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Rate lock advice

My recommendation reflects the success so far of the Fed’s actions in keeping rates uberlow combined with relatively benign markets. 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

Long-term hope?

Last week, the Federal Reserve changed its long-standing policy. From now on, it will prioritize boosting employment over containing inflation. Of course, it has no intention of letting inflation run riot. But the subtle shift is important.

And it may well lead to low or lower interest rates (including those for mortgages) for years to come. However, don’t expect a smooth ride. When it comes to mortgage rates, ups and downs are pretty much inevitable.

A new burden for mortgage applicants

Last Wednesday’s Wall Street Journal reported:

Some mortgage lenders are asking customers taking out a mortgage to confirm they don’t intend to seek forbearance, a move meant to keep losses low during a pandemic that has put millions of Americans on shaky financial footing. The unusual requirement comes in the form of a new document included in many borrowers’ closing paperwork. While the language varies, the forms generally tell borrowers that they won’t be allowed to skip payments until their loans are backed by the government, according to forms reviewed by The Wall Street Journal.

In brighter news for those affected by COVID-19, the Federal Housing Financing Agency announced that it was extending moratoriums on single-family foreclosures and real estate owned evictions until Dec. 31 at the soonest, according to NMP Daily. That applies only to Fannie Mae and Freddie Mac loans, which the FHFA regulates.

And yesterday, the FHFA said it would allow Fannie and Frddie to continue to buy loans that meet their standards even if they’re in forbearance, although only until the end of this month. That takes pressure off some lenders.

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.

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 Mortgage Bankers Association (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 latest 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. In mid-August, Fannie and the MBA refreshed theirs. Freddie’s, which is now a quarterly report, was published in mid-June.

The Aug. 17 update from Fannie included the prediction of a 2.9% average rate for the fourth quarter of this year. That was the first time we’ve seen a forecast from any of these organizations for a sub-3.0% rate during 2020.

Of course, none of these quarterly forecasts excludes daily or weekly averages below (or above) the levels they suggest during any quarter. After all, quarterly averages can include some quite sharp differences between highs and lows.

Fannie and the MBA were a bit more optimistic about future rates in their August (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 2.8% during the first quarter of next year and then inch down to 2.7% for the remainder of 2021.

Meanwhile, Freddie’s anticipating 3.2% throughout that year. And the MBA thinks it will be back up to 3.1% for the first three quarters of 2021 and then nudge up to 3.2% for the last. Indeed, the MBA reckons rates will average 3.6% 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.

The FHFA debacle

This is the story behind the sharp increases in mortgage rates on Aug 13 and 14. 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 imposed a new, additional closing cost.

This only applies to those Fannie and Freddie refinances with balances higher than $125,000. And HomeReady and Home Possible refinances are exempt.

Unless your loan closes before Dec. 1 (it was Sept. 1 before last Tuesday), 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).

That Dec. 1 cutoff date applies to the date on which Fannie or Freddie actually guarantees your loan. And that may be after you close. So, if you’re after one of their refinances and want to stand a good chance of getting in under the wire, you need to get a move on.

Change from the FHFA — Aug. 25 announcement

Until last Tuesday, if you’d already locked in your refinance but would close after Aug. 31, it may have been the lender who picked up the tab. But mortgage companies often operate on wafer-thin margins. So they passed on the cost — through higher mortgage rates — to new applicants (and those who are yet to lock) for all types of mortgages. Hence the higher mortgage rates all round following the announcement.

Last Tuesday, the FHFA caved under pressure from the mortgage industry and legislators. It hasn’t scrapped the new fee. But it has put back its implementation by three months. And that should get lenders off the hook for nearly all currently locked loans, and allow them to pass the new fee directly to the borrowers affected rather than spread the pain across all new borrowers.

It may well be that last Wednesday’s big fall in average mortgage rates was a result of those lenders adjusting to the previous day’s news.

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 Aug. 19 release of the minutes of the July meeting of the Fed’s top policy committee (the Federal Open Market Committee or FOMC) made sobering reading. In particular, they contained concerns about the:

1. Uncertainty and long-term economic risks created by the pandemic
2. Expiration of additional federal benefits under the Cares Act “against the backdrop of a still-weak labor market”
3. Slowing of the initial recovery as earlier in the summer the coronavirus moved into previously unaffected parts of the country
4. Possibility of banks and other lenders soon tightening their lending criteria in ways that could “restrain the availability of credit to households and businesses”

Fed concerned about employment

Perhaps most worryingly, the minutes also said:

The projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast.

That thinking may well have influenced the Fed’s decision last Thursday to loosen its inflation targets. The move should keep interest rates low for some years, something that could encourage investment and boost employment.

So the FOMC painted an unhappy picture. But it’s not the first time it’s done so. And markets seem adept at ignoring it — as long as it promises to keep shoveling money into the economy. It repeated just that promise in those minutes.

The president’s stimulus announcements

In an attempt to cut through the partisan logjam in Congress, President Donald Trump signed a number of executive orders and memorandums on Aug. 8. These were intended to provide an economic stimulus to counter the effects of the coronavirus pandemic.

Some hoped the president’s initiative might be a catalyst for legislators on Capitol Hill, who have failed to come up with their own, more sustainable stimulus package. But no. The Senate is now in recess until early September.

The impact of the executive orders is yet to become clear. There are certainly plenty of practical and possibly legal hurdles to be overcome before they deliver many tangible benefits. As The Washington Post observed on Aug 22:

Just two weeks after President Donald Trump approved executive actions aimed at bypassing stalled stimulus negotiations with Congress, only one state has said it is paying new jobless benefits, few evictions have been paused, and leading employers have made clear that workers will not benefit from the president’s new payroll tax deferral.

COVID-19 still a huge threat

The COVID-19 pandemic and its economic implications are the single biggest influences on markets at the moment. And nationwide trends for new infections and deaths are looking encouraging.

But there remain plenty of states, cities, areas and neighborhoods that are hot spots with rising infections and deaths. And we’re not yet past seeing some shocking figures.

A second wave?

Now there are more grounds for concern. Several countries that seemed to have their outbreaks under control a couple of months ago (including South Korea, Spain, Germany, France and Italy) are experiencing new spikes in infections. As importantly for markets, recent economic data out of Europe suggest this may be causing a slowing of the recovery there.

Is such a second wave the fate that awaits the United States and its economy after it winds down antivirus measures?

Third quarter GDP

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. And the party continues. The Dow Jones Industrial Average and the S&P 500 have just completed their most successful Augusts since 1984 and 1986, respectively, according to Investopedia.

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.

But it’s not just economists who are concerned. According to a survey published last Thursday by Deloitte, 84% of Fortune 500 chief financial officers (CFOs) reckon the US stock market is overvalued. As soberingly, only 42% expect better economic conditions in this country within the next year, according to a CNN Business report.

Economic reports this week

If one economic report dominates the minds of investors, analysts and traders it’s the monthly employment situation report. And that’s out on Friday.

With employment this week’s theme, markets may pay more attention than usual to Wednesday’s ADP employment report, which measures private-sector jobs and is sometimes seen a bellwether for Friday’s official one. Thursday’s weekly jobless figures (new claims for unemployment insurance) might also gain even more importance.

Few others this week are likely to make it onto investors’ radar unless they’re shockingly good or bad.

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.

This week’s calendar

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

• Monday: Nothing
• Tuesday: August ISM* manufacturing index (actual 56.0%; forecast 54.7%) and July construction spending (actual +0.1%; forecast +1.0%). Also, motor vehicle sales** for August will emerge during the day as manufacturers release their sales figures (no forecast but 14.5 million new vehicles sold in July )
• Wednesday: August ADP employment report (no forecast) and July factory orders (forecast +6.0%)
• Thursday: Weekly new jobless claims to August 29 (forecast 950,000 new claims for unemployment insurance). Also the July trade deficit (forecast -$58.7 billion) and revisions to second-quarter productivity (forecast 8.3%) and unit labor costs (forecast 10.5%) figures. Plus August ISM* services index (forecast 57.0%)
• Friday: August employment situation report, comprising nonfarm payrolls (forecast 1.30 million new jobs), unemployment rate (forecast 9.8%) and average hourly earnings (forecast 0.0% — unchanged)

*ISM is the Institute for Supply Mangement, the body that conducts the survey and compiles the figures