Originally posted by Ellen Seidman
and Wei Li :: February 12th, 2015
Mortgage interest rates—at
3.59 percent for a 30-year fixed rate loan and 2.92 percent for a 15 year
loan—are now at their lowest level since May 2014. Potential homebuyers in the
last several years have been consistently hearing that mortgage interest rates are about to go up,
but the downward trend of the last year and a half is unmistakable.
The reasons are complex,
and of course individual borrowers may not
find precisely these rates when they shop. But we recently huddled
with our HFPC colleagues to pool our thoughts about the major forces that are
pushing mortgage interest rates down.
They fall into two broad
categories: forces that affect the interest rate on Treasury securities
(reasons 1-3) and those that affect the mortgage risk premium above the
Treasury rate (reasons 4 and 5).
There certainly are forces
pushing mortgage interest rates in the opposite direction, most notably the
tapering of the Federal Reserve’s purchases of mortgage-backed securities
(MBS). This reduces the demand for MBS, putting downward pressure on their
price and upward pressure on MBS interest rates, which flow through to higher
interest rates on the underlying mortgages. And, as we point out in our monthly Chartbook (page 20), guarantee
fees on loans purchased by Fannie Mae and Freddie Mac have increased
dramatically. But so far, these forces have not been sufficient to stop the
downward trend in mortgage interest rates.
Of the five forces
discussed, three—commodity turmoil, very low Treasury rates, and reduced demand
for mortgages—are capable of fairly rapid turnarounds. So we should still
expect higher interest rates, although none of our colleagues are ready to
predict when. But it’s nice to know why we’ve got low rates now.