Mortgage Rates May Fall Even Lower

How low can mortgage rates go?

It seems like mortgage interest rates keep falling to new lows, largely thanks to a struggling economy.

The 30-year fixed-rate mortgage fell to 3.56 percent with an average point of 0.7 for the week ending July 12, down from 3.62 percent the previous week, according to Freddie Mac. At the same time, the 15-year fixed-rate mortgage dropped to 2.86 percent with an average 0.7 point, down from 2.89 percent from the previous week. This time last year, the 30-year fixed-rate mortgage averaged 4.51 percent, and the 15-year was at 3.65 percent.

A poor jobs report for June helped decrease long-term Treasury bond yields and mortgage rates. Only 80,000 jobs were created, not enough to make a dent in the 8.2 percent unemployment rate.

Homebuyers and current homeowners, as well as mortgage professionals, are probably wondering if rates can drop even more. Homeowners may be wondering if they should put off their mortgage refinance in a bid to lock into an even lower interest rate.

Wait for Lower Rates?

Home buyers might be thinking about delaying a home purchase for another year a few more months to wait for a better rate. Perhaps they think home prices will go down even more, and they figure they’ll be able to buy a larger, better house if interest rates decline a bit more.

Here are some reasons why mortgage rates could drop even more.

Bond spreads. Mortgage rates are higher than usual when compared to Treasury bonds.

Mortgage rates, typically based on Treasury bond yields, are usually about a 1.7 percentage point higher than the 10-yield Treasury bond yield. But recently the difference between mortgage rates and those bond yields, or the spread, been has more than 2 percentage points higher.

The euro zone. The ongoing euro zone debacle, which shows no signs of ending, could prompt investors to put even more of their money into Treasuries. That would drive both Treasury yields and mortgage rates even lower. European leaders appear to be dedicated to austerity measures that have proven to be a failure.

Drastically slashing public spending and raising taxes in an effort to decrease countries’ debt have decreased government revenues and worsened recessions. Recession in Europe will probably be a drag on the U.S. economy, as Europeans will have less money to buy American goods.

Plus, financial markets will probably continue to fear that break up of the euro zone will create a financial crisis that spreads to this country. Many European banks are highly interconnected with the U.S. financial system, and our fragile economy remains vulnerable in this integrated financial landscape.

Quantitative easing. The Federal Reserve might pursue another round of quantitative easing, a so-called QE 3, in which it purchases large amounts of bonds in an effort to drive down interest rates. Although only a few Fed board members now advocate more easing, other members say they will support it if economic conditions worsen.

The Fed has already extended its Operation Twist – selling short-term bonds and buying long-term bonds in an effort to drive down long-term interest rates – through the end of the year.

China. A slowing Chinese economy could export more economic troubles. The signs of an approaching economic meltdown are clear, notes an article in the journal, Foreign Policy. Chinese businesses are obtaining fewer loans. Interest rates have been cut. Manufacturing output has tanked. Imports are flat, and GDP growth projections are down. Real-world signs, like fire sales of government property, falling pork prices, and wealthy Chinese moving their money overseas, and incidents of social unrest, are evidence of a faltering economy.

Consumers Benefiting from Low Interest Rates

While low home loan rates show the feebleness of the global economic recovery, homeowners benefit by being able to refinance at much lower rates. If home loan rates are not at record lows, they’ll probably stay pretty close. The average 30-year fixed has stayed below 4 percent for 16 weeks, while the average 15-year fixed has remained under 3 percent for seven weeks, according to Freddie Mac.

But then again, anything is possible. It’s possible that the world economy will unexpectedly rebound and euro zone leaders will suddenly agree on a comprehensive solution to their fiscal crisis. Instead of waiting for mortgage rates to drop even more, home buyers and homeowners should lock into a low mortgage rate when it’s in their best financial interest.


Where Will Mortgage Rates Go in 2011?

Last week’s Treasury auctions’ effects heavily amplified; High volatility still common in fixed-income markets; Traders coming back this week; Strong beliefs that economic growth in 2011 will be significant; What about housing?

The final week of 2011 was quite the roller coaster for mortgage originators and home buyers waiting to lock in their mortgage rate. After a very weak 5-year Treasury note auction on Tuesday, mortgage pricing worsened by almost 1 point, roughly the equivalent of a 0.25% increase in interest rates. Then, on Wednesday, 7-year notes were on the block. Surprisingly, that auction saw the healthiest bidding in many auctions. Mortgage pricing reversed, more than offsetting Tuesday’s losses. Activity was minimal on Thursday, in spite of the best weekly unemployment claims report since 2008, while Friday, mortgage pricing improved on minimal activity, as traders closed out positions to close the year.

The key characteristic seen recently in fixed-income markets, such as those for Treasury debt and mortgage-backed securities is volatility. Movement in markets since the November 3rd announcement of “Quantitative Easing II” has been exaggerated, with daily pricing changes often more than twice the previously common change. That is to say, if mortgage originators had become accustomed to mortgage prices changing by 1/4 to 1/2 point on a busy day, since November 3rd, the new reality is that it isn’t uncommon for mortgage prices to change by 1/2 to 1 point. That type of change results in very rapid shifts in mortgage rates, and volatility like that makes home buyers nervous.

A significant factor that has contributed to this volatility is low trading volume. Traders are tending to purchase fewer Treasury secruities, which is contributing to the exaggerated swings we have seen in markets. This is not at all uncommon in the holiday season. From the Monday before Thanksgiving through New Year’s Day, many bond traders schedule time off from work, as do professionals in many other industries. The result of this is that the remaining traders are more likely to be swayed when markets make a sudden move in one direction or another. Short sellers, betting that mortgage prices will continue to worsen, also contributed to this effect.

On Wall Street, the consensus is that 2011 will be a strong year for the economy. Recent economic data (other than employment and housing data) has borne this out, with most of the regional Federal Reserve Bank business indexes showing positive signs for growth, inflation starting to pull away from zero, and retail sales figures suggesting the just-ended holiday season was the best in 4 or 5 years. The Federal Reserve, on the other hand, isn’t so sure, and is continuing its $600 billion asset-purchase program, intended to provide some stimulus to the economy, but, more importantly, to keep inflation positive.

A too-low inflation rate can lead to economic stagnation much like what Japan experienced in the latter part of the 20th century. The bigger concern is that the economy might actually slip into deflation, in which prices of goods and services decline over time. This causes consumers to defer purchases, expecting lower prices, which leads to lower economic growth and still-lower prices. It can be a very difficult economic cycle to break.

If recent data is correct (and we’ll have a very good idea on January 28th when the advance reading on 4th quarter GDP is released), we should expect mortgage rates to continue rising gradually, with the 30-year fixed rate mortgage staying between 5%-6% for most of 2011, barring other significant economic shifts. If, however, the Fed is correct, and economic growth has been overestimated, mortgage rates could correct significantly later this month, likely bringing the average 30-year fixed rate back below 4.5%. At present, according to Freddie Mac, the average 30-year fixed rate is 4.86% with an average of 0.8 points.

This week will provide a significant test for mortgage rates, as the most significant data of any month is published: employment market data. November was a conundrum, as only 39,000 jobs were added, in spite of continual declines in weekly unemployment claims. When we get a reading on December, it is hoped the picture becomes much clearer. Here’s what to expect later this week:


  • ISM Manufacturing index
  • Construction spending


  • Factory orders
  • Same-store sales
  • Fed minutes


  • ADP employment – private payrolls
  • ISM Non-manufacturing


  • Weekly unemployment claims
  • Monster employment index


  • Ben Bernanke speaks

All the key data points this week hit Americans in their pay checks. Are those checks growing? We’ll know by Friday. If they are, then predictions of a better-than-expected 2011 may come true.

But what about housing? Housing led the US economy into the Great Recession, as home prices tumbled when many owners were unable to make their payments, whether initially due to predatory lending, poor underwriting, or poor consumer choices, or later as the initial effects of the crisis sparked wave after wave of layoffs. Housing data has been dismal since the expiration of the home buyer tax credit last June. Because so many middle-class Americans held such a large proportion of their wealth in their homes, this has precipitated the largest broadening in the wealth gap in decades.

Consumer confidence will not rebound strongly until consumers are confident of when home prices will stop falling. At present, there are between 9-11 months of housing inventory on the market, and housing experts suggest there are many more months worth of inventory that have yet to be placed on the market. Will 2011 be the year that housing markets hit bottom? Check back here regularly to find out.

If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

Poor Data Lead to Fed Action; Quiet Week Ahead

Federal Reserve to reinvest principal payments on MBS investments into Treasuries; Tepid growth in Japan’s economy to drive Monday’s market activity

For several weeks now, we have seen mounting evidence that the economic recovery is not as strong as hoped. Rising unemployment claims, weaker than expected GDP growth, and poor consumer confidence combined to cause the Federal Reserve Open Markets Committee to add yet another to its surprising moves during the current downturn. The Fed’s primary policy tool, the Fed Funds Rate, has been stuck at a range between 0.00% and 0.25% since December, 2008.

Since then, regulators have come up with several never-before-attempted mechanisms to bolster the economy and stabilize the banking system, among them:

  • $1.25 trillion purchases of mortgage-backed securities
  • Paying interest to banks on reserves held by the Fed
  • Creating a system to allow asset backed loans like car loans and business equipment loans
  • Term deposit facility to manage bank reserves

Recently, though, the Fed has become worried that the current low interest rate environment is causing the unwinding of some of its actions. With mortgage rates currently averaging 4.44% on the 30-year fixed, demand for refinances is extremely high. Many of the loans currently getting refinanced are of a very recent vintage, some less than a year old. The Fed bought its mortgage-backed securities between November 2008 and March 2010, meaning that the majority of the loans in that pool of holdings were originated between September 2008 and January 2010.

Now those refinances are causing the MBS on the Fed’s balance sheet to be retired more rapidly than expected, and that is quite worrisome. When a loan is prepaid, funds are deducted from the bank providing the refinance, and passed to the bank getting paid off, which then passes those funds to investors holding mortgage-backed securities. Normally, this is fine, because those investors will simply reinvest the funds in new MBS or other securities.

The Federal Reserve, however, needs to have a policy in place to allow it to invest funds in open markets. Because it hasn’t had such a policy, funds it has received from those prepayments have lingered in the Fed’s coffers, and this is having the effect of reducing the money supply available to lend, making loans harder to obtain. On Tuesday, the FOMC announced it would use funds received from prepayments on its MBS holdings to purchase Treasury securities on the open market, effectively allowing it to return those funds into the financial system.

Markets reacted strongly to this on Tuesday and again on Wednesday, pushing treasury yields down by 12 basis points. Mortgage pricing improved, but not to the same degree, as traders sought the extra safety offered by the government backed securities. The 10-year Treasury currently yields just under 2.70%. Some analysts suggest that it could fall as low as 2.50%, which would cause further improvements in mortgage rates.

In the weak ahead, there is actually a very small amount of data coming, most of it weekly data. Specifically, we’ll hear on the following:


  • Empire State Manufacturing Index
  • Housing Market Index


  • Producer Price Index
  • Housing Starts
  • Industrial Production


  • Purchase Mortgage Applications


  • Unemployment Claims


  • Nothing

All-in-all, this is a pretty light week compared to some of what we’ve seen lately. It is more likely that mortgage and treasury rates will be driven by activity in the stock market this week by a factor often referred to as the stock lever. Essentially, this phenomenon is like a see-saw: when stock prices go up, bond prices go down, and vice-versa. I suspect that it will be in full force this week in the absence of much significant data.

Monday’s market activity will start with the effects of yesterday’s report on economic growth in Japan. Japan’s economy grew a mere 0.1% in the 2nd quarter, suggesting that its economy is faltering. Part of this should come as no surprise; a substantial portion of Japan’s economic activity comes from exporting to the US, and US consumers are limiting their spending. I suspect this will cause mortgage pricing to improve today.

If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

Fed Backs Off on YSPs after Listening to Consumers

We should be very grateful that the Fed officials don’t have to worry about re-election and pandering to the uninformed. Instead of running around characterizing lenders as evil just to suck up to voters, the Fed actually did a little homework. And in its study the fed discovered that, gawrsh, consumers actually don’t give a rat’s, um, tail, about YSP as long as they can shop and feel confident that they are getting a fair deal. And the fact that 85% of them choose loans with YSPs so they don’t have to come in with cash out of pocket speaks for itself.

Funny, the best LOs get that way by listening to their clients and looking at facts — not just pulling off a dog-and-pony sales job. Now if our leaders would put down the puppies and call off the ponies before signing off on a mortgage rescue plan, we’d all be better off. Thanks again, Fed.

Income: Define "Proof"

A Time article entitled Fed to Curb Shady Home-Lending Practices claims that the Fed seeks to “bar lenders from making loans without proof of a borrower’s income.” Is this really necessary? Fed economist William Emmons concluded in a recent study that intervention makes housing market conditions more volatile and artificially keeps the market from correcting itself. Self-correction generally happens sooner and is therefore less extreme. If left to itself the mortgage financing market will determine what loans lose money and which borrowers are most likely to successfully repay mortgages. Fix the accountability problem and you fix the “shady” lending problem. Lenders who will bear the consequenses of their decisions are unlikely to lend to someone who can’t repay the loan.

But we’ve heard that a million times so I’m not going there. I just have a practical question: how do you define “proof of income?” Does the Fed mean that those whose income doesn’t fall within Fannie or Freddie’s definition of “proof” are out of luck? For example, I had a self-employed client (a developer) whose business operated on weird cycles. He would experience huge outgo, often generating a loss or a tiny income at best for a year or two, followed by ginormous profits. His income averaged in the mid-six figures and he had the assets to back it up. I documented this with several years’ tax returns and a letter from his CPA. However, underwriters required that we take the lowest year’s income (happened to be the most recent) when calculating ratios; naturally negative income isn’t going to get you approved. So we went with stated income financing and all was well.

I feel that the proof we offered should have been adequate, and I hope that the Fed will allow alternative ways of documenting income, such as bank statements showing cash flow, or a statement from an accountant explaining why this year’s income is more representative of the true picture because it isn’t offset by start-up costs. In other words, I hope in the name of reform we don’t lose common sense. Too much of that has disappeared already.