Going from “Rates are AMAZING!” to “WHAT HAPPENED TO MY 401K?!”

Photo by Siavash Ghanbari on Unsplash

So, yes, the market has been insane these past few days. Down, up, down, up and little reason behind the huge swings we’re seeing in both directions, other than we’re living in uncertain times and the market hates uncertainty.

What does this mean for your specific situation? As of today, I am suggesting that my clients, who have loans originated with me to “sit tight”. With the current rate environment, we simply need to wait for our moment of opportunity to pull the trigger.

The market gurus are suggesting that we will see “windows of opportunity” in due time. Those may be fleeting. Here is what I’ve told many of my clients calling about refinances to improve their rate, shorten their term, home improvements, debt consolidation or school tuition: If you are considering a change to your home finance situation, you need to be “in position” to take advantage of any rate fluctuation. This will allow you to meet your specific home finance objectives.

What does that mean? If you want to refinance for any of the reasons I listed above, we need to make sure your file is in order and ready to submit. This means I need your loan application completed, credit pulled, all docs in order, supporting information, sent initial disclosures to you for signature, sent your file to underwriting and maybe even started to line up your appraisal.

Then, we wait for the rate that we’ve agreed upon to become available. When it does, I lock it. Does that make sense to you?

I’ll continue to be in touch with relevant information and education, so that you will be an informed consumer. Feel free to share this with anyone that you think would be interested in it. My goal is to have them thank YOU for the introduction.

You’ve no doubt been watching the market and the news regarding the Fed’s interest rate cuts and commitment to purchase $500 billion in Treasuries and another $200 billion in mortgage backed securities. Many thought that this would alleviate the uncertainty and perhaps tame the market volatility. Unfortunately, it did not.

So, what happened?

In a nutshell? Everyone wanted their money at the same time. No, not like a long line of folks standing in line at the ATM waiting to withdrawal their money. Instead, it was big banks and brokerages that had large investments and some of those investments were on credit (or margin accounts). When these banks and brokerages went to pull back their investments or came calling for money that was owed to them, that created a liquidity crunch.

What does that mean? There wasn’t enough purchasing power (meaning actual cash) to make good on all the moves that the market wanted and needed to make. That’s when the Fed stepped in with its $700 billion infusion. But that wasn’t enough, and the market basically freaked out. Add to that there wasn’t anyone interested in buying mortgage backed securities and now those lovely historically low rates that we had for less than a week at the beginning of March are gone.

How Big is the Market for Mortgages?

Barry Habib, the mortgage market guru, of MBS Highway, said in an update a few days ago that there is about $11 trillion in home mortgages in the United States. We originate between $1.75 trillion and $2.1 trillion in lending annually, depending on where interest rates fall. That amount covers both purchase and refinance business. That means that between $175 billion and $200 billion per month in volume is what the entire market for mortgages can handle.

Where Does It Go?

Much of the volume gets sold to the secondary market in the form of mortgage backed securities or bonds. What are those you ask? Picture a big stack of mortgages that get wrapped up and sold as one big chunk in the form of bonds. In 2008, these bonds were made up of mortgages that were poorly written with little to no documentation and, individually, highly susceptible to default. This makes the whole thing unstable and therefore worthless, or at least worth much less, than it was originally sold for when it initially went to market. This is why, in 2008, the market crashed. Is that what’s happening now? The short answer is “No.”

Are we going back to 2008?

What’s happening now is those same mortgage back securities (bonds) are for sale to the market. The quality now, is much higher than it was in 2004-2007 because these are full documentation loans that have been underwritten to a much higher standard, thanks to regulation by the Consumer Financial Protection Bureau. So, why isn’t anyone interested in buying them? Because the traders that purchase these securities don’t believe they’ll be worth anything in 6 months. Wait, what? I thought you said that these are higher quality bonds. They are higher quality bonds but if the mortgages that make them up get refinanced inside of 6 months because rates are lower (which is somewhat likely), they will become worth less than at the time of issue. In fact, most companies need the loans on their books for 2-3 years to earn a profit.

Ok, that’s confusing, right? These bonds have a maturity date. If the underlying assets (individual mortgages) that make up these bonds get sold to another bank as part of a refinance before the maturity date, the value of the bond where that mortgage was before it is refinanced (and paid off) is diminished. Bonds are supposed to be a “safe haven” for assets with a “guaranteed” return. If the assets that make up these financial instruments (mortgage backed securities) are sold, then the quality of that financial instrument is degraded or worth less. Bond traders don’t buy things that diminish in value. The traders expect these financial instruments to hold their value and if it appears that they won’t hold their value, well, the bond traders will take their money somewhere else or they simply won’t buy anything and sit on their cash. When that cash sits on the sidelines, it means others can’t make moves with that cash that would’ve been used to purchase and the whole thing starts to come apart. It’s not exactly where we are right now, but things are not stable and the banks that write mortgage loans and who set interest rates are not in the mood to play. Margins are thin and small mistakes can mean the difference between profitability and cutting staff. Combine that with the wave of volume that came at the banking system two weeks ago and you have a recipe for interest rates going up. Yep, UP!

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.