Mortgage Rates Continue Grinding Into Historically Low Territory

Mortgages rates were able to scrape together some minor improvements today but continue to have an exceedingly tough time keeping pace with the rest of the interest rate world.  Slow-going gains aside, rates are still chipping away at some of their best levels of all-time.  We’re now getting into territory where only a few days in history have seen more aggressive rate sheet offerings.

The Conventional 30yr Fixed Best-Execution Rate remains unchanged unchanged at 3.875%.  But we’re starting to see some softening of the buydown costs to move to 3.75%, but this varies greatly from lender to lender.  In other words, the most aggressive lenders in the market are increasingly close to being at a 3.75% Best-Execution rate, but when considered in conjunction with the other large lenders’ rate sheets, average Best-Ex isn’t that close to moving down to 3.75% yet.   (read more about Best-Execution calculations). 

If Best-Ex does make it to 3.75% on average, it will be the first time in history that it has done so.  We’re not necessarily expecting this to happen soon, but there’s a sort of tension building in the marketplace that makes it more and more possible if current levels are held or improved upon.  This has to do not only with the low yield levels of interest rates in general, but also with the underlying MBS market.

MBS are the mortgage-backed-securities that most directly influence lenders’ rates.  In order for rates to be as low as they are in the first place, loans with similar characteristics have to be pooled together to spread out risk to investors.  After all, if you invested in a single loan that defaulted, you’d lose 100% of your money even if the default rate for all similar loans was 3%.  But if you invested in 100 similar loans and the expected 3% defaulted, now you’d only lose 3%.

This oversimplified example is one of the reasons that securitization exists (the process of turning lots of little debt obligations into one bigger security).  The securitization process for mortgages divides various pools of mortgages by 0.5% differences in rate.  The bottom line is that your average plain vanilla mortgage will end up being slotted into the dominant 3.5% bucket with the next lowest option being 3.0%.

3.5% is the lowest bucket that’s ever seen much water, and for several reasons that are beyond the scope of our discussion, lenders can’t create new mortgages that fit into 3.0% buckets as safely as they can create 3.5%-bucket mortgages.  This then, is the main reason that 3.875% has been so darn “sticky” as the lowest stable Best-Execution rate in history.  Anything lower starts to become “3.0% bucket” material.  We talked more about this in the past HERE.

Long story short, it will take more time and more stability at low rates before the underpinnings of the MBS market can adapt to make room for those frontier buckets.  Until then, further gains are minimal and hard-fought.  

Tomorrow brings a bit of a high risk event in the form of the 10yr Treasury Note Auction.  This could help us or hurt us, but just like the recent Employment Situation Report, the extent to which a negative result could hurt us probably outpaces the extent to which a positive result would help us.

Today’s BEST-EXECUTION Rates 

  • 30YR FIXED –  3.875%
  • FHA/VA -3.75%
  • 15 YEAR FIXED –  3.125-3.25%
  • 5 YEAR ARMS –  2.625-3. 25% depending on the lender


Ongoing Lock/Float Considerations 

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

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