Mortgage Rates Increase even as Fed cuts Rates
Mortgage rates went from ridiculously low to not-so-bad in just over a week.
Everything that the media thinks should have happened to keep it at the ridiculously low levels did happen.
The Fed did an emergency rate cut on 3/3/2020 and cut the Fed Funds rate by half a percent. Treasury’s fell to levels never seen before and the stock market crashed to a point where the Dow officially entered the bear market, ending the 11-year run in the bull market territory.
Given all this, mortgage rates should have fallen more. Instead, they climbed 0.25% in the last couple of days.
What happened here? Let’s investigate.
Fed Rate Cut and Mortgage Rates
The general public believe that Fed Rate Cut is somehow directly correlated to mortgage rates going down, the truth is – there is no direct correlation. There have been several instances where the mortgage rates actually went up the day fed cut rates and vice versa.
It happened this time too when the mortgage rates went up the day after the Fed announced the rate cuts.
The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis. That ladies and gentlemen has got nothing to do with mortgage rates. Short term loan, credit cards and HELOCs – yes, but not mortgage rates.
In fact, the Fed left the rates unchanged between 2008 and 2016. So if the fed fund rate indeed impacted mortgage rates, they should have remained unchanged for 8 years. During those 8 years, mortgage rates moved in the range of 3.375%-5.125%, a very wild swing.
Treasury Yields and Mortgage Rates
The 2nd factor widely cited which correlates with mortgage rates is the 10-year Treasury Yields, which usually has an inverse relationship with the stock market.
When the stock market goes down, the fund managers will take their billions and invest in something safe like 10-year US Treasurys (UST). While the 10 Y UST nosedived (at one point reaching under 0.5 – see the chart below), mortgage rates didn’t follow suit.
Stock Markets and Mortgage Rates
There is an old adage in the industry – What is bad for Stocks must be good for Mortgage Rates.
Unless you have been living under a rock, you must have seen stocks have been in a free-fall with both S&P 500 (see chart below) and Dow entering the bear market with more than 20% fall.
All of this has made no impact on mortgage rates.
So what really changes mortgage rates?
The only metric that really drives mortgage rates is the yield on Mortgage-Backed Securities (MBS). The higher the yield, means more the demand and lower the rate for the borrowers. The chart below will show you that MBS actually lost in pricing 6 out of the last 8 days.
Note – Red days are bad for mortgage rates and green days are good. And the longer those red candlesticks, the worse it is for rates.
In the last 2 days, the beating has been severe and the uptick in mortgage rates swift.
And then there’s that issue of too much supply. In the last 12 years, US mortgages have touched the annual $2 Trillion production mark only once. That would mean the industry has a capacity of doing about $200 billion per month, maybe slightly more.
With a sudden rate drop like this, there can be $1 trillion of new rate locks because a majority of borrowers can benefit from refinancing. But since some lenders do not have the capacity to handle the added business, they increased the rates to deter additional loan applications.
Classic demand and supply equation. Since the demand was overwhelming and the capacity to process those loans lacking, increasing the rates was meant to dampen the demand.
There is also a liquidity issue. A lot of lenders use what is called a warehouse line of credit, a short-term borrowing, to fund these loans. If they accept submissions that are way more than the money they can borrow from warehouse lines, then they will have loans that they won’t be able to fund. Another reason for them, to stop taking more loans.
Even then, I have heard some of the lenders are anywhere from 45-90 days (I have even heard the big banks are at 120 days) turn times on these refinances. So, even if you were able to lock that ridiculously low rate, you will not see that on your mortgage statement anytime soon.
Will the rates go down again?
First of all, the rates are still super attractive for most borrowers to refinance into. So, if you are thinking of refinancing and see a benefit from the refinance with the current rates, you should proceed and lock that rate.
If that’s not the case, then waiting may not be a bad idea. Once the lenders clear out some backlog in the next month ot two and the markets stay rattled with CoronaVirus fear, Mortgage-Backed Securities will get a boost and the rates should go back down again. So, stay patient.
As always predicting the future in an unprecedented volatile market is filled with “ifs-and-buts”, so it may or may not come true.
And yes, Fed will cut the rates again. But by now, you are wise enough to know that it will not impact the mortgage rates in any way. Be smart and tell that to your friends too and if they don’t believe it, show them this blog.
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Charts Courtesy of – MBS Highway