What Mortgage Rates Will Do Next Year

What Mortgage Rates Will Do Next Year,
(from people who usually get it wrong)

Bajak and Associates

Looking back at the events that have derailed mortgage rates’ return to ‘normalcy’ over the past few years is unsettling

Rates for home loans have spent the past decade or so doing anything but what’s expected of them. Every year, it seems, the general consensus is that in the coming months, financial conditions will finally get back to “normal,” taking mortgage rates with them. And every year something has brought that “normalization” to a screeching halt.

In 2015, for example, shock-and-awe bond-buying by the European Central Bank helped push bond yields into negative territory in Europe and behind. In early 2016, markets were rocked so badly by concerns about earnings that there were fears of another recession – and then rocked again by the upset Brexit vote.

2017, which started off with concerns about surging bond yields under a pro-growth, anti-tax president, instead saw many months of a “Trump slump” when tax reform took a while to materialize.

Mortgage rates in 2018 may be the closest thing to “normal” we’ve seen in a long time. With two more weeks in the year as of this publication, we’re likely to see a full-year average of 4.54% for the 30-year fixed-rate mortgage. That will be the highest since 2010.

And for 2019? Given all the variables in both financial markets and housing, forecasting mortgage rates is for the “intrepid,” in the words of Mark Zandi, chief economist for Moody’s Analytics, and a long-time housing watcher. And those are just the known unknowns. Who can guess the curve balls lying in wait in financial markets, earnings, economic data, housing markets, and beyond?

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By Andrea Riquier, MarketWatch

Mortgage Rates Lowest in a Month!

Mortgage Rates Lowest in a Month!

Bajak and Associates

Lowest Mortgage Rates in a Month! Nov. 16, 2018

Mortgage rates hit their lowest levels of THE month yesterday, and the lowest levels in A month today.  It's a bit of a technicality, really.  As of yesterday, there were a few days in mid-to-late October that saw lower rates.  Today's drop means we'd need to go back to early October to see anything lower. 

What's the significance of being at the lowest levels in a month?  None, really.  It's just really fun to be able to say such things in an environment where such things haven't been easily said for quite some time!  Perhaps more relevant and more tangible is the fact that we can say rates are nearly an eighth of a percentage point lower on the week, and that's a decent move regardless of the environment.

Next week brings the Thanksgiving holiday, which tends to make mortgage lenders set rates more conservatively (secondary mortgage market is much less active than normal, starting on Wednesday afternoon).  As such, gains of this size are certainly worth considering from a lock/float standpoint.  In terms of tactical improvements amidst the broader trend toward higher rates, this is about as good as we've seen.


Loan Originator Perspective

Bonds enjoyed a green week, posting gains (minimal or not) all 5 days.  Treasury yields are nearing early October lows, but the improvements aren't fully reflected on my rate sheets yet.  I'll float new applications till Monday, for clients with a modicum of risk tolerance.  -Ted Rood, Senior Originator


Ongoing Lock/Float Considerations 

Rates continue coping with several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation (which certainly seems to be the case so far in 2018).

While rates were able to recover and stay sideways in the summer months, September and October have seen a surge up to the highest levels in more than 7 years. 

Upward pressure can continue as long as economic growth and inflation continue running near long-term highs.  Stay defensive (i.e. generally more lock-biased).  It will take a big change in economic fundamentals or geopolitical risk for the big picture to change.  Such things tend to not happen as quickly as we'd like.

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Source: Matthew Graham, Mortgage News Daily

Mortgage Rates Rise Sharply

Mortgage Rates Rise Sharply to 7-Year Highs

Bajak and Associates

Freddie Mac Projected 30 Year Fixed Rate Back in Feb. 2018

Mortgage rates had a bad week and an especially bad day following a much stronger-than-expected jobs report.  The Employment Situation (the most important piece of labor market data and arguably the most important economic report as far as interest rates are concerned) showed the highest pace of wage growth since before the recession and a surprisingly robust addition of new jobs in October. Strong jobs data is the nemesis of low interest rates and today was no exception.

Mortgage rates were already operating fairly close to long-term highs, but today's move easily took them to new highs.  The average lender is now quoting conventional 30-year fixed rates of 5% for relatively ideal scenarios.  Those without a big down payment or without perfect credit/income can expect to see even higher rates.  Most lenders ended up recalling the morning's initial rate sheets and reissuing higher rates at least once today. 

There's really no silver lining apart from the fact that the higher rates go, and the quicker they get there, the closer we get to the point that the economy slows down as a result.  When that happens, rates will begin to fall before just about anything else.  Unfortunately, the expected time frame for such things is incredibly wide (not the sort of thing you hope for if you need to buy/refi).  And yes... it's also unfortunate that our one source of solace at the moment involves an economic downturn, but if you want low interest rates, that tends to come with the territory.

Loan Originator Perspective

October's NFP jobs report beat market expectations today, and bonds sold off as a result. Treasury yields are near early October's multi-year high, and MBS are following their lead. There's little/no motivation for rates to drop, and plenty for them to rise.  Lock early, ideally as soon as you have the opportunity. -Ted Rood, Senior Originator

Vast majority of clients continue to favor locking in once within 30 days of funding.  I do not believe floaters have enough to gain to justify the risk as higher rates continue to be the trend. -Victor Burek, Churchill Mortgage

Lock/Float Considerations 

Rates continue coping with several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation (which certainly seems to be the case so far in 2018).

While rates were able to recover and stay sideways in the summer months, September and October have seen a surge up to the highest levels in more than 7 years. 


Upward pressure can continue as long as economic growth and inflation continue running near long-term highs.  Stay defensive (i.e. generally more lock-biased).  It will take a big change in economic fundamentals or geopolitical risk for the big picture to change. Such things tend to not happen as quickly as we'd like.

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Source: Matthew Graham, Mortgage News Daily

FICO Scores Hit Record High

FICO Scores Hit Record High

Bajak and Associates

Lesson learned?  Whether they saw their credit decimated by the housing crisis and the Great Recession or merely watched loan standards tightened beyond their ability to qualify, Americans seem to have taken to heart the importance of their credit scores.  The result, FICO says, is that consumer credit scores have reached a new high, an average of 704 points.

How Credit History Impacts Your Credit

Kenneth Harney, in an article for the Washington Post's Writers' Group, quotes FICO Vice President of Scores and Analytics Ethan Dornhelm that Americans are "making more judicious use of credit." This means higher scores on the FICO model that weights them not only in terms of on-time payments but on the length of the credit history, the amount and type of credit a consumer has available, and how much of that available credit is being used.

The 704 point average score, on scale that runs from 300 to 850, is a substantial improvement from the average of 686 in 2009.  Harney points out that a lot of the improvement, 5 points, has been added in the last two years, one of the fastest two-year runups in FICO history.

A score of 704 is considered good, meaning a consumer is a fairly safe bet for performing on a loan as agreed, and usually gets that borrower a fairly good interest rates and other terms.  The best deals are usually reserved for those with scores of 750 or better. However, while FICO scores for most categories of borrowers are rising, Harney points out that the averages for people taking out mortgages are sliding, down from 745 in the years after the crash to about 733.  This, of course, is not a reflection on borrowers but rather an indication that mortgage lenders are relaxing their standards, accepting slightly lower scores in their underwriting.

There are variations in average scores by age. Persons 18 to 29, a range that includes some Millennials and most adults of Generation Z, have an average score of 659.  They will typically have not only credit histories but thinner credit files, many any negative report will weigh more heavily on the score. The average score for people ages 40 to 49 is 690, and for those 60 and older, it's 747.

There are a lot of factors that help account for the overall higher scores.  First, fewer people have truly awful ones.   Those with scores under 500 now constitute 4.2 percent of the total, down from 7.3 percent in 2009 and the share with scores from 500 to 549 has dropped from 8.7 percent to 6.8 percent.

On the other end of the spectrum, 22 percent of those with a FICO number are considered "super-scorers," with a score over 800.  Forty-two percent have scores between 750 and 850.

Some help may have come from a change in reporting by the three major credit bureaus that we noted a few weeks ago. So-called collection reports, defaulted accounts that are sold to a third-party, have been handled differently since the first of this year.  They must be associated with a contract or agreement to pay and marked as paid when they are.  Medical accounts have to be at least 180 days past due before being reported and all collection accounts must have sufficient information to link them to that consumer.  The number of credit files with collection accounts were reported by the Federal Reserve as dropping from 12 percent last year to 9 percent at present.

Dornhelm says that lessons from the housing crisis are clearly affecting scores and consumer behavior.  He thinks more Americans have access to and better understand their credit scores and how to manage them, including managing the amount of their debt.


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Source: Jann Swanson, Mortgage News Daily

Mortgage Rates Flat Again, Despite Modest Market Weakness

Mortgage Rates Flat Again, Despite Modest Market Weakness

Bajak and Associates

Mortgage rates were flat again today, further prolonging a trend that's been in place for weeks.  During that time, we've seen modest ups and downs, but no significant changes.  To put the narrowness of the range in context, the "ups and downs" are only seen in the upfront costs associated with any given mortgage rate.  Rates themselves haven't changed for the average loan scenario.

Today's absence of change belies market movement to some extent.  The bonds that underlie mortgage rates weakened enough through the course of the day that mortgage lenders were nearly justified in a mid-day rate sheet adjustment (for the worse).  When this happens (i.e. when bonds weaken, but not quite by enough to prompt mid-day changes), the implication is that tomorrow starts out at a slight disadvantage.  In other words, if bond markets simply hold steady overnight, borrowing costs could edge higher.

Ongoing Lock/Float Considerations

Rates moved higher in a serious way due to several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation.

Despite those headwinds, the upward momentum in rates has cooled off heading into the summer months.  This could merely be the eye of the storm, or it could end up being the moment where markets began to doubt that prevailing trends would continue.

It makes sense to remain defensive (i.e. generally more lock-biased) because the headwinds mentioned above won't die down quickly.  Temporary corrections can be explained away, but it will take a big change in economic fundamentals or geopolitical risk for the big picture to change.  While that doesn't necessarily mean rates have to skyrocket, there's a good chance it means rates will struggle to move much lower than early 2018 lows until more convincing motivation shows up.

If you plan to or are actively searching for a new home, this would be a perfect time to get pre-qualified.

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Source: Matthew Graham, Mortgage News Daily, July 18, 2018

Are Lenders Prepared for the Borrower of the Future?

Are Lenders Prepared for the Borrower of the Future?

Bajak and Associates

Uber. Zipcar. Airbnb. New concepts that are now mainstream and indicative of the demographic, financial, technological and cultural forces transforming America and reshaping how people think of themselves, their families and their future. The market is changing and along with it, our home buyers.

To prepare to meet the evolving needs of the next generation of home buyers, we need to understand them. That’s why Freddie Mac is studying the behaviors and attitudes of different demographics and their views of home ownership. They’re also partnering with thought leaders on future trends – such as New York University Professor Arun Sundararajan – to shed light on how emerging trends and socioeconomic shifts, such as digital technologies, affect home ownership.

Their goal is to help lenders better understand the hopes and fears, characteristics and challenges of the Borrower of the Future as they relate to home-ownership and find ways our industry can innovate to address the emerging market realities.

Here are some key trends to consider:

• America is becoming a more diverse nation, and our ideas about family, tradition and independence are becoming more diverse too.
• Optimism about home-ownership is on the rise in minority communities, and as America becomes a “majority-minority” nation, that may change our idea of what “home” means – and who lives there.
• The nature of employment is changing, with more self-employed and contract workers and the digital age allowing work to be done from virtually anywhere.
• In an on-demand world, no one wants to wait. Younger borrowers expect a frictionless, digital-first experience.
• With many coming of age in the Great Recession, the Borrowers of the Future tend to have lower levels of accumulated savings.
• Baby boomers are “aging in place” and millennials are likely to live with their parents.

These are just a few of the trends. For more, including the latest article by Professor Sundararajan's, "How the Sharing Economy Could Transform the US Housing Market," visit www.borrowersofthefuture.com. The article is the first in a series that will examine how the sharing economy and new ways of working are altering the home buying process.

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Source: FreddieMac, July 3, 2018.

A Foolish Take: 2 Ways to Save With 15-Year Mortgages

A Foolish Take: 2 Ways to Save With 15-Year Mortgages

Bajak and Associates

It's not just about getting a lower rate.

Jul 9, 2018

For those looking to buy homes, the most popular way to finance a home purchase is to take out a 30-year mortgage. With mortgage rates having been exceptionally low for years, it's been possible to get extremely attractive monthly payments even on relatively large mortgage loans, and the 30-year term gives homeowners a long time to get their mortgages paid off.

Yet what's somewhat surprising is that relatively few people look at an alternative to the 30-year mortgage. A 15-year mortgage requires larger monthly payments, but their interest rates are almost always significantly lower. For instance, right now, a typical 30-year mortgage has an interest rate that's more than half a percentage point higher than what 15-year mortgages charge.

Half a percentage point doesn't look like a lot. But when you compare the amount of interest you'll pay on a 15-year mortgage at 4% compared to the corresponding amount on a 30-year mortgage at 4.5%, the difference is astounding.

You save twice with a 15-year mortgage. You have a lower rate, but the main reason why you pay so much more interest on a 30-year mortgage is simple: You take twice as long to pay down a 30-year mortgage. For example, on a $200,000 loan, monthly payments on a 30-year mortgage at 4.5% will be around $1,010. A 15-year mortgage at 4% will have monthly payments of about $1,480. The $470-per-month difference pays down the principal balance on the loan that much faster, and over time, that adds up to massive interest savings.


In many real estate markets, prices are too high for many homebuyers to afford a 15-year loan. If you can, however, consider the 15-year option closely. Lower rates and faster payouts will cut the amount of interest that goes to the bank and boost what you keep in your own pocket.

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Source: Dan Caplinger, 7/9/2018, The Motley Fool

Fannie Mae To Ease Financial Standards

Fannie Mae Will Ease Financial Standards for Mortgage Applicants

LenderVolt

It’s the No. 1 reason that mortgage applicants nationwide get rejected: They’re carrying too much debt relative to their monthly incomes. It’s especially a deal-killer for millennials early in their careers who have to stretch every month to pay the rent and other bills.

But here’s some good news: The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, potentially opening the door to home-purchase mortgages for large numbers of new buyers. Fannie will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

DTI is essentially a ratio that compares your gross monthly income with your monthly payment on all debt accounts — credit cards, auto loans, student loans, etc., plus the projected payments on the new mortgage you are seeking. If you’ve got $7,000 in household monthly income and $3,000 in monthly debt payments, your DTI is 43 percent. If you’ve got the same income but $4,000 in debt payments, your DTI is 57 percent.

In the mortgage arena, the lower your DTI ratio, the better. The federal “qualified mortgage” rule sets the safe maximum at 43 percent, though Fannie Mae, Freddie Mac and the Federal Housing Administration all have exemptions allowing them to buy or insure loans with higher ratios.

Studies by the Federal Reserve and FICO, the credit-scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.

“We feel very comfortable” with the increased DTI ceiling, Steve Holden, Fannie’s vice president of single family analytics, said in an interview. “What we’re seeing is that a lot of borrowers have other factors” in their credit profiles that reduce the risks associated with slightly higher DTIs. They make significant down payments, for example, or they’ve got reserves of 12 months or more set aside to handle a financial emergency without missing a mortgage payment. As a result, analysts concluded that there’s some room to treat these applicants differently than before.

Lenders are welcoming the change. “It’s a big deal,” says Joe Petrowsky, owner of Right Trac Financial Group in the Hartford, Conn., area. “There are so many clients that end up above the 45 percent debt ratio threshold” who get rejected, he said. Now they’ve got a shot.

That doesn’t mean everybody with a DTI higher than 45 percent is going to get approved under the new policy. As an applicant, you’ll still need to be vetted by Fannie’s automated underwriting system, which examines the totality of your application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes. The system weighs the good and the not-so-good in your application, and then decides whether you meet the company’s standards.

Fannie’s change may be most important to home buyers whose DTIs now limit them to just one option in the marketplace: an FHA loan. FHA traditionally has been generous when it comes to debt burdens: It allows DTIs well in excess of 50 percent for some borrowers.

But FHA has a major drawback, in Petrowsky’s view. It requires most borrowers to keep paying mortgage insurance premiums for the life of the loan — long after any real risk of financial loss to FHA has disappeared. Fannie Mae, on the other hand, uses private mortgage insurance on its low-down-payment loans, the premiums on which are canceled automatically when the principal balance drops to 78 percent of the original property value. Freddie Mac, another major player in the market, also uses private mortgage insurance and sometimes will accept loan applications with DTIs above 45 percent.

The big downside with both Fannie and Freddie: Their credit-score requirements tend to be more restrictive than FHA’s. So if you have a FICO score in the mid-600s and high debt burdens, FHA may still be your main mortgage option, even with Fannie’s new, friendlier approach on DTI.

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Source: Kenneth R. Harney, Washington Post