Coronavirus disease (COVID-19) & Your Mortgage

With the help of my Branch Manager, Mike Mazzola, this is the best way we can explain what is going on with the Fed cutting rates.  It does not mean you will get zero percent on your mortgage, but wouldn’t that be nice!  The 10-year Treasury Bond is low (mortgages rates follow this, typically).  So, if the 10-year Treasury bond fell to zero, mortgage interest rates would still be a few points higher for the lender to cover their costs to do business.    However, we are in an upside-down market and mortgage backed securities are not following the rules.

The Federal Reserve just cut rates to zero.  How does that affect your mortgage rate?  

The answer is not simple.  Our markets are not functioning as they normally do.  In the span of two weeks, mortgage rates dropped one half to three quarters percent in rate between February 26 and March 4th, only to see them quickly increase over one percent last week—the fastest I’ve ever seen them move!

The flood of borrowers to refinance has overwhelmed lenders to such a degree that the industry is deterring new business by raising rates, as we saw last week. This, in a sense, is a way to dam the flood gate that opened. Lowering mortgage rates in the near future makes little sense for lenders as they struggle to digest the business they already have.

COVID-19 created a market demand for safe-haven investments like Treasuries, raising treasury bond pricing and lowering treasury yields, the benchmark of mortgage rates.

However, rates are not dropping as sharply as the T-note yields and there are a few reasons why:

Lenders cannot keep up with the demand for refinances to cut interest payments. Last year, there was no way to forecast this boom and many companies laid off their workforce, creating a shortage of employees to handle the influx.

The secondary market that purchases or holds mortgage backed securities are worried about “churn” due to high refinance activity (churn is early payoff of existing mortgages)

The demand for mortgage bonds impacts mortgage rates. Bonds depreciate as borrowers refinance into lower rates, lowering what an investor can earn. As bidding activity for mortgage bonds dropped last week, rates moved up.

“The increase in refinancing activity — which deprives investors in the original mortgage of years of interest payments — could be contributing to a preference among investors for Treasury bonds as opposed to mortgages,” says Jonathan McCollum, director of federal government relations at Davidoff Hutcher & Citron LLP.

How long will the abnormal activity last?

Don’t expect the spread between the 10-year T bill and mortgage rates to narrow anytime soon.  This current market is not a new normal but ties to a rare and unusual virus outbreak unexpected and with no end date in site.

Once Treasury yields climb again, the spread between the T-bill and mortgage rates will close. Mortgage lenders will want to maximize the refi boom, and likely won’t raise rates as yields rise back to normal levels.

What should borrowers do?

“Most everyone is a good candidate to refi if you’re going to be in the house long enough — but there’s a traffic jam on the mortgage refinance highway,” says Greg McBride, CFA, Bankrate chief financial analyst.

During a refinance boom, borrowers typically wait eight to ten days longer than normal to close their loan.  So, the typical 30-45 day close is stretched out to approximately 55 days.  The current sudden surge may mean an even longer wait.  Look for 65-day locks as the norm.

“This refi boom has the potential to be one of the biggest one’s ever,” says Fratantoni. “Given the increases I’ve mentioned, lenders are completely flooded.”

If you plan to refinance, get your paperwork ready. Make application and upload your documentation.  Keep it current and remain patient.   Stay in touch with me.  You may end up waiting awhile for the rates to drop but be ready to move quickly when they do! Don’t hesitate and try to guess this market.


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