Mortgage Rates Run to 3-Month Highs Complicated by Fee Hikes

Mortgage Rates continued higher today, reaching levels not seen since the week before the FOMC Announcement in September. Today's weakness owes itself completely to yesterday's news. While the Fed’s decision to “taper” did not cause an excessive move higher yesterday, it did confirm the significant move higher that began in May.

While we're not moving higher at the same pace seen in May and June of this year, the determination is as high as ever. In a real sense, the pace of the movement--in general--and the mass behind it, are glacial.

Against the backdrop of that overall gradual move higher, we have had, and will have our ups and downs. Some days will be flat. Some days we'll improve or deteriorate modestly, other days a lot. Today was a bit more than modest for most lenders, though some borrowers will only experience it in terms of closing costs.

That means that 4.625% remains intact as the most prevalently quoted rate for ideal, conforming 30yr Fixed scenarios, but that it will be more expensive to obtain than it was yesterday. 4.75% is creeping up quickly.

If it seems like rates have been slow to move up recently despite talk of "higher rates," it's because the gap between rates (usually 1/8th or .125% increments) has gotten increasingly expensive in terms of PRICE (related in terms of percentage of the loan amount such as 0.75 = $750 on a $100,000 loan).

In the past, when we've discussed "affordable buy downs," that might look like .4 to .5 in terms of upfront cost to move between rates (i.e. paying to move an eighth lower in rate, or being charged less to move an eighth higher in rate). Those same costs are now closer to 1.0, meaning that it costs more to buy down to the next lower rate, but that there is also better insulation from being pushed up to the next eighth higher in rate or better compensation in terms of decreased closing costs if you do move to the next higher rate.

So will rates continue to go higher? Remember the glacial pace with ups and downs. There will always be pockets of correction and consolidation even within broad trends higher. The entire month of October was a great example. Whether or not we'll see another extended period of time like that in the near future is uncertain, but less likely than it was for two reasons.

First, the tapering corner has been turned. Even though markets will continue to speculate about whether or not each upcoming Fed Announcement will result in another $10bln reduction in bond buying, the biggest speculation as to whether or not the process will start, is in the books. Some have suggested that this calms volatility, and that may well be true, but it was volatility working in our favor that allowed October's little bounce back to happen.

The other incredibly important factor is the recently announced increases to the Guarantee Fee imposed by Fannie and Freddie's conservator the FHFA. This will raise rates by .25-.375% for many borrowers by the time the up-front cost changes are applied, and that's happening a lot sooner than most people realize.

In fact, at least one big bank has already applied part of the G-fee change to rate locks of 60 days. It instantly made those locks way more expensive than they were yesterday. Borrowers would either pay for it by moving up to the next eighth of a percent higher in rate, or by raising their up-front costs by around three quarters of a point (so $1500 on a $200k loan). If 60 day locks just took the hit, it will be 2 weeks or less before it affects 45 day locks. Time is ticking...

Not only does this put a big consideration on the horizon, but it also means that lenders aren't going to be too eager to put out lower rates between now and then because it's unprofitable and unwise for them to get locked into earning interest rates that aren't in line with the rest of the market in a few weeks' time.

Let’s try to keep in touch by either giving me a call at 314-744-7806 – or visiting my website and follow RATES & TRENDS at www.CallTheMoneyMan.com.