Given the Federal Reserve’s current policy of holding the Fed funds rate at near 0% for the foreseeable future, you might assume mortgage rates will remain at the historically low levels we have seen throughout the COVID-19 pandemic. However, we have seen this before and mortgage rates did move.
The last time the Fed instituted a Zero Interest Rate Policy (ZIRP) was following the Global Financial Crisis lasting a span of seven years from December 2008 to December 2015. In December 2008, the average note rate for 30-year mortgages was 5.14%; when ZIRP ended in December 2015, the par note rate was 3.31%. However, despite a Federal Open Markets Committee target on short-term rates of 0.00% - 0.25%, mortgage rates experienced several violent swings. Rates shot up more than 100 basis points over a short 3-month period, and during another span lasting only 9 weeks, pricing for the lowest-coupon mortgage-backed security (MBS) declined by 800 basis points from 101 to a 93 handle. Note that this activity occurred more than two years before the Fed began tapering off its purchasing of Treasuries and MBS.
Currently, the Fed has indicated it will not raise the Fed funds rate until at least 2023. However, this does not mean mortgage rates will remain in the same range that we’ve seen over the last 10 months. It would not be unusual to see changes of even an entire whole percentage point up, or down, for however long this current policy remains in place. Therefore maintaining a comprehensive hedge strategy is a must to both benefit and protect your pipeline during these swings.