Forecast plus what’s driving mortgage rates today

Average mortgage rates yesterday rose very slightly for a third consecutive day. Of course, they remain extraordinarily low by almost every standard.

We’ve been warning consistently that there will be days and longer periods of rises punctuating what we still hope will be a gentle downward trend. The Federal Reserve’s interventions in the mortgage market should, in theory, create that. But other factors are in play. What are they? Read on.

So, for now, we remain optimistic that, overall, the Fed will prevent the most serious rises and may perhaps push mortgage rates lower in coming days and weeks. But questions about the effectiveness of its interventions are growing.

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 all appreciably higher. (Bad 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 climbed to $1,730 an ounce from $1,689. (Good 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 increased to $14.70 a barrel from $1.52 (Bad 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 rose to 0.60% from 0.57%. A year ago, it was at 2.57%. (Bad for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
•  CNN Business Fear & Greed index inched lower to 41 from 42 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

Recent mortgage rate rises may turn out to be a blip. But don’t bank on it. 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. If you think that was premature, you should consider locking before my suggested time. 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.

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 this morning’s MBA data, for the week ending April 17, showed them 225% up on that period in 2019.

So, as you’d expect, current, 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 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. Many homeowners are already unable to make their monthly payments in full (see “Americans already struggling with mortgage and rent payments,” below).

And 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 without the cash to lend, the supply of new mortgages could diminish.

Possible removal of fly

But, yesterday, 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.

We’ll have to wait to see if that 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.

Of course, actual banks’ mortgage operations are also struggling. Last week, several of the biggest banks unveiled dire figures. And many are tightening their lending criteria and are now demanding higher credit scores and down payments.

Higher rates that are unconnected to MBS prices

Meanwhile, of course, while we’re waiting to see how the FHFA’s initiative 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 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 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. Soon, 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.

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 less than nine weeks.

The virus now has a confirmed presence on five continents and in 210 countries and territories. Overnight figures show COVID-19 has been confirmed in 2,580,637 (up from 2,503,392 yesterday) cases around the world, and has killed 179,069 (up from yesterday’s 171,796).

Here at home, the US has 819,321 cases, up from 792,938 yesterday. It ranks No. 1 on a list of countries with the most infections, with more than the next four worst-affected nations added together. Indeed, New York state alone has significantly more infections than Spain, the most badly hit nation after America.

Worse, with 45,355 (42,518 yesterday), we are, tragically, also first for COVID-19-related deaths, although considerably lower on a per capita basis. But we’re at an earlier stage of infection than others with higher per-head numbers. So the prospects are grim.

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 and Turkey, 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.

Biggest human costs to come

But an even bigger human tragedy may emerge later in countries with emerging economies. Many of those lack medical resources and expertise, as well as the running water that’s essential for hand-washing. Meanwhile, they have many densely packed slums in which isolation and social distancing are next to impossible.

Last Friday, the World Health Organization warned that Africa could become the pandemic’s next epicenter. And, on April 18, The New York Times reported that 10 African nations don’t have a single ventilator between them. It went on:

In all, fewer than 2,000 working ventilators have to serve hundreds of millions of people in public hospitals across 41 African countries, the World Health Organization says, compared with more than 170,000 in the United States.

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.

Domestic 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.

True, the fall should eventually benefit consumers at gas stations. But it could also see hundreds of US companies involved in oil exploration and drilling and fracking in real trouble. Meanwhile, many other sectors are badly affected, from airlines to restaurants and travel to finance.

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. But don’t assume that they’re going to be accurate. A headline in Monday’s Financial Times summed up the situation during the 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. 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 US Senate passed a new $484 billion stimulus bill that could take the deficit above that range. Following agreements across parties, that legislation is expected to pass the House and quickly be signed by the president.

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.

Americans already struggling with mortgage and rent payments

Inevitably, the financial pain felt by many Americans is beginning to impact the housing market. A survey by Apartment List, published April 8, found that one in four Americans failed to pay their housing costs in full this month. And homeowners were unable to make their full mortgage payments roughly as frequently as tenants struggled with their rents.

Twelve percent of respondents made no payment and about the same proportion made a partial one. Perhaps surprisingly, the report says that nearly 17% of households making six-figure incomes weren’t able to pay in full. 

You can see why non-bank mortgage lenders are worried about their liquidity.

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 won’t take 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 in cash 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 (forecast 4.0 million new claims for unemployment insurance). March new home sales (annualized forecast of 610,000 new homes sold). April PMI flashes* from Markit for the manufacturing sector (no forecast but 48.5 in March) and the services sector (no forecast but 39.8 in March)
• Friday: April consumer sentiment index (forecast 68.0 index points). Also March durable goods orders (forecast -12.0%) and core capital goods orders (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.