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Rate lock advice

My recommendation reflects the success so far of the Fed’s actions in keeping rates uberlow. I personally suggest:

• LOCK if closing in 7 days
• LOCK if closing in 15 days
• FLOAT if closing in 30 days
• FLOAT if closing in 45 days
• FLOAT if closing in 60 days

But it’s entirely your decision. And you might wish to lock anyway on days when rates are at or near all-time lows.

The Fed may end up pushing down rates even further over the coming weeks, though that’s far from certain. And, separately, continuing bad news about COVID-19 could have a similar effect through markets. (Read on for specialist economists’ forecasts.) But you can expect bad patches when they rise.

As importantly, the coronavirus has created massive uncertainty — and disruption that seems capable of defying in the short term all human efforts, including perhaps the Fed’s. So locking or floating is a gamble either way.

Important notes on today’s mortgage rates

Freddie Mac’s weekly rates

Don’t be surprised if Freddie’s Thursday rate reports and ours rarely coincide. To start with, the two are measuring different things: weekly and daily averages.

But also, Freddie tends to collect data on only Mondays and Tuesdays each week. And, by publication day, they’re often already out of date.

By all means, rely on Freddie’s accuracy over time. But not necessarily each day or week.

The rate you’ll actually get

Naturally, few buying or refinancing will actually qualify for the lowest rates you’ll see bandied around in some media and lender ads. Those are typically available only to people with stellar credit scores, big down payments and robust finances (“top-tier borrowers,” in industry jargon). And, even then, the state in which you’re buying can affect your rate.

Still, prior to locking, everyone buying or refinancing typically stands to lose when rates rise or gain when they fall.

When movements are very small, many lenders don’t bother changing their rate cards. Instead, you might find you have to pay a little more or less on closing in compensation.

A new blow for Fannie and Freddie refinances

This is the story behind yesterday’s sharp increase in mortgage rates. If you’re planning to refinance to a loan backed by Fannie Mae or Freddie Mac, you may have to pay more for the privilege. Because the Federal Housing Finance Agency, which regulates the two enterprises, has just imposed a new, additional closing cost.

Unless your loan closes before the end of this month, the FHFA will make you pay an additional 0.5% of the loan amount, supposedly to cover additional market risk. For a $200,000 loan, that’s $1,000 added to your closing costs (divide your loan amount by 200).

However, if you’ve already locked in your refinance, it may be the lender who picks up the tab. But mortgage companies often operate on wafer-thin margins. So they’re passing the cost on to new applicants and those who are yet to lock. Hence yesterday’s higher mortgage rales all round.

The future

Overall, we still think it possible that the Federal Reserve’s going to drive rates even lower over time. And, following the last meeting of its policy committee, the organization confirmed that it planned to maintain this strategy for as long as proves necessary. At a news conference, Fed chair Jay Powell promised:

We are committed to using our full range of tools to support our economy in this challenging environment.

However, there was a lot going on here, even before the green shoots of economic recovery began to emerge. There’s even more now. And, as we’ve already seen, the Fed can only influence some of the forces that affect mortgage rates some of the time. So nothing is assured.

What economists expect for mortgage rates

Mortgage rates forecasts for 2020

The only function of economic forecasting is to make astrology look respectable. — John Kenneth Galbraith, Harvard economist

Galbraith made a telling point about economists’ forecasts. But there’s nothing wrong with taking them into account, appropriately seasoned with a pinch of salt. After all, who else are we going to ask when making financial plans?

Fannie Mae, Freddie Mac and the MBA each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.

The numbers

And here are their latest forecasts for the average rate for a 30-year, fixed-rate mortgage during each quarter (Q1, Q2 …) in 2020. Fannie updated its forecasts on July 14 and the MBA refreshed its the following day. Freddie’s, which is now a quarterly report, was published in mid-June.

So none of the forecasters is expecting a quarterly average below the 3.0% mark this year. Of course, that doesn’t exclude daily or weekly averages below that level during any quarter. After all, quarterly averages can include some quite sharp differences between highs and lows.

Both Fannie and the MBA were a bit more optimistic about rates in their July (monthly) forecasts. And that’s leaving Freddie’s June (quarterly) one looking stale.

What should you conclude from all this? That nobody’s sure about much but that wild optimism about the direction of mortgage rates might be misplaced.

Further ahead

The gap between forecasts is real and widens the further ahead forecasters look. So Fannie’s now expecting that rate to average 2.9% through the first half of next year and then inch down to 2.8% for the second half.

Meanwhile, Freddie’s anticipating 3.2% throughout that year. And the MBA thinks it will be back up to 3.4% for the first half of 2021 and 3.5% for the second. Indeed, the MBA reckons it will average 3.7% during 2022. You pays yer money …

Still, all these forecasts show significantly lower rates this year and next than in 2019, when that particular one averaged 3.94%, according to Freddie Mac’s archives.

And never forget that last year had the fourth-lowest mortgage rates since records began. Better yet, this year may well deliver an all-time annual low — barring shocking news. Of course, shocking news is a low bar in 2020.

Mortgages tougher to get

The mortgage market is currently very messy. And some lenders are offering appreciably lower rates than others. When you’re borrowing big sums, such differences can add up to several thousands of dollars over a few years — more on larger loans and over longer periods.

Worse, many have been putting restrictions on their loans. So you might have found it harder to find a cash-out refinance, a loan for an investment property, a jumbo loan — or any mortgage at all if your credit score is damaged.

All this makes it even more important than usual that you shop widely for your mortgage and compare quotes from multiple lenders.

Economic worries

Mortgage rates traditionally improve (move lower) the worse the economic outlook. So where the economy is now and where it might go are relevant to rate watchers.

The president’s weekend announcements

In an attempt to cut through the partisan logjam in Congress, President Donald Trump signed a number of executive orders and memorandums over the weekend.

Some hoped the president’s initiative might be a catalyst for legislators on Capitol Hill, who have failed to come up with their own stimulus package. But no. The Senate is now in recess and isn’t due back until next month.

What and why

The measures are intended to boost the economy, principally by providing the unemployed with $300 in weekly benefits (the White House has clarified that only the few whose states wish to chip in $100 could get $400) and by suspending payroll tax payments for the last four months of this year for those earning less than about $100,000.

Another order seeks to moderate the number of evictions that the pandemic might produce. And a fourth might provide assistance for those paying student loans.

These measures have to overcome two hurdles. First, experts are divided over the legality and constitutionality of the initiatives. And, when he announced them, the president himself acknowledged that some of his actions might be challenged in court.

Practical issues

And, secondly, some point to practical problems that could undermine the measures. Not least among these is the time it might take to implement them. On Tuesday, Treasury Secretary Steven Mnuchin said he hoped unemployment relief might start to flow “within the next week or two.”

But some doubt the likelihood of that. It took some states many weeks or even months to start paying the now-expired Pandemic Unemployment Assistance program.

And there are other practical issues. The money will apparently come from $44 billion in FEMA funds, leaving that agency with limited resources to cope with a future disaster. But some say $44 billion would fund the president’s program for roughly five weeks. And that program would only help those receiving at least $100 in state unemployment benefits, leaving those hardest hit with no additional aid.

Payroll problems

The payroll tax initiative is at least as fraught. Employers will be asked to suspend withholding tax for those last four months of the year. But there are concerns that many won’t cooperate.

That’s because their employees will still owe the tax whether or not it’s withheld. And they will not be grateful if they’re faced with huge bills next year. As significantly, employers are legally liable for shortfalls that arise through failing to withhold taxes properly.

So many may protect themselves and their people by creating escrow accounts into which withheld taxes are put — or at least wait until details of the program are clearer. And that would defeat the object of the executive order, which was to quickly put more money into consumers’ pockets.

The president says he hopes the unwithheld tax will ultimately be forgiven. But that’s not currently in his gift.

Lesser measures and their issues

The measure concerning evictions only directs the Department of Health and Human Services and the Centers for Disease Control and Prevention to “consider” the necessity of further suspending evictions. It has no immediate effect.

A fourth initiative waived interest for a period on student loans and suspended collection of principal payments.

Politics a growing issue

The threats to the economy that stem from the current Congressional deadlock are obvious. And you can see why the president sought to intervene.

There may be sound ideological and long-term economic reasons for discontinuing additional unemployment benefits. But, in the short term, that might impact millions, including those who don’t directly receive them.

Most obviously, landlords may not receive their rents and have to go to the expense of evicting tenants and finding new ones, while being unable to pay their own mortgages. And lenders (those who provide credit cards, personal loans, auto loans and so on, as well as mortgages) could see defaults, repossessions and foreclosures soar across broad population groups.

As importantly, some economists warn that letting the federal benefit lapse risks hitting consumer spending, something that could quickly affect the wider economy. On Aug. 3, The Financial Times had a headline, “US economy in peril as unemployment payments expire.”

Consumers key to US economy

Think The Financial Times was exaggerating? Maybe. But the US economy relies heavily on consumer spending for its growth.

Markets seem untethered from reality

And yet, in spite of all the above, on June 30, US stock markets celebrated the end of their best quarter for more than a decade — by some measures since 1987. Various record highs have been reached since.

Many economists are warning that stock markets may be underestimating both the long-term economic impact of the pandemic and its unpredictability. And some fear that we’re currently in a bubble that can only bring more pain when it bursts. ING Chief International Economist James Knightley was quoted by CNN Business on Aug. 2 thus:

With virus fears on the rise, jobs being lost and incomes squeezed, we feel the recovery could be much bumpier than markets seemingly do, and think we are in for some data disappointment over the next couple of months.