In the first week of March, mortgage rates hit historic lows. For a brief moment in time, 30 year rates reached the low to mid 3s and 15 year rates hit the high 2s to low 3s. Our company, First Home Mortgage which is the largest lender in MD and 4th largest lender in DC, was overwhelmed by requests for purchase and refinance loans, as we and other lenders served record numbers of clients.
In the second week of March, my wife and I went to Sibley Hospital in DC and there she delivered a happy and healthy baby, Morrison William Jaffe, who we call Moe.
Also beginning in the second week of March, interest rates started to rise. At first the reason for this was that banks simply didn’t have the capacity to handle the volume and so the only reason to cope with it was to raise rates to slow the origination of new mortgages. But this reason was short lived, because in the afternoon of March 9th the volatility in financial markets dramatically increased. Since then, the stock market has gone up or down, between 5-12%, every day.
In normal times, when stocks go down rates go down, and when stocks go up rates go up. But we are not in normal times, right now.
There is so much uncertainty and concern in financial markets right now, that the price of stocks and bonds are both decreasing in lockstep, and rates are rising as financial markets react to government public health responses and proposals to address the coronavirus pandemic and offer financial and fiscal responses.
On Sunday March 14th, the federal reserve lowered the federal funds rate by 1%.
The federal funds rate is the rate at which banks are charged for overnight borrowing from the federal reserve. An overnight interest rate of course is going to be different from a rate which is fixed for 30 years. While it doesn’t have a direct relationship with mortgage rates, it does influence all loan types. It has an impact not only on the national economy but globally since other countries and individuals lend money to the US.
The federal reserve dropped these rates to stimulate the stock market, the economy, by lowering banks’ cost of borrowing. The Federal Reserve is trying to ensure adequate liquidity and credit availability for consumers, businesses, and banks. This is important for mortgage interest rates as inadequate liquidity is one of the factors currently driving mortgage interest rates up.
The government hoped to calm markets by reducing the federal funds rate to zero.
But there are so many more mortgages being created right now, more than investors are willing to buy. The government is ordinarily the largest buyer of mortgages, through its arms Fannie Mae and Freddie Mac. But sometimes the federal reserve buys mortgages, too. So do banks and pension funds, major investors, and individual investors.
As stocks have fallen so sharply and so dramatically, many non-government investors are forced to liquidate their positions and go to cash in their portfolios. They simply don’t have the liquidity to buy what is considered a very safe investment, purchasing a mortgage backed security.
Mortgage rates are determined based on the sale of mortgage backed securities, which are bonds. The purchaser of this bond gets the interest earned from the mortgage.
In the first week of March, everybody wanted to buy these, and therefore rates plummeted. Since March 9, the opposite occurred.
The federal reserve lowering the federal funds rate on March 14th was not impactful to the pricing of mortgage rates. What was impactful however was their announced re-implementing of quantitative easing. Through this they shared they’ll purchase $200 billion in new mortgages over the next few months. And so this Monday March 15th, after seeing mortgage rates rise a half percent to a full percent the prior week, rates fell a quarter percent.
On Wednesday March 18th, we saw rates rise between .375%-.5%. This is because as the stock market continues to worsen, liquidity becomes more and more of a concern. We have mortgage companies looking to sell mortgage backed securities, but also individual investors, banks, pension funds, now also need to re-sell mortgage backed securities so they can rebuild liquidity.
For years the government has discussed an intention to privatize the mortgage industry, but in a liquidity crunch financial markets go haywire without government intervention.
Interest rates are no longer at historic lows and the amount of volatility in rates is quite unprecedented.
Notice I’ve barely mentioned coronavirus and we’re already deep into this commentary. Real estate is facing uncertain times right now. We are fortunate that as of Monday March 16th, all employees of First Home Mortgage are working remotely and our company is fully operational. But our ability to work remotely is made possible by the realtors, appraisers, and settlement attorneys who do not.
I expect significant volatility to continue. Coronavirus is wreaking havoc in peoples’ lives as well as financial markets.
For anyone who wants to know what it’ll take for rates to fall further, or at least stop rising, the answer is money. If the federal reserve ramps up quantitative easing and puts much more than $200 Billion into buying mortgages, you could see rates improve. Further, success in slowing the severity of the coronavirus will help restore financial confidence in the market. This will likely add to volatility initially.
It’s my sincere pleasure to be your loan officer and I appreciate the opportunity to help you understand, and do, what is best for you financially. Thank you for recommending me to your friends and family – that is how I grow my business and it’s thanks to you that in the almost 13 years I’ve been a loan officer, I’ve helped over 1,700 of you finance your home, in which many of you are now working and or caring for your children. I, my wife Jackie, and my three sons Louie, Cole, and Moe are hunkering down for the sake of public health. To those of you who cannot work from home, particularly those who provide essential services, thank you so very much for doing so.
Questions? I look forward to being of assistance.
I’ll be working out of my new home office, Cole’s bedroom.