Mortgage rates went from ridiculously low to “still not-so-bad” in just over a week. I can’t say that I recall ever seeing mortgage backed securities and mortgage rates having such gigantic swings in 6 days.
A flood of demand for refinancing combined with volatile credit markets last week caused mortgage rates to actually spike on Tuesday and Wednesday. By Thursday, buyers for mortgage debt had largely stopped making bids.
Borrowers who were looking at a 3.25% or a lower rate on a 30-year mortgage the prior week were quoted 4% on Tuesday and then above 4.25% on Wednesday.
When U.S. mortgage rates spiked last week, the entire market clogged up on Thursday and bidding on mortgage loans essentially stopped.
Secondarily, the Federal Reserve cut the federal funds to near zero on Sunday, adding to their earlier rate cut of a half a percent last week.
The Fed has also stated it will purchase $700 billion in bonds and mortgage backed securities on Sunday. Last week’s Fed injection was to allow banks to have the appropriate levels of cash reserves.
This new one is to bolster markets ahead of potential coming weaknesses.
Nearly all of this was in direct reaction to the COVID-19 (Coronavirus) threat and fears of an economic calamity that could be brought on by the virus.
Stock trading was halted for 15 minutes a few times last week due to a 7% drop in the market.
Treasuries tumbled to levels never seen before and the stock market dropped to a point where the Dow officially entered the bear market, ending the 11-year run in bull market territory.
Given all this, mortgage rates should have seen a serious decline last week. Instead, they’ve climbed nearly 0.75% in the last couple of days.
Why the disconnect? There are 3 main reasons for this anomaly:
Capacity
Mortgage applications soared 55% last week from the previous week and demand for refinances rose to an almost 11-year high, as borrowers responded to the historically low rates.
Because of this volume, multiple investors actually stopped taking applications due to capacity concerns. Many mortgage lenders would no longer accept locks less than 60 days for refinances. Their systems are stressed and they do not have the capacity to originate, process, and underwrite such an extremely high influx of loans.
Essentially, mortgage lenders are trying to put 10 gallons of water in a 2 gallon jug.
So, investors are raising rates to combat the surge in an attempt to slow things down a bit.
Out With The Old and In With The New
The surge in refinances has increased prepay speeds for securities backed by recent mortgages. This is essentially shortening the term of the investment and reducing the expected return of previous mortgages by the investor and servicer.
With this increased flood of refis, many previously funded and serviced loans are actually money losers now.
These losses for investors and servicers will see their revenue streams from their mortgage servicing rights dry up. Most mortgage servicers see a break-even of 3 years for each transaction – and most mortgages are kept on an average for 7, so there’s generally a tidy profit for the average loan.
A vast majority of the loans being refinanced are less than 3 years old – many are less than 18 months old, as a matter of fact..
So, investors are adding in some padded profits to cover those losses…and they do they by increasing mortgage rates they charge to borrowers.
Margin Calls
Because of the intense stock market drop this week, many investors were forced to sell their most easily liquidated assets to cover stock losses.
Many of those assets were mortgage backed securities that had appreciated and were easily available to be sold.
In the short term, that made mortgage backed securities more expensive, forcing rates higher in the short term.
Fed Rate Cut and Mortgage rates
Also, many erroneously believe that Federal Reserve rate cut directly correlates to mortgage interest rates moving downward. As you can see by the piece I’ve written here, the Fed does not control mortgage rates. As a matter of fact, there have countless times where the mortgage rates moved higher the day fed cut the federal funds rate.
Note that the federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. This is not what drives mortgage rates – it does influence them, but does not “set” them.
Treasury Yields and Mortgage Rates
The 30-year fixed mortgage rate and 10-year treasury yield generally move together because investors who want a steady and safe return compare interest rates of all fixed-income products.
You can find out more on that here…
This week, that relationship seemed to disappear, as the 10-year treasury plummeted and mortgage backed securities increased, due mainly to the 3 factors listed previously.
What Does The Future Hold?
It’s important to understand that mortgage rates are still extremely attractive relative to historical norms.
Until things normalize a bit, we can continue to expect volatility in the marketplace, although yesterday’s Fed actions could move the market in the short term.
If you haven’t locked and started already with a refinance, then I recommend that you get ready to do so, as timing could be everything. Once the investors clear out some backlog and more economic data comes out (especially concerning COVID-19 ), mortgage backed securities will most likely get a boost and mortgage rates should ease back down once again.
My advice is to stay patient and be ready to move when the numbers work for you.
Secondly, inflation (the arch enemy of interest rates) is low, and the latest measures show that pressures are actually easing…again, good news for interest rates in the long term.
What Can You Do Now?
I recommend that you reach out to your mortgage lender right away and put a plan in place for a future drop in rates. It would be my pleasure to give you some scenarios that might help you in your decisions making to know when/if you should make a move. Don’t hesitate to reach out to me for more!
