As refinance applications continue to surge and lenders work to manage capacity, the 30-year fixed-rate mortgage ticked up from last week’s all-time low. Mortgage rates remain at extraordinary levels and many homeowners are smartly weighing their options to refinance, potentially saving themselves money.
Mortgage Rates Spiking Quickly as Bond Market Panics
Mortgage rates have exploded higher over the past day and a half as the bond market sends threatening signals about a big picture bounce off the recent lows. This is made all the more jarring by the timing and the scope of the movement, as well as the circumstances surrounding it. What does that mean? First off, the scope is huge, considering the 10yr Treasury yield (the most widely cited benchmark for the bonds that underlie mortgage rates) hit 0.318% late Sunday night. While the 10yr doesn't dictate mortgage rates, its movement speaks to the general momentum for all longer-term rates in the US. 0.318% was more than 1.0% below the previous all-time low seen in 2016, and it only took 8 business days to cover that entire 1.0%.
The drop in Treasury yields coincided with decent pricing in the mortgage-backed-securities (MBS) that underlie mortgage rates, which in turn allowed lenders to offer all-time low mortgage rates at some point in the past several business days. For many, it was first thing Monday morning. For others, it was in the previous week. Either way, the average lender has been at or near all time lows on a few occasions over the past 6 business days.
This is why the move is jarring. From all-time lows early yesterday morning, rates have moved up to the highest levels in more than a week for most lenders. The average lender had been able to quote rates as low as 3.125% during the best few hours, but they're now back up in the 3.375% neighborhood.
How could mortgage rates be 3.375% if they were also 3.375% in 2012 and 2016 (years when 10yr Treasury yields only managed to make it into the 1.3% range)? Therein lies the caveat of Treasuries guiding rate momentum but not directly dictating outright levels in mortgages. MBS have their own set of concerns brought about by the pace of the move. The short version of the story is that volatility costs money for mortgage lenders. The longer version would involve a discussion about overly-quick drops in rates prompting homeowners to refinance loans only recently acquired. When that happens, it costs mortgage investors money in lost interest payments. Investors then pay less for the same type of mortgages. Lower investor demand results in lower MBS prices and higher mortgage rates, all other things being equal.
But all other things aren't equal. Lenders have been so incredibly slammed with business that they've either turned it away outright or simply raised their rates high enough to send the message: find someone else to do your loan. On a final, rather complex note, many lenders are beholden to the requirements of their own creditors (even though the lender is a creditor as far as the mortgage borrower is concerned). Due to market volatility, those creditors are not only running low on funds in some cases, they're also requiring or suggesting that lenders set bigger margins on new business right now. In other words, if your rate would have been 3.125% in a calm market environment at current MBS levels, it's 3.375% today.
One last thing to keep in mind when we talk about the lowest available rates: this WILL NOT apply to every scenario. In fact, it ONLY applies to the best scenarios (25%+ equity, 760+ credit, single-family, owner occupied homes). Once you start looking at rates for less than perfect scenarios, things get ugly quick. That has to do with the higher mortgage rates being VERY poorly priced because investors are REALLY scared about how quickly they could be paid off in this environment. And again, the less an investor wants to buy the underlying mortgage debt, the higher your rate is going to be.
Above all this at a longer-term, conceptual level. A bounce of the size seen in the bond market today begs the question of whether or not the coronavirus-induced rate drop (and stock sell-off) is over. If anyone knew how that future would play out, rest-assured, you'd have seen much bigger market movement today. Things can still go either way for a variety of reasons. Certainly, the risk of a bounce has been raised, but we'd need to see much more bond market weakness (i.e. higher Treasury yields) to confirm it. That could lead to a dicey, stressful couple of days as there are two Treasury auctions to content with (tomorrow and Thursday). If the bond market hasn't totally given up by then, we're more likely to get a clearer sense of where we stand by the end of the week.
The average 30-year fixed-rate mortgage hit a record 3.29 percent this week, the lowest level in its nearly 50-year history. Meanwhile, mortgage applications increased 10 percent last week from one year ago and show no signs of slowing down. Given these strong indicators in rates and sales, as well as recent increases in new construction, it’s clear the housing market continues to be a positive force for the broader economy
Given the recent volatility of the ten-year Treasury yield, it's not surprising that mortgage rates again have dropped. These low rates combined with high consumer confidence continue to drive home sales upward, a trend that is likely to endure as we enter spring.
The low mortgage rate environment continues to spur home buying activity, with applications to purchase a home up fifteen percent from a year ago. We’ve seen new residential construction surge over the last few months, on pace to reach the highest level in more than a decade. This is a good sign for the inventory-starved housing market and is a promising indication for the spring home buying season.
Generally, lenders will evaluate the four Cs when determining a borrower's eligibility for a mortgage. If your self-employed, you'll still be evaluated on the four Cs, but may be asked to provide some different or additional documentation to determine how much you may be qualified to borrow.
If you're self-employed, you may be required to submit the following documents when applying for a mortgage:
The sound and fury of the financial markets continue to warn of an impending recession, however, the silver lining is mortgage demand reached a three-year high this week. The decline in mortgage rates over the last month is causing a spike in refinancing activity – as homeowners currently have $2 trillion in conventional mortgage loans that are in the money – which will help support consumer balance sheets and increase household cash flow. On top of that, purchase demand is up seven percent from a year ago.
We’re seeing a tug of war happen as the fixed income market flashes warning signs while the equities market continues to march higher with optimism. The data suggests the economy is weakening but is still on very solid ground with high consumer confidence and a strong labor market. Closer to home, the housing market continues to slowly improve and gain momentum as we head into the second half of the year, which is good news and should keep the economy growing.