This week has been a wild one for mortgages! Let me breakdown the major headlines for you…
On Monday, one of our lending partners, United Wholesale Mortgage, began offering 30-yr fixed rates at 1.999%. Many clients have seen posts on social media about these never-before rates, and have asked if they can get on the action. Unfortunately, the marketing pieces don’t tell the whole story. While these rates are technically available, the closing costs are so high most clients will sour to the idea of this offer. I’m happy to discuss your options with you, but in general I do not recommend applying for these ultra-low rates just yet.
Then on Tuesday, mortgages had their single-worst day all summer, as most programs saw rates climb nearly .25% in a matter of hours due to mortgage investors lowering their demand to buy mortgage bonds.
Finally on Wednesday night, the US government imposed added closing costs for refinance loans. Yes, they can do this (whether they should is another matter I’ll dive into in this post), and ultimately these costs are passed on to homeowners looking to refinance.
Mortgage rates change because of these three entities: banks, investors, and the government. Here is a little insight into each, and while all of them influenced rates higher this week, I believe lower mortgage rates are ahead. Feel free to read the entire post to educate yourself a bit on the dynamics of the mortgage industry. Above all, however, I want to encourage you to still pursue a refinance application with me as I fully expect mortgage rates to settle down after this volatile week.
Banks – Banks are the connection between you (the consumer) and the market (bond investors). Think of them as the Amazon of the mortgage biz. When banks get overwhelmed with loan applications (as they have for the last several months) they make tons of money and take longer to process loans.
This is just like Amazon, which has made record profits during the pandemic but is also taking longer to deliver items. When business activity becomes unsustainable, banks raise their rates to slow down new applications. This is why our position as a mortgage broker is so important; we know which lenders are pushing business away and which are putting their rate “on sale” to encourage more business. Unlike Amazon, mortgage banks do not hold a market monopoly, so we navigate the market to help find you the best rates and terms available.
Investors – Investors are the “free market” component of the mortgage industry, where good old-fashioned Supply & Demand influence the price of a product, in this case the rate on a mortgage. As economic conditions change, it changes the value of mortgage bond investments.
This value to an investor is the rate and “points” you pay for a new mortgage. Generally speaking, when the economy is doing poorly, investors want to buy mortgage bonds because they are seen as a safe investment. And when the economy is doing well and/or inflation is running high, investors shy away from buying so rates must go up to entice investors to keep buying mortgages.
Government – Whether we like it or not, our US government literally owns the mortgage industry. The mortgage banks and investors utilize Fannie Mae and Freddie Mac to have standardized rules for mortgage underwriting and to “package” mortgages into investments. Fannie Mae and Freddie Mac are owned by the US Government (a result of the mortgage market collapse in 2008), and their Board of Directors (US Congress) has given orders to these companies to be as profitable as possible. They are not currently acting as a public service entity (as do most government operations); instead they are for-profit organizations for their shareholders (US taxpayers). To keep up with the Amazon analogy, if you are the consumer and the investor is the market, then the government is the provider of cardboard. Sounds benign enough, but in this world there is no other manufacturer of cardboard and all packages by law must be wrapped in cardboard. So when the cardboard company sees Amazon making record profits and consumers getting record-low prices on products, they see a market opportunity for themselves. They decide to drastically increase the price Amazon must pay for cardboard, so everyone in the supply chain must also increase their prices that the consumer ultimately pays.
This precise act just happened last night in the mortgage industry (read this article if you want to geek out on the details). In short, the US Government increased the price investors must pay to buy mortgage bonds from refinance loans, which means the banks now have to offer higher rates to offset this price increase.
In my opinion, this is a dirty “cash-grab” by a government forced to bail out an economy crippled by the pandemic with trillions of dollars in stimulus money. Their announcement last night references “economic uncertainty” as a justification for the added fee, but if that’s true why didn’t this fee come into play months ago when uncertainty was at its apex, and why not apply it to purchase loans? I don’t buy their story.
Congress is having a hard time passing laws to change taxes and other unemployment relief measures, so the government instead is changing “fees” to their services (you need a law to change taxes, but not fees) to raise money. As an example, a refinance loan of $400,000 now carries an extra $2,000 fee that wasn’t there yesterday, which ultimately works its way to the government. Multiply that by the millions of loans potentially closing in the coming months, and you can quickly see the government is taking advantage of their monopoly in the mortgage market. If you like Calls To Action, the Mortgage Bankers Association has already started an effort to reverse it. Click here to read their official statement and submit a message to politicians (use my company name in the business info section).
Simply put, this week was a bad week for mortgage rates, but I think better weeks lie ahead. Our economy is still on the ropes, and uncertainty remains high. An effective Covid vaccine may never make it to the market, the current state of USPS may make it difficult to have a timely presidential election during this pandemic, and millions of Americans may remain unemployed indefinitely as certain business sectors die under the weight of Covid. I know those are sobering points, but as long as they remain potential outcomes in the coming months it will keep downward pressure on mortgage rates. If you have a refinance application in with me or hope to be submitting one in the near future, I urge you to stay the course. Don’t abort your refinance mission, as I am confident rates will remain low and trend even lower in the coming months.