December 17th, 2012 (Modified on December 18th, 2012)

Mortgage rates find new room to fall



falling ratesAfter spending the last couple of years framing interest-rate policy in terms of calendar dates, the Federal Reserve abandoned time-based monetary policy in favor of pursuing a more goals-based one. At the moment, and regardless of any declared finish line, mortgage and other interest rates are going nowhere fast.

Record-setting week’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator (FRMI)–revealed that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbo) declined by two basis points (0.02 percent) to 3.58 percent last week, setting another new record low.

The overall average rate for 15-year fixed-rate mortgages (conforming, non-conforming and jumbo) also moved downward last week, in this case by three basis points (.03 percent) to touch a new record low of 2.92 percent.

FHA-backed 30-year fixed-rate mortgages were unchanged last week, as the most viable option for credit- or equity-impaired borrowers held fast at an average rate of 3.28 percent.

Finally, the overall average rate for 5/1 Hybrid ARMs also remained unchanged, closing the survey week at 2.69 percent.

Fed sets market-based timetables for rising rates

The Fed spent the better part of the last few years developing a strategy to help the market understand the Fed’s thinking and has been broadcasting their thoughts with increasing clarity. To this, they added time elements, revealing their expectations of when interest rates would be most likely to start to rise.

According to the Fed, monetary policy will remain largely on hold until the unemployment rate moves toward 6.5 percent and/or inflation moves above 2.5 percent. Even if these official benchmarks aren’t attained, the Fed may change policy if expectations for future inflation become less “anchored,” or the attainment of a given unemployment rate comes not through job creation, but rather from people giving up looking for work.

Fed’s programs to keep rates low

To enhance their ability to influence interest rates, the Fed has embarked on an open-ended program comprised of outright purchases of new Treasury bonds in an amount of $45 billion per month, at least to start. Of course, the Fed may adjust the size of purchases as it sees fit.

However, unlike the money-recycling program of Operation Twist, where short-term holdings were sold and long ones purchased, this one will expand the size of the Fed’s balance sheet, and the increase of money into circulation. This program joins an existing open-ended commitment to purchase some $40 billion per month in Mortgage-Backed Securities (QE3).

As the economy goes, so will go Fed policy. Let us hope that the Fed is correct in its assessment that it can manage these unconventional policies well. Should we get a spate of inflation as a result of them at some point, by its own guidance the Fed would have no choice but to raise rates, unemployment above 6.5 percent or not.

Low rates will be with us for a while

What it does mean is that the time of low interest rates will be with us for a while yet to come. It also means that future mortgage shoppers will need to watch the data and read the economic tea leaves so as to not be caught off-guard when the Fed does finally decide to change its stance. That won’t be today, tomorrow and probably not even next year.

Between now and then, it will remain a fantastic time to purchase or refinance a home. Rates can be expected to wobble around, of course, but should be reliably low though the winter and into the spring. Should the economy not fall off a cliff, and should any deal which comes instead not create a new economic mess, we might see an even stronger housing market before too much more time passes.

We’ll know more about the housing market as this week unfolds. Mortgage rates will probably tick a couple of basis points upward as they continue to wobble in a narrow range.

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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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