Explaining the chances of lower mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Explaining the chances of lower mortgage rates
Apr 212020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

A question I keep getting asked – are mortgage rates going to drop any further?  I wish I had a crystal ball so I could give everyone a definitive answer.  Instead, I’ve tried to educate the questioners about the finer points of the mortgage bond market, but I find they usually fall asleep before I get to the tenth slide.

So, after trying to answer this question so many times, I think I have winnowed out the minutiae and will try to defend a simple answer.  I think there’s about a 75% chance mortgage rates will go lower, and here’s why I believe that.

Mortgage rates tend to follow the 10-year Treasury bond.  I say “tend to” because the correlation isn’t perfect, and current times are a good example.  If mortgage rates had followed 10-year Treasuries perfectly to their current very low levels, 30-year mortgage rates would be around 2.5%.  Instead, they’re hanging in the mid-3% range.

That begs the question why.  We’ve discussed some of the reasons previously, but it seems the most tractable one is the CARES Act.  The Act gave homeowners with a mortgage the right to request a forbearance from mortgage payments for up to 12 months with seemingly no penalty to the homeowner.  Unfortunately, loan servicers, the companies to which you send your mortgage payment, still have to pay the investors who bought those mortgages, as well as pay property taxes and insurance premiums for homeowners who escrow.  The Mortgage Bankers Association estimates servicers may need to come up with $100 billion (that’s billion with a B) to cover the forborne payments, and the Act didn’t provide servicers with any assistance.  As a result, the bond market is requiring higher mortgage rates to account for this risk.

A number of Congressmen and Senators as well as trade associations have asked the Executive Branch to do what Congress failed to do – provide a borrowing program for mortgage servicers.  Rumor has it that the Treasury Dept has heard them, and something is in the works.

For mortgage rates, the questions then become:

  • whether markets think the program will be effective, thus relaxing what is essentially a risk premium currently built into mortgage rates; and
  • how quickly will it happen?

The risk for those waiting for lower rates is that the economy ramps up again, allowing rates to rise naturally, before markets eliminate the risk premium, allowing rates to fall.  But if your mortgage needs are more urgent, or you’re more risk averse, the current 3.5% mortgage rate really is pretty sweet.

Mar 162020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Over the weekend, the Federal Reserve cut the federal funds rate to zero, and it seems the whole world is asking today, “Where can I get that free money?”  And, unfortunately, you can’t. The reasons are a little complex, but let’s see if we can break it down a little.

First, you have to realize that the federal funds rate, and in fact all the rates the Fed directly sets, are very short-term rates.  Mortgage rates are long-term rates. They respond to different factors, and often move higher when the Fed rates are moving lower.

So, mortgage rates have been on a wild ride the last couple weeks with rates falling to record lows, then bouncing 25% higher in just one week.  The reason they fell so quickly is the same as the reason the Fed acted this weekend: the pandemic is slowing our economy. But it looks like the virus is going to be with us for a while, so why didn’t rates remain at record lows?  Let’s analyze the causes and predict what will happen over the coming weeks.

Mortgage rates are a reflection of the price investors are willing to pay for mortgage-backed securities – basically, your mortgage bundled with a bunch of others as an investment.  That price is influenced by a number of factors. We discuss some of those factors regularly, such as expectations for economic growth and expectations of inflation. It’s economic growth expectations that caused rates to plummet a couple weeks ago.

But we had other negative factors come into play last week.

  • – One of those factors we call runoff.  As we’ve discussed before, investors buy mortgage bonds expecting to earn interest over a number of years.  When mortgages pay off early, such as through refinance, investors actually may lose money. In response, investors lower the price they’re willing to pay for mortgage securities, which results in higher rates.
  • – A second factor is basic economics:  supply and demand. The drop in rates generated an enormous number of mortgage applications.  We didn’t have enough investors to absorb all that supply. On top of that, investors didn’t seem to be the mood to buy much of anything last week as prices dropped in most markets.
  • – Finally, lenders’ systems were overwhelmed with the volume of new applications, and many of them raised their rates as a means of throttling that volume.

So, what’s next?  While the federal funds rate announcement isn’t going to lead to lower rates, one of the Fed’s other actions may.  The Fed is stepping into the market to buy a small amount of mortgage-backed securities. It appears this is returning liquidity to the market as rates have dropped a little today.

It probably will take a few weeks to dissipate the other negative factors, but I suspect the positive factors, slowing economy and negligible inflation, will still be in place.  And once that happens, we could see record low mortgage rates again.

Rate update: Virus outbreak leads to lower mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Virus outbreak leads to lower mortgage rates
Jan 282020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Tragedy can lead to uncertainty, and uncertainty is good for lower interest rates. The outbreak of the coronavirus in China has unsettled global markets, and investors are running to the safety of Treasury bonds. Investors are concerned the virus will seriously impact global growth. One analyst already is predicting the virus will shave 0.4% off global GDP, and the outbreak seems to be growing.

The effect on stock and Treasury bond prices has been much more significant than the effect on mortgage rates. Even so, mortgage rates are the lowest they’ve been in over 3 years.

If you’ve been watching for low interest rates, don’t procrastinate. As quickly as these rates have appeared they could evaporate. If the number of new cases of the virus starts to decline, markets may conclude the effects will be limited, and rates will snap back.

In that case, we’re back to watching economic data and events, which ramp up this week. The Federal Reserve meets today and tomorrow. While no one expects the Fed to change its current policy – no rate hikes or cuts until inflation or unemployment change significantly – investors love to parse the post-meeting statements for hidden meanings.

Next week we get the ISM reports and the Jan jobs report. The service sector of the economy has remained strong despite the trade disputes, but pundits have been predicting its deterioration for many months. Should the ISM report hint a downturn, rates could improve further. Likewise, should the jobs report deviate from its current trend, that could gets rates moving.