Sunday, March 21, 2021 / by Teresa DiPeso
Freddie Mac, the federally chartered mortgage investor, aggregates rates from around 80 lenders across the country to come up with weekly national average mortgage rates. 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 survey is based on home purchase mortgages, which means rates for refinances may be higher. The price adjustment for refinance transactions that went into effect in December is adding to the cost. The adjustment, which applies to all Fannie Mae and Freddie Mac refinances, is 0.5 percent of the loan amount. That works out to $1,500 on a $300,000 loan.
The 15-year fixed-rate average ticked up to 2.40 percent with an average 0.7 point. It was 2.38 percent a week ago and 3.06 percent a year ago. The five-year adjustable rate average grew to 2.79 percent with an average 0.3 point. It was 2.77 percent a week ago and 3.11 percent a year ago.
“Mortgage rates rose again this week, continuing their ascent to reach their highest levels in a year,” said Matthew Speakman, a Zillow economist. “Upward pressure on mortgage rates is likely to remain, as increased economic activity and steeper inflation both tend to push rates higher. Further fueling this week’s increases was the implementation of a new policy from the Federal Housing Finance Agency. The policy places a cap on how [big] the share of Fannie Mae and Freddie Mac’s portfolio that loans associated with investment properties or second homes can comprise. Lenders who had a larger share of those loans had to quickly raise rates associated with them to lessen their ratios.”
The Federal Reserve concluded its meeting Wednesday, leaving its benchmark rate untouched. Fed Chair Jerome H. Powell said after the meeting that the Fed would need to see consistent and sustained growth in prices and a sharp drop in unemployment before discussing changes to interest rates or its monthly bond purchases.
Although the Federal Reserve does not set mortgage rates, its policies can influence them. Since early in the pandemic, the Fed has been buying $120 billion in bonds each month, which has held down mortgage rates.
“Today’s statement did not indicate any changes in the Fed’s plans to continue to purchase $120 billion per month of longer-term Treasuries and [mortgage-backed securities],” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.
“However, we do expect that the economy will make substantial further progress by the end of this year, which likely means the potential for the beginning, or at least the announcement, of a tapering of these [qualitative-easing] purchases.”
In 2013 when then-Fed chairman Ben Bernanke announced the central bank would be tapering its bond-buying program, the resulting “taper tantrum” sent mortgage rates soaring.
Although rates are being held somewhat in check by the Fed’s bond-buying program, rising long-term bond yields have been putting upward pressure on them lately. The yield on the 10-year Treasury has been on a tear. It surged to a 13-month high of 1.64 percent on Friday and has remained above 1.6 percent ever since.
“Economic signs are pointing toward a post-pandemic return to normality, a welcome development as spring approaches,” said George Ratiu, senior economist at Realtor.com. “However, good news for the economy also means a pivot away from bonds for many investors, which translates into higher rates which are likely to stick around for the rest of 2021. While we expect rates to remain favorable, especially in light of historical trends, the upward move is capping many buyers’ budgets and trimming their ability to qualify for more expensive homes.”
Bankrate.com, which puts out a weekly mortgage rate trend index, found the experts it surveyed nearly evenly divided on where rates were headed in the coming week. About a third said they would go up, another third said they would go down and another third said they would remain about the same.
Ken H. Johnson, a real estate economist at Florida Atlantic University, said he expects rates to remain unchanged this coming week.
“Many central banks around the world are recognizing arbitrage opportunities and buying U.S. 10-year Treasurys to cover their local borrowing positions at much lower rates,” he said. “This unexpected demand for U.S. debt is putting a temporary ceiling on U.S. 10-year Treasury yields and long-term U.S. mortgage rates. Long-term mortgage rates in the U.S. should remain stable until foreign central banks’ demand for these notes recedes.”
Meanwhile, rising rates put a damper on refinances leading to a drop in mortgage applications last week. According to the latest data from the Mortgage Bankers Association, the market composite index — a measure of total loan application volume — decreased 2.2 percent from a week earlier.
Although the purchase index grew 2 percent from the previous week, the refinance index dropped 4 percent. The refinance share of mortgage activity accounted for 62.9 percent of applications.
“The spring housing market is off to a good start, with buyer demand being driven by the improving job market, rising economic outlook and ongoing wave of millennial households interested in buying their first home,” said Bob Broeksmit, MBA president and CEO. “Purchase applications increased again last week on a weekly and annual basis. Applications to refinance a home fell to the lowest level of activity since last September. With mortgage rates continuing to climb from recent record lows, the pool of homeowners who can benefit from a refinance is shrinking.”