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Mortgage Rates Return to 2015 Highs

Risk is flooding back into the markets, most notably in the form of the changes in the European bond markets. After a year and a half of record lows, it would seem that things have finally turned around. Though it is still too early to know whether or not this is to be a major, long-term reversal, investors are playing it safe by dumping their bonds.

Since the European markets are connected fairly closely with US markets, this selling trend is having an effect on American mortgage rates. This is providing for a high-risk environment, and the average borrower would do well to lock in to current rates before they can jump any higher.

Mortgage Fraud Risk on the Rise

Back in the period between 2005 and 2008, instances of mortgage fraud were at a peak. Fortunately, increases in regulation and lending standards led to a strong reversal of this trend, and we have seen very little in the way of fraud in the past few years. However, according to Bret Fortenberry of CoreLogic’s Insights blog, there is reason to believe that mortgage fraud is once again on the rise.

CoreLogic has been tracking mortgage fraud risk since 2010. Risk has moved up and down significantly, dipping into a deep valley early this year, but the overall trend still seems to be moving gradually upward. Low interest rates and rising home prices, which give unscrupulous individuals an opportunity to misrepresent down payments, can be attributed to much of this risk. Moving forward, the group expects these trends to continue, placing us at the bottom of a peak that should reach its highest level at some point in the second quarter. According to projections, this could be the highest level of fraud risk since CoreLogic first started tracking.

Volatile Movement in the Holiday Season

Mortgage rates were already near 2015 highs going into the Christmas holiday. On the 23rd, activity in mortgage-backed-securities only made this problem worse. Though the movement in MBS was a relatively small one, and one that would usually translate to a very slight change in mortgage rates, rates moved up to their highest level in the past five months.

This unusual fluctuation can be attributed to the volatile nature of the holiday season. Lenders are considerably more conservative about adjusting their rate sheets when market activity dies down during the holidays. The previous day was a far weaker one for MBS activity, but many mortgage lenders were not adjusting their rate quotes as much as they may otherwise have. Therefore, the 23rd started off on a much weaker foot than rate sheets indicated.

If you are trying to decide whether to float or lock, it would seem that the odds are in your favor. Should MBS prices linger where they are, mortgage rates could experience a significant improvement as we head into 2016.

Economy Outlook Weakens, Housing Indicators Improve

We’re past the halfway point in 2015, and the news is not good. According to Fannie Mae’s economic team, the outlook for the economy is less robust than had been anticipated earlier in the year. This is as a result of the second quarter economic growth reports, which came in lower than expected. Even factoring in the revised, improved growth reports of the first quarter of the year, the full-year outlook for 2015 remains at an improvement of 2.1%.

Currently, we are looking to the housing market to be a bigger contributor to growth for the rest of the year. Though activity was mixed throughout June, the first half of 2015 showed improvement over the same period in 2014. Existing home sales in June were at their strongest pace since February of 2007, and marketing time is shorter than it has been in the past four years. Throughout 2015 so far, we have seen a year-to-date improvement over 2014 of 7.7% in existing home sales, 20.3% in new home sales, 9.1% in single-family housing starts, and 14.4% in multifamily housing starts.

What to Expect in the End of 2015

We’re going into the final week of 2015, which means that there are only four more days to close loans this year. With fears about what to expect in the coming year, including fines, unsaleable loans, and UDAAP violations, many people are having to make tough decisions as to whether to lock in now or wait until after the start of 2016. So, what’s the best choice?

Fortunately, both Christmas and New Year’s Day fall on a Friday this year. This makes it easier to predict market activity. At the moment, the momentum continues to be fairly flat. For the next few days, we’re looking forward to the 5 year Treasury Auction, the 7 year Treasury Auction, the Case Shiller Home Prices, and Consumer Confidence reports. Any of these could have a powerful effect on mortgage rate activity, up until the markets close early on Thursday and remain closed throughout the New Year celebration. However, we’re not expecting much activity from this cycle of auctions. All things considered, the current flat trend may very well continue into 2016.

Underwater Homes Fall Below 10%

The housing crisis saw many homeowners go underwater with their mortgages, where their outstanding mortgage balance exceeds the actual value of the home. As the market continues to improve, though, it would appear that these days are far behind us. Just last quarter, more than three-quarters of a million US homes regained equity, bringing the percentage of homes with negative equity down to single digits.

Currently, there are approximately 4.4 million properties still underwater, representing about 8.7% of the country’s homes. The national aggregate value of this negative equity was down to $309.5 billion, representing a decrease of 11.6% from the $350 billion a year ago. The total borrower equity rose by $691 billion.

All the same, there is still a fair number of homes that are under-equitied. These homes, which have less than 20% equity, generally have a more difficult time securing a refinancing into a more favorable mortgage rate. They can also easily fall underwater when home prices dip. At present, there are about 9 million under-equitied homes, representing about 17.8% of total homes.