Coronavirus and Rates

As a mortgage professional for almost two decades, I have been through many wild rides, but nothing compares to what we are experiencing right now with this coronavirus; or what I am calling our alternative universe. Just over a week ago, the fear of COVID-19 sent stocks tumbling, and mortgage rates lower – according to Mortgage News Daily, the average rate for the popular 30-year fixed mortgage fell to 3.23%, an 8-year low.

Rates had been dropping for weeks as “breaking news” seemed to ping our phones by the minute, and fear began to manifest in real-time, as we watched the stock market cradle. In times of economic uncertainty, mortgage rates are typically the beneficiary of bad news, and rates go down as dollars move from the risky stock market and into the “usually” safe haven of mortgage-backed securities (aka mortgage debt) – and rates go lower.

As news of the virus drove interest rates down, homeowners rushed to apply for mortgages not seen in over a decade. According to the Mortgage Bankers Association, during the first week of March, refinancing applications reached their highest levels in over 11 years and jumped 79% week over week. We all went from being plain old busy to our hair catching on fire. That’s when the damn broke, almost at once, as Banks quickly began to increase rates to stem the demand. More factors contributed to mortgage rates spiking, and I will cover those in future blogs — no need to get too far in the weeds here.

In what seemed like a matter of hours, those attractive low-interest rates vanished in a poof of air, and rates shot up – and fast! According to Mortgage News Daily, that average rate is now over 4%, and we don’t know how high it may go.

The Fed Didn’t Drop Rates?

Most had not heard the news that rates had jumped when the Fed made a dramatic announcement that they were going to lower the Fed funds rate to almost zero. Within minutes my cell phone exploded with calls and text messages from clients “Dan, did you hear the news? The Fed is lowering rates to zero, and I want it! Unfortunately, I had to tell them it doesn’t work that way.

The Fed Funds Rate is the overnight rate at which banks borrow money from each other; it is not, however, the mortgage rate. Mortgage rates are influenced by the U.S. and global economies and the demand (or lack thereof) of mortgage-backed securities (MBS) that are bought and sold on Wall Street. In short, MBS represents the prices investors are willing to pay for these low risk, low rate, fixed investments. More demand drives interest rates lower, and less demand drives them higher. 

So to be clear, the Fed can’t just announce they are lowering mortgage rates by dropping the federal funds rate. But, by making these incremental moves, they can help influence mortgage rates to drop – or in this case not to go too much higher!

What is Quantitative Easing, and why do we want it?

Now that we all know Fed rate cuts don’t always lead to lower rates, there are a few other tricks the Fed has up her sleeve to help us. One method that paid huge dividends during the crash of 2008 is Quantitative Easing (QE), which is “the introduction of new money into the money supply by a central bank. 

In laymen’s terms, if the guys on Wall Street and investors won’t purchase Mortgage bonds or treasuries, the government can step in and fill that void. Thus, keeping the demand for MBS going, which in turn keeps mortgage rates low. And if rates stay low, it will promote consumer spending (and borrowing) and keep our economy humming. The Fed’s goal to push rates down using QE may work again, as it did when they purchased billions in bonds and securities over many years following The Great Recession.

What is happening today reminds me of just how fragile and reversible progress can be. And unfortunately, as a society, we sometimes have this terrible habit of repeating mistakes we made years ago. This is why it is so essential to work with people you trust and who have the experience to guide you through the steps of homeownership and finance. I am hopeful this move by the Fed will pay dividends, just as it did before, and we can all continue to realize the dream of homeownership. Be safe, everyone. 

Should I Lock Or Float This Week : December 17, 2012

Todays_MBS_12-17-2012This so-called fiscal cliff is leaving mortgage rate shoppers shaking their heads? First, we are being told, if our congress allows us to fall over that cliff, it will equate to a monthly loss of $530, or more than $6000 per year, for many americans. If this were not enough to worry about, my clients shopping for homes, are also facing the uncertainty of what direction mortgage rates will move – Up? or Down? Last week, rates have started to creep up, and up. Continue reading “Should I Lock Or Float This Week : December 17, 2012”

Explanation Of The Fed Statement Today (December 12 , 2012)

Putting the FOMC statement in plain EnglishThe Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent Wednesday.

For the tenth consecutive meeting, the FOMC vote was nearly unanimous. Richmond Federal Reserve President Jeffrey Lacker was the lone dissenter in the 9-1 vote. Continue reading “Explanation Of The Fed Statement Today (December 12 , 2012)”

Explanation Of The Fed Statement Today (October 24 , 2012)

Putting the FOMC statement in plain EnglishThe Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent Wednesday.

For the ninth consecutive meeting, the vote was nearly unanimous. And, also for the ninth consecutive meeting, Richmond Federal Reserve President Jeffrey Lacker was the lone dissenter in the 9-1 vote.

The Fed Funds Rate has been near zero percent since December 2008. At the close today, Mortgage Backed Securities ended the day a little worse (rates/fees went up a bit) on the news… Continue reading “Explanation Of The Fed Statement Today (October 24 , 2012)”

Rates Are Going Down and Fee’s Are Going Up! I Am So Confused.

Putting the FOMC statement in plain EnglishSometimes, things just have a way of working themselves out. My wife hates when I say that, but in this circumstance it is true. If you read my blog a few days ago, I braced my clients for fees to increase on all conventional loans. But thankfully, the news today from The Federal Open Market Committee drove rates right back down. It’s like the fee increase never happened. Why?

Because the Fed voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent. For the eighth consecutive meeting, the vote was nearly unanimous (9-1 vote).

The Fed Funds Rate has been near zero percent since December 2008. Continue reading “Rates Are Going Down and Fee’s Are Going Up! I Am So Confused.”

Why Are Rates Getting Worse Today? (August 1 , 2012)

Putting the FOMC statement in plain EnglishAfter the The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged this morning, mortgage rates got worse. Why? The vote was nearly unanimous (9-1 vote).

In its press release, the Federal Reserve noted that the U.S. economy has “decelerated somewhat” since January. Beyond the next few quarters, though, the Fed expects growth to “remain moderate” and then gradually pick up. Remember, when there is bad news for the economy, rates improve. And when there is good to moderate news, rates get worse (see video explanation). Continue reading “Why Are Rates Getting Worse Today? (August 1 , 2012)”

A Simple Explanation Of Bernanke’s Statement Today (April 25, 2012)

Putting the FOMC statement in plain EnglishThe Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent Wednesday.

For the fifth consecutive month, the Fed Funds Rate vote was nearly unanimous. Just one FOMC member, Richmond Federal Reserve President Jeffrey Lacker, dissented in the 9-1 vote.

The Fed Funds Rate has been near zero percent since December 2008. It is expected to stay near-zero through 2014, at least. Continue reading “A Simple Explanation Of Bernanke’s Statement Today (April 25, 2012)”