By: Cheryl MacCluskey
Hi Everyone,
As I just got home from the supermarket I was reflecting on how life is so different for all of us. Extra long lines, shelves empty of toilet paper and paper hand towels. Many discussions with friends of why everyone is buying all the toilet paper. A friend from Germany wrote “ WHAT’S with the Toilet Paper?” Hopefully someday we will be laughing at this Toilet Paper mystery
This is a reminder of the new world we’re living in because of the coronavirus. An extraordinary life is unraveling and no one will be untouched. The economic and social disruptions of this crisis will be deep, board, and long-lasting. We must remember during the tidal wave of bad news, fearmongering, that us as humans, we will all rise to the challenge of overcoming the coronavirus.
With this said, I have been getting calls from clients wanting to refinance because the Fed
Dropped rates. I have been in this business for a long time and I have never seen rates change so dramatically sometimes by the minute. I thought I would explain why rates are rising when the Fed dropped rates and the 10 year Treasury bond is so low. Rates are individual to each borrower and very much dependent on a borrower’s credit score, the loan to value and debt to income ratios. Here are my personal thoughts on the market. Much of what happens with mortgage rates is much dependent on two things, the bond market and the MBS (Mortgage Back Securities) market. When referring to bonds we are talking about the 10 year treasury bond. Bonds are fixed rate investment that is considered to be a safe haven investment during times of economic uncertainty. A bond has two features that work in opposite directions. Its yield and its price. That said, rates don’t move in tandem.
Meaning, if the yields drop by say .050 basis points so will mortgage rates, its viewed as a trend for long term rate. The mortgage back securities market is also important because this is a source of funding for the mortgage markets. MBS are sold to investors for a guaranteed Yield. The government stimulus plan that was just approved by the Senate offers homeowners affected by Covid#19, the option to make the mortgage payments without a penalty for up to 90 days.
While this is great news to homeowner’s it is worrisome to the large mortgage services who collect mortgage payments on behalf of MBS investors. Think about this. If homeowners don’t pay their mortgage for 90 days or more will servicers have the reserves on hand to meet their contractual obligations to MBS holders? This question has injected fear into the MBS market and the demand for Mortgage Back Securities has dropped contributing to what I believe are artificially higher rates. Congress to date has been focused helping the everyday worker and small businesses and they have not yet addressed unintended consequences in the MBS market. Until this issue is resolved and investors regain confidence in the MBS market I would expect continued volatility and dislocation as it relates to mortgage rates. In short there is greater demand for mortgages by consumers than there is for MBS investors, which raises interest rates and in the last two weeks I have seen a big jump in rates.
I do believe they will be coming back down in the next couple of weeks when things stabilize. I hope this clears up why interest rates have been on the rise when the Fed lowered the interest rate. I wish everyone a happy and heathy month of April. Please don’t forget to be grateful for the many positives we do have in our lives, family, friends, children, pets and our health. Take the time to appreciate the time you are able to spend together, we may never have this opportunity in the future to spend such quality time together! Enjoy this time off, write a book, clean out that closet or garage. I polished all my silver on Saturday! On that note, I wish you all the happiness and health.
