2020 MarketWatch
Daily Quick Message:
May 7: Interest rates are continuing their slow march downward. Competition is returning as lenders have figured out how to deal with the multiple issues related to COVID-19. We are now back to the rates we saw in early March for the 30-year fixed. 15-year fixed rates are lagging a little, but should catch up soon. I expect the trend to continue unless something else unexpected happens.
Special Note on Cash Out and Home Equity Lines: It appears there are concerns about property values as lenders have put restrictions and rate penalties on cash out refinances. We still have a few lenders with good cash-out opportunities if you meet the more restrictive guidelines. Please call me immediately if you fall into this category. (Your new mortgage will be generating cash to you or paying of an existing second mortgage.)
Lock advice: Wait and watch carefully unless you already have excellent value (1-year or less breakeven on closing costs) or are looking for a CASH OUT REFINANCE.
April 30: Interest rates are beginning to start a slow march downward. Competition is returning as lenders have figured out how to deal with the multiple issues related to COVID-19. We are now back to the rates we saw in early March for the 3- year fixed. 15-year fixed rates are lagging a little, but should catch up soon. I expect the trend to continue unless something else unexpected happens.
Lock advice: Wait and watch carefully unless you already have excellent value (less than 1-year break even on closing costs.)
April 24: The big news is that lenders (servicers) received clarification on how liable they are for funding the forbearance provisions of the CARES Act. Their participation is limited to 5% to 7% of the loan balance, which is huge in comparison to the amount of profit they make for servicing a loan (approx .25% per year). It's a complex model - either genius, or a happy accident that the forbearance costs are being funded by YOU in the form of a higher interest rate on your new mortgage. If lenders were being covered completely, then mortgage rates would be about 1/2% lower than they are today. That 1/2% translates to about 4% additional profit to the lender for each new loan originated. It's more complicated than this, but generally speaking, we are at equilibrium with current market conditions and are likely to see a little lender competition soon, and a slight improvement in rates if nothing else happens.
My lock advice is similar to before. If you have good value in the refinance now (less than two year break-even on closing costs and a long-term stay in the home), then you should consider locking your rate as the hope of a large drop in rates is diminishing in the near term. If you are at or below 4%, then you should probably wait it out to see if we get that major shift that was expected before CARES.
April 21: Mortgage rates are being held up by lender fears of an increase in forbearance requests (which have been increasing dramatically since CARES Act - read April 10 post). As businesses reopen across America in the coming weeks we will see how the economy rebounds, and this will have a big impact on whether lenders' appetite for new business increases. If the trend for forbearance requests drops, then rates should drop accordingly. If the economy fails to rebound then mortgage rates will stay flat or maybe rise a little bit. There are many other factors at play now with global markets being impacted by the sudden drop in oil prices. Rates have been very stable over the past week, as have mortgage backed securities. This break in the volatility has me thinking we are on the verge of a slight rate improvement.
April 15: Tipping Point?
Optimism is creeping into the real estate and mortgage market as talks of reopening the economy begin. Lenders have capacity now as the initial glut of refinances has worked its way through the system, and there is a tension building between an appetite for new business and a fear of forbearance claims. (click here for a Q&A on forbearance.)
What does that mean for mortgage rates? I believe we will begin to see some lenders dipping their toe in the water, offering lower interest rates in the next week or two. Stay tuned - and Stay safe!
April 10: Forbearance package in CARES act SCARES lenders
We are entering a new phase of the COVID-19 interest rate market. Now that lenders have adapted to work from home, and have worked through the rush of refinances from early March, there is a new issue. They are running out of money.
The CARES Act contains a provision for anyone with a FHFA loan (most mortgages in US) to skip as many as six mortgage payments without proof of hardship (forbearance program). There is an unresolved issue - how do the lenders pay their investors if they aren't collecting from borrowers?! The CARES Act failed to include a provision for lenders to draw from government funds to keep the wheels of the mortgage industry turning. I believe this will be fixed shortly and we will be off to the races - however it may have some lasting damage and rates may not fall as much as previously thought.
If you have a rate above 4.25% and looking for a 30-year fixed, or you are refinancing for any reason other than to reduce your rate, you may want to consider locking in now/soon. There are some good deals out there this week.
Otherwise it may still be a good idea to wait it out.
April 3: A New Normal in Mortgage Lending? Smart Buyers Know their Math...
Calculating savings from a refinance is a cost/benefit analysis. To keep it simple, ask yourself "How much will my after-cost (net) savings be?" Stay with me for 5 minutes and you'll be up to speed with current and up-coming opportunities...
Back Story:
In normal markets, lenders are competing against each other for your business and this competition drives rates and costs down. That is not the case right now. Lenders are making huge profits by using rate as a means to restrict volume. They are loving this - knowing all of their competitors are dealing with the same work-from-home challenges and unable to scale up to capture the massive amount of refinances that are available. So while rates should be lower based on current bond yields, supply and demand is ruling the day and profit margins are HUGE for banks and mortgage lenders (not for me, I'm a broker - my fees are fixed).
In normal markets, lenders offer cash-back incentives in exchange for "higher" rates. This "lender credit" is how you can refinance with low to no closing costs. That is not the case right now. Lenders lose money if you refinance within a couple of years of originating a mortgage, so they are holding back to avoid creating a rolling avalanche of refinances that can actually damage the industry as a whole.
Refinance Basics:
Closing Costs for a refinance in Georgia are roughly $2,500 plus .75% of the loan amount ($7.50 per $1,000 borrowed). This includes lender fees, attorney and title charges, appraisal, and state taxes. If you are paying less than this, it is because there is a credit from the lender offsetting those hard costs that exist on EVERY loan. For example, a $300,000 refinance has hard costs of $2,500 + $2,250 (300X$7.50) = $4,750.
Discount Points are additional fees paid to get a "lower" rate. If you can get a 3.25% 30-year fixed rate with "no points", then you can get 3% or 2.75% by paying some extra money. Most people haven't been doing this because it was more exciting to get a lower rate for free (lender credit is the opposite of discount points - you get paid to take a higher rate, like 3.75%).
Where we are now:
Paying full closing costs (and maybe) some discount points is how you get to the good rates today. (The lower your rate, the less likely you are to refinance again and the less likely a lender is to experience an early prepayment on your loan.) So while lenders are desperately trying to scale up their work force and deal with changing loan guidelines, they are also eager to secure business that will stay on the books for a long period of time.
Conclusion:
IF we are bound for historically low mortgage rates in coming years, then waiting will surely pay off as lenders grind through this impossible situation. However, there is mounting evidence for both lower and higher future mortgage rates:
- LOWER RATES: Trump will keep rates low and try to force them lower to spur a real estate recovery.
- HIGHER RATES: The economy worsens and foreclosures rise making real estate loans more risky and thus rates will rise.
The only way to decide on whether to refinance in this environment is to know your numbers. How much will I save over time, after costs. This requires a detailed cost/benefit analysis that requires the following information:
- Current Loan Balance(s)
- Current Interest Rate(s)
- Current Mortgage Insurance Cost
- Current Value of the Home
- Expected length of stay in the home
- Credit Score
- Other factors (do you want cash out etc)
Many of you have already submitted loan applications which puts you in position to lock when opportunities arise. If you have sent in your supporting documents like most recent mortgage statements, then I have what I need to help you. If this is not the case then please send your most recent mortgage statement (or statements if you have a second mortgage) to my email address.
Stay Safe!
April 1: Increasing risk of economic damage has the spread between 10-year treasury yields (currently .7%) and 30-year fixed conventional mortgages widening. It was running at about 2% pre-COVID, which translates into a 2.75% 30 year fixed rate. However, investors are becoming concerned that the economic fallout could impact borrowers' ability to repay and foreclosures may be on the rise. This will cause mortgage rates to rise compared to the benchmark Treasury investments that are backed by the US Government. The longer we suspend business operations, the more likely home mortgage interest rates will rise.
My advice for refinancing:
- If you are currently locked at a rate at or below 3.5% (30-year fixed) / 3% (15 year fixed) with any lender credit, my advice is to proceed toward closing.
- If you are not already locked in, I would advise you to stay in close contact with your mortgage advisor and be prepared to act on any solid opportunity for savings.
My advice for buyers:
- If your closing is in the next 30 days, I would consider locking in as soon as you find a good opportunity.
- If your closing is beyond 30 days I would watch very carefully and consider locking if a good opportunity presents itself.
**NOTE - Beware of lenders that are promoting interest rates that seem too good to be true. Many lenders are taking more orders than they can process which will result in your interest rate lock expiring before you can close the loan.
March 24: There are two forces working against each other that are preventing mortgage rates from falling to natural levels. On one hand you have falling cost of money, and on the other an industry that is clogged with refinance applications. Under normal circumstances (pre-Covid) we would see a steady stream of applications as mortgage rates slowly decline (which is what was happening in January/February). But once President Trump announced on national TV that interest rates are at "zero", everyone on the planet called their mortgage broker. Now there is a glut of applications the likes of which we have never seen. Without scaling up, it will take the industry years to process all of the paperwork. Scaling up is difficult in our current work environment, not to mention the added difficulty in getting employment verified and title work completed. So the low cost of money is simply lining the pockets of the lenders as they are all over capacity and using rate as a means of controlling the flow of incoming applications. The resulting profit margin for lenders is 500% higher than normal for locks taken since the announcement on March 15th, which means the benefit of these low rates is not reaching the consumer, but staying in the hands of the banks and lenders.
At the same time, these market undulations are causing other problems and some lenders have decided to stop taking new locks at all. One of the nation's largest "Non QM" or high-risk lenders stopped all closings yesterday, leaving countless people stranded in the middle of their transactions with no alternative but to abandon their home purchase - even at the moment of signing paperwork.
Here's what might happen:
- Rates will remain elevated as lenders struggle to work through the volume.
- If the appetite for MBS remains strong throughout the next few months, mortgage rates will drop as lenders work through the volume of refinance applications that is still piling up and competition returns to the marketplace.
- The government could intervene and cap the profit that lenders are allowed to make, forcing rates to lower levels (this would likely take many months to configure and enforce.)
- Investors could turn from mortgage investments if the economic outlook worsens - which would cause rates to rise.
- You, as a borrower might incur a temporary employment issue that would prevent closing on a loan.
My advice for refinancing:
- If you are currently locked at a rate at or below 3.5% (30-year fixed) / 3% (15 year fixed) with any lender credit, my advice is to proceed toward closing.
- If you are not already locked in, I would advise you to consider your options carefully and consider being patient.
My advice for buyers:
- If your closing is in the next 30 days, I would watch carefully for lock opportunities as processing times are increasing and you need to act fast.
- If your closing is beyond 30 days I would continue to wait until you are in a 30-day window then follow the advice above.
**NOTE - Beware of online lenders that are taking more orders than they can process which will result in your interest rate lock expiring before you can close the loan. This is a common occurrence at times like these and amounts to a bunch of work for you with no guarantee of results.
MBS Past 30 days
30 year fixed conventional (30-day history)
(MND average)
March 23 - More volatility and more hope. MBS (see below) closed up (good) on Friday and opened on a tear this morning. We should see some lower rates today by lenders who are pushing through their volume and getting ready for more. We are probably still weeks away from normalizing, but today may be a good day to lock if you are buying a home and closing in the next 30 days.
Mortgage Pro's like to watch charts to predict what mortgage rates will do. The chart on the right is a prediction from a highly respected account executive that I have worked with for many years:
March 19, 2020: It looked like rates were going to try to drop again, but then immediately shot back up. The government can throw as much money as they want at mortgage-backed securities, but none of it will make it into the hands of the consumer (borrower) because there's no way to process mortgage loans efficiently in this environment. Not only is the mortgage industry hamstrung from a work-from-home trend, but employers are slower to respond to verifications of employment, title orders are coming in much slower than usual, etc.
I spoke with an expert yesterday who shared their company profits are 800% higher per loan than normal as they are using rate to control the flow of volume.
What this means to rates: They aren't going down until lenders can handle more volume. That may take a minute...
March 17, 2020: Mortgage rates are still being held up by industry limitations. Many if not most lenders are converting their entire workforce to remote locations which is slowing down rather than speeding up loan processing. Rates will drop as competition returns to the marketplace which could take weeks. If there were no barriers to processing a loan, mortgage rates would be significantly lower than they are today.
If you are currently locked at a rate at or below 3.5% with any lender credit, my advice is to proceed toward closing.
- There are many market forces that could intercept the interest rate decline.
- Lenders may decide to cease funding all loans if the economy is at risk.
- If the lender cannot verify you are fully employed at the time of closing, your mortgage loan will ultimately be declined.
If you are not locked in, I would advise you to consider your options carefully and consider being patient.
- If your rate is above 4.375% you may wish to look at current lock options. Otherwise I would wait and watch carefully to see if things improve.
Also, beware of online lenders that are taking more orders than they can process which will result in your interest rate lock expiring before you can close the loan. This is a common occurrence at times like these and amounts to a bunch of work for you with no guarantee of results.
MBS (Mortgage-Backed Securities)
Mortgage rates are not set by the government but are the result of trading mortgage-backed securities (MBS). Many things affect the price of these "bonds" that drive the real estate industry and there is no way to accurately predict what will happen in the future days/weeks/months. Price is inverse to yield meaning when prices go up, interest rates go down.
Here is a chart of the last 12 months of the MBS price for 30 year fixed rate, top tier, conforming mortgage loans. The big rise and drop is the massive inflow of money that was then rejected by the industry's inability to deliver closed loans.
This is the parallel travel of mortgage rates as they reflect the price of the MBS (above).
Source
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