Forecast plus what’s driving mortgage rates today

Average mortgage rates fell appreciably yesterday. And suddenly they’re matching the record low seen on April 9. Wow! Such bargains were unthinkable a couple of months ago.

Should you wait for them to go down further? Maybe. But you’d be taking a big risk. We think we may be in for yet lower rates. But there are no guarantees. And there are likely to be periods of rises ahead, whatever the overall trend. You might think about locking as close to yesterday’s historic low as you can get.

So, for now, little’s changed. And we remain optimistic that, overall, the Federal Reserve will prevent the most serious rises and may perhaps push mortgage rates even lower in coming days and weeks.

But there’s a lot going on here. And the Fed can only influence some of the forces that affect mortgage rates. So nothing is assured. Read “This week,” below, to discover the essential details.

Market data affecting (or not) today’s mortgage rates

We still see no reason to think markets are currently providing many clues as to what may happen to mortgage rates today. But, in the hope you have insights that we’re missing, here’s the state of play this morning. By about 9:50 a.m. (ET), the data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were mixed and barely moving. (Neutral for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of those down and increases yields and mortgage rates. The opposite happens when indexes are lower
• Gold prices inched higher to $1,754 an ounce from $1,752. (Neutral for mortgage rates*.) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower. But if they’re not worried now …
• Oil prices nudged up to $17.64 a barrel from $17.28 (Neutral for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.) 
• The yield on 10-year Treasurys held steady at 0.61%. A year ago, it was at 2.53%. (Neutral for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though much less so recently
•  CNN Business Fear & Greed index fell to 37 from 41 out of a possible 100 points. (Good for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones

Right now, daily rates are effectively unpredictable. Because they remain untethered from markets — and markets from reality.

Still, we hope the Fed will hold the line against investors who’d like those rates to be significantly higher. And that a trend that’s benign will eventually emerge, punctuated with rises that aren’t too frequent, too sustained or too sharp.

Rate lock advice

I changed my recommendation last week to reflect the success so far of the Fed’s actions. I personally recommend:

• 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.

The Fed might end up pushing down rates further over the coming weeks, though that’s far from certain. And you can expect bad patches.

More 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.

This week

How the Fed’s helping mortgage rates

In an announcement on March 23, the Federal Reserve said it was lifting the previous cap on its purchases of mortgage-backed securities (MBSs). For now, there would be no limit on how much it would spend buying these.

MBSs are bond-like instruments: bundles of mortgages that are traded on a secondary market. Picture a tall pile of different closing documents tied up with string and you’re probably getting the concept of an MBS, even if the reality is often more digital. Chances are, your existing mortgage is tied up in just such a bundle and forms part of one MBS.

And, if you’re currently buying or refinancing a home, it’s the going price of these bundles on that secondary market that more than anything else determines your next mortgage rate. However, as you’re about to discover, it’s not the only determinant.

For reasons explained near the end of this article, the higher the price of MBSs, the lower the rate you’ll pay. Given that the Fed is a uniquely huge new buyer in that market, it should generate increased demand that raises MBS prices and so creates lower yields for investors — and lower mortgage rates for you.

Fed’s been buying $1 million in assets

On April 5, The Financial Times reported, “The US central bank bought more than $1m of assets per second over past two weeks.” [Our emphasis.] While MBSs are only a part of those purchases, the Fed’s clearly not holding back. And there’s little reason to think it’s scaling back its activities yet.

So that’s the theory. But we’ve seen a lot of those crumble to dust in recent weeks. And only time will tell how well this one holds up in practice.

Challenges to the Fed’s program

That Fed program took a while to have an effect on mortgage rates. Indeed, it was only on April 6 that they first dipped lower than they were on March 23, when unlimited purchases were announced. So how come there was a delay? And why do we still see some rises?

Well, there’s a lot going on here. But a big reason may be a resurgence in new applications from consumers for mortgages and especially refinances.

Since late in March, refinances have been elevated, according to the Mortgage Bankers Association (MBA). So, last week, the number of new applications for refinancings was 192% higher than the same week one year ago. And Wednesday’s MBA data, for the week ending April 17, showed them 225% up on the same period in 2019.

So, as you’d expect, current, record or near-record lows for these rates are tempting more homeowners to refinance. But there’s one problem …

Fed may now be main player

… Investors hate refinances, especially if they’re for mortgages that are recent. Each sees a mortgage pulled from an MBS bundle — and a reduction of income and profit on that MBS. Indeed, some investors make actual losses on especially fast refinancings.

So the last thing they want is to replace lost mortgages with ones at an even lower rate and yield. And, understandably, they’re shying away from MBSs. But the law of supply and demand means that lower demand inevitably pushes up mortgage rates. (Remember that counterintuitive point about lower bond prices meaning higher yields and rates.)

So the Fed is trying to resist the market forces that arise when investors vote so decisively with their feet. We still think it likely (though far from certain) that it will get its way in the end and stabilize the market, perhaps pushing mortgage rates even lower in the process. But don’t expect a smooth ride.

Fly meets ointment

Now, there’s another issue rearing its head. Lenders that aren’t banks face cash flow issues arising from the pandemic. Millions of homeowners are already unable to make their monthly mortgage payments in full.

“As of April 23, 2020, more than 3.4 million homeowners — or 6.4% of all mortgages — have entered into COVID-19 mortgage forbearance plans,” according to a news release issued earlier this morning by Black Knight.

And that means loans that are in lenders’ “warehouses” (that are waiting to be sold) are already turning bad before they even reach the secondary market as delinquencies and defaults become more common.

That problem’s likely to get only worse as unemployment and underemployment soar. Importantly, those non-bank lenders currently originate more than half of all residential mortgages. If they find themselves with warehouses overflowing with unsellable MBSs, that could leave them without the cash to lend. And that would see the supply of new mortgages diminish.

Possible removal of fly

But, on Tuesday, the Federal Housing Finance Agency (FHFA) announced that it was capping lenders’ (or, more accurately, servicers’) liability for forbearance issues to four months of payments. Still, Black Knight reckons that will still leave them with a revenues reduced by more than $7 billion.

We’ll have to wait to see if that FHFA cap takes off the pressure. You’d think limiting liability would at least make it easier for mortgage companies to borrow to cover their shortfalls. If things work out that way, it should restore the supply of mortgages.

Meanwhile, the FHFA on Wednesday said that Fannie Mae and Freddie Mac could buy loans that are in forbearance. But insiders are outraged by the deals on offer, according to Inside Mortgage Finance magazine. Because those include “steep loan-level price adjustments,” which mean worse returns for mortgage companies.

Higher rates that are unconnected to MBS prices

Meanwhile, of course, while we’re waiting to see how the FHFA’s initiatives plays out, a reduced supply of any product tends to push prices (or rates in this case) upward. This supply issue happens further down the mortgage production line than where the Fed is tinkering — and from where higher prices mean lower yields and rates.

And a similar thing happens when lenders who can’t cope with sudden tsunamis of demand try to manage their workloads by deterring would-be borrowers through higher rates. So we may sometimes see (or have already seen) higher rates that are unconnected with MBS prices.

You can now understand why we said there’s a lot going on here.

Closing help …

Closing on a real estate transaction is hard enough without the extra obstacles erected by social distancing and lockdowns. So some are trying to dismantle the biggest barriers.

Legislators are currently working on a law that could further facilitate the remote, digital signing of closing documents. That’s generally already legal under the Electronic Signatures in Global and National Commerce Act (E-Sign) and various state laws. But a new bipartisan bill is intended to make it easier and more commonplace at a national level.

Meanwhile, states are trying to help in similar ways. For example, Georgia Gov. Brian Kemp recently signed an executive order allowing, subject to rules, the remote notarization and witnessing of documents via live video links.

And Fannie Mae, Freddie Mac and probably others are being less strict about some aspects of verification. So, perhaps, your employer, working from home without access to paper files, may be able to certify your employment by email rather than provide documentary evidence.

Appraisals sometimes avoidable

Many lenders are already allowing “drive-by” (exterior only) home appraisals or even wholly remote ones based on desk research.

Last Tuesday, National Mortgage Professional magazine reported on a new federal government initiative to get past appraisal issues. Some government-backed loans may no longer need a home appraisal prior to closing, subject to rules and limits:

Federal banking agencies have decided to issue a deferral on appraisals and evaluations for real estate properties as detailed in a joint press release. The interagency statement outlines the parameters of the deferrals and revealed that there is no appraisal necessary for refinance transactions valued at $400,000 or less. Appraisals and evaluations can be made up to 120 days after the closing of a loan transaction.

… But a big issue for closings

But another closing obstacle may prove more difficult to surmount. Many county recording offices have been closed.

And, without access to the title searches and deed filings those provide, some purchases and refinancings may stall. The industry is working to overcome this obstacle. But its response is patchy, as legal website JD Supra reports:

Title insurance companies have issued underwriting bulletins confirming they will provide title insurance coverage for transactions that occur when recording offices will not accept documents for recording. Each title company has its own requirements and limitations, so it is important to confirm those requirements on a closing-by-closing basis.

If you’re affected, talk with your loan officer, attorney or real estate agent.

An economist writes …

On March 16, realtor.com Chief Economist Danielle Hale thought lower rates were coming. “That [Fed buying of MBSs] should stabilize rates and bring them back down lower,” she said on her employer’s website. “They’ll [likely] go back to the low 3% [range]. Might we see rates below 3%? I wouldn’t rule it out.”

Those predictions are still looking sensible. However, they’re not universally shared so you shouldn’t rely on them for future trends. On April 2, the Mortgage Bankers Association’s economists forecast that the rate for a 30-year, fixed-rate mortgage would average 3.6% between now and the start of October — a higher rate than they were forecasting in March.

But, having said that, Fannie Mae and Freddie Mac unveiled their rates forecasts last week (details below). And they both expect them to head lower, more in line with Danielle Hale’s prediction. Indeed, Fannie’s expecting that rate to dip to 2.9% in 2021.

What should you conclude from this? That nobody’s sure about much.

Virus still the biggest factor for mortgage rates

COVID-19 stands for COronaVIrus Disease 2019 and refers to the disease. SARS-CoV-2 (Severe Acute Respiratory Syndrome CoronaVirus 2) is the name of the virus itself. But, whatever you call it, it’s certainly been behind the chaos seen in global markets since Feb. 20. Gosh, a lot can happen in nine weeks.

Until today, we’ve been reporting daily the number of infections and deaths both globally and in the US. But, unlike when we started doing so, those are now widely reported across the media. And our repeating them seems unnecessary. After all, it’s only the virus’s economic impact that affects mortgage rates.

COVID-19 hitting biggest economies hardest

Of the world’s top-10 economies, five (America, Italy, France, Germany and the UK) now count their infections in the hundreds of thousands. All the other five count them in the tens of thousands.

With the exception of Iran, the worst-hit nations are major economies. That’s probably because those are so interconnected and so many people were routinely moving between them for business or pleasure before travel restrictions were implemented.

But, while markets are made up of people who share the fear and empathy of the rest of humanity, their focus isn’t directly on COVID-19’s health implications. Their concern when trading is the virus’s economic consequences, which are a byproduct of the medical ones.

Economic worries

Monday’s collapse in oil prices was partly technical. It was for oil that would be delivered almost immediately and reflected the fact that storage facilities are already very nearly full. But with global demand still so low owing to the pandemic, that shortage of storage capacity isn’t likely to go away. Prices have rebounded since they entered negative territory for the first time ever. But they’re still extremely low.

True, these low prices should eventually benefit consumers at gas stations. But they could also see hundreds of US companies involved in oil exploration and drilling and fracking in real trouble.

Meanwhile, countless other sectors are severely affected, from airlines to restaurants and leisure — and from automakers to financial institutions. Few economists think we’ll escape a recession and some expect a depression.

Yesterday saw the announcement of 4.4 million new filings for unemployment insurance. That takes the total COVID-19 jobs toll in America to over 26 million.

Global threat

As economic data were released yesterday for European countries, including the UK, Jan Vlieghe, a senior policymaker at the Bank of England (Britain’s central bank, so its equivalent of the Fed) suggested:

Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries.

And such mayhem looks unlikely to be confined to Europe. On April 14, the International Monetary Fund (IMF) issued a fairly dire warning. According to a report that day in The Financial Times:

The coronavirus crisis will leave lasting scars on the global economy and most countries should expect their economies to be 5 per cent smaller than planned even after a sharp recovery in 2021, the IMF said on Tuesday.

Forecasting that this year would be the worst global economic contraction since the Great Depression of the 1930s, Gita Gopinath, the fund’s chief economist, said the world outlook had “changed dramatically” since January with output losses that would “dwarf” the global financial crisis 12 years ago.

Don’t take forecasts too seriously

Of course, such forecasts are justifiably worrying and must be taken seriously. But don’t assume that they’re going to prove wholly accurate.

A headline in Monday’s Financial Times summed up the situation during this pandemic when so little is certain: “Banks are forecasting on gut instinct — just like the rest of us.”

And never forget a remark made by the late Harvard economics professor John Kenneth Galbraith:

The only function of economic forecasting is to make astrology look respectable.

Deficit Everest

Meanwhile there’s cause for concern about the US national deficit and debt. On March 25, The New York Times quoted analysts at the Eurasia Group:

The U.S. is likely on pace for an annual deficit of at least $4 trillion and likely higher, in the range of 15-20 percent of G.D.P.

Yesterday, the House of Representatives passed a new $484 billion stimulus bill that could take the deficit above that range. It had already been passed by the Senate on Tuesday. So now, at the time of writing, it is awaiting the president’s signature.

Some economists subscribe to modern monetary theory (MMT), which says we shouldn’t be too bothered by large national debts and deficits in advanced economies. But many still will be.

But markets seem untethered from reality

We said above that markets are untethered from reality. That is, of course, a value judgment. But it’s hard to see why, for example, the S&P 500 had by the Easter weekend bounced back 25% since its low on March 23.

Aren’t investors seeing the same death tolls, infection rates, unemployment rates and GDP forecasts as the rest of us? Do they think company earnings aren’t taking severe hits?

On April 10, The New York Times offered a possible explanation: Markets see all that. But they hope the federal government’s and Federal Reserve’s mass pumping of trillions of dollars into the economy will see the big companies in which they invest emerge largely unscathed.

Indeed, they perceive huge numbers of newly unemployed Americans each week as a plus. Because, politically, those force the administration and Congress to pump in yet more money.

But this strategy’s success depends on a very quick economic recovery (a so-called V-shaped recession) once the COVID-19 threat dissipates. Yes, maybe Wall Street expectations of one will be proved right. But you may wonder whether they should be betting so big on so many unknowable variables. And we’ll continue to say they’re untethered from reality.

Economic reports this week

Since the pandemic took hold, investors have shrugged off virtually every domestic economic report — even those shocking numbers of newly unemployed we’re getting used to seeing each Thursday. Don’t expect this week to be any different.

But don’t be surprised by this. Many of the ones out this week relate to March. And only the last part of that month was seriously affected by the pandemic. So the figures they contain are no more relevant to current economic activity than ones from a year or a decade ago. They’re effectively meaningless.

But, as we explained in the previous section, markets seem determined to go their own way, no matter what the real world is doing. So it would be no surprise if they ignored this week’s April figures, too. Those include purchasing managers indexes (PMIs) on Thursday and the consumer sentiment index on Friday.

Forecasts matter

More normally, any economic report can move markets, as long as it contains news that’s shockingly good or devastatingly bad — providing that news is unexpected.

That’s because markets tend to price in analysts’ consensus forecasts (below, we use those reported by MarketWatch) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect.

And that means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead.

Although there are exceptions, you can usually expect downward pressure on mortgage rates from worse-than-expected figures and upward on better ones. However, for most reports, much of the time, that pressure may be imperceptible or barely perceptible.

This week’s calendar

This week’s calendar for important, domestic economic reports comprises:

• Monday: Nothing
• Tuesday: March annualized existing home sales (actual 5.27 million homes; forecast 5.32 million)
• Wednesday: Nothing
• Thursday: Weekly jobless claims to April 18 (actual 4.4 million new claims for unemployment insurance; forecast 4.0 million). March new home sales (annualized actual of 627,000 new homes sold; forecast 628,000). April PMI flashes* from Markit for the manufacturing sector (actual 36.9 index points; no forecast but 48.5 in March) and the services sector (actual 27.0 index points; no forecast but 39.8 in March)
• Friday: April consumer sentiment index (actual 71.8 index points; forecast 68.0). Also March durable goods orders (actual -14.4%; forecast -12.0%) and core capital goods orders (actual +0.1%; forecast -8.5%)

*PMI stands for purchasing managers index and is an indicator of likely future economic activity. A flash is an initial reading that is subject to subsequent refinement and change.