The Federal Reserve Surprises

September 25, 2013

The Federal Reserve Board of Governors surprised almost all Fed watchers when it decided at its Sept. 18 meeting not to start tapering with its $85 billion bond-buying program. The program consists of the Fed buying $45 million in 10-Year Treasuries and $40 in mortgage-backed securities.

In explaining why it chose not to start tapering, the Fed cited continued weakness of the overall economy. They pointed to a few concerns in the current economy; employment, inflation, a recent spike in rates as well as the government sequester.
The unemployment rate remains elevated. The labor participation rate is low. This means that there are many workers who are not looking for work, which means the actual unemployment rate is higher, perhaps significantly higher than what is being gauged and reported these days by the Department of Labor.

Other worrisome factors that made influenced the Fed’s decision included pullback of government investments because of the ongoing sequester and other cutbacks. The uncertainty of the raising of the debt ceiling and the possible government shut down also part of the concerns. These items are ultimately a drag on the economy.

The inflation rate, or lack thereof, was also cited. The Fed has called for a steady 2-percent rate of inflation to one of the foundations for a healthy economy. Currently, the inflation rate is 1.3 percent. This is well below the target. The Fed is concerned about possible disinflation.

In chairman Ben Bernanke’s press conference, he showed charts by the Fed that predicted that the 2-percent inflation target would not be reached until 2016. The Chair reiterated that the Fed would not raise the Fed Funds Rate until the goals are archived. Taken at his word, the Fed is not likely to raise the key Fed Funds rate, which is currently at 0 to ¼ percent, until late 2015 or early 2016.

In explaining its accommodative monetary policy, the Fed states: “It will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

The Fed also expressed concern about the recent increases in mortgage interest rates. The Fed is worried the recent spike in rates is hurting the economic recovery.

For the time being, the Fed will be very accommodative in an effort to keep the overall economy moving forward. Expect the bond markets and mortgages to readjust yields lower in order to reflect the Fed’s current outlook.

Bill Starrels lives in Georgetown where he works as a mortgage loan officer. He can be reached at 703-625-7355 or

Mortgage Rates Climb in an Unsettled Market

August 21, 2013

Mortgage rates continue to climb to higher levels as the market prepares for an eventual Federal Reserve Bank decision to pull back from its bond-buying program.

The Fed has been buying $85 billion dollars worth of bonds and mortgage backed securities in an effort to keep mortgage rates at lower levels. If the Fed pulls back from its bond buying program, the expectation is for bond prices to go down in value and rates to go up.

Over the last several weeks, the markets have driven rates on the 10-year Treasury notes up over 100 basis points. Mortgage interest rates have gone up around 150 basis points.

The markets have likely priced in a good portion of the anticipated change, when the Fed does pull back on its stimulus program.

Economic reports have been fair to good. Housing starts were good for multi-family and less then stellar for single-family homes. House sales have been strong but appear to be showing the effects of rising rates, which have hurt affordability.

The latest employment report missed the consensus numbers and was generally a soft report. Additionally, there were downward revisions for the previous two months of employment numbers. The Fed has stated repeatedly that it will not raise the Fed Funds rate until employment goes to around 6.5 percent. Goldman Sachs, among others, does not think the Fed will raise rates until late 2015 or early 2016.

Corporate earnings for the latest quarter have been coming in with less then robust numbers. The earnings reports suggest that the economy may be slowing some in the second half of the year.

Housing inventory remains tight, and pricing remain at high levels. It does appear in the most recent reports and statistics that the rise in interest rates is dampening the rise in house prices.

The housing affordability index is showing the highest readings in years. House prices are clearly rising faster then wages.

This coupled with the spike in interest rates have made affordability more difficult for a lot of perspective home buyers.

Congress, which reconvenes in September, will launch into its divisive do-nothing mode of governing as the next round of budget talks take center stage. It will be another glaring mess of a lack of governing. This will likely be unsettling for the markets and ultimately the economy.

For the near term, expect volatile markets that do not always make sense. Interest rates will remain choppy and on the higher side. Keep focused on the prize of getting that house you want to live in. For your mortgage, simply get the best interest rate of the day and be happy.

Bill Starrels lives in Georgetown. He works as a mortgage loan officer. Bill can be reached at 703-625-7355 or

Looking Beyond the Squall

July 17, 2013

Sometimes, it is a good idea to look beyond the debris left behind by the squall and do an assessment of where things are.

Yes, interest rates have spiked from recent historical lows of several weeks ago when mortgage rates were in the middle three-percent range. However, mortgage rates are now moving in a relatively narrow range with the best execution for thirty-year fixed rate mortgages hovering in the mid four percent range.

Jumbo rates, for loans above $625,000 in the D.C. metropolitan market are priced very competitively to conventional rates. Rates on 15-year fixed rate money are below 4 percent for purchase rates. Adjustable rate mortgages, including seven-year ARMs are below 4 percent.

Today’s rates are similar to rates in late 2011. By historical standards, interest rates are in a very good range. The problem is that most people remember only the lowest of the low rates.
After the release of the mid-September FOMC minutes, Federal Reserve Chairman Ben Bernanke made a statement in order to calm the wild market reactions to his early speech from a week earlier which had caused a wild spike in interest rates and unease on Wall Street.

In his statement, Bernanke most notably referred to the unemployment rate. He said that the 7.6-percent unemployment rate overstated the strength of the labor market. This is very significant because the announced policy of the Fed has been that they would not think about raising interest rates until the unemployment rate was driven to 6.5 percent. Clearly, there is a long way to go for employment to get close to the Fed’s target.

By making these comments, the stock market regained its footing and the bond markets moderated. This helped mortgage rates go to the lower range of their recent range.

There will be increased volatility this summer. Economic news, good or bad, is likely to cause an occasional spike in the markets which will drive rates a little higher or a little lower depending on the news of the day.
Other economies are slowing, most notably China. The European Union is in the midst of stimulus for its economies. There are clearly a lot of pressures that should help the Fed keep rates in a relative narrow range this summer. ?

Bill Starrels lives in Georgetown and is a mortgage loan officer, who specializes in refinance and purchase mortgages. He can be reached at, or 703-625-7355.

Rates Take Spike After Fed Comments

July 4, 2013

June was a horrible month for mortgage interest rates. Interest rates hit their recent lows in May when the average 30-year fixed rate loan was 3.4%. Rates for the last week of June hit 4.45% a jump of just over one hundred basis points. In the second quarter, the quarterly rise in rates was the highest since the fourth quarter of 2010.

The catalyst for the rate jump was Wall Street’s reaction to the Federal Reserve Chairman Ben Bernanke’s June 19 news conference.

The following are the comments that moved the markets: “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.”
After the extreme move in the markets, there has been a lot written about the likely overreaction of the markets to Bernanke’s words.

Wall Street Journal economics editor David Wessel wrote a column, “A Hawkish Signal Bernanke Didn’t Send,” He wrote the markets overreacted to the Fed’s statements. “Futures markets are betting the Fed might lift short-term rates from zero as soon as mid-2014. “That is neither what Mr. Bernanke expected nor what he meant.” Wessel explained that Bernanke said, “There is no change in policy here” at the Fed’s news conference.

After reactions to Bernanke’s statement, the Fed started to clarify the Fed’s positions to temper the market reactions. Fed Governor Jeremy Stein was quoted as saying that the Fed did not want to raise rates until 2015 or later.

Even St. Louis Fed President James Bullard, who is known as an interest rate and inflation hawk, shifted his position on raising rates. He has acknowledged that inflation is running substantially below the Fed’s 2% target.

The Fed has set a long-term inflation target of 2% when the bank would begin to tighten monetary policy. Inflation remains very low.

Jeremy Siegel of the Wharton School of Economics wrote that partially due to the change in demographics – the population is getting older and will spend less and invest more conservatively. This will help to keep interest “rates low for years to come.”
Historically speaking, rates are still attractive.

Mortgage: Rates Jump Higher

June 6, 2013

Late May was the worst period for mortgage interest rates in recent years.

Before the turnaround in the markets interest rates on 30-year fixed conventional mortgages was in the mid 3-percent range. FHA government backed mortgages were 3.25 percent with lender credits towards closing costs. Fast forward and we find rates for conventional mortgages on single family houses now at 4 percent or slightly higher and rates for FHA mortgages now in the high 3 percent to almost 4 percent.

The catalyst for the jump in rate was the ramification from last month’s employment report. The report was simply much stronger than Wall Street was expecting. Before the report, the markets were pricing in anticipation of much weaker numbers. When the reports came in opposite where the markets were positioned, the severe correction took hold.

The labor participation numbers are another important factor in the economy. Fewer people are looking for work then are historically normal. This may be contributing to the lower unemployment numbers.

The next event that could upset the markets again is the next employment report. Another strong report will help solidify the current higher trends. If the report is not as strong as expected, then the markets could reverse the current trend.

Another catalyst is the Federal Reserve Bank’s asset buying program. There is great debate as to when the Fed will start tapering its buying program. The program includes the massive buy back of treasury notes, which has been helping to keep rates down. An industry newsletter, “Mortgage News Daily,” reported in late May, “The pendulum is swinging back from April’s extremes and is being accelerated by changes in the Fed’s asset buying outlook–even though no changes in the asset buying have yet occurred.”
No one has a crystal ball. Clearly, the economy is showing some traction. A couple of weak notes including a slight downward revision to the first quarter GNP and a slight decrease in consumer spending. Lastly, the labor participation rates are low. Inflation is low and is not showing signs of increasing anytime soon.

Expect further volatility in coming days and weeks. Calmer waters are somewhere in the future. Until then, the ride will be turbulent. ?

+Bill Starrels lives in Georgetown and is a mortgage loan officer who specializes in refinance and purchase mortgages. He can be reached at or 703-625-7355.

Volatility In The Markets

May 23, 2013

Mortgage interest rates have become increasingly volatile in May. Money is flowing into the stock market and out of the bond market. When bonds sell off, yields go up. Mortgages usually follow the bond market.

Although recent mortgage interest rates are close to the high water mark for 2013, they are still at very reasonable levels.
The best execution for thirty-year fixed rate mortgage has moved from around 3.5 percent to close to 3.75 percent in the middle of May. The volatility is the sharpest the market has seen in several months.

There have been recent articles about the Federal Reserve Bank backing away from quantitate easing programs which include massive purchasing of Treasury Bonds. The obvious concern is that once the Fed stops buying bonds, the price of bonds, which are the foundation for the mortgage markets, would go up in rate. This would translate to still higher interest rates.
The housing markets locally, and in some regions nationwide, remain very strong. In these hot markets, listings are selling in 14 days. The strong job market in the Washington metropolitan area is a key driver to home sales.

The effects of the federal sequestration are going to start to filter though the economy. Many government workers from the Park Police to defense workers are feeling it. The math is not hard to understand. If someone is working several fewer hours less a week, they get paid less. This translates to less money they have to spend.

It will be interesting to see the Federal Reserve minutes due to be released in the third week of May. The Fed is likely to show a little disagreement in its ranks. At the same time, the Fed should be reiterating its policy of not raising rates for a couple of years.
The nation’s economy is moving forward. Inflation is very low. The world economy has some catching up to do. Job growth is getting better, but there is a long way to go for “full” employment. The GDP is expected to rise less than in previous quarters.

The Congressional Budget office forecasted that the Federal budget deficit will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago. This is positive for both the economy and the bond market.

The bottom line is this: there will be more volatility in the markets in coming weeks and rates, too, will be volatile. Rates in general are in a good range.

Interest Rates Are Still Attractive

May 9, 2013

The only constant about mortgage interest rates is that they do move. Depending on the economic news of the day rates will go higher or they will go lower.

Case in point was the first week of May. The much touted monthly employment numbers blew past expectations. Additionally, the numbers preciously reported for the preceding two months were revised higher. Total nonfarm payrolls were higher by 165,000 led by 176,000 new private sector jobs. Most were expecting a number closer to 125,000. The unemployment rate fell to 7.5 percent. Most economists expected the rate to hold steady at 7.7 percent.

Increased jobs were higher in transportation, financial services and health care. Job losses were seen in government and information services.
Construction jobs were off by 6,000 after rising 138,000 for the previous six months. The jobs numbers were revised upwards for February and March. February was revised to 332,000 and March to 138,000 The report was the catalyst for the stock markets. The Standard and Poors index reached 16,000 and the Dow Jones Industrial average reached 15,000, both represented new highs. Conversely there was a selloff in the bond market. The 10-year Treasury notes were yielding around 1.62 percent before the jobs report was released. The yield on the 10-Year notes ended the day at 1.74 percent. Mortgage interest rates track the 10-Year Treasury notes. Mortgage rates bounced higher after the jobs numbers were released. Rates generally speaking rose by around 1/8 in rate. The overall jobs numbers are encouraging.

They do point to an economy that is growing at a modest pace. The GDP numbers for the first quarter of 2013 showed a growth rate of 2.5 percent. Although positive, this is a modest pace. The effects of the government sequestration will likely be a weight in the second quarter numbers. Inflation remains benign. The rate of inflation is presently around 1.5 perfect. There is no cause for concern. Some inflation is good for the economy. Mortgage interest rates are still at very nice low levels. They are off of their recent lows, but not by much. Expect rates to keep in a relatively narrow range in the near term. It is still an excellent time if one needs a purchase or refinance mortgage.

Economic Numbers Continue to Impress

March 13, 2013

The February employment numbers blew the doors off consensus numbers. In February, the economy produced 236,000 new non-farm payroll jobs. The consensus was around 165,000. So the new numbers were 71,000 higher then predicted. The unemployment rate fell from 7.9 percent to 7.7 percent. It was an excellent report.

Interest rates after the release of the employment numbers hit the highest levels since May of 2012. Generally speaking good news on the economy means higher mortgage interest rates.

Consumer spending continues to be strong. This is likely attributable to continued robust consumer spending. Many economists expected consumer spending to decline after the increase in payroll taxes in January, which resulted in a decline in take home pay. One theory is the wealth effect. Household wealth is at its highest level since the third quarter of 2007. This figure represents the difference between the value of household assets and liabilities.

The record highs of the stock markets, which in the first full week of March were at its highest level ever helps contribute to the good feeling of the consumer.
Household income has held up surprisingly well in recent months.
House prices are strong. Housing inventory is at very low levels. With demand rising and inventory at low levels, prices are increasing. Merrill Lynch increased its prediction for home appreciation. The new prediction is for single-family houses to appreciate by 8 percent in 2013. Prices were up 7.3 percent nationally in 2012.

The housing affordability index is excellent. Mortgage interest rates are at low levels and house prices are still attractive. Both are off of their historic lows.

The Federal Reserve Board of Governors has repeatedly stated that they will not stop their current foundation of low rates until the unemployment rate reaches 6.5 percent. No matter how pretty the February numbers were, the distance between an unemployment rate of 7.7 percent and 6.5 percent is a long one.

There will be more fluctuations in the economy in the near term. Mortgage rates will likely stay in a relatively narrow range in the near term. Rates have bounced higher off of the recent historically low levels.

Economists warn that sequestration may temper economic progress starting in the next couple of months. One strong employment report is good. Economists are anxious to see if the accelerated employment can be sustained in the next couple of months.?

Mortgage Standards Getting Tougher

January 16, 2013

There is one constant in the mortgage industry these days. It is not easy getting a mortgage. Well, folks, coming to you in 2014 – even tougher mortgage standards.

The Consumer Financial Protection Bureau (CFPB) has announced new rules for a new class of “qualified mortgages” unveiled on Jan. 10.

Banks that underwrite mortgages that meet the criteria as “qualified mortgages” will be protected from homeowner lawsuits which is a big win for the banking industry. This comes on the heals of the multi-billion dollar settlements the nation’s largest banks just paid to Fannie Mae and Freddie Mac.

Some of the basic changes in the new rules include;
•Lowering the maximum loan to value ratio to 43%
•Eliminating interest only mortgages
•Limiting up front fees charged on a mortgage
•Eliminating most low documentation loans
•Raising the amount of down payment required on mortgages

Reactions by various industry leaders where mixed. Debra Still, chairman of the Mortgage Bankers Association, said that the MBA agrees that the goal of the regulations, ensuring that borrowers receive loans they can repay, is in everyone’s best interests. The MBA did express some reservations about some aspects of the new rules that could curb competition and perhaps increase some costs.

Fred Becker, the president and CEO of the National Association of Federal Credit Unions, embraced the inclusion of credit unions in the new umbrella. Becker said, “NAFCU strongly believes that the safe harbor approach is preferable for all parties involved in a mortgage loan transaction as it provides parties clarity and certainty, and consequently discourages frivolous lawsuits, claims or defenses.”

It appears that industry leaders see the protection against lawsuits as a good tradeoff for the tightening of constraints of underwriting standards.

The National Association of Home Builders was cautious in its reaction, stating that the new rules should strike a “proper balance” that encourages lenders to appropriately provide credit to qualified borrowers while assuring financial institutions they will be protected from lawsuits if they follow the rule’s criteria.

The industry has gone from very lax underwriting standards which helps lead to the housing crisis of 2008. Many have commented that standards had swung to the other extreme. Now, the rules are getting tighter. We hope he new, stricter rules will not constrain the market further.

Bill Starrels lives in Georgetown and is a mortgage loan officer. He can be reached at 703- 625-7355 or

Interest Rates and the Fiscal Cliff

November 15, 2012

Mortgage interest rates during the presidential campaign season have remained in a relatively steady range.
Rates have been hovering near record lows. The fluctuations have been around a quarter point in rate. Rates for the balance of the year should remain steady to lower depending on pending action by the president and Congress to avoid the fiscal cliff in early 2013.

The fiscal cliff — a term coined by Federal Reserve chairman Ben Bernanke — is used to describe a raft of tax increases and spending cuts that will automatically come into effect at the beginning of 2013 if Congress does not take decisive action on the budget.

If automatic cuts are triggered, the economic recovery could be slowed due to the severity of those budget cuts as dictated by the fiscal cliff. One expects that the spirit or hope of bipartisanship will carry the day and ultimately encourage some type of compromise between the president and Congress to avoid the consequences of inaction.

Congress will also have to tackle the debt ceiling next year. If the talks around the fiscal cliff go badly, then the debt ceiling negotiations will be difficult and likely become a real struggle. Another possibility would be for Congressional leaders to strike a bipartisan plan that would take a more gradual approach to aus- terity measures including defense cuts. There is no clear-cut road map.

With Congressional elections two years away, one would think Congress would like to find a solution. The politics of obstruction failed to elect a Republican president. Voters are looking for an Obama-Christie moment more than a repeat of the deficit-ceiling debacle of last year.

Interest rates will benefit from the bad days during the evolution of the upcoming work on the fiscal cliff. If a compromise is finally reached, then money will go back into equity markets and taken from bonds. This would cause rates to go higher.

With the reelection of Obama the fiscal poli- cy of the Federal Reserve should remain dovish. With all the variables in the economy, including the effects of Hurricane Sandy, the Fed is not going to change policy at this time.

The one certainty in the coming weeks is there will be a lot of uncertainty, which will move the equity and bond markets. Look for rates to be reactive along with the progress of our post-election leaders.

Bill Starrels is a mortgage loan consultant who lives in Georgetown. He can be reached at (703) 625-7355 or