I wanted to take a moment to share my opinions, forecast, and insight on the effect of the Coronavirus on the Mortgage and Real Estate industry. I will try to put this in an easily understandable sequence and offer some explanations to the Mortgage and Real Estate industry in recent weeks.
As the virus takes hold of the world, economy, and our way of life, we will all feel the pinch. It appears the situation will get worse before we begin to recover. With the economy strong, the housing market very strong and interest rates falling; the virus continued to grow. Then, the economy and the virus met at the crossroads.
On March 9th mortgage interest rates dropped to a 50 year low. 30 yr. fixed-rate mortgage rates drop to 3.125% and the 15-year fixed-rate mortgage to 2.75%.
Millions of homeowners and homebuyers opted to lock in on the low-interest rates. Overnight on March 10th, the interest rates shot up to 4.25% for the 30-year fixed-rate mortgage. On March 16th, rates began to drop again. 30 yr. fixed-rate down to 3.5%. On March 17th, again rates rise to 4.25%. End of day March 18th rise to 4.75%
As lenders were inundated by never before seen volumes, they found themselves at capacity. In some cases, a 425% increase into loan volumes. Lenders raised the rates to stop the volumes from coming. So, with this said. Why are mortgage interest rates increasing?
This morning, jobless claims this week are approximately 280,000 as the stock market continues to tumble, the country continues to tighten with lockdown procedures. Hundreds of thousands or millions of people may lose their jobs due to lay-off or their job is eliminated. Projections of 20% unemployment rate is the discussion in many financial markets.
Lenders look at these particulars and analyze risk. If 20% of the mortgages held are at potential risk of delinquent payments/foreclosure due to job loss/layoffs, the lender must consider these factors when pricing out/determining an interest rate. If interest rates are too low, the lender has lower margins of profits. With lower margins of profits, lenders are at higher risk of imploding themselves if foreclosures begin and begin to snowball as experienced in 2008. They would not have the money to cover the losses of any foreclosure on their book. Remember, these lenders and banks have stockholders to answer too. Stockholders want to profit, not be at risk of loss. Therefore, we are seeing higher interest rates. Lenders are pricing or factoring this risk into the offered interest rates for Mortgages.
So the feds lower rates to ZERO percent. Why can’t I lock into that?
When the feds lower interest rates, this really has nothing or very little to do with mortgage interest rates. The Feds lower rates to lend to businesses or banks. This is short term lending, generally paid back to the government in 90days or so. So a company a couple of weeks ago goes to the feds and borrows money. They had to pay about 1% on this money; no problem. The company invests the money into their business for goods, services, or improvements thus creating jobs, and more revenue to pay back the Feds
Banks also use the feds money.
Lenders use this pool of money as credit lines. Lenders originate mortgages, lock the interest rates and close these consumer mortgages. The lender then sells the mortgage on the secondary market as a mortgage back security. The Feds buy this mortgage back security/your mortgage from the lenders. (These mortgage back securities back a majority of everyone’s 401k as mortgages are generally a safe investment). We then pay back the original credit line we received from the Feds. 2 weeks ago the lenders and corporations were paying the Feds 1% or so.
Now, as we are in the economic spiral, the Feds lower the rate to zero trying to stimulate the economy. The bank or lender can borrow the money from the Feds at zero percent short term; the world markets reacted at first in a positive manner. If the lenders can borrow money cheaper, they can lower mortgage interest rates to the consumer. This did happen and we see mortgage interest rates fall on Monday, March 16th, lasting a day. The market then took another dive as uncertainty drove world markets in a spin downward. The lender took notice, became concerned, and took a protective approach to raise interest rates.
So, this is where it gets rather strange.
Across the country, consumers locked in millions of mortgages last week at record low-interest rates. Now as these loans are in process, 10 days prior to closing the lenders are required to do verification of employment for the borrowers. Lenders are not able to contact these employers due to shutdowns, quarantines, or the company closing or layoffs. If the lender cannot verify the employment, the mortgage will be denied. The borrower will have to pay dearly for a rate lock extension until they return to work, or they will have to cancel the transaction, causing a further negative impact on our consumers.
About 25% of these mortgages locked in the last 30 days were people buying a home. If we start to increase unemployment or quarantines where a lender cannot verify employment, these transactions may have delays or not close. In many cases, a homeowner wanting to sell their home to buy another can be stalled creating a domino effect. In some cases, this can affect several other transactions. See where this going?
The virus effect is also starting to slow down the real estate market.
Sellers are canceling open houses and waiting to sell their home; while a buyer is not willing to view homes. Buyers are also more concerned to purchase due to the uncertainty of their employment. They are putting on the brakes until they can see the light at the end of the tunnel.
Where do we go from here? The rest of this blog is my opinion.
I have 20 years in the business and have my thumb on the pulse of the markets, analytics, trends, and insight from professionals around the country. I have led thousands of my clients in meeting their mortgage objectives, both long- and short-term cash flow, and financial goals. Here are my forecast and advice.
LOW RATES ARE ON THE HORIZON
As this pandemic begins to ease, people will return to work, bars and restaurants will open, and we will see the stock market level off. You will see some sense of normalcy returning. Lenders love predictability as well as Wall Street. The American consumer will have pent up demand for socializing and getting back to a normal life. As confidence begins to return, the government will want to get the economy moving fast forward especially in an election year.
In an effort to stimulate the economy with this new confidence, interest rates will begin to fall. I predict 3.0% on a 30 year fixed 2.6% on a 15 yr. fixed rate. The real estate industry will flourish. With the events of the virus, this created serious job loss. The job loss will make one find other employment. Many re-locations will take place, thus creating a real estate sale for sellers and buyers. Many will choose to downsize, wanting to protect for the next big event. Many will upsize due to family growth. With the self-quarantine in effect, I see a baby boom in December of 2020 or January. This will create sales. The American dream will be alive and kicking again.
For any of you that would consider or wanting to refinance into lower rates, this is my recommendation.
Apply for your refinance now.
Get the application completed and get on the sidelines. By having an open loan application, we will be in a position to lock in a timely manner when rates fall. Working together, we can run different scenarios. On a rate term refinance or a cash-out refinance one can pay off debt, accumulated, and re-position your financial state.
Gathering the documents, getting your loan through underwriting, and approved we are then in a position to lock your interest rate and order the appraisal (if needed.) This way when the wave of low-interest rates return you are ahead of the game.
Remember what just happened. Millions of borrowers missed out on the low rates just 2 weeks ago. If you do lock in like millions of others you are within 2 weeks of closing and beat the strain as the capacity of the lenders will be challenged again.
Feel free to reach out at any time for those questions needing answers!
For my clients who have recently closed on your mortgage, I thank you.
For my clients currently locked in on an interest rate. We will proceed at lightning speed to get your loan closed before any other disruptions in employment, the mortgage market itself or other curve ball aligned with the virus.
For any clients in process on a purchase transaction and not locked, we will continually monitor the market and navigate to get the best interest rate possible.
NOTE: Interest rates change by the hour in this very volatile market
For clients wishing to purchase a home – Apply with me and get the pre-approval started in preparations of the lower rates THAT WILL COME.
I thank you for your time and welcome any feedback, questions or concerns