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June 2018
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Online Loan Shoppers See Lower Mortgage Rates

CBS News reported that the Greek debt crisis led to an unexpected drop in fixed mortgage rates. The Royal Bank, along with all of the other four big banks, dropped the popular five-year fixed closed mortgage 0.15 percentage points to 6.10% on Tuesday. Most banks also dropped the benchmark rate for their discounted five-year mortgage by a similar amount to 4.70%. Some online and smaller mortgage lenders offer no cost refinance loans. This is good news for online home loan shoppers who’ve experienced higher fixed mortgage rates that have risen over 1% in the last month. Many banks followed with reported lower mortgage rates for home buying in the US and Canada. Longer-term fixed interest mortgage rates typically follow longer-term bond yields. The Greek debt crisis put a stop to rising bond yields as traders moved money out of risky assets. “Both treasuries and Government of Canada bonds have recently benefited from lower mortgage interest rates in the Unites States.” Many mortgage loan experts say the lower interest rates are just temporary and note that bond yields are already edging higher as the EU’s bailout package eases Greek default concerns. Adjustable rate mortgage loans are tied to the overnight lending rate. That mortgage interest rate has been at a rock-bottom 0.25% for over a year.

Fed Reserve Raises Interest Rates

In subprime mortgage debacle and financial crisis, the Federal Reserve urged the national banks to step up to its discount window, pushing the banking industry to get over the stigma on borrowing from the government. When banks and finance companies stopped lending to each other overnight altogether in the fall of 2008, discount window for home mortgage loans became even more crucial. The Fed even narrowed the penalty banks paid for using discount window money, moving the discount rate closer to the Federal funds rate during the crisis.

Watch Video on the Fed Raising the Discount Rate

According to mortgage executive, Bryan Dornan, “Clearly, the Fed is signaling a change in direction for interest rates.”  Dornan continued, “Now that the Fed is raising rates, expect mortgage rates to begin retreating upwards.” Now that the crisis has blown over, the Federal Reserve wants things to get back to normal. Late Thursday afternoon, it surprised the markets by raising the discount rate it charges though its emergency window to 0.75% from 0.50% while keeping its targeted Federal funds rate at between zero and 0.25%. The change will take effect on Friday. Meanwhile, the duration of the mortgage loans will revert to the normal overnight period from 30 days come mid-March. Though many thought the Fed was headed in this direction, most everyone thought it wouldn’t act until its next Open Market Committee meeting next month.

The Fed explained in a brief statement that it wants banks to return to the private debt markets. The increase “will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds.” The central bank added the move was not a signal it was tightening money nor a signal its outlook on the economy had changed. It is a further indication; however, that the government is pulling away from the extraordinary assistance it has given the financial markets over the last few years.

Later this spring the Fed is expected to stop buying bad credit mortgages and mortgage-backed securities, a move that is worrying those in the housing markets who had hoped for a smooth recovery. The government’s numerous bank industry lifelines have been criticized for allowing banks to make heaps of money by borrowing from the Fed at next to nothing and profiting from the spreads they can make by investing that cash in the Treasury markets. But the Fed also has to come up with an exit strategy for a balance sheet that has become bloated with Wall Street’s unwanted assets. Forcing banks back to the short-term debt markets for funding (or even to rely on their own deposit taking operations) is another baby step to getting the banks out of the emergency safety net.

Which Way Will Mortgage Rates Go?

Mortgage interest rates continue to hover around the 5% mark. Conforming, FHA and VA mortgage rates all continue to be reported in the low 5 percent range for home loans and mortgage-refinancing. There have been positive signs in the last quarter regarding job losses, the financial markets and even the housing sector, but economic recovery is likely still a few months away, Freddie Mac’s chief economist said today. In an article titled, “Are We There Yet?” the outlook from Freddie Mac’s Frank E. Nothaft for 2010 is mostly positive, although there are cautionary flags ahead – particularly with higher mortgage interest rates and the expiration of home-buyer tax credits.

Most economists will be looking at the aftermath from the government’s winding down of its purchases of mortgage loan backed securities from Freddie Mac and Fannie Mae. By discontinuing its purchase program in April, the central bank is hoping that private buyers of mortgage-backed securities will return, and rates won’t rise much after that. Investors in mortgaged-backed securities have stayed mostly on the sidelines. “U.S. Department of the Treasury MBS purchases were completed by year-end, and Federal Reserve purchases of MBS and Freddie Mac and Fannie Mae debt are scheduled to terminate by the end of the first quarter 2010 – both potentially pose the risk of a rise in mortgage rates relative to benchmark yields,” Nothaft said.

Another potential strain on interest rates is the expiration of tax credits for home buyers. Under the federal program, home purchase contracts must be signed by April 30 to qualify for the tax credits. “The tax credits have likely caused some families to purchase a home earlier than they might have otherwise, thus moving sales forward in time and helping support the housing market. High affordability and improved buyer sentiment further bolster sales,” Nothaft wrote.

So when will we get there? “While there may be some bumps along the way, the transition into economic recovery appears to be underway as we head into 2010: real economic growth in the 3 to 3.5 percent range, a cessation of job losses in the first quarter, rising home sales, and a strengthening of housing starts in some markets,” Nothaft wrote “We should be ‘there’ in the next few months, if not already.” Read the original article online.

Mortgage Rates Rising as US Treasuries Stop Buying Mortgage Securities

A recent article highlighted that the Federal Reserve’s decision to stop buying mortgage loan securities (MBS) should cause an increase in mortgage rates. But that won’t be the only thing driving up long-term interest rates: the Treasury’s trouble going forward in selling debt will also contribute to higher mortgage rates, according to a Morgan Stanley economist. According to Bloomberg, Yields on benchmark 10-year notes will climb about 40% to 5.5%, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgage loans to 7.5% to 8%, almost the highest in a decade, Greenlaw said.

These are very high mortgage rates -and much higher than we’re used to seeing over the past several years. They should cut significantly into the demand for refinancing and even new home purchases. Mortgage rates like that could also worsen the foreclosures crisis, as many adjustable-rate mortgage loans (ARMs) have benefited from historically low interest rates. Once they adjust to near, or over, double-digits, many more homeowners with ARMs will be force to fold. The cause of this increase in home mortgage rates comes from what this economist believes will be a higher yield demanded for government Treasury securities. Those are generally considered risk-free rates, so any mortgage bearing a similar long-term coupon will consist of its default risk premium added to that risk-free rate. FHA guidelines are tightening and most conforming and jumbo loan programs have seen requirements increase for income documentation.

Bloomberg explains that the government debt will become more expensive because of both supply and demand: The U.S. will face increased competition from other debt issuers, spurring investors to demand higher yields as the Federal Reserve ends a $1.6 trillion asset-purchase program, according to James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley. The central bank was the largest purchaser of Treasuries in 2009 through a $300 billion buyback of the securities completed in October. The Treasury will sell a record $2.55 trillion of notes and bonds in 2010, an increase of about $700 billion, or 38%, from this year, Morgan Stanley estimates. Caron says total dollar-denominated debt issuance will rise by $2.2 trillion in the next year as corporate and municipal debt sales climb. So in addition to the pressure that I mentioned earlier stemming from the Fed’s departure from the MBS market, the broader investment community will likely drive rates higher on long-term debt as well. While bad news for the housing market, this is probably good news for sensible investing.

Treasurys Drop

Treasury prices turned lower on Wednesday, pushing long-term yields up for the first day in three, ahead of an auction of a record amount of 10-year notes and the conclusion of the Federal Reserve’s two-day policy meeting.  Yields on the current 10-year note rose 2 basis points to 3.69%. A basis point is 0.01%. Mortgage interest rates climbed last week and loan application volumes declined as a result.

Yields on 2-year notes, more sensitive to expectations for interest rates, remained lower by 2 basis points to 1.15%.  Bids on the $23 billion 10-year debt are due at 1 p.m. Eastern time. The auction is the second of three this week in the Treasury Department’s quarterly refunding.   “Caution [is] recommended with $23 billion 10-year notes one hour before the FOMC decision and $15 billion bonds on tap” in 30-year bonds on Thursday, said John Spinello, Treasury strategist at primary dealer Jefferies & Co., one of the 18 primary dealers that trade with the Fed and are required to bid at government auctions.  The U.S. will sell more than 2 trillion in debt in the fiscal year ending in September to finance a bevy of government stimulus programs, and central-bank activities to ease strains in financial markets and cushion the economy’s slowdown.