Why Mortgage Rates Are Rising
The spread between the 2 year and 10 year treasury yields continues to widen. Federal Reserve policies largely control the direction of shorter-dated notes, while the overall bond market and investors largely determine the direction of longer-dated bonds.
The difference between short and long-term bonds is called the ‘yield spread’ and it is a measure of varied expectations. This yield spread chart clearly shows that what the Fed policies are doing is largely different than the overall expectations from the bond market. This is one reason why interest rates on certain types of home loans such as refinance mortgages, purchase and equity loans have risen lately even as the Fed keeps its target interest rate at 0-0.25%. The bond market is seeing the future differently than the Federal Reserve.
Mortgage Loan Applications Increased as Interest Rates Rose
Bloomberg reported this week that mortgage loan applications in the U.S. gained last week, helped by affordable mortgage rates that enticed homeowners to seek mortgage refinancing. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan rose 2.3% to 915.9 in the week ended May 15th, from 895.6 the week before. The group’s refinancing gauge increased 4.5%. The average rate on a thirty-year fixed mortgage loans fell for the second straight week and was near the record low reached at the end of March.
Lower borrowing costs, supported by an increase in Federal Reserve purchases of longer-term securities, and reduced prices are boosting mortgage rates for home refinancing and purchases of homes and may help settle the slumping housing market. “The broader housing market certainly looks to be stabilizing,” Zach Pandl, an economist at Nomura Securities International Inc. in New York, said before the report. “Home loan applications responded very well to the Fed’s purchases of Treasuries and mortgage-backed securities.” The mortgage bankers Association reported that their mortgage refinancing gauge rose to 4,794.4, from 4,588.6 the previous week. The purchase index fell 4.4% to 254 last week, from 265.7 the week before. The share of applicants seeking to refinance loans rose to 73.6% of total applications last week from 71.9%.
Mortgage Rates Decline as Refinance Applications Rise
Low mortgage rates continue to stimulate refinancing activity and the Obama administration hopes to encourage more first time buyers to seek financing to jump-start the struggling housing markets. Mortgage refinance applications jumped last week, as low mortgage interest rates fueled the increased refinance activity. The Mortgage Bankers Association said Wednesday its weekly application index climbed 21.2 % for the week ended March 13.
KMG Publisher, Jason Cardiff told Mortgage Related News that he anticipates that the FHA mortgage rates could decline to 4.5% or even 4.25%. Cardiff said, “Obama is serious about reviving the cash flow for homeowners on Main St. and the Federal Reserve made another move to pump more blood back into the housing sector.”
The index was 876.9, up from 723.4 a week earlier, the trade group said. Almost 73% of mortgage applications came from borrowers seeking to mortgage refinance loans at reduced interest rates, not home buyers. The lending survey provides a snapshot of mortgage lending activity involving mortgage bankers, commercial banks and thrifts. It covers about half of all new residential home loans made each week. An index value of 100 is equal to the application volume on March 16, 1990, the first week the association tracked it.
Fed Makes History by Cutting Interest Rates to the Lowest Level
The Federal Reserve stepped to the financial platform and announced key interest rates that reach historic levels. Mortgage lenders reported interest rates at 5% for mortgage refinancing and home financing. Many mortgage brokers believe the rumors are true that the government will induce lenders to offer mortgage rates in the 4.5% range.”
The Fed’s unprecedented move to further reduce its fed funds target rate to a range of 0 to 0.25% rather than a fixed point was a surprise. The move is an acknowledgment that interest rates in the marketplace had been well below the Fed’s 1% target, which it set at its previous meeting on October 29. The central bank also cut the lending rate for loans directly to banks. “Today was a reminder that the Fed was on the case,” said Jim McDonald, director of equity research at Northern Trust in Chicago. “It was a reaffirmation of their willingness to be very aggressive.” “What we heard today was not revolutionarily different but it was a reminder that they are committed to using their balance sheet to the fullest extent to repair the financial markets and stimulate the economy.”
Many analysts had expected the Fed would cut its fed funds rate to 0.5% from 1%. “In some senses the whole point of this meeting was to say ‘Quit watching interest rates, watch the other things that we can and will do,’” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. Jack A. Ablin, chief investment officer at Harris Private Bank, said the fact that the Fed targeted a range for its fed fund rate indicates that policy makers did not want to bring the rate all the way to zero. Further rate cuts could have create problems with complications for money market funds, in which fees might outpace yields.
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