Rising Interest Rates and How to Position Yourself
Within 24-48 hours the national media will begin reporting mortgage interest rates are on the rise. This is exact the opposite of what has been reported for the past 2 weeks. Rates have been increasing since Monday of this week. My friends in the Private Wealth Mortgage Departments at large deposit banks say they have raised rates every day this week. My loan officer associates at smaller credit unions, have stopped taking on any new mortgage loans. These articles are already starting to move thru the media These articles are already starting to appear, http://www.mortgagenewsdaily.com/consumer_rates/938445.aspx
WHAT IS GOING ON?
It is no secret that the national and global economy is in turmoil at this point. Historically, when institutional investors move money out of a volatile stock market, they place it into Bond markets like a 10-year Treasury bond or Mortgage Backed Securities Bond. These are considered a less risky investment.
Institutional investors might not make a huge return on the investment but shouldn’t lose. Generally, when money moves into Treasuries (bonds), mortgage interest rates fall as there is more demand for Bonds.
This is exactly what was happening over the last 2 weeks. Stock Market volatility increased, the Bond Markets fell, and interest rates fell, significantly. Prompting what will be the largest mortgage refinance opportunity in history.
Monday, March 9th the Stock Market plummeted. The Dow Jones fell over 2,000 points and the 10 Year Treasury Bond Yield hit a low of .405%, when in November of 2019 it was 1.95%. Historically, interest rates should have fallen thru the floor but they didn’t. Rates started increasing. From Monday’s open to yesterdays close there have been no less than 6 negative reprices and 3 more today.
Tuesday, the stock market bounced back, the 10 Year Treasury increased over 30 basis points and rates increased again. Today the stock market is down over 1,400 points and interest rates are still increasing.
Wednesday, the stock market has shed another 1,828.81 points after several events that happened last night. The NBA suspended their season, there is a travel ban from Europe to the US and the count of individuals with Covid-19 is massively increasing. The 10 -year Treasury Bond is down over 11 points, but again interest rates are higher.
There are two very important factors that are contributing to this situation. The first is somewhat practical and easy to understand. The second is a bit more complicated but equally important.
MORTGAGE BANK CAPACITY
Typically, Mortgage Banks staff enough people for the capacity to service a 25-50% increase in loan production. Most Mortgage Banks have experienced an increase in production of 300-500% in the past two weeks. These companies simply do not have the people to handle this tidal wave of new business. Ironically, the bigger the bank, the less capacity that they have. Without the staff to take on new loans, a bank will increase rates to slow down production. https://www.housingwire.com/articles/super-low-interest-rates-disappear-from-mortgage-comparison-sites/
MORTGAGE BANKING LIQUIDITY
This concept is a bit more complicated, but very much the source of interest rates currently rising.
A lack of banking liquidity was at the center of the banking melt-down of 2008. There is an extreme level of awareness around this scenario and Federal Regulations are in place to prevent banks from over leveraging themselves in any capacity. The 2008 banking crisis was more around not having access to credit and the concern now is more of mortgage being over leveraged. Many mortgage banks have already hit their limits to take on new mortgage locks.
When a mortgage bank locks a loan, they are hedging or betting on where the rate will be in 30 days when the closed loans are sold on the secondary market into mortgage backed security bonds. If the demand that they are anticipating is not available, then these banks could take loses on the loans that they have locked. In keeping with Federal Regulations, banks have to reconcile their liquidity with the commitment of loans that they have made. Many banks have had to increase liquidity to continue lending and have been advised to slow down production. To protect themselves, Bond traders are lowering the price they will pay for bundles of loans. Both resulting in a higher interest rate for the borrower.
The extreme high demand for mortgage loans and mortgage locks coming in for the past two weeks has cause a level of concern. That concern being the mortgage banks making these loans are taking on more debt than their levels of liquidity will allow. There is also a concern that the Mortgage Backed Securities Market could have less demand in 30 days. This could result in financial loses on these loans that have already been locked. To hedge or minimize these potential losses, bond traders are limiting the amount they are willing to pay for these new mortgage loans. Which means, you guessed it the interest rates will go up as well.
WHAT IS THE STRATEGY MOVING FORWARD?
The banking industry is taking active steps to protect themselves against loses, and you as the consumer need to be taking the same approach.
To lock in an interest rate, you need to have your application and all documentation into a lender. This not only to confirms qualification but registers the loan ready to be locked. If your interest rate was locked last week, you have nothing to worry about. If you are in the process of your application or have been waiting for rates to go lower, the rates you were looking at last week are not going to be there with any lender. Your strategy needs to examine the savings or payment where rates are today and if the payment works for you lock in the rate. Should the market improve .25% during the loan process you can take advantage of an interest rate float down. Don’t hesitate there are multiple factors at play here that are impacting where mortgage rates are going and they are not following historical behaviors.