Hey there, it’s Josh Lewis broker-owner at Buywise Mortgage, a California Mortgage Broker.
I wanted to record an update. I’ve had a lot of conversations with both borrowers and our realtor partners.
A lot of the same conversations, a lot of the same questions so I wanted to give a quick run through and bring everyone up to speed.
It’s been just crazy over the last 10 days, and I’m talking just the mortgage markets.
Life in general outside and all of us being stuck at home now, we’ve all isolated and are working from home the whole Buywise team.
So, I’m sure most of you are experiencing the same thing but wanted to give you a run-through so you have a better understanding as you’re talking to clients, potential buyers, future buyers, past clients, that are just wondering what the heck’s going on, asking you questions about their mortgage, asking you questions about what’s going on.
So, just kind of giving an update. Well there’s probably about three, four weeks ago the virus, which we were all watching in China, escapes China, gets over into Iran and into Europe and Italy, and it starts getting worse.
And as we see that, the economic impact in the United States was considering that it was going to be bigger, so. That it was going to slow our economy, trade with China, trade with Europe was gonna slow, and as a result interest rates were improving.
This was a great thing. No one was worried about the virus, just happy we had lower interest rates, and that continued through a week go Friday. So not last Friday, but the Friday before that March 6th.
Basically had continuous and steady improvement, accelerating improvement. Monday, March 9th in the morning, we kinda had, that was the big weekend where the news got out that this is a bigger thing and it’s coming to the United States.
We started seeing the cases in Washington. So, definitely a bigger deal. So, what happened is, not this Monday, the previous Monday, the stock market opened up limit down.
And what that means, is the stock market has circuit breakers built-in so that we don’t have a giant panic sell-off and everyone loses their money. If the market goes down 7% they stop trading for 15 minutes for everyone to regroup and get their wits about them, and then, it resumes trading.
It gets 13%, they stop for another 15 minutes, and if it gets to 20% after that they just halt trading for the day. So, we opened limit down a week ago, bonds reacted predictably that treasuries plunged all the way down to .4%.
Previously, we had never been under 1%. Within about a week we went under 1% all the way down to .4%. Mortgage bonds were up almost 80 basis points that morning. That equates to a quarter percent improvement.
I mean the morning, like right when the market opened. Before we can even get any loans locked in at those great rates, which would pretty much be the lowest 30 year fixed rates of all time.
Most of our lenders have already re-priced for the worse. By the end of the day, they repriced again, and we’re a quarter worse than where the day had started. And a half percent worse from the absolute best levels.
So, flash forward to Friday, treasuries had recovered all the way back up to .95%. Mortgage bonds had decreased in price, which is inverse to the yield or the interest rates, decreased in price 300 basis points.
So, that’s about a three quarter percent change in rates from Monday to Friday. I actually looked up one of our premier lender partners, looked up the rate sheet on Monday.
So, for our prime borrower, getting a conventional Franny Mae Freddy Mac loan, 0 points at our absolute best Monday morning, was three and an eighth, 3.125, that’s nuts!
By Friday, that same borrower was looking at 3.875. And I’m sure, just like us, or just like you, we’re getting calls and questions. Everyone’s hearing, “Hey, rates are dropping!”. The economy’s doing badly. People are scared of the virus.
How low of a rate can I get? A little bit hard to explain, that we’re actually up three-quarters of a percent last week. So, as we all know, now, the fed was watching.
The fed knew that they had to step in and do something. So, they cut the federal funds rate to 0. So, the question that you, as a real estate professional, probably are getting, the questions that we’re getting, “Hey, I want you to 0% mortgage rate.”
The fed does not directly control mortgage rates. They control the rates that they charge to each other for overnight lending. They did, also, do several things on Sunday, which was very important for mortgage interest rates.
They committed to buying 700 million dollars in bonds. 500 billion of treasuries, 200 million of mortgage bonds. They, also, agreed, if you remember back in 2013 – 2014, in looking at all of that, they were adding to their balance sheet.
They were buying mortgages. They were buying treasuries. So, when we look at all of that, they had a big balance sheet. And what they had committed to was selling off that balance sheet. So, they were actually sellers.
They were selling mortgage-backed securities. So, they agreed to stop doing that, and probably most importantly, they agreed to temporarily suspend bank reserve requirements.
After 2010, the Dodd-Frank legislation, banks are required to keep large amounts of reserves.
So, to meet those reserve requirements, what was happening last week that forced rates way higher than where the fundamentals implied they should have been, they were selling off treasury, they were selling off mortgage bonds because those are the most liquid assets they have.
And they were selling those to get cash to meet their reserve requirements. So, between them, the large banks no longer having to sell off those assets. Between the feds stopping selling their mortgage-backed securities, and actually started buying.
We saw on Monday a very predictable response. Mortgage bonds improved 220 basis points at the highest. Which is over a half percent in rate, and he ended up with over 170 basis points to close, just about a half percent.
So, now, we went back from, the prime borrower that went back in the course of one week, that went from three and an eighth to 3.875 on Friday was down to three and a half on Monday.
Yesterday was fairly uneventful. Mortgage-backed securities were down 25 basis points. Just normal day to day movement. Not a big thing there. As the day wore on, and it became clear that the government was close to approving a one trillion dollar stimulus package.
The bond markets started worrying and going, “Hey, how do they finance that? “How do they pay for it?” Their gonna have to sell a trillion dollars worth of treasuries. So, we were talking about supply and demand dynamics in the mortgage-backed security markets, and the fed makes an announcement on Sunday to bring them into balance and things kind of normalized.
And now the markets are panicked. That there’s gonna be a trillion dollars more of supply coming to the market in the near term future. And today, we saw the market down 195 basis points to close.
So, again, a half percent worse in interest rate, but worse are lenders are panicking and not pricing to market movement. So, if we’re at Three and a half on Monday, we’re a half percent worse today.
We should be around 4%. That same lender, I worked back and priced that 30 year fixed rate. We’re at 0 points at 4.75%, right now. Now, with a point, it would normally take it down to a quarter percent.
A point is getting you down, you know, back in that 3.875 – 4% range. But just really weird rate sheets. Even weirder on the government loan side. So, everyone’s asking where do we go from here?
What happens tomorrow? Normally, I have a really strong opinion and an idea of what’s going to happen in the markets. Right now, this is so chaotic and illogical, I have no idea what’s gonna happen tomorrow.
I can tell you the things that are impacting rate sheets and are causing lenders to price so crazy. Right now, because rates are so low, and so many loans came into the pipeline, we have serious capacity issues for lenders.
They just can’t handle any more volume coming in. So, they’re pricing accordingly. We, also, have the issue of; so many loans are paying off, that people who buy mortgage servicing rights, mortgage servicers, have no idea what those rights are worth.
They generally count on those loans lasting 4 – 7 years and then collecting their servicing fees. And we’re seeing loans paying off in three months, six months, 12 months. So, until that shakes out, no one’s paying a premium for servicing rights.
We’re seeing bond yields rise, because of the additional supply coming through the market. On top of all that, we’re seeing hedging costs for lenders go sky high because they’re having to hedge against all these movements in the market.
I wanted to just give you this hope, that for some good information that you can take back to your clients. For right now, we’re kind of in the middle of the fog of war. You don’t really know what’s going on until that clears.
Hopefully, in the next two, three days, if not one to two weeks, we’re gonna have an eye on this and a handle on it. For us personally, if anyone is in contract, we’re locking them immediately, up until today, before rate sheets got really wacky.
So, most everyone is locked in. If you have offers out for clients, and they are not locked in, you need to talk to their lender ahead of time and see if that rate is still valid. If not, if they still qualify at the current interest rates. And for clients that are asking about refinancing, they have a risk.
For almost no one, would it make sense right now, with current rate sheets. I do expect things to settle out. The underlying fundamentals still say the economy is gonna slow considerably.
Or we’ll go into a recession that’s deflationary, and has always led the lower interest rates. I don’t know if we’re gonna get back to three and an eighth on a 30-year fixed, like we were nine trading days ago, but we should have an opportunity to get most of the people that can benefit in.
So, if you have clients that are asking. They want to hear this. Share this video. Give them our name, give them our number. If you have clients that just want a second opinion on what they’re seeing, I am more than happy to do that.
If they’re with a good lender, we’re not trying to pull deals from other people. It’s not the type of environment to do that. All business owners, all business people, just need to focus on servicing their clients and doing the best they can.
I’m not trying to be opportunistic in this process, but absolutely willing to use our expertise and share with any of your clients what we know if they have questions.
Cause a lot of them probably are saying, “Hey, my loan officer’s screwing me. “Last week he quoted me three and a half, “and today he quoted me four and a quarter.”
It’s just absolutely not the case, and it just takes a second, of course, to hear that they’re in good hands, and someone’s taking good care of them.
We’re happy to do that for ya. So, most importantly, what we’re going to be doing just because the situation is going to be changing so rapidly.
My business partner, Scott, Schang, and I are gonna be on Facebook Live every day. The bond market closes at 2 pm. Sometime between 2 and 4 pm we’re gonna get onto Facebook Live.
So, subscribe to our Facebook page, so you’ll get notified when we do go live. Send me your email address. Put your email address in the comments below, and we will make sure you get notified any time we do our Facebook Lives and give you an update.
This is a fluid situation. It’s changing day by day. I have a lot of really good contacts throughout the industry, so does Scott. We don’t know everything, but we got a pretty good handle on this. As much as can be had at this point.
And we’d love to share that information with ya. So, I hoped you found this helpful. Hope you tune back in. We’d love to keep you up to date on this situation so that we all can keep happy clients. Closed business, keep things going as close to as normal during this crazy time.
So, stay safe and we’ll be in touch.