We’re going to RECAP everything that’s happened to the Mortgage Market in the last 40 days….and what it means for homeowners, home buyers, and real estate professionals.
- Fed actions
- Rate cuts
- Quantitative Easing
- Mortgage lender distress
- Margin calls and Hedging Costs -Capacity issues
- Transition to working from home
- Servicer distress caused by forbearance
WHAT THIS MEANS FOR YOU AS A
- Home Owner
- Home Buyer
- -Real estate professional
For up to date news and analysis of forbearance options, check out https://forbearancereport.com/
The purpose of the updates is to get you the information you need to navigate the current mortgage environment. Watch the video now, or read the transcript below:
Welcome back, It’s Josh Lewis, Broker Owner at BuyWise Mortgage with the Mortgage Market Update for April 16th, 2020.
Little deviation from what we normally do. Gonna answer, probably the biggest question that I’ve been getting here, is what in the heck is going on with interest rates?
We look at treasuries and they are at really record low yields, all time low yields, and mortgages are good for the most part, but not at record low levels, and that’s throwing some people off.
So, without going too far down the rabbit hole, let’s jump in and check it out. So again, this is today’s bond chart. I’m really looking here to show you, we’re gonna show you a version of this, with some more information on it, but long way of saying we’re just going sideways here.
We did the Monday update. Monday, we had a little bit of a bad day in mortgage-backed security within the grand scheme, not that big of a deal. And then another tiny bad day, Tuesday, a tiny improvement Wednesday, tried to improve again this morning and ended up a little bit worse.
So really we’re just in a sideways trend, mortgage rates aren’t moving much in terms of what they sell for in the secondary markets. But that doesn’t mean our Rate Sheet doesn’t move, ’cause despite the fact that these values have been very stable in the secondary markets, the values on Rate Sheets and what you see as a consumer, have been all over the place.
So let’s look, I did wanna show you this one, because this is important. So this, we had another look here at the weekly initial unemployment claims. And if we go back here just a month ago, so one, two, three, four, five weeks ago, there were 282,000, initial jobless claims that week, and it’d been averaging in the low 200,000’s.
So, first week after the mass movement to, to sending people home and shutting down businesses, we had 3.3 million initial jobless claims, far and away shattering a record we’ve never seen something just go that big, that fast, until the following week. And then we had 6.8 million initial jobless claims, followed by 6.6 million, and then again at 5.2 million today.
If we dig into these numbers, we’re seeing unemployment right now at about 17%. We’re going to peak somewhere north of 20% unemployment. Now, if this were a structural change to the economy, where these people are gonna be out of work for years, a year, we would be more concerned. This is transient. The majority of these people are furloughed, and will get their jobs back, when we come back online.
So if you look at going from 4% unemployment to 20, 21, 22% unemployment, if two thirds of those people get their jobs back, we’re still gonna be up near eight, nine, 10% unemployment. So it’s not to say that it’s good, it is to say that this is really temporary.
If you look for those of us here in California the largest increase last week was in California, 660,000, and then the next largest was in New York. Obviously large population centers along with Texas, California and New York were, a concern the last few weeks is they had numbers that didn’t jive with the size of the working population.
So it looks like they were both a little bit delayed in getting, the unemployment claims in, and they’re catching up. So again, another reason why we expect, few more weeks of these big numbers and a peak up in the low 20% unemployment range. So what does that actually mean for mortgage rates?
So we talk right now, normally the difference between a standard balance loan, a loan 510,400 and below, versus a high-balance loan above 510,000, usually about an eighth of a percent in interest.
We’re seeing a big, big spread, we’re gonna get into the details on why that is, later here. But for today, conventional loan for the best-qualified borrower, under 510,400 is 3.375 with zero points. FHA, we saw some improvement, we’re at 3% on, when we did this on Monday down to 2.875. And with my best price lender that actually has a small lender credit today.
Same thing with VA at 2.875. So those are really good interest rates, close to the best that we’ve ever seen. Briefly, at the beginning of March, we could have done three and a quarter on a conventional, maybe 2.75 on FHA and VA. So those are really close to all-time lows, in terms of interest rates.
Now when we click over to the high balance, this is where we’re seeing the big disconnect, and we’ll go through that. Conventional high balance, you can get to 3.625 interest rate, but you’re gonna pay about a point for that. FHA saw some big improvement here.
We were up over three and a half, for a zero-point high balance, on Monday, and again back, down around three and a quarter today. And the one that I’m really struggling with is this, big disconnect here with VA, VA 3.75 with one point, it’s even worse than conventional.
As you can see over here, we usually see about a half percent, the VA loans about a half percent better across the board than conventional rates. So that’s what we’re looking at right now. Let’s go into the details of why this is, and why these numbers are higher than what we would expect, with the Treasury markets where they’re at right now.
The short answer is the US Government and unintended consequences. We all have our thoughts and feelings about the government, but what we can generally all agree on, is that in a crisis like this, the government is trying to help. They’re not actively doing anything where they’re saying, “Hey, let’s make this worse. Let’s throw some gas on the fire.”
Every action that they’ve taken was with an objective to do something good. To help the mortgage market, to help people in the economy. Now the reality of what’s happened, we’ve got some unintended consequences here, that have had some pretty negative impacts and are keeping mortgage rates higher than what they should be.
And a lot of you that are calling saying, “Hey, I wanna refinance because most people are now buying right now. About 80, 90% of our activity is refinance activity right now. So those of you looking to take advantage of the rates, say “I’m stuck at home, I still have a job, I might as well get the benefit of having a lower mortgage rate.” In a lot of cases, we’re not seeing that.
So let’s look at what’s going on, and what’s happening there. So this first chart right here is I wanted to show you, what these fed moves look like. So this is going back to the, back when we had President Bush in office, the economy was doing well.
Fed was coming off of, of some rough times, right around September 11th where we had got down really low on the federal funds rate, and we just saw a hike, hike, hike, hike, hike, hike, hike, hike, hike, and those are all actually good. That means the economy is doing well, and we don’t, well we’re kinda trying to put the brakes on, to slow things down so it doesn’t overheat inflation doesn’t get out of control.
Then we had the crisis in 2008, and if you look here, we had one, two, three, four, five, six, seven, eight, nine, ten, eleven, cuts that took us from over 5%, about five and a half percent down to just over 0%. And then we stayed there for going on six, six and a half, seven years. And it took, the fed from 2016 through 2019, to baby step, these quarter-point hikes.
One, two, three, four, five, six, seven, eight, nine hikes to get us back to two and a half, which is a historically very low federal funds rate. But looking at that two and a half, a lot of what people were saying is, “The fed doesn’t need to hike. We don’t really need to put the brakes on the economy, but what we do need to do is get some bullets back in the chamber so that when we get to the next crisis, that we’ll be able to cut rates and do some things to stimulate the economy.”
Well, here’s the next crisis and this is what it looks like. So the economy started to slow, and we had one, two, three cuts through 2019. The projection was, we’re probably gonna be flat, maybe another cut here this year. And then we had the Coronavirus issue hit. So if you look on Tuesday, March 3rd, we had a half point cut, and that was an emergency meeting.
So one of the cool things about this little chart, the green ones here are emergency meetings, and the red cuts and hikes or just your standard fed meeting. So the fed was gonna meet on Wednesday, March 4th, and they actually had an emergency meeting and announcement, move that up and cut it at a half percent.
And that really spooked the markets ‘ cause people started to look and go, “Hey, what the heck is this? Is this not a China deal? Is this a bigger deal?” And we hadn’t really seen it too much in the US and most people weren’t worried about it.
Now flash forward 12 days, the fed comes in on a Sunday, so obviously their meetings and announcements, their meetings are two day meetings, Tuesday, Wednesday, and then they make the announcement Wednesday afternoon.
They come in on a Sunday, and cut a 100-Basis-Points back all the way to zero. So all of those bullets we had put back in the chamber from 2016 to 2019 gone in less than a year. And the majority of it, one and a half of that two and a half, gone in just a couple of weeks. So, what does all that mean? First of all, let’s talk about why?
Why did they do it on a Sunday? Well, on a Sunday the markets are closed, and this was gonna anytime the fed comes and cuts a 100-Basis-Points, that’s a big shock to the market. Market’s not expecting it, and it gives time prior to market opening on Monday, for everyone to absorb it. Take it in and say, “What does this mean?”
And not have as big of a shock versus a 10:00 AM on a Wednesday just throwing out the a 100-Basis-Point Cut. So it was important they came in, they met over the weekend, but what we’re gonna get in a little bit forward here is, the most important thing they did was not the fed cut. So when they cut the rates to zero, I got about a 100 calls, maybe not a 100, I got about 1520 calls that Sunday.
“Hey, do I get a 0% mortgage rate?” The fed does not control mortgage rates. The federal funds rate, is a rate that involves borrowing between banks, which you’re not a bank, I’m not a bank, we don’t get to borrow mortgage rates at that. But what it does, is it, dictates the trend of short-term rates, a home equity lines of credit, credit cards, things of that sort.
So with that, let’s look at what each one of these did, how this impacted the mortgage markets. So we had the first cut, and we see a big green candle. So the markets, generally the bond markets react to bad news. So this is bad. The economy is gonna likely see some issues, from the Coronavirus. So the fed cuts and the market goes, “Hey, this is dangerous, so let’s put money in bonds,” bonds improved, and we got to, at that point, the best levels.
Went sideways here, for a few days and then the market starts selling off, and you’re like, “What’s going on here?” We had a fed cut, we have troubles in the economy, normally money jumps in here in the bonds, and we see it selling off. Well, what was happening was, we were seeing margin calls throughout the economy, and banks and mortgage lenders were having to actually sell good assets, treasuries, and mortgage-backed securities, to meet their margin calls.
So, we flashforward here to the 15th, and that’s when we had the big fed cut. And the more important thing for mortgage rates, was that the fed announced we’re gonna buy $500 billion of US treasuries. We’re gonna buy $200 billion of mortgage-backed securities. Because what was happening here again, banks and mortgage companies were selling mortgage-backed securities.
Despite the fact that they were the best assets, they were having to sell them, ’cause those were their best assets to raise, raise cash to cover their margin calls. So the fed steps in, and you see this giant green candle, which tells you, fed buys a bunch of mortgages, a mortgage-backed security, everyone else jumps in by this mortgage-backed security okay. Now we’re back here to normal, of what we see.
The unintended consequence part comes in here, is that the way lenders, can actually offer you a rate lock, there’s no such thing as a rate lock in the natural world. So what lenders do is they short the bond market, so that if rates go up, and they have to give you a rate better than what the rate is in the market, they made money on the short trade, to cover that lock.
So it evens out, and it’s built into their business model. Well what happened here, when the fed jumps in, and starts doing all this buying, you see this straight vertical climb here, over one, two, three, four, five, six, seven, seven trading days. All of those shorts, of the mortgage-backed securities as these prices go up are deeply underwater.
So again, we had mortgage lenders who were having margin calls and issues with liquidity. Now all their liquidity is truly going to exacerbate the margin calls, because of the volatility, and the increase in prices in the bonds. So, we have some really good leadership both at the Mortgage Bankers Association, and some thought leaders here in the industry, that have good connections that got to members of Congress, and they were able to talk to the fed over the weekend and say, “Hey, we can’t be buying $40 billion of mortgage-backed securities a day, and keep driving these prices higher.”
The thought from the fed was, “If we do this, drive the bond prices higher, rates will go down, people can benefit from this, and it stabilizes the mortgage market.” It’s not that simple. So the first unintended consequence was, that lenders were buried with too much capacity. Now their hedging costs to offer rate locks are going through the roof. So those trading desks were already in trouble, because they have 10 times the volume that they normally have.
Now they have crazy volatility in the market, not behaving the way it’s supposed to, because we have outside intervention from the government. So again, the best of intense from the government, but what it did, is it costs lenders a bunch of money, and put them in a position, where they had to make their Rate Sheets look ugly to slow volume.
So they’re not subject to something that they couldn’t understand. So the second piece of it, that’s the first piece, and it’s largely been cured, because the fed has slowed their buying. Eventually it’s gonna become a little bit of an issue as the fed will back out entirely. They don’t want to be in the mortgage-backed security market forever. And when they back out entirely, it’ll be interesting to see, how many natural buyers there are in the market.
The second piece, and the piece that we’re still fighting with, is no one wants to own Mortgage Servicing Rights. So it’s important for you to know, what in the heck are Mortgage Servicing Rights and who is a mortgage servicer? So mortgages generally end up in these pools, the mortgage-backed securities that trade in those charts, in the markets that we show you in the candlestick charts.
So there’s a person or actually a group or a fund that owns a giant pool of mortgages. They’re not in the business of collecting your monthly payments, they hire a servicer to do that. So the servicer that come here that collects the payments, they make sure your taxes and insurance are paid, and in the event that you don’t pay, they make the collection efforts all the way through to foreclosing on the property to make sure the investor gets a made whole and their rights are protected.
They don’t do this as a charity, they do this for a profit. So what does profit look like for them? We take an example, an average loan, and here in California, in the current market, $450,000. They get a servicing fee annually of about 0.3%. So they would get $1,350 a year. So as part of the mortgage-backed securities, investors will sell the servicing rights to the highest bidder. So if you’re a servicer, you would like to get it as cheap as possible, so that you make as much profit.
If you’re an investor, you wanna sell it as expensively as possible, so that you can offer lower rates. So if we’re at that level of it’s about 0.3% annually, then what we’re gonna see is, that lenders are willing to pay about 1%. So 0.3% is what they make annually, they’ll pay about 1%, and what that means, is that they need to keep that loan on the books, for three years or more before they even get the profits.
So 0.3 for one year, 0.3 for two years, 0.3 for three years, somewhere in that third year they become profitable. And if that loan stays on the books, like it has historically, for five to seven years, they’ve got two, three years of profit. Maybe some of them stay on the books for 10 or 15 years, and they have multiple years of profit. There are two risks to that servicer.
The first is prepayment risk. So we’ve seen over the last few years, rates had gone up, after the election in 2017 and 2018. In 2018 we had rates in the high fours, low fives. In California where I’m at, with large loan amounts, it doesn’t take much of a movement. If you have a four and three-quarters rate, if rates go down to four and a quarter, it makes all the sense in the world for you to refinance that.
So we had people who bought in 2018 refinance in 2019, if you’re the servicer, you might have collected a quarter of a percent, for something that you paid a full 1% for. So sometime in 2019 when those pre-payments were increasing, servicers had already backed off and said, “We’re not gonna pay nearly as much for the servicing, because we have great uncertainty with interest rates decreasing as to how long we’re gonna have those loans on the books.”
So that’s part number one, and part number two is they have default risk, and that’s what we’re seeing right now. So the borrower stops making their payments, the servicer has to make the missed payments to the investor until the loan is brought current or paid off through sale or foreclosure.
So, the thing that I’m sure we’re all aware of, the CARES Act, the two-point $2 trillion stimulus require servicers to offer forbearance of up to 360 days to anyone suffering from a loss of income, because of the Coronavirus. They’re not even allowed to ask questions, they just have to ask you to affirm that you’re suffering through a loss of income.
On top of that, it places a moratorium on foreclosure proceedings, it’s for anyone suffering that loss. So they can’t foreclose, they have to offer forbearance. So we have all of these options that mean, they’re not collecting monthly payments, and they’re going to have to make the payment on to the investor.
So for that reason, if you take on new loans, you don’t know how long it’s gonna stay onto the books, and if you’re gonna get to the point where you can profit from it, but on top of that, you may have to make payments out to the investor, during the time that the government’s telling you, you can’t collect payments from anyone who’s suffered from a loss of income due to Coronavirus.
So for that reason, those servicing rights, certain types of loans, people aren’t willing to buy them at all. So instead of paying 1%, they’ll pay zero. So because of that, the loans are much less profitable to own and service, and therefore we’re seeing Rate Sheets, looking a lot worse right now. So the last piece we wanna talk about, and I hinted at it and showed you in the chart of what rates look like right now is high-balance loans.
So after the last meltdown in 2008, there were almost no jumbo loan options. So in high-cost areas like New York, Boston, L.A., San Francisco. The government said, “We’ve got a lot of people that own homes that are worth a million dollars, if we want them to be able to sell their homes, someone’s going to need a large loan to buy it, if we want them to do a refinance, and take advantage of the low rates that we are, financing through some of the stimulus packages, we need to create an option here.”
So they said, “We will buy loans up to 150% of the standard Fannie, Freddie limits, in high-cost areas.” But they put a limit on there, they said, “We’re not in the business of doing jumbo loans, we only want your lender portfolios to be 10% or less high balance.” Now let’s flashback 2019, the early part of this year. The people that most benefit from small decreases in interest rates, are the people with the big loans.
So the majority of the refinances, a lot of the refinances, far more than 10% of the refinances for people with high balance loans. So nearly every lender is way out of whack, and they’re gonna get punished from Fannie and Freddie for having too many high-balance loans and not enough standard balanced loans.
So right now, they are priced out across the board. Now, depending on where you’re at, that may or may not be an issue at all. For us here in California, it’s a big issue. I have a list of about 32 clients right now, who are waiting for those loans to come back in line. That’s probably, our average, high-balance loan amount is probably 600-ish, 33 of them… We’re talking 18, $20 million of loans, that we can’t do and can’t profit from.
Borrowers can’t close and benefit from, because of this weird quirk. So again, it’s an unintended consequence. The government says, “Hey, we’re gonna do a good thing. We’re gonna step in and replace some of the market for jumbo loans. that’s not really our deal. Fannie and Freddie are not meant for, high-income earners to buy expensive homes. So let’s put a limit on it.”
Well, no one would have thought that 10 years later, that’s a standard feature of the mortgage market, and in areas like California, most borrowers, California, we have an $800,000 median list price right now, so you put 30% down, you still have a $560,000 loan.
It’s a high-balance loan. So the unintended consequences of them doing something good, and putting a limit on here to keep it getting out of control, but never revisiting that in the last 12 years, means that we have lender Rate Sheets where half of our borrowers in California can’t benefit from it.
And if you’re in Hawaii or you’re in the Bay Area, or you’re in New York city or Boston, you’re probably in a super similar circumstance. So long winded answer to why are rates higher than they should be. The next question is the one I do not have an answer to, nor does anyone else. When are they going to be better?
The high balance stuff is gonna be difficult to shake out. ‘Cause as soon as rates come down, then a bunch more high-balance loans comes in, and they’re out of whack. In terms of where we should be in interest rates, the 10 year treasury is usually our proxy for where 30 year fixed rate mortgages should be.
If the 10 Year, and the spread is generally about 2%, usually a little right at, sometimes a little bit more, but let’s say it’s two and a quarter percent, the 10 Year Treasury today is about 0.6%. A two and a quarter margin to that, says we should have 30 year fixed rates at 2.875. We’re at least a half percent above that.
As time goes by, and things normalize, and servicers come back into the market and say, “Hey, the forbearance stuff has shaken out, people are back to work, we got a better handle on it,” and they start paying normal servicing premiums. We will get some of that back.
Lenders are already getting their pipelines under control, whereas a month ago, everyone was way overburdened, and sending all of their employees home, to work from home, which they never had done. Lenders have now had a month of that, and they’ve worked the biggest bulk of the loans through the pipeline. So we’re in a better position to be able to handle it.
Capacity wise, the fed learned their lesson of what they were doing, and stopped buying and causing those margin calls for lenders. So that part is shaken out. We’re going to get some normalcy at some point, as soon as we know that forbearance isn’t an issue. So is that gonna happen in the next two weeks? No. It’s probably not going to happen in the next six or eight weeks.
We’re probably three to six months out, from seeing that shake out. But everything that’s going on right now, is actually deflationary. Nothing that’s going on, is gonna lead to inflation would lead to higher rates.
So as to a secondary question, I keep getting from those that don’t have high-balance loans. You have a $300,000 loan and you’re at four and a quarter, should I refinance it three and a half, 3.375 or should I wait til they go lower?
And my answer is, don’t bet on something that could happen in the future. Let’s run the numbers, if they make sense today, ring the cash register, put the extra money in your family’s pocket.
We always can take advantage of the opportunity further down the line. So again, a lot of information, I kind of bounced all around, hope you found it helpful.