Freddie Mac, the federally chartered mortgage investor, aggregates rates from about 80 lenders across the country to come up with weekly national average mortgage rates. It uses rates for high-quality borrowers who tend to have strong credit scores and large down payments. These rates are not available to every borrower.
The 15-year fixed-rate average slipped to 2.35 percent with an average 0.8 point. It was 2.37 percent a week ago and 3.21 percent a year ago. The five-year adjustable rate average dropped to 2.96 percent with an average 0.3 point. It was 3.11 percent a week ago and 3.49 percent a year ago.
“The Federal Reserve’s continued commitment to a zero interest rate policy combined with the central bank’s purchases of mortgage-backed securities kept the 30-year fixed mortgage rate unchanged,” said George Ratiu, a senior economist at Realtor.com.
At the end of its two-day policy meeting Wednesday, the Federal Reserve, as expected, left its benchmark rate untouched. The Fed slashed rates to near zero about six months ago when the pandemic first took hold. Some Fed officials signaled that rates could remain low until 2023.
In addition to holding down short-term rates, the Fed has been buying mortgage-backed securities — or MBSs, as they are often known — which are bundles of mortgages sold on a secondary market. When a borrower takes out a loan such as a 30-year fixed-rate mortgage, a lender often bundles that loan with other loans into an MBS and then sells it to investors.
Mortgage rates are typically based on MBS prices. When MBS prices go up, secondary market prices go down. (It’s not unlike U.S. Treasurys. When prices go up, yields go down.) The Fed’s unlimited MBS buying has put downward pressure on rates.
“The biggest driver behind low mortgage rates is the Fed, as 30-year fixed rates have fallen about three-quarters of a percent since the Fed began buying up mortgage-backed securities in March,” said Brian Koss, executive vice president of Mortgage Network. “But the final ‘street price’ of loans is being set by the ability of lenders to manage capacity, which has been challenging since the demand for refinancing has skyrocketed.”
The Fed said in its statement that it would continue to purchase Treasurys and MBSs “at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”
While the pandemic has driven down mortgage rates, it has also made mortgages more difficult to obtain.
“There’s still a lot of economic uncertainty tied to the pandemic, which has caused lenders to tighten up their loan criteria,” Koss said. “As a result, higher risk loans — that is, loans with low credit scores, high debt ratios and low down-payments — are being priced higher than normal. In some cases, borrowers who might have qualified before the pandemic could not qualify today.”
“Rates have been pretty consistent since early July, as economic activity just hasn’t pushed the needle much in the way of movement either up or down,” said Jim Sahnger, a mortgage planner at C2 Financial. “The Fed met this week and offered a pretty weak expectation of inflation for years to come. As inflation is the enemy of bonds and mortgage-backed securities, the Fed pretty much said don’t expect rates to change much from here and for a while. Look for refinance transactions to get a little more expensive as lenders are pricing back in a fee being levied by the [Federal Housing Finance Agency] for most conventional mortgage transactions.”
Meanwhile, mortgages applications dropped off last week. According to the latest data from the Mortgage Bankers Association, the market composite index — a measure of total loan application volume — decreased 2.5 percent from a week earlier. The purchase index slipped 1 percent from the previous week but was 6 percent higher than a year ago. The refinance index fell 4 percent but was 30 percent higher than a year ago. The refinance share of mortgage activity accounted for 62.8 percent of applications.
“Both purchase and refinance applications eased slightly last week, but both continue to outpace year-ago levels,” said Bob Broeksmit, MBA president and CEO. “Purchase activity has increased on an annual basis for an impressive 17 straight weeks. The mortgage market has been the backbone of an economy that is still struggling with high unemployment. With mortgage rates hovering near a record low and likely to stay there, borrower demand this fall should stay robust. MBA forecasts total originations in 2020 to be the highest in 15 years, led by the ongoing wave in refinances.”
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