The decade-long month of March 2020 brought many swift changes and confusion to the financial industry, especially mortgages. Just a few short weeks ago, mortgage rates dropped to a 50-year all time low. The market was flooded with refinance applications as homeowners across the country were scrambling to capitalize on the opportunity to save up to several hundred dollars of their hard-earned money every month. Refinance applications were pouring in at a pace 168% higher than last year, forecasted to well exceed one trillion dollars. While this sounds great on a consumer level, it’s what happens behind the scenes that caused these rock-bottom rates to disappear almost as fast as they emerged.
At the dawn of the Coronavirus threat in February, many were concerned about what would happen with the economy. In a protective measure, investors began selling stocks in exchange for purchasing government bonds due to their track record for being more stable. The influx of bond purchasing drove up the price which, in turn, affected the mortgage rates. Refinance applications were pouring in at levels that companies simply could not support, and the law of supply and demand kicks in.
Lenders are forced to slightly raise rates to slow down applications until new loans are closed and sold in the secondary market, giving the lenders the money to start the process all over again. Consider it the mortgage market’s own version of “flattening the curve” to give some stability to all working parties behind the scenes taking care of all moving parts required to close these loans.
When coronavirus strengthened its force, economists realized that the impact could be so severe that it could cause a large number of people to not be able to afford their mortgage payments. Unemployment numbers were being predicted to exceed those of the Great Depression and the Great Recession. Companies and people were concerned about liquidity so now stocks and bonds were being offloaded in exchange for cash. This perfect storm meant rates would go even higher.
High mortgage rates in hard economic times are no good at all, and the government knows this all too well. The Federal Reserve swoops in with a bailout, including their promise to buy billions of dollars in mortgage backed securities – daily. This, in theory, should restore confidence in investors to put their money back into the bond market. But, this volatile market means a risk of even more refinances of recently closed loans, before the servicers have a chance to break even on their cost. Rates now have to build in insulation from massive losses servicing is incurring. It is like a roller coaster ride for all involved, but there IS end in sight.
The good news is that all signs point to low rates in the future. The Federal Reserve is going to continue purchasing mortgage backed securities. Mortgage companies are going to close up the deals currently on the books to free more capital to write more loans. The economy struggling to recover will keep rates at affordable levels so we don’t come to a grinding halt. This is great news considering the majority of our active duty families are at a stop-movement. The forced patience will likely pay dividends in the long run in saved interest.
For those of us that don’t like to sit on idle hands, there are steps you can take now. Start interviewing lenders and make sure you find one that is a good fit. Fill out the application and start sending in supporting documents so you can take advantage of low rates as soon as the time is right. We in the real estate and financial sectors are essential workers because “home” is something no one should be without. While all parties involved have modifications in place, rest easy knowing that it WILL get better and we are here to help.