Falling Rates Push Refis Higher

Long-term rates continued downward as the 30-year fixed-rate mortgage average came in at 5.70%, a decrease of 5 BPS from last week, and the 15-year dropped 3 BPS to 5.10%, according to Freddie Mac’s latest survey of 125 thrifts, commercial banks and mortgage lending companies.

As expected, the Federal Reserve lifted the federal funds rate Tuesday by 0.25% to 1.75%. The federal funds rate, which is the rate charged on overnight loans between banks, sat at a very low 1% for one year to bolster the U.S. economy, until the Fed raised it by one-quarter percentage point this June, another quarter point in August and again this week.

But even the average for the 1-year Treasury-indexed adjustable-rate mortgage (ARM), which is more responsive to the Fed’s moves than long-term rates, did not follow upward. Instead, Freddie said the ARM average slipped 3 BPS to 4.00% within the past seven days, reversing its uptick reported last week.

“People in the market have been expecting the Fed to increase the funds target by a quarter percent for a really long time,” Freddie chief economist Frank Nothaft said in a short interview, when explaining the slight reverse in the ARM average. “That change was already embedded in the pricing of the short-term instruments, including adjustable-rate contracts.”

Also, the Fed’s announcement was done in the middle of Freddie’s data collection period so “its possible we may see some lenders over the next week or so incorporate the higher funds target into their pricing of the ARM contract,” Nothaft said. He noted, however, that he did not foresee any “material change” occurring within the next week in short-term or long-term mortgage rates.

Looking further ahead into next quarter, Fannie Mae’s economic forecast update released this week has the 30-year averaging 5.9%. The figure is down 32 BPS from its forecast a month ago and matches Freddie’s prediction. The MBA latest outlook has it slightly higher at 6.1%.

At Bankrate.com, the surveyed panel of mortgage bankers, brokers and other industry individuals was evenly split on whether rates would rise (43%) or stay about the same (43%) over the next month and a half, while only 14% believed rates would fall.

In response to the low rates the mortgage market has been experiencing, mortgage applications upticked. This was reflected in the seasonally adjusted increase of 1.8% to 690.7 in the Market Composite Index, shown in the latest applications survey by the Mortgage Bankers Association (MBA). Activity is close to that of a year ago when the index stood at 699.6% and the 30-year was about 30 BPS higher than its current level.

The slight increase in activity was due to homeowners’ heading to mortgage shops to refinance — the Refinance Index rose 4.1% within the past week on a seasonally adjusted basis, while the Purchase Index was virtually unchanged. However, compared to a year ago, MBA pointed out that refinance application volume has decreased 15.5% and purchase money volume has increased 13.6%, on an unadjusted basis.

Accordingly, Fannie estimates purchase originations will climb to an all-time high this year — up by more than 9% from last year to $1.29 trillion — and that refi originations will plummet by 52% to $1.26 trillion.

The refinance share of total mortgage applications edged up from the previous week to 44.5% and the ARM share was unchanged at one-third, the MBA said.

The 10-year Treasury-Note yield was 4.04% early Friday, with a price of 101 21/32.