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Fed cuts but only some mortgage rates are moving lower
The Federal Open Market Committee's decision to meet broad expectations for a 25 basis point cut might not give many people in the market for a home loan the break they anticipated."What does that do for mortgage rates? I think we've already seen that show up. The last three, four weeks, we've seen mortgage rates come in, or come down by about 30 basis points in anticipation of this," Joel Kan, deputy chief economist at the Mortgage Bankers Association, told attendees at NMN's Digital Mortgage Conference in San Diego.So when it comes to what the Fed cut itself did for long-term mortgage rates, it wasn't much."We think the 10-year Treasury is not going to go that much lower. We're sitting at around 4.05%, last I checked," Kan said, noting that at the time of the conference he had a "pretty flat rate forecast.""The short end of the curve, yes, is coming down because the Fed is expecting to lower rates over the next 12 months or so. But the long end, we think, is held up by just overall uncertainty around the U.S. deficit," he said.Lenders generally confirmed that view Wednesday."The mortgage rates haven't really moved. The markets in general have been anticipating this," said Tom Hutchens, president of Angel Oak Mortgage Solutions, in an interview Wednesday afternoon.Eventually the financing costs for the most common type of mortgage may fall, but the longer-term bond yields that are a more direct driver of interest-rate direction saw relatively minimal moves on Wednesday, Hutchens said."Mortgage rates may stay relatively flat in the short term since markets have already priced in the cut," said Bill Banfield, chief business officer at Rocket Cos., although he acknowledges there is one exception to that.Most home loans are 30-year fixed rate products driven more by long-term bond activity than the fed funds rate but there are some with variable financing costs more closely correlated with monetary policymakers' actions, he said in an emailed statement.Fixed rates might not be lower, ARMs, HELOCs will"Consumers could benefit from lower short-term rates, making adjustable-rate mortgages – which closely follow the Fed's moves – more attractive," he added.The ARM share of loan applications tracked by the Mortgage Bankers Association hit its highest point since 2008 last week, but 30-year fixed rate loans dominate the market. ARMs represented 12.9% of total applications last week and they're currently configured a lot differently than they were back when payment shock related to them contributed to the Great Financial Crisis in 2008. Today, most ARMs are hybrid products that start with a fixed rate period, many of which are multiple years. .Rates for home equity lines of credit, which are normally adjustable, also will be 25 basis points lower starting on Oct. 1, noted Hutchens. "It makes tapping into one's equity even more appealing," he said.Rates for personal and credit card debts also will fall, which could help more borrowers qualify for mortgage financing and homeownership, Hutchens added.Mortgage rates likely to fall further in futureThe Fed's cut still bodes well for interest rates in general to eventually trend downward, Banfield said."For consumers, it's another signal that the cost of borrowing is gradually moving lower," he said.Lenders also have a lot of business from the rate cuts that they made in anticipation of the Fed's action to tide them over."The good news is we've seen a lot of activity in the last 35-45 days so we're very optimistic as to where we're headed," Hutchens said.Housing supply concerns Federal Reserve Chairman Powell brought up in his press conference Wednesday afternoon do exist but conditions are improving in some markets, the Angel Oak executive said.The Fed's decision to keep the runoff in its bond portfolio as is and its economic outlook largely in line with expectations means lenders will be looking to the next round of indicators to determine whether they'll raise or lower the price of loans."Now we go back to data watching for the direction of mortgage rates for the rest of the month," said Melissa Cohn, regional vice president at William Raveis Mortgage, in an email.Kan said the MBA is forecasting rates going down to the mid to low 6s in 2026.There also could be issues with a potential government shutdown or a U.S. debt downgrade related to the deficit more near-term that could affect the rate outlook. Prepayment risk related to increased refinancing's impact on the mortgage-backed securities market also will play a role."Because rates can also come down, MBS investors want to be compensated for that prepayment risk, and so we think that's keeping that spread a little bit wider around 220, 230 basis points. Typically, we run at 180 or so historically," he said.
Rithm purchasing commercial REIT Paramount Group for $1.6B
In its second transaction this month, Rithm Capital took steps to further diversify its business, this time buying office property real estate investment trust Paramount Group for $1.6 billion.It will pay $6.60 for each Paramount share, funding by cash and liquidity from the balance sheets of both companies. The company also spoke of potential opportunities for co-investors to participate in the transaction.Rithm is the parent of mortgage lender Newrez, which on several occasions has discussed doing an initial public offering of its common stock, going as far as filing a confidential registration statementBut during its second quarter earnings call, Rithm management temporarily shelved the idea yet again.How active a buyer is RithmInstead, Rithm has been an asset purchaser, buying over $1 billion of residential transition loans in July from an undisclosed seller and a month later, $1 billion in home renovation loans from fintech Upgrade.Earlier this month, it signed a deal to buy Crestline Management, an alternative investment company which also operates an insurer and reinsurer.It was two years ago that Rithm engaged in a contentious battle to buy another asset manager, Sculptor Capital Management.Rithm has been waiting for this type of deal for a long time, Michael Nierenberg, chief executive, said on a post-announcement conference call."We have avoided the downturn in the real estate market, particularly in the office sector," Nierenberg said, noting that currently Class A properties are in demand.How the FOMC move affects this latest buyThe Federal Open Market reduction in short-term rates is also a plus, as commercial real-estate financing is more tied to those movements, versus residential mortgages, which price off the 10-year Treasury.Lower rates should lead to cap rate compression, he said, referring to the expected rate of return on a real estate investment property. This gets calculated based on dividing the net operating income by the asset value."Our entry point on this deal and these assets are as follows: it would cost us roughly 30% — we're entering at 30% of what it would cost to replace these assets," Nierenberg said. The valuation of these assets is roughly 40% of the pre-pandemic levels, which gives Rithm the ability to generate outsized returns for its investors, he continued.What is Rithm's relationship with GreenbarnRithm has an investment management affiliate for its commercial real estate activities, Greenbarn, which it founded in 2022, along with David Welsh and David Schonbraun, the latter company's managing partners. It deployed $700 million of equity representing $3 billion of assets in 13 deals."Rithm looks forward to working with the employees of Paramount, leveraging our Greenbarn partners…to continue building out our world-class operating and investment manager," said Nierenberg.Paramount owns properties in New York and San Francisco.Martin Bussmann, lead independent director of Paramount, called Rithm an ideal partner who offers it the financial scale needed to improve its fundamental operating performance."After an extensive process and evaluation of a range of strategic alternatives, we are pleased to have reached this agreement which will deliver immediate, full and fair value to our shareholders," Bussmann said in the Rithm press release.
Mortgage applications soar, led by refinancing spike
Adobe Stock Mortgage applications continued to soar last week on the back of the lowest rates in almost a year, according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey.After application volume dropped in three consecutive weeks, it rose 9.2% on a seasonally adjusted basis the week ending September 5 and jumped another 29.7% last week. On an unadjusted basis, the MBA's Market Composite Index, a measure of mortgage loan application volume, increased 43% last week.The Refinance Index spiked 58% from the previous week and 70% on a year-over-year basis, while the Purchase Index rose 3% on a seasonally adjusted basis and 12% on an unadjusted basis."Mortgage rates last week dropped to their lowest level since last October, with the 30-year fixed rate declining to 6.39 percent," said Mike Fratantoni, MBA's senior vice president and chief economist, in a press release Wednesday. "Homeowners responded swiftly, with refinance application volume jumping almost 60 percent compared to the prior week."Nearly 60% of applications were for refinances, up from 48.8% the previous week. Homeowners with larger loans jumped at the opportunity, as the average loan size on refinances reached its highest level in the 35 years MBA has been conducting this survey, Fratantoni said.Adjustable-rate mortgages also increased their share of activity from 9.2% to 12.9% this week."Even as 30-year fixed rates reached their lowest level in almost a year, more borrowers, and particularly more refinance borrowers, opted for adjustable-rate loans, with the ARM share reaching its highest level since 2008," Fratantoni said.Current ARMs have rates about 75 basis points lower than 30-year fixed rate loans. They also typically are hybrids that start with a 5-10 year fixed rate, which reduces their risk of payment shock relative to pre-2008 predecessors that contributed to the Great Financial Crisis.Loans backed by the Federal Housing Administration and U.S. Department of Agriculture lost 2.2 and 0.1 percentage points of their share of total applications, respectively, while Department of Veterans Affairs-guaranteed loans increased their share to 15.8% from 15.3% the week prior.Four of the five types of mortgages the MBA tracks saw interest rates fall last week compared with the week prior, including:30-year fixed-rate mortgages with conforming loan balances, 6.39% from 6.49%;30-year fixed-rate mortgages the FHA backs, 6.14% from 6.27%;15-year fixed-rate mortgages, 5.63% from 5.70%; and five-year ARMs, 5.9% from 5.94%. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances, greater than $806,500, was the only type to see an increase, a rise to 6.48% from 6.44%.
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