Mortgage rates today, May 22, 2020, plus lock recommendations

Forecast plus what’s driving mortgage rates today

Average mortgage rates inched downward yesterday, setting another all-time low. But the fall was the smallest one that’s measurable. And there are wide variations between the rates different lenders are offering. So yours may not have reached a new low, though it’s likely to have improved over the last couple of days.

The Federal Reserve is currently getting its way through its interventions in the mortgage market. But, over the last month, falls have occurred on only a small majority of business days. So don’t assume more drops are inevitable.

Markets will be closed for Memorial Day on Monday. So this column will be back on Tuesday.

Find and lock current rates. (May 24th, 2020)

Important notes on today’s mortgage rates

It’s important to note that uberlow rates are available only to the most creditworthy borrowers with big down payments and robust finances. Still, recent drops should mean that most who are in the process of borrowing will get a lower rate than the one they were looking at on Wednesday.

Overall, we think it likely that the Federal Reserve’s going to drive rates even lower over time. However, there’s a lot going on here. And, as we’ve recently seen, the Fed can only influence some of the forces that affect mortgage rates. So nothing is assured.

And expect some rises along the way. Read “How the Fed’s helping mortgage rates,” below, to explore the essential details.

Market data affecting (or not) today’s mortgage rates

We can still see little relationship between mortgage rates today and activity in the markets they usually follow. So we’re publishing the following only in the hope you have insights that we’re missing. Here’s the state of play this morning at about 9:50 a.m. (ET). The data, compared with roughly the same time yesterday morning, were:

• Major stock indexes were modestly lower. (Good for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of those down and increases yields and mortgage rates. The opposite happens when indexes are lower
• Gold prices held steady at $1,738 an ounce. (Neutral for mortgage rates*.) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower. But if they’re not worried now …
• Oil prices moved lower to $32.67 a barrel from $34.52 (Good for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.) 
• The yield on 10-year Treasurys fell to 0.66% from 0.68%. A year ago, it was at 2.30%. (Good for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though much less so recently
•  CNN Business Fear & Greed index nudged down to 52 from 54 out of a possible 100 points. (Good for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones

*A change of a few dollars on gold prices or a few cents on oil ones is a tiny fraction of 1%. So we only count meaningful differences as good or bad for mortgage rates.

Time was when we could use those markets to fairly confidently predict what would happen to mortgage rates on any given day. But those rates are for now divorced from those markets — and those markets are untethered from reality.

Rate lock advice

My recommendation reflects the success so far of the Fed’s actions. I personally suggest:

• LOCK if closing in 7 days
• LOCK if closing in 15 days
• FLOAT if closing in 30 days
• FLOAT if closing in 45 days
• FLOAT if closing in 60 days

But it’s entirely your decision.

The Fed might end up pushing down rates further over the coming weeks, though that’s far from certain. And you can expect bad patches.

As importantly, the coronavirus has created massive uncertainty — and disruption that seems capable of defying in the short term all human efforts, including perhaps the Fed’s. So locking or floating is a gamble either way.

How the Fed’s helping mortgage rates

In an announcement on March 23, the Federal Reserve said it was lifting the previous cap on its purchases of mortgage-backed securities (MBSs — explanation coming up). For now, there would be no limit on how much it would spend buying these.

On May 12, for example, the Federal Reserve Bank of New York purchased $240 million of mortgage bonds with a “coupon” (yield, well, sort of) of 2%, according to Bloomberg. The Fed said more buying was imminent. And that might see some mortgages being offered at sub-3% rates sooner than most expect.

What a mortgage-backed security is

MBSs are bond-like instruments: bundles of mortgages that are traded on a secondary market. Picture a tall pile of different closing documents tied up with string and you’re probably getting the concept of an MBS, even if the reality is often more digital. Chances are, your existing mortgage is tied up in just such a bundle and forms part of one MBS.

And, if you’re currently buying or refinancing a home, it’s the going price of these bundles on that secondary market that more than anything else determines your next mortgage rate. However, as you’re about to discover, it’s not the only determinant.

How Fed affects mortgage rates

For reasons explained near the end of this article, it’s a mathematical certainty that the higher the price of MBSs, the lower the rate you’ll pay.

Given that the Fed is a gigantic new buyer in this secondary market, it should generate increased demand that raises MBS prices and so creates lower yields for investors — and lower mortgage rates for you.

So that’s the theory. But we’ve seen a lot of those crumble to dust in recent months. And only time will tell how well this one holds up in practice.

Challenges to the Fed’s program

That Fed program took a while to have an effect on mortgage rates. Indeed, it was only on April 6 that they first dipped lower than they were on March 23, when unlimited purchases were announced. So how come there was a delay? And why do we still see some rises?

Well, there’s a lot going on here. But a big reason may be a resurgence in new applications from consumers for refinances.

Since late in March, refinances have been elevated, according to the Mortgage Bankers Association (MBA). Over the last previous five weeks, the numbers of new applications for refinancings has been more than twice as high as the same week one year earlier. That’s now easing, but only slowly. And the latest data, published on Wednesday for the week ending May 15, showed that figure to still be 160% up on the same period in 2019.

So no surprises there. As you’d expect, current, record or near-record lows for these rates are tempting more homeowners to refinance. But there’s one problem …

Fed may now be main player

… Investors hate refinances, especially if they’re for mortgages that are recent. Each sees a mortgage pulled from an MBS bundle — and a reduction of income and profit on that MBS. Indeed, some investors make actual losses on especially fast refinancings.

So the last thing they want is to replace lost mortgages with ones at an even lower rate and yield. And, understandably, many are shying away from MBSs. But the law of supply and demand means that lower demand inevitably pushes up mortgage rates. (Remember that counterintuitive mathematical certainty that lower bond prices mean higher yields and rates.)

So the Fed is trying to resist the market forces that arise when investors vote so decisively with their feet. We still think it likely (though far from certain) that it will get its way in the end and stabilize the market, perhaps pushing mortgage rates even lower in the process. But, with so many competing pressures, don’t expect a smooth ride.

Fly meets ointment

However, there’s another issue that’s been in play. Lenders that aren’t banks face cash flow problems arising from the pandemic. Millions of homeowners are already unable to make their monthly mortgage payments in full.

On Monday, the MBA said it reckoned around 4.1 million homeowning households with mortgages were currently in forbearance plans. And Black Knight’s latest research, for May 12, is even more pessimistic: It puts the same number at 4.7 million. That’s 8.8% of all mortgages.

All that means some loans that are in lenders’ “warehouses” (that are waiting to be sold) are turning bad before they even reach the secondary market as forbearances, delinquencies and defaults become more common.

Possible removal of fly

That problem’s likely to get only worse as unemployment and underemployment soar. Already, COVID-19 has caused more than 38.6 million Americans to lose their jobs.

Importantly, those non-bank lenders currently originate more than half of all residential mortgages. If they find themselves with warehouses overflowing with unsellable MBSs, that could leave them without the cash to lend to future borrowers. And that would see the supply of new mortgages diminish.

Toward the end of April, the Federal Housing Finance Agency (FHFA) announced two initiatives that might assist non-bank lenders. And they may be beginning to work. On Monday, Inside Mortgage Finance magazine noted:

Is it just us or has anyone noticed that the cries to assist nonbanks with their MBS payments have subsided, at least for now? Credit Ginnie Mae and its Pass-Through Assistance Program and the Federal Housing Finance Agency’s announcement that the GSEs [government-sponsored enterprises Fannie Mae and Freddie Mac] will take over MBS remittance obligations after four months, if need be …

Higher rates that are unconnected to MBS prices

But another supply issue also happens further down the mortgage production line than where the Fed is tinkering — and than where higher prices mean lower yields and rates.

Lenders who can’t cope with sudden tsunamis of demand try to manage their workloads by deterring would-be borrowers through higher rates. And, in this way, we may have already seen higher rates that are unconnected with MBS prices.

The current record low might trigger another such tsunami.

You can now understand why we said there’s a lot going on here.

Mortgages tougher to get

It’s all very messy. And some lenders are offering appreciably lower rates than others. Meanwhile, many are putting restrictions on their loans. And you may find it harder to find a cash-out refinance, a loan for an investment property — or any mortgage at all if your credit score’s iffy. So shopping around for your loan or refinance is even more important than usual.

On May 7, the MBA revealed the extent to which spooked lenders are tightening their credit requirements. Its Mortgage Credit Availability Index (MCAI) fell by 12.2% in April. And economist and MBA associate vice president Joel Kan explained:

The overall index fell to its lowest level since December 2014, and the subindexes pointed to tightened credit supply for all loan types. The decline was largely driven by lenders dropping many low credit score and high-LTV* programs, as well as further reduction in jumbo … products.

* LTV stands for loan-to-value ratio and determines how big a down payment you need. The higher the LTV, the less you have to put down.

An economist writes …

Back in mid-March, realtor.com® Chief Economist Danielle Hale thought lower rates were coming. “That [Fed buying of MBSs] should stabilize rates and bring them back down lower,” she said on her employer’s website. “They’ll [likely] go back to the low 3% [range]. Might we see rates below 3%? I wouldn’t rule it out.”

Those predictions are still looking sensible. However, they’re not universally shared. So you shouldn’t totally rely on them when you’re planning for the future.

For example, in their latest figures, published on May 15, the MBA’s economists forecast that the rate for a 30-year, fixed-rate mortgage would average 3.4% for the rest of this year. OK, that’s better than they thought in April. But it’s among the less optimistic forecasts.

Fannie Mae and Freddie Mac both expect them to head lower, more in line with Danielle Hale’s prediction. Indeed, Fannie’s expecting that rate to dip to 2.9% throughout 2021.

What should you conclude from this? That nobody’s sure about much.

Economic worries

Domestic threat

April 29’s official gross domestic product (GDP) figure showed the US economy contracting at a rate of 4.8% during the first quarter of this year. And the second quarter is, as you’d expect, looking much worse.

Indeed, on May 15, the Federal Reserve Bank of Atlanta’s running GDP estimate put its worst-case real GDP growth forecast for the current quarter at -42.8% — even worse than the -34.9% it was predicting a week earlier.

May 8’s official data showed April’s unemployment rate soaring to 14.7%, up from 3.5% in February. And, at 20.5 million, the total number of jobs lost in April was a record. Indeed it was more than twice as many in that one month than the 8.7 million that disappeared throughout the Great Recession.

But Goldman Sachs is forecasting much worse unemployment. It’s expecting a 25% rate at the peak.

Clash of the titans

During their virtual testimonies before the Senate Banking Committee on Tuesday, Fed Chair Jay Powell and Treasury Secretary Steve Mnuchin agreed that there are very tough times ahead.

However, they disagreed about how best to reduce the pain. Powell believed that no sustainable recovery was possible before the medical crisis subsides. But Mnuchen thought the early reopening of states was the best way to avoid “permanent damage.”

That’s a debate that’s raging in advanced economies across the world as the global impact of the pandemic grows.

Either way, a recession of some sort seems inescapable. But what will it look like?

What shape will a recession take?

Economists are squabbling about the shape (if you pictured it on a graph) the recession might take.

For a while, a V-shaped one (sharp dip and sharp recovery) was favorite. And it still is for some.

But other shapes are available. Some think a W more likely, especially if there’s a second wave of coronavirus infections following the early ending of lockdowns. Others fear an L: a precipitous fall and no recovery.

A “Nike swoosh” (based on that company’s famous logo) is gaining popularity. That’s a sharp drop followed by a gradual recovery. On May 11, The Wall Street Journal ran the headline, “Why the Economic Recovery Will Be More of a ‘Swoosh’ Than V-Shaped.”

And, on Monday, the CFA Institute, the global association of investment management professionals, reported that, in a survey, its members favored a hockey-stick shape: ” … any recovery will be slow or stagnant in the short term before picking up eventually in the medium term …”

Don’t take forecasts too seriously

Of course, such forecasts are justifiably worrying and must be taken seriously. But don’t assume that they’re going to prove wholly accurate.

A headline in The Financial Times on April 20 summed up the situation during this pandemic when so little is certain: “Banks are forecasting on gut instinct — just like the rest of us.”

And never forget a remark made by the late Harvard economics professor John Kenneth Galbraith:

The only function of economic forecasting is to make astrology look respectable.

Markets seem untethered from reality

We said above that markets are untethered from reality. That is, of course, a value judgment. But it’s hard to see why the S&P 500 stock index was up nearly 13% in April, its best monthly performance in 33 years.

That’s especially confusing given that, on May 1, analytics firm FactSet calculated that the decline in earnings for S&P 500 companies during the first quarter was -13.7%.

On May 15, The New Yorker ran a headline that posed a question many are asking:

Sly like a fox? Or not?

On April 10, The New York Times offered a possible explanation for markets’ apparent break from reality. Investors see the same death tolls, GDP forecasts, unemployment numbers and company earnings results as the rest of us.

But they hope the federal government’s and Federal Reserve’s mass pumping of trillions of dollars into the economy will see the big companies in which they invest emerge largely unscathed — or even stronger as smaller competitors go to the wall.

Indeed, they perceive huge numbers of newly unemployed Americans each week as a plus. Because, politically, those could force the administration and Congress to pump in yet more money.

However, this strategy’s success depends on a very quick economic recovery (a V-shaped recession) once the COVID-19 threat dissipates. And that may not be as likely as investors seem to think. Perhaps a more likely explanation for stock market performances is that investors simply have few other places to put their money.

But you may wonder whether investors should be betting so big on so many unknowable variables. Meanwhile, we’ll continue to say they’re untethered from reality.

Economic reports this week

It’s a very light week for economic reports. Not that that’s likely to affect markets. They’ve been unmoved by seriously important ones recently.

Indeed, the items on this week’s calendar most likely to attract investors’ attention aren’t economic reports at all. First came the virtual testimony on Tuesday before the Senate Banking Committee of Fed Chair Jay Powell and Treasury Secretary Steven Mnuchin.

And, secondly, was the publication of the minutes of the last meeting of the Federal Open Market Committee (FOMC) on Wednesday. That’s the Fed policy committee that sets that organization’s interest rates. So investors always pore over these minutes.

In any event, it would be a surprise if reality suddenly intruded on markets in coming days.

Forecasts matter

More normally, any economic report can move markets, as long as it contains news that’s shockingly good or devastatingly bad — providing that news is unexpected.

That’s because markets tend to price in analysts’ consensus forecasts (below, we use those reported by MarketWatch) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect.

And that means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead.

This week’s calendar

This week’s calendar of important, domestic economic reports comprises:

• Monday: Nothing
• Tuesday: April housing starts (actual 891,000 new homes started at an annualized rate; forecast 900,000) and building permits (actual 1.074 million permits issued at an annualized rate; forecast 996,000). Also Fed Chair Jay Powell, and Treasury Secretary Steven Mnuchin testify at a virtual hearing of the Senate Banking Committee
  
• Wednesday: No reports. But FOMC minutes published at 2 p.m. (ET)
• Thursday: Weekly jobless claims to May 16 (actual 2.4 million new claims; forecast 2.35 million). Plus April’s exiting home sales (actual 4.33 million at annualized rate; forecast 4.2 million) and leading economic indicators (actual -4.4%%; no forecast but -6.7% in March)
  
• Friday: Nothing
  

Might any of this week’s reports on economic reality catch investors’ attention? Seems unlikely.

Mortgage rates forecasts for 2020

Earlier, we reminded you of John Kenneth Galbraith’s warning not to take economists’ forecasts too seriously. But there’s nothing wrong with taking them into account, appropriately seasoned with a pinch of salt. After all, who else are we going to ask when making financial plans?

Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA) each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.

And here are their latest forecasts for the average rate for a 30-year, fixed-rate mortgage during each quarter (Q1, Q2 …) in 2020. Freddie’s (now a quarterly report, so less responsive to rapidly unfolding events) was published in April, and the MBA’s and Fannie’s were released last week:

Interestingly, in its May 15 forecast, the MBA predicted higher rates for the rest of this year than either Freddie or Fannie. If you’re waiting for even cheaper mortgages, you might see that as a red flag.

However, note the more optimistic numbers from Freddie on April 13 and Fannie on May 13.

The gap is real and widens the further ahead forecasters look. So Fannie’s now expecting that rate to average 2.9% throughout next year, while the MBA thinks it will be back up to 3.5% for the last half of 2021. Indeed, the MBA thinks it will average 3.7% during 2022. You pays yer money …

Still, all these forecasts show significantly lower rates this year and next year than in 2019, when that particular one averaged 3.9%, according to Freddie Mac.

Closing help …

Closing on a real estate transaction is hard enough without the extra obstacles erected by social distancing and lockdowns. So some are trying to dismantle the biggest barriers.

Appraisals sometimes avoidable

Many lenders are already allowing “drive-by” (exterior only) home appraisals or even wholly remote ones based on desk research.

On May 5, National Mortgage Professional magazine reported that an April 14 federal government initiative to get past some closing issues was being extended until at least June 30. The magazine listed the following bullet points:

• Alternative appraisals on purchase and rate term refinance loans
• Alternative methods for verifying employment before loan closing
• Flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws)
• Expanding the use of power of attorney and remote online notarizations to assist with loan closings

Those directly apply only to mortgages backed by Fannie and Freddie, though individual lenders may be making similar provisions for other types of loans.

… But a big issue for closings

But another closing obstacle may prove more difficult to surmount. Many county recording offices have been closed.

And, without access to the title searches and deed filings those provide, some purchases and refinancings may stall. The industry is working to overcome this obstacle. But its response is patchy, as legal website JD Supra reports:

Title insurance companies have issued underwriting bulletins confirming they will provide title insurance coverage for transactions that occur when recording offices will not accept documents for recording. Each title company has its own requirements and limitations, so it is important to confirm those requirements on a closing-by-closing basis.

If you’re affected, talk with your loan officer, attorney or real estate agent.

Rate lock recommendation

I suggest

I suggest that you lock if you’re less than 15 days from closing. But we’re looking at a personal judgment on a risk assessment here: Do the dangers outweigh the possible rewards?

At the moment, the Fed mostly seems on top of things (though recent rises have highlighted the limits of its power). And I think it likely it will remain so, at least over the medium term.

But that doesn’t mean there won’t be upsets along the way. It’s perfectly possible that we’ll see periods of rises in mortgage rates, not all of which will be manageable by the Fed.

That’s why I’m suggesting a 15-day cutoff. In my view, that optimizes your chances of riding any rises while taking advantage of falls. But it really is just a personal view.

Only you can decide

And, of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. After all, current mortgage rates are at record or near-record lows and a great deal is assured.

On the other hand, risk-takers might prefer to bide their time and take a chance on future falls. But only you can decide on the level of risk with which you’re personally comfortable.

If you are still floating, do remain vigilant right up until you lock. Make sure your lender is ready to act as soon as you push the button. And continue to watch mortgage rates closely.

When to lock anyway

You may wish to lock your loan anyway if you are buying a home and have a higher debt-to-income ratio than most. Indeed, you should be more inclined to lock because any rises in rates could kill your mortgage approval. If you’re refinancing, that’s less critical and you may be able to gamble and float.

If your closing is weeks or months away, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer your lock, the higher your upfront costs. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.

If you’re still floating, stay in close contact with your lender.

Verify your new rate (May 24th, 2020)

What causes rates to rise and fall?

In normal times (so not now), mortgage interest rates depend a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.

For example, suppose that two years ago, you bought a $1,000 bond paying 5% interest ($50) each year. (This is called its “coupon rate” or “par rate” because you paid $1,000 for a $1,000 bond, and because its interest rate equals the rate stated on the bond — in this case, 5%).

• Your interest rate: $50 annual interest / $1,000 = 5.0%

When rates fall

That’s a pretty good rate today, so lots of investors want to buy it from you. You can sell your $1,000 bond for $1,200. The buyer gets the same $50 a year in interest that you were getting. It’s still 5% of the $1,000 coupon. However, because he paid more for the bond, his return is lower.

• Your buyer’s interest rate: $50 annual interest / $1,200 = 4.2%

The buyer gets an interest rate, or yield, of only 4.2%. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.

When rates rise

However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.

Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:

• $50 annual interest / $700 = 7.1%

The buyer’s interest rate is now slightly more than 7%. Interest rates and yields are not mysterious. You calculate them with simple math.

Mortgage rate methodology

The Mortgage Reports receives rates based on selected criteria from multiple lending partners each day. We arrive at an average rate and APR for each loan type to display in our chart. Because we average an array of rates, it gives you a better idea of what you might find in the marketplace. Furthermore, we average rates for the same loan types. For example, FHA fixed with FHA fixed. The end result is a good snapshot of daily rates and how they change over time.