The Current State of Mortgage Rates | Guest Post

The pace of the spike in mortgage rates over the last week has been incredible, considering it began when rates were already near their highest levels in more than a decade. 5.55 percent was the average level for a top tier 30 year fixed quote on Thursday June 9th and by June 15th the average lender was up to 6.28 percent.

The show began on June 10th when the Consumer Price Index (CPI), a key inflation report showed prices rising faster than expected. Inflation is the biggest concern for the Fed now, and the biggest reason for their increasingly aggressive efforts to push rates higher in 2022.

CPI alone wouldn't have been worth the drama we witnessed, however. The frenzy of the past few days was compounded by the fact that the financial market knew there was a Fed announcement coming up on Wednesday and that the Fed was in its regularly scheduled "blackout period." During the blackout period, the Fed refrains from public comment on monetary policy. Markets were flying blind as to what the Fed's response might be to the CPI data.

When we finally heard from the Fed, the initial reaction suggested the market's wild imagination was fairly accurate. The Fed hiked its policy rate by the same 75 basis points (0.75 percent) predicted by Fed Funds Futures, tradeable contracts that allow markets to bet on the level of the Fed Funds Rate. Not only that, but the initial reaction in bonds was insignificant.

How can that be?! If the Fed hiked 75 basis points, wouldn't mortgage rates rise by 75 basis points?

This question is a popular source of exasperation for those of us in the industry. The short answer is that the Fed Funds rate doesn't control mortgage rates. Significant changes in Fed Funds Rate expectations typically translate well to mortgage rate momentum. The bottom line though is that by the time the Fed hikes or cuts, mortgage rates have already reacted to whatever the Fed was likely to do.

It wasn't until Fed Chair Powell made one key comment that bonds felt a significant measure of reassurance. What did Powell say? It was quite simple. Powell does not expect 75 basis point rate hikes to be common and that the next meeting would involve a decision between that and 50 basis points.

For a market that was sure we'd be seeing 2 consecutive 75 basis points hikes, this was worth a reprieve from the recent stress. By hiking 75 basis points at this meeting and leaving it on the table for the next meeting, Powell showed markets he's serious about righting the Fed's wrongs, which was letting the Fed policy run too hot for too long.

The bond market rejoiced with the bonds that specifically underlie mortgage rates improving enough for the average lender to drop rates at least a quarter of a point. Some lenders dropped rates by more than that, depending on the starting point.

As has been and continues to be the case, the mortgage market is a highly stratified and highly volatile environment right now. There are no issues regarding credit availability, money is available to lend and there are no signs of stress, but it's not all sunshine and lollipops regarding the buying and selling of mortgage bonds on the secondary market. This affects prices and rates both in terms of elevated rate levels and volatile movement, moment-to-moment.

Rates will continue to be a topic of conversation for your clients, but now that we have the Federal Reserve meeting out of the way mortgage rates should settle down and there should be less volatility until the week before July 26-27 when the FOMC meet again.

*source: Mortgage News Daily – Matt Graham

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