It has been nearly three decades since mortgage rates spiked this quickly. And there’s no indication they are going to slow down anytime soon.
Freddie Mac, the federally chartered mortgage investor, aggregates rates from about 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. It uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.
The 15-year fixed-rate average climbed to 3.91 percent with an average 0.8 point. It was 3.83 percent a week ago and 2.42 percent a year ago. The five-year adjustable-rate average grew to 3.56 percent with an average 0.3 point. It was 3.5 percent a week ago and 2.92 percent a year ago.
“The upward movement in mortgage rates got a turbo boost this week when Federal Reserve governor Lael Brainard indicated that the central bank plans to quickly raise interest rates to control inflation,” said Holden Lewis, home and mortgage expert at NerdWallet. “She noted that mortgage rates have jumped a full percentage point in just a few months and made it clear that the Fed plans to continue raising interest rates this year.”
The Federal Reserve released the minutes from its March meeting this week, which showed officials discussed ways to pare the central bank’s balance sheet. The Fed holds about $9 trillion in bonds, of which $2.7 trillion are mortgage-backed securities.
The consensus, according to the minutes, was that the Fed would shed a maximum of $60 billion in Treasurys and $35 billion in mortgage-backed securities over three months probably starting in May. That pace would be about twice as fast as the last time the Fed allowed its holdings to roll off from 2017 to 2019.
The Fed doesn’t intend to sell bonds from its portfolio. Its plan is to allow the bonds to mature without reinvesting the principal, which it did in 2017. However, because of rising mortgage rates, which have diminished refinances, the demand for mortgage-backed securities has softened, and the Fed may be forced to sell its mortgage-backed securities’ holdings “after balance sheet runoff was well under way,” according to the minutes. Officials have indicated the central bank would prefer to hold only Treasurys.
Brainard said in a speech this week that bringing inflation down will require a combination of steady interest rate hikes plus aggressive balance sheet reduction.
“Like Einstein’s theory of relativity, when the Fed wants rapid reductions in balance sheet holdings, the market rate of interest to consumers will have an equal and opposite reaction and rise just as rapidly,” said Derek Egeberg, certified mortgage planning specialist at Academy Mortgage.
Rising rates are having an effect on the spring home-buying season. Fannie Mae, which conducts a monthly survey of sentiment toward buying a home, found consumers are pessimistic. Asked whether now was a good or bad time to buy a home, 73 percent said it is a bad time to buy, a survey low.
“The sharp jump in mortgage rates over the past quarter indicates a decisive turning point,” George Ratiu, manager of economic research at Realtor.com, said. “We entered 2022 on strong footing, with rising job numbers and wage growth driving demand for homes. The shortage of inventory pushed prices to record highs even before the spring season got underway. At current rates, buyers of a median-priced home are looking at monthly mortgage payments which are almost $500 higher than a year ago, a 40 percent increase from April 2021.”
It is not only rising rates that are making home loans more expensive. As of April 1, the Federal Housing Finance Agency implemented a fee increase for some Fannie Mae and Freddie Mac home loans. Mortgages that FHFA considers “high balance” or mortgages for a second home are now more expensive.
High-balance loans are mortgages above the conforming national baseline limit ($647,200). Fees for high-balance loans increased between 0.25 percent and 0.75 percent, tiered by loan-to-value ratio. Fees for second home loans increased between 1.125 percent and 3.875 percent, tiered by loan-to-value ratio.
Bankrate.com, which puts out a weekly mortgage rate trend index, found more than three-quarters of the experts it surveyed expect rates to go up in the coming week.
“Mortgage rates are likely to continue their unprecedented rise this week,” Ralph McLaughlin, chief economist at Kukun, said. “Expect them to dampen — but not bury — this spring’s home-buying season.”
Meanwhile, mortgage applications continued to decline last week. The market composite index — a measure of total loan application volume — decreased 6.3 percent from a week earlier, according to Mortgage Bankers Association data.
The refinance index fell 10 percent and was down 62 percent from a year ago. Refinance application volume dropped to its lowest level since spring 2019. The purchase index slid 3 percent. The refinance share of mortgage activity accounted for 38.8 percent of applications.
“The surge in mortgage rates — now 1.5 percentage points higher than a year ago — continues to dampen refinance activity and is pressuring home-buyer affordability,” Bob Broeksmit, MBA’s president and chief executive, said. “Refinance applications decreased to the lowest level in three years, and their overall share of activity fell from 50 percent in April 2021 to 39 percent last week. While mortgage lenders across the country are reporting sustained home-buyer demand from the red-hot job market and stronger wage growth, extremely low inventory and increasing home prices are keeping activity at bay. Purchase applications declined again last week and were 9 percent lower than a year ago.”
The MBA also released its mortgage credit availability index (MCAI) that showed credit availability decreased in March. The MCAI slid 0.7 percent to 125.1 last month. A decrease in the MCAI indicates lending standards are tightening, while an increase signals they are loosening.
“Credit availability has gradually trended higher since mid-2021 but remains around 30 percent tighter than it was in early 2020,” Joel Kan, an MBA economist, said in a statement. “There were also mixed trends for the various loan categories, as conventional loan credit availability increased for the second month in a row, while government credit supply decreased to its tightest level since February 2014. Additionally, jumbo credit expanded for the tenth time in the past 12 months but remained almost 40 percent lower than the pre-pandemic level.”