For some unknown reason, there were additional articles over the weekend touting "all-time low mortgage rates."  Underpinning these alleged rates is primary data that was released on Wednesday and Thursday last week.  In short, the two weekly survey-based mortgage rate indices agreed that best-case-scenario rates were at all-time lows.  To be fair, they're not terribly far off base.  "Best-case scenario" rates are indeed pretty close to all time lows.  The methodology limitations of the surveys could easily explain how they each missed the actual all-time lows that occurred in early August and are thus seeing slightly lower rates now.

Yesterday, we discussed why rates are not actually at all-time lows.  But rates are whatever they are.  They're relation to previous lows doesn't really matter at the end of the day.  Do you benefit from refinancing?  Can you afford your new purchase payment?  Great!  Don't worry if the rate is technically not an all-time low.  I'm just on a crusade for journalistic accuracy, shouting at my own little wall over here.

More important than the outright level of interest rates is the risk of volatility on the horizon.  With everything the economy and financial markets have been through in 2020, the past few months have been surprisingly calm in the bigger picture--especially for the bond market (which has a direct bearing on mortgage rates).  But there are several reasons we should be prepared for more volatility ahead.

Many of today's mortgage-related headlines are touting "new all-time lows," but there are significant caveats.  The biggest caveat would likely be the fact that the average 30yr fixed rate is actually nowhere near its previous all-time lows!  So why are there so many headlines saying otherwise?

Issue 1: Freddie Mac's Weekly Rate Survey

Freddie conducts the longest-running weekly mortgage rate survey in the biz.  If you're not worried about nitty gritty details or day to day movement, it's plenty accurate and consistent.  That's why the industry and news media have grown to rely on it for a quick, rough take on mortgage rates every Thursday morning.

If you're shopping for a purchase mortgage and if you'd previously received quotes from one of the slower moving lenders back in late July or early August, you may be looking at mortgage rates that are very close to all-time lows.  If you're in the market for a refinance, you're nowhere near all-time lows--especially if you count jumpier lenders (those who change their rates with minimal provocation from the bond market or their operational capacity) and shorter time horizons.  In fact, the average lender was quoting refi rates roughly a quarter of a percent lower in early August before the new refi fee was announced.

For what it's worth, the rates on MND are weighted in favor of the market profile when it comes to purchases vs refis.  As such, the comparatively higher rates for refis have pulled the average higher (refis comprise more of the market).  Given my lust for accuracy and precision, we may break out purchases and refis into separate indices until and unless the adverse market fee goes away, and that could take years.

Mortgage Rates have been exceptionally calm recently.  The only major exception has been the implementation, delay, and re-implementation of a new fee that affects almost all refinance transactions.  The coming and going of this "adverse market fee" has accounted for the biggest day-to-day differences in rates for any given lender who flipped the switch.  Those days vary by lender because the fee's deadline applies to a post-closing event for lenders that cannot be accurately predicted.  In other words, they know they'll pay the fee on any loans delivered to the housing agencies on or after December 1st, but they don't know how long it will take to get the loans from the closing table to the "delivery" milestone.  

Naturally, the pandemic's economic impact will take years to be fully understood.  On that front, there will be no single event that decides the fate of the market and interest rates.  

The election, on the other hand, has a definitive result and deadline attached to it, but it's still a month away.

In the meantime, fiscal stimulus is an important consideration for the economy, the election, and especially for interest rates.  A decision could come at any time.  It could be delayed until after the election.  It could be bigger or smaller than expected. But odds are something will happen before the election and despite all the political posturing, that it will fall somewhere between the two ideological boundaries guarded by either side of the aisle.  

After rising at a medium-quick pace to begin the week, the past 3 days have been much calmer by comparison for mortgage rates.  Today was the best example of that stability with the average lender effectively unchanged from yesterday's latest levels.  In addition, there were fewer mid-day price changes among lenders than on any of the other days this week.  

This isn't a huge surprise considering the lack of actionable info on tap, both in terms of economic data and headline news.  The market already had a chance to react to stimulus-related dust-ups over the past few days.  By the time Trump's upbeat stimulus comments hit the newswires this morning, the bond market (which dictates mortgage rates) didn't seem to mind too much.

This morning's weekly survey data from the Mortgage Bankers Association showed a nice increase in refinance applications offset by a smaller decrease in purchase applications.  It also showed mortgage rates falling to a new all-time low last week.  Don't worry, rates didn't really hit an all-time low last week, nor are they at an all-time low today.  Are they close?  Perhaps for purchase mortgages at certain lenders, but even then, early August was unequivocally better.  Apples to apples (same lender, same loan type), rates were anywhere from .125-.375% lower 2 months ago.  

Why am I telling you something different than the MBA?  They're relying on weekly survey-based data that includes plenty of purchase mortgage rates while I'm looking at rates from multiple lenders every day, weighting for volume and loan type.  In short, these sorts of discrepancies happen given the different methodologies.  The weekly surveys do a decent job of providing general rate momentum, but my data will give you a better idea of when an all-time low actually occurred and how far away we currently are.

After falling moderately to start the week, mortgage rates put in a calmer performance on Tuesday.  As we discussed yesterday, volatility in the bond market results in lenders making changes to their mortgage rate offerings.  Sometimes the volatility is big enough that those changes occur intraday despite lenders generally preferring to set rates only one time on any given day. 

With that in mind, the ingredients are in place for more change tomorrow.  Reason being: late day tweets from Trump threatened to withhold stimulus until after the election.  Markets entered a logical tailspin resulting in significant stock losses and improvements for bonds.  To reiterate yesterday's conversation, these sorts of bond market improvements typically result in lower rates.

Mortgage rates have been spoiled, relatively, by an extraordinarily calm/narrow trading pattern in the bond market.  That's important because the bond market directly affects the day to day changes in mortgage rates.  A narrow/calm trading pattern means bond prices aren't moving.  The implication is that mortgage rates wouldn't need to move much either.

That WOULD be the case were it not for the new adverse market fee being phased in by every lender that offers conventional refinances (pretty much all of them).  Additionally, the historically low rates forced lenders to change their pricing based on their capacity at times.  In other words, there have been a few solid reasons for mortgage rates to move on any given day/week even though the underlying bond market hasn't suggested much movement since mid-August at least.

But now the bond market IS moving, and that will always be something the mortgage market has to consider when setting rates.  Let's just say today's move--while not remotely the worst we've ever seen--was bad. 

After weeks of incredibly subdued volatility, the bond market (which dictates rates) is starting to show some signs of life, but not for the same old reasons.

Inflation?

Inflation is one of the oldest and most significant reasons to freak out about interest rates.  It was by far and away the dominant source of drama in the 70's and 80's, arguably doing more than anything to shape the way policymakers would think about their rate-related goals going forward.

For instance, 3 decades of runaway inflation caused Fed policy to gradually evolve into a deadly weapon against higher rates.  The other school of thought is that inflation was destined to fall for reasons beyond the Fed's monetary policy decisions.  

Mortgage rates were mixed today, depending on the lender.  The underlying bond market (which dictates day to day changes in rates) has been more volatile in the past 48 hours compared to the past 4 weeks.  Mortgage lenders respond to this volatility in different ways.  It's those differences that account for higher rates for some lenders and lower rates for others.

But those differences are only in day-over-day terms.  In other words, one lender might be higher in rate compared to yesterday only because they didn't respond to yesterday's market volatility in a timely way.  Specifically, lenders have a choice as to whether or not they will adjust their mortgage rate offerings based on market conditions.  Some are jumpier than others. 

Mortgage rates don't just magically appear.  Lenders don't choose them arbitrarily.  To sustain the pace and scope of the mortgage market in the US (and indeed of most any debt), the cost of money over time has to be carefully considered before a lender knows where to set its rates.  When it comes to something like the money the US government borrows, it's the Treasury market that determines the cost of money over time.  In other words, open trading in financial markets results in the yield (aka rate) on a 10yr Treasury note being at one level while the rate for a 30yr Treasury note is at a different level.

There's a market for mortgage lenders to openly trade groups of mortgages (or even individual mortgages) too!  Like the US government sells Treasuries to fund operations, mortgage lenders sell Mortgage-backed securities (MBS) on the open market.  The prices paid by investors determine the value of MBS and consequently the line in the sand for mortgage lender profitability.

The average mortgage lender continues to offer top tier conventional 30yr fixed rates in the "high 2% to low 3%" neighborhood.  Exactly where any given quote will reside in that neighborhood depends on several factors.  The most important of those is the re-introduction of the new adverse market fee for all conventional refinances.  If you're not up to speed on that, here's some additional background.

The adverse fee is the most important factor because it instantly accounts for a change of at least 0.125% in rate for refinances.  Purchase mortgages are officially unaffected, but they've been caught in the crossfire, to some extent, as many lenders are generally pricing more cautiously during the phasing-in process for the new fee.  After all, the fee significantly affects lender cash flows.

Considering this week's generally positive drift in rates, we shouldn't expect lenders to get less busy any time soon.  In recent weeks, there's been a sense that mortgage pricing seems just a little bit "off" compared to expectations.  Those expectations are primarily derived from movement in the bond market.  When bonds improve, rates tent to improve as well, but that wasn't reliably happening recently.  One plausible hunch involves lenders being a bit more cautious with pricing until they have a clear sense of which loans will be subject to the new adverse market fee (not sure what that is?  read THIS).  With each passing day, they can be more and more certain that new loans will indeed get hit with the fee and thus are able to tighten up margins (thus resulting in slightly lower rates, all other things being equal).

Either way, the average lender had inched to the best levels of the week by Friday (apart from those who implemented the few fee at some point this week... those lenders are much worse off).