By Stephen Simone (Senior MLO MortgageTech Home Finance Mar 12, 2020
Well if you haven’t been living under a rock, you have heard every talking head on TV talking about historically low rates. It’s true the US 10 Year Treasury Note is now trading @ .68% as of this printing. And the US 10-Year Treasury Note is the most widely cited benchmark for mortgage rates. So typically, when Treasury rates go down, mortgage rates usually follow. It’s usually never a one for one movement, but it usually does move somewhat in tandem. With that said, you would assume that with this historic push lower in Treasury rates, we would see unbelievable pricing on mortgages. Well we did see lenders with fantastic rates, late last week. I personally, locked in many clients last week @ 2.875% – 3.00% for 30-year fixed rate mortgages and 2.625% for 15-year mortgages. That lasted 2-3 days at the most. Then the bottom dropped out, and rates jumped .50%- .75%. Why you ask? Well I will do my best to explain.
First, banks got inundated with so many applications in just a short period of time, that they got overwhelmed. Afterall, when you are staffed to underwrite 50 loans a day and 1,000 applications come in, you have a problem. So to combat this, they did what they always do. They raised the rates they offer consumers to slow the number of mortgage applications. That’s all well and good and would indicate this jump up in rates would most likely be temporary, until they get through their pipelines. BUT something else happened that very rarely happens, and this is where it gets a little complicated.
What I want everyone who reads this to understand, is that the rate you are quoted for a residential mortgage directly correlates to the movement of mortgage-backed-securities (MBS). These MBS are pools of individual mortgages (like yours and mine) that are packaged up by Fannie Mae and Freddie Mac and sold to investors. Like all bonds, there is an inverse relationship between price and yield (rates). As investors buy MBS it pushes the price up and the rates down. Conversely, as investors sell MBS, the prices go down and it pushes rates up.
MBS have their own set of concerns brought about by the pace of last week’s move. Quick drops in rates prompt homeowners to refinance loans. As people refinance, these individual loans get paid off. So traders that own these MBS securities, that thought they had a duration (term) of 6-7 years (the average duration of a home mortgage) now may have a bond that has only a 3-6 month duration. Traders pricing models (for these MBS) cannot account for events that have never really happened before. The fact is, they really don’t know what they own right now. And they don’t know how to hedge them in this environment. So, the bail. They sell their MBS positions and wait for the volatility to subside. And as mentioned above, since MBS yields have an inverse relationship to price, as they sell these MBS it puts massive pressure on the price and the price for these bonds goes down. As prices for these MBS bonds go down, the yields (rates) goes up. That’s what you are seeing now.
So, between the banks being overwhelmed with applications last week and MBS traders temporarily selling their holdings, you get what we have now. But as with all things, this too shall pass. When the volatility in the markets subside (and it will) we “should” see mortgage rates come down again. Until then take a breath, wash your hands and have a drink.
If you have any mortgage questions, feel free to email me @ firstname.lastname@example.org