rates.
“Of all the data, I think that the inflation, specifically the [Consumer Price Index] out May 15, will have the biggest impact,” Hale told Newsweek. “Inflation and labor market data has come in higher and hotter than expected. This change in the data, which is driving a change in the outlook, has pushed interest rates, including mortgage rates, higher across the board.”
Read more: How to Get a Mortgage
High mortgage rates will depress buyers’ ability to buy homes.
“I expect homebuyers to approach the housing market more tepidly, and sales will reflect that trend,” Hale told Newsweek.
Orphe Divounguy, a senior economist at Zillow Home Loans, echoed Hale’s perspective on what will drive mortgage rates as inflation remains elevated.
“The fact that government borrowing remains high relative to demand for U.S. Treasury bonds is likely to continue to push yields—which mortgage rates follow—elevated,” he told Newsweek. “Looking into May, we can expect more rate volatility as investors and the Fed wait for more conclusive evidence of a return to low, stable and more predictable inflation.”
Buyers are still likely to be waiting for rates to fall but the key to the trajectory of rates will be how inflation performs over the coming months, said Holden Lewis, a home and mortgage expert at NerdWallet.
“Inflation remains stubbornly above the Fed’s target of 2 [percent], and mortgage rates won’t fall significantly until the inflation rate consistently drops for multiple months in a row,” Lewis told Newsweek. “Potential home buyers are holding back and waiting for mortgage rates to decline. The slowdown in home sales will allow the inventory of unsold homes to increase. That won’t stop home prices from going up, but it might slow down the pace of home price increases this summer.”
In May, policymakers from the Fed will reveal their latest rate decision and provide insights on the trajectory of borrowing costs. Also in May, the CPI inflation data reading for April will give insight into how prices are performing, which will give a signal to how rates might unfold over the next few weeks.
For the housing market, one silver lining may come from buyers who have to acquire homes due to personal situations.
Read more: How to Buy a House if You Have Bad Credit
“Purchases are likely to be dominated by movers who feel like they don’t have a choice to wait out higher rates, but rather, they have to move now for personal reasons,” Hale said.
Zillow’s Divounguy suggested that with mortgage rates expected to stay high, lower-priced homes could see escalated competition.
“We continue to expect significant competition this spring, especially for attractive listings on the lower end of the price range. New construction homes are selling well too; they’re available, and builders are offering financial incentives—such as rate buydowns and covering closing costs—to potential home buyers,” he said. “Remember, higher rates mean the home price a buyer can afford is lower, so if you’re shopping for a home in the mid-tier or lower, it’s best to assume you’ll run into some competition.”
Hale suggested that sellers, who can also be buyers, enter the housing market.
“With 80 [percent] of potential sellers having thought about selling for 1 to 3 years, it could be that higher rates are less of a deterrent this year than in the recent past,” she said.
The perspective from lenders appears to be that the 10-year treasury yields, currently at around 4.7 percent, will drop in the coming weeks to 4 percent and narrow the difference between mortgage rates and treasury rates.
“We expect the spread will tighten further by the end of 2024. The combination implies a 30-year fixed mortgage rate mostly unchanged in the coming weeks but eventually moving closer to 6.5 percent by the end of 2024,” Joel Kan, Mortgage Bankers Association’s deputy chief economist, told Newsweek.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Source: newsweek.com
So where does this leave us? Let’s look at my labor economic model that started on April 7, 2020, and see where are we today.
1. The current state of the labor market results from a series of events, with COVID-19 being a significant catalyst. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.
2. During the early stages of the labor market recovery, when we observed weaker job reports, I remained steadfast in my belief that job openings would reach 10 million in this recovery. Despite the unexpected job report in May 2021, I was confident in the recovery trajectory. Job openings reached as high as 12 million and are now at 8.5 million. Today the labor market is less tight, but the Fed would love to see this number even lower, down to 7 million.
Currently, the job opening quit percentage and hires data are below pre-COVID-19 levels. We are getting closer to having a single handle on this data, which, when coming from an elevated level, means any Fed member talking about a tight labor market is smoking some good stuff.
3. I wrote that we should get back all the jobs lost to COVID-19 by September 2022. This would be a speedy labor market recovery but it happened right on schedule.
4. This is the key one right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, based on the job growth rate in February 2020. Today, we are at 158,286,000. This is vital because given this level, job growth should be cooling down now. We will be more in line with where the labor market should be when the average is 140,000 to 165,000 monthly.
Today’s job print of 175,000 is still above my target level for where jobs should be and we are getting closer to that 159 million total nonfarm payroll number. I will be shocked if we are still trending above 165,000 per month once we break over 159 million total employed people. With that said, the labor market is still outperforming my model.
Looking at the six-month average of job-growth data, we are running at 242,000, even with all the revisions. I am still above my 165,000-per-month level, but we are heading in that direction.
From BLS: Total nonfarm payroll employment increased by 175,000 in April, and the unemployment rate changed little at 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in social assistance, and in transportation and warehousing.
Here are the jobs that were created and lost in the previous month:
In this jobs report, the unemployment rate for education levels looks like this:
A critical part of this report is that wage growth is cooling down, which is key to many of the Federal Reserve’s concerns. The Fed likes a 3% wage growth trend because they believe productivity is 1%. As you can see below, wage growth is continuing to head in that direction.
We now have multiple data lines that show the labor market isn’t as tight as it once was. The Federal Reserve is now considering this since they have been talking more about their dual mandate as opposed to just being a single mandate Fed. This is positive for mortgage rates because once they pivot, we can see a more sustained move lower in rates instead of what we have had to deal with since 2022. We still have some work to get wage growth back down to a 3%-3.5% level, but it’s at least heading that way.
Source: housingwire.com
Rates have been in retreat as bond market investors who fund most mortgage loans react to the latest economic news and scaleback in tightening by Fed policymakers.
At Inman Connect Las Vegas, July 30-Aug. 1, 2024, the noise and misinformation will be banished, all your big questions will be answered, and new business opportunities will be revealed. Join us.
Mortgage rates retreated for the third day in a row Friday as the latest numbers from the Labor Department showed employers added fewer jobs than expected in April, pushing unemployment closer to 4 percent, a level not seen in more than two years.
The U.S. economy added 175,000 jobs in April, down from 315,000 in March and the most anemic growth since October 2023. Economists had expected April employment growth of 240,000 jobs.
The report came on the heels of Wednesday’s announcement by Federal Reserve policymakers that they intend to slow the pace of “quantitative tightening” — an unwinding of the central bank’s $7 trillion balance sheet — to $40 billion a month, less than half the pace envisioned two years ago.
Change in employment, by month. Red bars are the latest forecast, including revisions to previous estimates for February and March. Source: U.S. Bureau of Labor Statistics.
“This report is nothing like bad enough to trigger a wholesale rethink at the Fed, but things will be different if the July numbers are weaker still, as we expect,” economists at Pantheon Macroeconomics said in a note to clients. “The downshift in payroll growth has come exactly when the [National Federation of Independent Business] suggested it would, and the signal for the future is unambiguous.”
Futures markets tracked by the CME FedWatch Tool last week predicted that the odds were against the Fed making more than one 25-basis point rate cut this year. On Friday, investors had repositioned their bets in line with expectations that there’s a 61 percent chance of two or more Fed rate cuts by the end of the year, with the first move now expected in September rather than December.
Pantheon economists are sticking to their forecast that the central bank will bring the federal funds rate down by a full percentage point, starting in September.
“Businesses — especially small firms — are responding to the lagged effect of the huge increase in interest rates and the tightening in lending standards, which have made working capital much more expensive and harder to obtain,” Pantheon economists said. “At the margin, this is depressing hiring and lowering the bar to layoffs.”
Unemployment, which dipped below 4 percent in February 2022, is once again flirting with that level, hitting 3.9 percent in April, up half a percentage point from a year ago.
The Fed doesn’t have direct control over long-term rates, but bond market investors who fund most mortgage loans are reacting to this week’s news.
Yields on 10-year Treasurys, which often predict trends in mortgage rates, fell 7 basis points Friday to 4.50 percent, a 25-basis point drop from the 2024 high of 4.75 percent registered on April 25.
Surveys of lenders by Mortgage News Daily showed rates for 30-year fixed-rate loans dropping for a third day in a row Friday, to 7.28 percent, down 24 basis points from a 2024 high of 7.52 percent, also registered on April 25.
Data tracked by Optimal Blue, which lags by one day, showed borrowers were locking in rates on 30-year fixed-rate mortgages Thursday at an average rate of 7.21 percent, down 6 basis points from the 2024 high of 7.27 percent recorded on April 25.
Borrowers taking out jumbo loans have seen spreads over conventional mortgages widen as higher interest rates and defaults on commercial loans weigh on regional banks that are often the source of those loans.
The rates published by Mortgage News Daily (MND) are higher than those reported by Optimal Blue because MND’s rate index is adjusted to account for points that borrowers often pay to get a lower rate. Optimal Blue uses actual rates provided to borrowers for rate locks, whether they paid points or not.
Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.
Email Matt Carter
Source: inman.com
Mortgage rates will probably remain above 7% in May as inflation resists the Federal Reserve’s efforts to bring it under control. It left rates unchanged at the conclusion of its April 30-May 1 meeting, and seemed as frustrated by inflation and high interest rates as home buyers are.
The Fed is trying to wrestle the inflation rate down to 2%. The central bank made progress toward that goal in the last half of 2023, and investors rang in the new year with hopes of a Fed rate cut by spring. But the inflation rate sprang a surprise: It hardly budged in the first three months of the year. Investors have convinced themselves that inflation will stick around for a while. Mortgage rates have moved higher as a consequence.
The 30-year mortgage leapt more than a quarter of a percentage point in April. Mortgage rates are unlikely to fall significantly until inflation wanes and the Fed signals that it’s getting ready to announce a rate cut. It’s unlikely that we’ll see such a turnaround by Memorial Day.
The outlook was sunnier just a few months ago. As 2023 turned to 2024, it looked as if inflation was waning in earnest. The core consumer price index had fallen every month since March. From that month to December, core CPI fell from 5.6% to 3.9%. Investors took it as a sign that inflation was headed toward the Fed’s 2% goal, and that the central bank would cut the short-term federal funds rate in the first half of 2024.
But progress on prices slowed dramatically in 2024’s first quarter, as if the inflation rate had deployed a parachute. In March, core CPI was 3.8%, or just 0.1 percentage point lower than in December. At that rate of decline, it would take more than four years for the inflation rate to drift down to 2%.
“In recent months, there has been a lack of further progress toward the committee’s 2% inflation objective,” the Fed’s rate-setting committee announced at the conclusion of the April 30-May 1 meeting.
The statement added that the Fed won’t cut rates until the committee “has gained greater confidence that inflation is moving sustainably toward 2%.” That seemed to push a rate reduction months into the future.
Financial markets now expect the Fed to wait until September or November before reducing the federal funds rate. The dashed hopes for a springtime reduction led lenders to raise mortgage rates in April.
The average rate on the 30-year fixed rate mortgage moved upward week after week throughout April. In Freddie Mac’s weekly rate survey, it averaged 6.79% in the last week of March, then marched upward to 7.17% in the week ending April 25.
Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors all predict that mortgage rates will fall over the next 12 months. Their forecasts have the 30-year fixed-rate mortgage dropping to below 6.5% in the first quarter of 2025, compared with an average of 6.75% in the first quarter of this year.
Home prices are rising along with mortgage rates. The combination of higher prices and mortgage rates is making it harder to afford a home. According to the Mortgage Bankers Association, the typical mortgage payment was $2,021 for home buyers who applied for mortgages in March. That was $108 more from 12 months earlier. This means that the median mortgage payment went up 5.2%. At the same time, the median income went up 3.5%, according to the MBA. House payments are rising faster than incomes.
Homebuilders have been offering relief in the form of temporary rate buydowns. With a rate buydown, the builder reduces the buyer’s house payments for the first one to three years. They do it by subsidizing the buyer’s interest rate.
Here’s an example of how a one-year buydown might work: The buyer gets a mortgage with a 7.25% interest rate, but the first 12 payments are based on a 6.25% interest rate. That gives the buyer a discount on the monthly payments for that year.
Builders do this in recognition of the effect of rising rates and prices. “To address affordability for home buyers, we are still using incentives such as mortgage rate buydowns and we have reduced the prices and sizes of our homes where necessary,” said Bill Wheat, the chief financial officer of D.R. Horton, a prominent homebuilder, in an earnings call April 18.
The takeaway is that some homebuilders are cutting rates, even if the Fed isn’t.
Source: nerdwallet.com
Wed, May 1 2024, 4:49 PM
Decent Data and Palatable Powell
Bonds managed modest to moderate gains after digesting all of the morning’s economic data and events. None of the reports were too exciting and one might conclude that traders were slightly more interested in buying bonds regardless of the data. Yields flat-lined in stronger territory ahead of the Fed. The announcement itself was largely as-expected. The same could be said of the press conference, but with the qualification that Powell definitely stopped short of expressing as much concern about inflation as the recent data justified. Rate cuts aren’t likely any time soon, but the next move is still seen as much more likely to be a cut rather than a hike. Markets also appreciated Powell’s reiteration that the Fed wouldn’t hesitate to do what it needed to do based on the data/economy without considering political implications.
08:59 AM
unchanged overnight and modestly stronger after ADP/Treasury. MBS up an eighth. 10yr down 2.3bps at 4.66
09:46 AM
Slightly stronger leading up to S&P PMI. No reaction afterward. MBS up 7 ticks (.22). 10yr down 3.2bps at 4.65
10:05 AM
No major reaction to 10am data. 10yr yields are down 4bps at 4.643 and MBS are up nearly a quarter point.
02:18 PM
Modestly stronger after Fed. 10yr down 4.2bps at 4.462. MBS up a quarter point
02:47 PM
Additional gains as Powell press conference continues. MBS up half a point. 10yr down 10bps at 4.587
Download our mobile app to get alerts for MBS Commentary and streaming MBS and Treasury prices.
Source: mortgagenewsdaily.com
The bottom line is the housing market remains in flux and is once again adjusting to the likelihood of interest rates remaining higher for longer after being teased by the potential of a falling rate environment.
This flux has created far more volatility in the housing market, particularly in recent weeks, with the MOVE Index — a measure of rate volatility in the U.S. Treasury market — jumping to as high as 121 in mid-April after ending March near 85.
Ben Hunsaker, a Beach Point Capital Management portfolio manager who is focused on securitized credit, said that during the past year, nonqualified mortgage (non-QM) AAA bond spreads have actually contracted from 155 to 135, while agency mortgage-backed securities (MBS) spreads have widened from about 118 to 134 over the same period.
“With agency spreads moving out 10 to 15 basis points, you would expect that non-QM spreads also have to widen eventually, otherwise the market’s a little bit out of sync,” Hunsaker said. “On a forward-looking basis, you would expect you don’t have the same tailwinds as you did before.”
Volatility in the Treasury market, which trades at a shifting spread below that of mortgage rates, also translates into uncertainty among housing market investors. Market observers say this normally leads to investor hesitancy and a tendency to keep more money parked on the sidelines.
“When interest rate volatility goes up, you generally have lower fund flows, which you’ve seen over the last few weeks,” Hunsaker said.
On top of that, mortgage origination volumes are projected to be flat this year in the agency (Fannie Mae, Freddie Mac and Ginnie Mae) sector, and only slightly better on the non-agency (non-QM) side compared to 2023, according to market experts.
Non-QM mortgages include loans that cannot be purchased by Fannie Mae or Freddie Mac. The pool of non-QM borrowers includes real estate investors, fix-and-flippers, foreign nationals, business owners, gig economy workers and the self-employed.
What does this market uncertainty — marked by low origination volumes and a move toward higher rates for longer — mean for the secondary mortgage market, which creates liquidity for the primary mortgage market via securitization and has a heavy finger on the scale in determining interest rates for homebuyers?
If bond yields rise in the secondary market due to a supply-demand imbalance or because of increased perceived risk, then that also tends to put upward pressure on mortgage rates in the primary market.
HousingWire interviewed a range of experts across the secondary market to get a pulse on the dynamics at play at the end of April across the following sectors: whole loan trading, agency and non-agency MBS, and mortgage servicing rights (MSRs).
Following are excerpts from their responses that reflect on the good, the bad and the ugly of the current market.
“When we came into the year, we thought we were in for as many as five or six rate cuts. That was a problem for sellers of loans. For mortgages, specifically 30-year fixed rate, it was hard to find a buyer willing to make a strong premium payment [on a whole loan purchase] when you think you are going to get four or five or six rate cuts, because that meant rates were going to fall and [mortgage] prepayments [due to refinancing] were going to increase.
“However, what we’re discovering is that those folks that had the courage to put that trade on back in the third and fourth quarter of last year are in the first quarter of this year being rewarded. Because if we are now looking at only one rate cut [in 2024], maybe even one hike — although I think that’s still a pretty low probability — but let’s just say we’re flat — then prepayment speeds should remain low.
“Higher-coupon loans now may [offer] a higher rate of return for longer than someone might have anticipated in a rate assessment that was at the beginning of 2024. … So, basically, if I’m trading [as a seller] a 7% loan right now, I may get a premium — like a solid 102 [over par] or whatever.
“The buyer is going to be happy because the prepayment speeds are likely to remain low given the current Fed stance [of higher for longer], and you can amortize that premium over a longer period of time to get a better yield. So, both seller and buyer are happier with the newer loan.“
— John Toohig, head of whole loan trading at Raymond James and president of Raymond James Mortgage Co.
“There’s a lot of cash on the sidelines. There’s a lot of money out there. This translates into whole loans too.
“In RPL and NPL, which are reperforming loans and nonperforming loans, there’s a ton of demand. We just put a bid out recently and … had over 30 bids. That tells you that folks are trying to grab those loans, either for the real estate — if it’s a nonperforming loan … such as for rentals, accumulating assets for their portfolio — or if it’s reperforming, to get cash flows at a discount.
“Those loans [RPL and NPL] are really rich on the demand side, but the only sellers are those who are forced to sell because it’s at a discount, with the stuff we’ve seen trading in the 80s [below par].
— JB Long, president of Incenter Capital Advisors
“Rate volatility has persisted in the market. It’s essentially like playing a game of Keno [with bets being placed on] what number when, and that money can be lost doing so is not surprising. From my perspective, transaction volume and mortgage origination volume has been on its back — and stayed on its back — for the last year and a half.
“ … There is a book called “Who Moved My Cheese.” And it is a very simple book that highlights a very important premise. A mouse goes looking around, looking around, looking around, and spends all its time looking for cheese. Then [after it finds the cheese], it just keeps going back to the same place, but the cheese is gone.
“The mouse forgot the whole reason he ever found the cheese in the first place, and that’s because the mouse remained nimble and adaptive, as opposed to just hitting the same button as many times as he possibly could. The point is we have to continue to evolve with an evolving market.
“ … [For example], one of the big changes in the [agency] CRT [credit risk transfer] market has been a decision by the GSEs to not issue the most subordinate [securities] tranches. They are the riskiest tranches … and they’re the ones that offer the highest return. The supply of that profile has diminished considerably because they’re not issuing it anymore.
“… So, what happens is those investors go to non-QM subs. … There’s a lot of demand for that sub now [securities backed by non-QM mortgages, particularly those linked to home equity loan products].“
— Peter Van Gelderen, specialist portfolio manager in the fixed-income group and co-head of Global Securitized at TCW
“Inflation is running hotter than expected, but I wouldn’t say it’s out of control. We’ve just been kind of consistently in a range that’s higher than what the Fed would like. .. Rates do feel rich. They do feel high, but I think the market has adjusted pretty well to where the rates are and certainly it’s within the range of expectations.
“The credit spreads [for non-agency MBS] have come in throughout the year, and so the [non-agency] securitization market is open, and it’s functioning from the originator through the aggregator to the end buyer. Everyone can still make it work.
“It’s by no means the best market anyone’s ever seen, but [non-agency mortgage] originations are growing. … It’s a market that’s diverse in product types and participants.“
— Dane Smith, senior managing director and president of Verus Mortgage Capital
[Editor’s Note: Kroll Bond Rating Agency (KBRA) expects 2024 issuance for non-agency MBS to be approximately $67 billion, up 22% year over year. Home equity lines of credit (HELOCs) and closed-end second (CES) originations are expected to account for $11 billion of the increase. KBRA’s measure of non-agency loans encompasses the prime jumbo, nonprime/non-QM, and home equity lending spaces, as well as credit-risk transfer deals.]
“The lock-in effect [of homeowners staying in place due to low mortgage rates] has taken so many homes off the market that you’re seeing reduced sales volume, which creates fewer issuances of mortgages so that the market doesn’t have to metabolize that many loans.
“… But you still have this issue that the Fed displaced real money investors [in the agency MBS acquisition market] for a whole business cycle, a decade, [before pulling back from the market starting in 2022] and that market just doesn’t reappear overnight.
“… We’ve never had this many people that have a loan that’s so far below prevailing rates. So, we’re in a part of the cycle that people can’t look to a model and say, ’This is what’s going to happen,’ because we’ve never been here before.
“… Lower interest rates will create more [agency MBS] issuance, but more issuance creates a wider basis [spread from Treasurys] because there’s now a lack of investor demand versus the added MBS supply, and this creates higher primary mortgage rates to account for the lower investor bids for the excess MBS supply.
“… It’s a structural issue that I would love to see more focus on … because if you don’t have a couple of trillion dollars of excess balance sheet out there somewhere that’s priced appropriately, then the homeowner is going to end up paying more for their mortgage than they otherwise would.“
— Sean Dobson, chairman and CEO of real estate investment firm Amherst
“I think agency spreads have a pretty high correlation to interest rate volatility, so when you go from relatively low interest rate volatility, like where we came into April, to where we are today, it’s a pretty big shock to the agency mortgage market.
“And accordingly, you’ve seen agency spreads widen pretty materially. [April has] been a really bad month for agency mortgage-backed securities. … The supply-demand for agency MBS is probably in balance, however, and it’s in balance because there’s very light creation of new agency MBS [about $232 billion of agency MBS issuance in Q1 2024, compared with $223 billion in Q1 2023, according to the Securities Industry and Financial Markets Association (SIFMA)].
“… The money managers who really drove spreads tightening [in the agency market] from middle of last year to the end of last year, they’ve become pretty overweight in agency MBS. … But there’s still a lot of annuity money being deployed from annuity sales, and so that should be a continued tailwind [for the overall secondary mortgage market].
“Insurance is really the 900-pound gorilla in the room driving the bus, so they matter a lot, and there’s not a lot of credit creation that can satiate their needs.“
— Ben Hunsaker, portfolio manager focused on securitized credit for Beach Point Capital Management
“You were able to get [MSR] trades off [much of] last year with interest rates somewhat certain. But then when the uncertainty hit [late in the year, with rates declining] that slowed the fourth-quarter [deal volume], and that’s what was reflected [in the number of deals closing] when we came into this first quarter.
“Then all this data starts coming out and it became obvious that [rate cuts were] not going to happen, and that gave a lot more confidence to the buy side. [MSRs tend to price better in a high or rising rate environment because prepayment speeds are reduced. They tend to lose value in a falling rate environment as mortgage prepayments increase, reducing the payout of MSRs.]
“So, look, pricing began to pick up [as it became clear rate cuts were not likely in the near term], but we also saw an interesting phenomenon. And that is the capital that was tied to highly efficient, highly capable [refinance- and home equity loan-focused] recapture platforms decided it was not as concerned about interest rates [going] either way.
“If rates do not move, [they are] comfortable with the pricing that they’re paying today based on just the steady prepayment speeds and the cash flows, and they’re clipping coupons each month based off of those payments coming in. However, when rates do move, they are going to be in position to recapture [those customers via refinancing].
“… So, we now have a strong appetite for the MSR asset, whether it’s out of the money — which to us is below prevailing market rates — or at the money, and we also have a strong demand for both conventional as well as government [MSR assets].
“I will paraphrase a seasoned veteran in the industry that I was talking to recently, who said candidly, ’I have never seen the market like it is today — how extremely active and busy it is.’
“I’m not calling a peak yet. There’s a lot of interest from some pretty significant [investor] sources, who have a lot of capital [and] who are still looking to buy … And it’s driven again by [a desire to] put units on their platform, maintaining efficiencies, while also then having the ability to recapture when — and who knows when — that market opportunity presents itself.“
— Tom Piercy, chief growth officer at Incenter Capital Advisors
[Editor’s Note: Year to date, Incenter has announced auctions for some $15 billion in new bulk MSR deals, which does not include privately negotiated deals.]
“I don’t know if this is the peak or if … rates are going to continue to go up from here, and MSR values are going follow suit or not. But I think people are of the mindset that it’s now higher for longer [on rates].
“It’s hard because of low [housing] inventory levels and higher interest rates to bring in new originations, but that’s the reason why so many of these servicers keep going back to the same well, with a focus on offering cash-out refinance [or closed-end second liens, or home equity lines of credit] to existing customers, given that can be a source of some volume.
“It’s been a strong [MSR] market [so far this year], with some really attractive execution levels that are, dare I say, being influenced by one’s ability to recapture these borrowers. … It’s hard to convince a borrower with a 3% note rate to cash-out refinance into a 7% note rate, but they can still tap their equity by taking out a HELOC or closed-end second without impacting the rate on their first lien.
“I’ve got probably three or four deals I’m currently working on, so [MSR] volume and pricing are strong. We’ve seen some high-5 multiple trades [historically a great deal in this measure of pricing on MSR pools].
“I think [MSR trading volume] this year is going to be on par, if not slightly better, than last year [which would mark the fourth year in a row that the MSR market has recorded trading volume near the $1 trillion level].“
— Mike Carnes, managing director of MSR valuations at Mortgage Industry Advisory Corp. (MIAC)
[Editor’s Note: Year to date, MIAC has announced auctions for some $6.4 billion in new bulk MSR deals, which does not include privately negotiated deals.)
Source: housingwire.com