FHA borrowers can expect to pay even higher rates, but lenders are offering discounts on jumbo mortgages too big for Fannie and Freddie, according to new Optimal Blue Mortgage Market data

The prospect of more severe Fed tightening has spooked bond market investors, pushing rates for conforming 30-year fixed-rate mortgages above 4 percent for the first time since December 2019, according to a daily index of rate lock data compiled by Optimal Blue.

The Optimal Blue Mortgage Market Indices also show that while first-time buyers seeking FHA-backed mortgages can expect to pay even higher rates, lenders are offering discounted rates on jumbo loans that are too big for purchase by Fannie Mae and Freddie Mac.

Optimal Blue’s lock data shows rates on conforming 30-year fixed-rate mortgages eligible for purchase by Fannie and Freddie averaged 4.071  percent on Thursday, while lenders were offering jumbo loan borrowers rates averaging 3.696 percent.

FHA borrowers, who are often first-time homebuyers with lower credit scores and little savings for down payments, paid the highest rates — 4.122 percent, on average.

According to Optimal Blue’s data, rates on the workhorse 30-year conforming loan hit an all-time low of 2.77 percent on Dec. 31, 2020 when the Federal Reserve was buying $120 billion in Treasurys and mortgage-backed securities every month to support the economy during the pandemic.

The Fed began tapering those purchases in December — a process that it will complete this month, setting the stage for policymakers to begin raising short-term interest rates in March.

Fed policymakers have been telegraphing their intention to raise the short-term federal funds rate six times this year, one quarter of a percentage point at a time.

But bond investors were startled Thursday by a U.S. Department of Labor report showing the consumer price index rose 7.5 percent in January, the largest annual increase since 1982.

After that report came out, St. Louis Fed Chair James Bullard fueled investor concerns, telling Bloomberg News that he would support raising the federal funds rate by a full percentage point during the first half of the year — a rapid increase that which would entail implementing the first half-point rate hike since 2000.

“I’d like to see 100 basis points in the bag by July 1,” Bullard told Bloomberg. “I was already more hawkish but I have pulled up dramatically what I think” the Federal Open Market committee should do to fight inflation.

Bullard also said he wants to begin shrinking the Fed’s nearly $9 trillion balance sheet during the second quarter. Minutes from the committee’s December meeting showed almost all members agree with Bullard that “it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate.”

Per Inman.com