The Federal Reserve has soothed the mortgage market, at least temporarily. After weeks of volatility, the Fed’s purchases of mortgage-backed securities have had a calming effect on rates the past two weeks.
Freddie Mac, the federally chartered mortgage investor, aggregates rates from 125 lenders across the country to come up with national average mortgage rates. It uses rates for borrowers with flawless credit scores. The rates quoted are not available to every borrower.
The 15-year fixed-rate average ticked up to 2.8 percent with an average 0.7 point. It was 2.77 percent a week ago and 3.62 percent a year ago. The five-year adjustable rate average fell to 3.34 percent with an average 0.3 point. It was 3.4 percent a week ago and 3.78 percent a year ago.
“The wild swings have calmed in recent weeks after a period of extreme fluctuations,” said Matthew Speakman, a Zillow economist. “This suggests the historic intervention by the Federal Reserve has successfully eased some of the strains that had plagued the market just a few weeks ago, though challenges remain.”
Last month, the Federal Reserve restarted its massive bond-buying program. The Fed has been purchasing mortgage-backed securities — or MBSs as they are often known — which are bundles of mortgages sold on a secondary market. When a borrower takes out a loan such as a 30-year fixed-rate mortgage, a lender often bundles that loan with other loans into an MBS and then sells it to investors.
Mortgage rates are usually based on MBS prices. The Fed’s unlimited MBS buying pushes prices up and rates down.
However, normal market dynamics have gone out the window during the coronavirus outbreak. What causes mortgage rates to move has less to do with the usual factors such as long-term bonds than investors’ concerns over borrowers’ inability to pay their mortgages.
“Under normal circumstances, the high volume of money currently parked in the bond market would have likely led to a drop in interest rates to at least 2 percent,” said George Ratiu, senior economist at Realtor.com. “But instead, rates remained roughly consistent this week. One of the largest drivers contributing to rate stickiness has been the tightening of underwriting standards by banks and lenders in response to the historical number of unemployment insurance claims. As we move forward in these anything but normal times, we can expect investors to continue their risk-averse behavior as they try to navigate market volatility.”
Bankrate.com, which puts out a weekly mortgage rate trend index, found half the experts it surveyed predict rates will remain about the same in the coming week.
“Same story, different week, but there’s no real reason to see any significant drop in rates while lenders work around continuing changes in product and eligibility,” said Gordon Miller, president of Miller Lending in Cary, N.C. “Jumbo loans are almost unavailable now and it’s getting harder to lend to self-employed borrowers as we now have to establish that the coronavirus has had no impact on their business.”
Meanwhile, fueled by refinances, mortgage applications picked up last week. According to the latest data from the Mortgage Bankers Association, the market composite index — a measure of total loan application volume — increased 7.3 percent from a week earlier. The refinance index jumped 10 percent and was 192 percent higher than it was the same time last year. The refinance share of mortgage activity accounted for 76.2 percent of applications.
The purchase index continued to slide, falling 2 percent. It is 35 percent lower than it was a year ago. The purchase index, which started March at 280.7, has fallen to 182.6, a 35 percent decline over the past five weeks.
“During these challenging times for the U.S. economy, record-low rates continue to benefit the many homeowners able to refinance and save money on their monthly mortgage payments,” said Bob Broeksmit, MBA president and chief executive. “Given the rise in unemployment and stay-at-home orders aimed at curbing the spread of [the coronavirus], the spring home-buying season showed further weakness.”
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