A funny thing happened on the way to the lowest interest rates in history.
The mortgage market revolted. Lenders and investors were caught with their pants down.
As you know from following my mortgage market updates, despite what the media says, or mortgage companies peddle in their advertisements, mortgage rates are not driven by the Fed. They are not driven by what the 10yr US Treasury yield does. They are not driven by what happens in the stock market. Mortgage rates are driven by what investors are willing to take in return for their perceived risk. It is supply and demand. Full stop.
So what happened in the last week or so? Supply spiked, and demand waned. Nobody wanted to buy mortgage backed securities with rates heading to lows we’d really never seen before. So, lenders who had pools of loans set for sale at say 3% or 3.5% couldn’t sell them. That means they can’t replenish their coffers to lend more, potentially not cover their operating expenses, or cover their expansion plans, etc. They’re being squeezed.
So what do they do? They raise their rates, hoping to entice buyers. It is supply and demand. Full stop.
Now, the other part of the equation is what happened to the buyers? Go back about three weeks. 30yr fixed mortgage money was around 3.5%, with low or no costs, depending on the scenario. Everything was fine. So what happened? Fear.
Regardless of your thoughts on Covid 19, the economic impact is going to be indisputably significant. It starts with taking 100 million Chinese out of the workforce for what, six or eight weeks? Think that will impact things? From there we’ve seen the disruptions, and sadly, we’re probably in the early stages of the full impact across the globe and here at home in the US.
So, back to the supply and demand problem, investors (and I’m not talking about individuals, I’m talking about China, CalPERS, Goldman Sachs, State Farm, AIG, and others of that scale) were posed with a problem: Where do I put my money as the sh*t hits the fan? They didn’t know. It could go to equities, and risk losing 10% in a day. It could go into commodities. It could go into bonds, and get paid .3% on a US 10yr Treasury. It could go into Mortgage Backed Securities, or it could just be held as cash. Obviously, that’s a little over-simplified, but you get the point.
The last time we had a meltdown like this, in 2009, who stepped in as the primary buyer? Yep. The Fed. Now, we don’t know what they’ll do in their meeting this week. I expect more “shock and awe” and probably some ramping back up of their QE program (which they actually rekindled back in September) and they will likely come back to buying mortgage backed securities. We’ll see.
Regardless, going back to supply and demand, you now have a whole lot of money sitting in lenders’ coffers needing to be sold. There’s supply and no demand. Mortgage applications for refinances skyrocketed in the last three weeks or so. Once they work through that supply, what will happen?
My guess is, if an institutional or governmental investor has the option of getting paid between .3% (a never before seen low in 10yr US Treasuries) or putting your money in equities, or commodities, or mortgages, you might think that taking a 3% to 3.5% return by lending money to John and June Jones at 50% loan to value ratio, with high credit scores, stable jobs, and money in the bank, you might find that’s the least dirty shirt in the laundry, and put it on.
Additionally, with rates that low, the risk of early payoff is not very high, so you’re looking at a likely long-term return, at relatively low risk at a very predictable rate. Investors like that, even if it’s not the level of return they may like.
If the Fed steps in and does some significant buying, that will likely help too.
It’s going to be interesting to watch it all unfold. The spike in mortgage rates from the morning of Monday the 9th through to closing at the end of the day Friday the 13th, is unlike anything I’ve ever seen before, including the crazy times of the “Great Recession”. Most lenders pulled rates higher by .5% to .75% for the same cost/credit inside of five days. It was nutty.
Now, to keep all that in perspective? Rates are still ridiculous. When we’re talking about rates not being great when you can get say 4% no points no fees on a 30yr fixed loan, or 3.25% on a 15yr, that’s crazy.
But, it is what it is. We’ve been at a ridiculous level for 10yrs now, and we think it’s normal. It may be normal, now, really. But regardless, the point of this update is really to explain the difference of where things are, and where you may hear things are, and shine a little light on why that is. I hope it helps.
We’ll see where it goes from here. But I don’t believe the line in the sand that mortgage lenders are currently trying to hold, to drive demand on their back-end, will last. I think it will break. That may not be great for some, but for others it will provide some terrific opportunities. We’ll see how it shakes down.
As always, I’ll do my best to keep you posted. And, you know you can always reach out to me, as well.
In the meantime, best wishes to you and yours and stay healthy out there.
Here’s where rates ended last week.
|30 yr fixed mortgage||3.375%||0||3.425%||$ 300,000.00||$ 1,326|
|15 yr fixed mortgage||3.000%||0||3.050%||$ 300,000.00||$ 2,072|
|5/1 ARM||2.875%||0||3.125%||$ 300,000.00||$ 1,245|
|7/1 ARM||3.125%||0||3.175%||$ 300,000.00||$ 1,285|
|Jumbo (ask me about Super Conforming limit, per your zip code)|
|30 yr fixed mortgage||3.875%||0||3.905%||$ 555,000.00||$ 2,610|
|15 yr fixed mortgage||3.875%||0||3.905%||$ 555,000.00||$ 4,071|
|5/1 ARM||3.375%||0||3.405%||$ 555,000.00||$ 2,454|
|10/1 ARM||3.500%||0||3.530%||$ 555,000.00||$ 2,492|
|Rates subject to change without notice.|
|Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics (760+ fico, owner occupied SFR with 75% loan to value ratio or less and $200,000+ loan amount), your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. NMLS: 239756. Equal Opportunity Housing Lender. If you’d like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:firstname.lastname@example.org and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.|
EZ Mortgages, Inc.
4535 Missouri Flat Rd. Ste. 2E
Placerville, CA 95667