The Federal Reserve announced today that it will keep interest rates the same for the second time since beginning its current rate hike cycle aimed at taming inflation last March. The Fed projected that rates will remain higher over the next two years than previously expected, providing some unwelcome news for investors who have been hoping for rates to come down sooner rather than later.
Since last March, the Federal reserve raised the federal funds rate 11 times in an effort to control inflation by slowing the economy, bringing it up from the near-zero levels they hovered at beginning in early 2020. The federal funds rate only technically determines the interest rate at which banks can lend to each other but heavily influences the borrowing costs across the economy. The rise in rates came as the Fed tried to tackle high inflation. The consumer price index (a key economic growth indicator) peaked at 9.1% last June but came in at a more modest 3.7% last month, still well above the Fed’s 2% long-term target. The central bank’s battle on inflation seems to be working but remains far from over.
The Federal Reserve has hinted on one more .25% interest rate hike this year peaking in the 5.50%-5.75% range before starting to lower rates. The updated projections see the Fed funds target rate coming down to 5.1% by the end of next year, and to 3.9% by the end of 2025.
According to analysts, the economic projections released today (Wednesday, September 20) indicate “the Fed is more confident that they can pull off a soft landing and that the economy can withstand higher rates for longer.
Why Are Mortgage Rates So High?
Below is brief explanation on what’s triggering mortgage rates to move up.
Mortgage rates have been on the rise in recent weeks.
This is primarily due to the stubbornly resilient inflation, an ongoing strong US economy and of course, a political showdown over the federal debt ceiling resulting in the US credit downgrade by Fitch ratings.
NOTE- Fitch ratings is a credit rating agency that rates the viability of investments relative to the likelihood of default. Fitch is one of the top three credit rating agencies internationally, along with Moody's and Standard & Poor's.
In times of uncertainty, another contributing factor for the 30-year mortgage rate is the gap between the 10-year Treasury Yield. This gap between 30-year mortgage rates and their closest proxy, the 10-year Treasury yield is known to economists as “the spread,”. This gap typically runs between 1.5 and 2 percentage points under normal economic circumstances. for example, if the 10-year yield sits at 4 percent, the 30-year rate should be close to 6 percent.
Now, what’s happening?
Over the past year and a half, spreads have gotten wacky. As of early August, the average 30-year rate was 6.84 percent, but the 10-year yield was just 3.7 percent. The gap had widened to 3.14 percentage points — or, in finance jargon, 314 basis points. That, statistically, was the highest level since 2009, when the global economy was in a meltdown.
These days, the mortgage spreads are “abnormally high.
In fact, current spreads match or exceed those historically seen only at times of intense crises, such as the global financial crash of 2009 and at the beginning of the Coronavirus pandemic when the world was going into lockdown.
In both past cases, lenders and investors were afraid to take on risk, and that fear translated to an extra fee to the borrower. This is similar to what we are seeing nowadays.
For example, your lender promises you a rate weeks before you finalize your home purchase. You lock in that rate today, even though you probably won’t find a home and close on the loan for another month or so. The gap creates a problem for your lender. If rates drop in the coming weeks, you simply ditch the loan for a better rate elsewhere. And, if rates go up, you’ll keep the loan and congratulate yourself for locking in a rate that’s favorable to you and unfavorable to the lender.
Mortgage originators typically package their loans and sell them off to investors as mortgage-backed-securities (MBS). During the pandemic, the Federal Reserve stepped in to buy billions of dollars’ worth of mortgage bonds to stabilize the economy. This caused mortgage rates to drop as the Federal Reserve was artificially supporting the economy through their massive bond buying program.
The Federal Reserve has stopped that bit of stimulus. And the MBS buyers are insisting on a better deal. If you lock in your rate at 6.5% today and your lender sells your loan at 7%, it suddenly looks less attractive to the investor. Again, this is all due to instability in the economy this time caused by inflation.
The more volatile rates are the more difficult it is to hedge that rate.
We are hoping to eventually see the US economy reach the Federal Reserves’ expected stability threshold and allow the Federal Reserve to begin lowering rates by one percent in 2024 and another one percent in 2025. This should put mortgage rates in the low to mid six percent in 2024 and mid to high 5% in 2025.
This week mortgage rates reached their 22 year high and we asked if there was any hope for relief and concluded that the only question was about timing. Timing would depend on economic data and inflation. Mortgage rates got a glimpse of friendly economic data today following the jobs report from the Labor Department (The Bureau of Labor Statistics or BLS report). It was still very strong in a historical context, but not quite as strong as economists had predicted. The not so quite strong numbers indicate a slowdown in hiring.
Up until todays BLS report, rates were in a bit of a panic mode this week due to combination of other data and events. Wednesday was saw the biggest jump after the ADP employment data and an announcement regarding the government's anticipated borrowing needs (via Treasuries). Private businesses in the US hired 324,000 workers in July 2023, surpassing market expectations. This was an indication that the economy is still strong.
The main difference between the ADP Employment Report and the official BLS report is that ADP only covers non-farm, private employees. As a government body, the BLS survey also includes government employees
U.S. Treasuries are at the core of the rate market. When investors become less interested in buying them or when the government becomes more interested in selling them, rates rise. The ADP data hit the demand side of the equation and the Treasury announcement hit the supply side. We can see how things played out in the following chart of 10-year Treasury yields as well as the much-needed response to Friday's more important jobs report.
Despite Friday's recovery, current rate levels are still uncomfortably close to long-term highs. Mortgage rates only made it back to Monday's levels (30yr fixed index still over 7%). In order to get meaningfully into the 6's, we'll need more data that comes in cooler (weaker) than the market expects.
So what's the next big economic report to watch? Easy! The Consumer Price Index (CPI) on Thursday, August 10th. CPI is the only other piece of scheduled monthly economic data that could compete with the jobs report over the past 2 years when it comes to impact on rates. The last CPI report was good for rates, but the market needs to see a pattern that's repeated for several consecutive months. If inflation is lower than expected this time around, it would be a solid step in that direction, one that likely allows rates to continue to moderately come down after this week's push toward long-term highs.
Washington, DC-CNN —
Federal Reserve Chair Jerome Powell doubled down Wednesday on the hawkish view that the central bank isn’t done with fighting inflation and could even implement further rate hikes at its upcoming monetary policy meetings.
“If you look at the data over the last quarter, what you see is stronger than expected growth, a tighter than expected labor market and higher than expected inflation,” Powell said during a central banker panel hosted by the European Central Bank in Sintra, Portugal. “That tells us that although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.”
Powell said officials haven’t decided how and when they will raise rates again, including if they will hikes rates at every other meeting or do back-to-back rate hikes.
“I wouldn’t take moving at consecutive meetings off the table at all,” he said.
The Fed’s position could mean as many as two more quarter-point rate hikes sometime this year, according to the latest Summary of Economic Projections. But it’s not clear at what meeting officials will vote to raise interest rates, especially given that they won’t learn much about the economy before their upcoming meeting in July.
Some Fed officials have made it clear in recent speeches that inflationary pressures persist, pointing to core inflation, which excludes volatile food and gas prices, not decelerating as fast as overall inflation. At the European Central Bank (ECB) conference in Sintra, Powell echoed that sentiment pointing to services inflation — which includes labor-intensive businesses such as restaurants and health care facilities — remaining stubbornly high.
Powell said part of the reason why Fed officials voted to hold rates steady had to do with the bank stresses that emerged in the spring.
“Part of the decision, in my thinking anyway, was the bank stress that we experienced earlier this year,” he said. “There’s a fair amount of research showing that when something like that happens, bank-credit availability and credit can move down a little bit, with a bit of a lag, so we’re watching carefully to see whether that does appear.”
The Fed’s latest survey of senior loan officers showed that banks were toughening their lending standards even before the bank failures. Powell argued that it’s still unclear whether that intensified after the turbulence in March.
Economists and some Fed officials have said that bank stresses can have the same effect on financial conditions as a rate hike.
This is a good time for homeowners who currently have HELOC’s with balances that carry a high interest rate to either strategize to pay them off or consider converting into a HELOAN with a fixed interest rate before the rates on HELOC’s go any higher.
What is a Rate Buydown
A 3–2–1 rate buydown is a type of mortgage financing option that allows borrowers to temporarily reduce their interest rate and monthly mortgage payments buy buying down their interest rate during the initial years of the loan.
This is a good strategy in the current high interest rate environment for home-buyers where it is expected for interest rates to come down once the government is able to get inflation under control and stabilize the economy.
Here’s how it typically works.
For example, let’s say you have a 30-year fixed rate mortgage with a 3–2–1 rate buydown. The lender might offer you an initial interest rate of 6.125%, but with the buydown your interest rate for the first year would be reduced by 3%, resulting in a rate of 3.125%.
In the second year, the interest rate would be reduced by 2% making it 4.125%.
In the third year the interest rate would be reduced by 1% making it 5.125%
At the end of the third year, the interest rate would go to the original rate of 6.125%.
The purpose of a 3–2–1 rate buydown is to provide borrowers with lower initial monthly mortgage payments, making homeownership more affordable in the early years of the loan. This can be particularly beneficial if you expect your income to increase in the future, or if you want to allocate more funds to other expenses during the initial stages of homeownership.
There are also 2-1 and a 1 year rate buydown as well.
In a buyer’s market, the rate buydown cost can be split between the buyer and seller. Or, sellers are willing to pay for the buydown cost instead of lowering the sale price.
For a 3-2-1 rate buydown calculator please click here.
Article originally posted by Matthew Graham
Mortgage News Daily
Fri, Apr 21 2023, 5:06 PM
Seemingly overnight, the internet is awash with news regarding a "new," unfair tax on mortgage borrowers with higher credit scores. Some have gone so far as to suggest that someone could intentionally lower their credit score in order to get a better deal.
Before you stop paying your bills in the hope of cashing in, let's separate fact from fiction. First and most importantly, you will absolutely NOT get a better deal on a mortgage rate if your credit score is lower, even if your friend just texted you a screenshot of a news headline saying "620 FICO SCORE GETS A 1.75% FEE DISCOUNT credit" and "740 FICO SCORE PAYS 1% FEE cost."
This all has to do with changes to Loan Level Price Adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (the "agencies"), the two entities that guaranty a vast majority of new mortgages. LLPAs are based on loan features such as your credit score and the loan-to-value ratio among other things. These LLPA”s determine the costs and credits that apply to a particular scenario that finally determine the interest rate one can qualify for based on credit score, down-payment or equity in their property, etc. They've changed several times over the years and a fairly substantial change was announced in January of this year.
So low credit borrowers are already getting a discount while high credit borrowers pay more?
Not exactly, and this is where the confusion comes in. Also, from here on out, please note that there is no opinion offered here as to whether this is good/bad/etc. The only goal is to clear up confusion and offer facts.
The fact of matter is that LLPAs are indeed changing in a way that improves costs for those with lower credit scores and increases costs for those with higher credit scores (in many cases, anyway). But people are confusing the CHANGE for the ACTUAL cost and rate.
So a low credit borrower isn't paying less than a high credit borrower? The gap between what they pay is just smaller than it was?
YES! Again, all value judgements and political commentary aside, the change amounts to a fee structure in favor of those with lower credit scores and at the expense of those with higher credit scores, but there's no scenario where someone with lower credit will have a lower fee. In other words, don't go skipping those credit card payments in the hopes of getting a lower rate. Rates for low credit borrowers is getting better while rates for high credit borrowers no as much.
How about some color-coded charts/tables?
Let's start with the changes that have everyone so upset. The following tables shows the DIFFERENCES in LLPAs before and after the change. RED = rising costs. GREEN = falling costs.
If you only saw this chart, one would assume that a 640 credit score was paying less than someone with a 740, but again, these are just the changes to determine the rate after taking into consideration the credit scores, loan-to-value ratios, etc..
Yes, it's a big change, so why is the government doing this to people with higher credit?!
Fannie and Freddie technically have a "mission" to promote affordable home ownership. Here is the statement on the topic by their regulator, the FHFA: FHFA Announces Updates to the Enterprises’ Single-Family Pricing Framework.
Note in the two tables above, there is more of an improvement for the lower FICO rows on PURCHASES (i.e. home ownership) vs REFINANCES.
The California Housing Finance Agency launched its new shared equity home loan program on March 27. With the Dream for All program, the state plans to provide $300 million worth of down payments for an estimated 2,300 first-time homebuyers. This is a very popular program and the funds allocated for this program usually run out very quickly and the program becomes no longer available.
California Dream For All Shared Appreciation Loan Program
The Dream For All Shared Appreciation Loan is a down payment assistance program for first-time homebuyers to be used in conjunction with the Dream For All Conventional first mortgage. It can be used for down payment and/or closing costs.
Upon sale or transfer of the home, the homebuyer repays the original down payment loan, plus a share of the appreciation in the value of the home.
In order to qualify you must:
Homebuyer Education Requirement
This is a very popular program and the funds allocated for this program usually run out very quickly and the program becomes no longer available.
If this is a good option for you or anyone you know who can benefit from this program, please contact me for more details.
I am sure you are wondering what is going on with mortgage rates. They have climbed noticeably after the Federal Reserve started taking action to tame inflation that was the result of their rate drops during the outbreak of the Corona Virus.
Below is a brief comparison on how the rate on the 30-year fixed conventional loans have been behaving:
One of the strongest ammunition the Fed has to control inflation is its ability to raise rates. Raising rates is referring to raising the Federal Funds Rate by the FOMC (Federal Open Market Committee). The FOMC is a committee within the FED responsible for deciding open market operations.
The Federal Funds rate is the rate commercial banks borrow and lend their excess reserves to each other overnight.
When the Fed raises the Federal Funds Rate, its intention is to slow economical growth by:
Now, after more than a year of “unfriendliness,” the Fed is finally thinking about leveling off its pace of raising rates and seeing how things play out without too many more rate hikes. They have already decreased the pace from 0.75% per meeting to 0.25%.
Below is a historical graph of the Federal Funds Rate going back to 2000:
As for the current week, the drop in rates was driven not only by the flight to safety, but also the expectation that the Fed will be able to start cutting rates by the end of the year. Please refer to my previous blog for the chart referring to September’s Fed Funds Rate expectations falling below March’s.
Last but not least, every Fed day concludes with a press conference from the Fed Chair. This week’s will be one of the most important and informative press conferenced in recent memory as Powell will be forced to choose between policy goals and calming a potentially panicked market.
By: Matthew Graham
Fri, Mar 17 2023, 4:48 PM
There’s certainly a chicken/egg problem when it comes to interest rate news. Is it the Fed’s decisions that move rates? Or do market forces move rates, thus forcing the Fed to react?
The answer is somewhere in between. If inflation and economic growth were always positive, low, and stable, the Fed would never lift a finger, but they are compelled to act when stability is threatened.
Since March 2020, the Fed has acted quite a bit. They maintained rate-friendly policies for almost 2 years and then got precipitously unfriendly early in 2022. “Unfriendly,” in this case, refers to hiking the Fed Funds Rate and buying fewer bonds on the open market. The combined effect was one of the sharpest rate spikes in history.
Now after more than a year of unfriendliness, the Fed is finally thinking about leveling off and seeing how things play out without too many more rate hikes. They’ve already decreased the pace from 0.75% per meeting to 0.25%.
This isn’t a random decision on the part of the Fed. It comes in response to shifts in inflation data as well as other signs that their unfriendly policies are having an effect on the economy.
The latest sign is the banking drama that has been in the news this week. It began with Silicon Valley Bank last week but spiraled into a bigger problem with the closure of Signature bank over the weekend. Many people have never heard of these institutions, but they now represent the 2nd and 3rd largest bank failure in US history.
Many people have heard of Credit Suisse. While the European institution has been on shaky ground for months, markets nonetheless reacted to news that it too could get swept up in the recent drama. The stock price plummeted almost all week and other European banks moved lower in sympathy.
All of the above contributed to yet another week with an obvious “flight to safety” in the market. In not so many words, this involves selling riskier assets like stocks and buying bonds. When traders buy bonds, it pushes interest rates lower (represented by US 10yr Treasury yields in the chart below), all other things being equal.
Despite the apparent panic in financial markets, the Fed will almost certainly continue to hike rates when it meets next week. It will also almost certainly signal that additional rate hikes are possible, if not probable, and that they depend much more on the path of inflation than on a handful of mismanaged banks experiencing trouble coping with a tough rate environment.
When that happens, keep in mind that the market is less concerned with how the Fed changes rates at the current meeting and more interested in how the rate outlook evolves for the coming months. That outlook is driven by two things: the Fed’s stance on the economy and the economy itself.
By maintaining a tough stance on rates, the Fed makes it harder for the economy to experience strong growth. It also means inflation will have a harder time experiencing a resurgence. That adds up to downward pressure on rates in the longer term.
As for the current week, the drop in rates was driven not only by the flight to safety, but also the expectation that the Fed will be able to start cutting rates by the end of the year. This can be seen in the following chart with September’s Fed Funds Rate expectations falling below March.
Unfortunately for the mortgage market, a classic flight to safety tends to benefit Treasuries first and foremost, even though the 10yr Treasury is often used as a benchmark for mortgage rate movement. Mortgages definitely improved--just not as noticeably as Treasuries.
That's OK though. The most sustainable improvement in mortgage rates is the improvement that happens gradually. The housing market is already responding to the apparent ceiling in rates seen in the chart above. Ever since the highs in late 2022, housing metrics have slowly come off their lower levels, as seen in the latest construction and builder confidence data released this week.
Existing and New home sales will both be released next week for the month of February, but when it comes to market movement and the impact on rates, all eyes will be on Wednesday afternoon's Fed events.
Why events? It's not just the Fed's rate hike that happens on Wednesday. They'll also have quite a few updates to the verbiage of the policy announcement. Those words will help frame the policy path going forward. Markets will get even more clarity and insight from the updated forecasts for future rate hikes (or cuts?) submitted by each Fed member. Those forecasts will likely be at odds with market expectations and it will be interesting to see how the market reacts when confronted with that reality.
Last but not least, every Fed day concludes with a press conference from the Fed Chair. This one will be one of the most important and informative in recent memory as Powell will be forced to choose between policy goals and calming a potentially panicked market.
Inverted yield curve: How it predicts
The inverted yield curve is the bellwether for an economic
recession. Here’s how it occurs and what you should know and do about it.
yield curve is a graph that shows that younger (shorter) treasury bond yields
are yielding more interest than older (longer) ones.
terrifying for financial pundits all over the world. It’s a graph that could
mean the difference between a thriving bull market or the downswing of a bear market.
AND it’s been known to throw entire economies into a state of abject terror and chaos.
Want to see
what it looks like? Okay. Don’t say I didn’t warn you …
While it might
not seem like much at first glance, the inverted yield curve is actually the
bellwether for an economic recession. You know, that thing that happened
in 2008 that was kind of a huge deal?
Luckily, the inverted
yield curve is a rare occurrence … BUT it’s useful to know what it means and
how to spot one when it happens.
You don’t want to get swept up in the herd mentality of one, and being able to recognize when it happens is the
first step in preventing yourself from making bad decisions based on what
everyone else is doing.
So let’s take a
look at the inverted yield curve, how it happens, and what it means for you and
What is an inverted yield curve?
what an inverted yield curve is, you must first understand one of the most
basic financial asset classes out there: Bonds.
A bond is like
an IOU given to you by a bank. When you lend the bank money, they’ll give you
back that same amount at a later time along with a fixed amount of interest.
For example, if
you bought a two-year bond for $100 with a 2% annual return on it, that means
you’ll get $104.04 back after two years (this accounts for compounding).
Yes, that’s a
low return rate. However, bonds have a number of benefits that justify the
small rate of return:
They’re an extremely stable investment. This is especially true when it
comes to government bonds. The only way you can lose your money with them is if
the government defaulted on its loans — which the U.S. government has never done.
They’re guaranteed to have a return. This means that you’ll know
exactly how much you’re getting on your ROI when you purchase a bond.
Longer investments yield higher returns. The longer you’re willing to wait
on your bond typically means that you’re going to have higher return rates. I
say typically because there are exceptions to this (Hint: It has to do with
what we’re talking about right now).
And when people
refer to inverted yield curves, they’re typically referring to the yields on
U.S. Treasury bonds, or bonds guaranteed to investors by the U.S. government.
BONUS: If you
want even more information on investment basics, check out Ramit’s video on the
hierarchy of investments. Don’t be thrown off by the potato quality of the
video — the advice is timeless.
A yield curve
graph shows the returns of those bonds (i.e., the yield) based on
maturity, or how old the bond is.
A typical one
looks like this:
Notice how it curves? That’s why it’s called a yield curve. (Source: money-zine.com)
The above is a
normal yield curve. It shows that older bonds have higher interest rates and
will yield more than younger ones.
On the other
hand, an “inverted” yield curve looks like this:
when the curve inverts or goes the other way. It shows that younger bonds
(i.e., bonds that are two years or less) yield more in interest than older
ones. This shows the lack of investor confidence in older bonds and is a
good indicator that a recession is incoming (more on that soon).
You can find
the daily fund rate straight from the U.S. Department of Treasury itself here and chart it out here (you’ll need Flash).
But a yield
curve doesn’t invert on its own. Let’s take a look at a few elements that are
needed for an inverted yield curve to occur.
How does an inverted yield curve happen?
Humans are more
motivated by a fear of loss than anything else. This is a psychological
phenomenon called “loss aversion.” When the possibility of loss comes up, we get scared. We
remember the things we’ve lost more acutely than what we’ve gained (just ask
any gambler). When we’re scared we tend to make weird decisions like selling
off all of our investments due to a dip in the markets or splitting up the group
in a haunted house so the murderer can pick you off one by one.
When it comes
to a recession, many investors will start to invest in long-term U.S. Treasury
bonds as it approaches — since they know that the interest rates on other
assets like stocks will soon drop.
As more and
more people begin to buy long-term bonds, however, the Federal Reserve responds
by lowering the yield rates for those securities. And since people aren’t
buying a lot of short-term U.S. Treasury bonds, the Fed will make those yields higher
to attract investors. To recap:
Bonds are considered safe.
People who are not confident in the market will move more money
With more people investing in bonds, their return rate goes
This is basic
supply and demand. The less people want a bond, the more financial institutions
like the Fed are going to make that bond appealing to investors.
A great example
of a yield curve inverting occurred before the 2008 housing market crisis in December 2005 — almost three years before the crash. The Fed raised the federal fund
rate to 4.25% due to a number of factors. Mainly, they were aware that
there was a growing price bubble within certain assets like housing, and they were
concerned that low interest rates were causing this.
So when the
fund rate was raised to 4.25% in 2005, it caused the two-year U.S. Treasury
bond to yield 4.4% while the longer term seven-year bond only yielded 4.39%. Soon the curve began to invert
more and more as the recession began approaching and investors continued to
invest more heavily into longer-term bonds.
United States found itself thrown into a recession after the housing market
crash roughly two years later.
inverted yield curve wasn’t the cause of the recession but rather a symptom of
it. Think of the inverted yield curve as a cough or fever in a greater
The last seven recessions the country has seen were preceded by an
inverted yield curve — and many experts agree that another inversion of the yield curve could
be on its way.
inverted yield curve is a great indication that there’s a recession and a
subsequent bear market is on the way, what does that mean for you? What should
a typical non–Wall Street, every-person do when you see a headline like this?