This week, the government passed another record $2.3 trillion stimulus package in the hopes of giving American workers and small businesses some breathing room on bills and expenses. But while this week’s stimulus bill and the last one might provide those groups some cash flow, we’re seeing unprecedented challenges for the mortgage industry.
Mortgage companies are struggling – like many businesses right now – to manage their cash shortages. Coronavirus-caused forbearance requests mean homeowners may be off the hook in payments, but mortgage servicers still have to fund that money to lenders, and lenders still have to move loans to investors despite defaults.
In short, the mortgage industry requires cash flow to keep functioning, but dry spots are causing unpredictability with rates and loan demand.
Depending on how much liquidity a lender has, they may hike up their rates to dissuade homeowners from taking on any new loans or refinancings right now. Across the country, large lenders are showing rates that differ from each other by as much as a full percentage point.
Let’s dive into what all these market movements mean for you.
1. Big Intraday Rate Swings
Any headlines you’re reading about mortgage rates right now aren’t likely telling the whole story. Why? Because rates’ current high-volatility – not to mention the wide spread between different lenders’ offerings – is causing the needle to change faster than any mass media outlet reports. Not only that, but the correlation between rates and the mortgage bond market, which usually move together, has been much less connected as of late, making rates more unpredictable.
If you’re looking to refinance, have some patience and clear communication with your loan officer. We’re seeing intraday rate swings from lenders bigger than we ever have. If you’re trying to lock a rate, be aware that things are moving faster and wider than ever right now.
2. Rate locks have much shorter durations
On the note of rate locks: they’ve changed for the time being. Due to increased rate volatility and cash flow uncertainties, lenders are currently extending 60-day rate locks only for new loans. Usually, lenders will hedge rate locks with mortgage-backed securities investments. But recent Fed buybacks have put many lenders in trouble with making margin calls on those hedges. Right now, they can’t risk making losses on a long-term rate lock.
So if you’d like the security of a rate lock right now, keep in mind 60-day locks are available only for new loans and only from some banks. Other banks require the loan to be approved before the rate lock, but in exchange, they’re offering attractive rate incentives.
3. Demand is still there but is quickly drying up
Lenders are having trouble off-loading their loans to investors, particularly loans for investment properties or borrowers with weaker credit profiles. With the current rate volatility, investors aren’t keen to buy up new loans that might get refinanced in a few months’ time. While the Fed buybacks certainly increase demand for mortgage-backed securities, there’s still some backlog in lenders’ systems. The Fed has slowed down their buybacks, hoping to diminish mortgage-backed security pricing, but unfortunately, the damage to many lenders has already been done.
In particular, borrowers with unique financial situations might have a harder time finding a loan right now, as lenders are becoming pickier about which applications they accept. So, while most people can still find a loan, it’s a tricky market to navigate. Now more than ever it’s important to work with a mortgage advisor who can help find you the best rate and best loan structure for your situation.
4. We may see lenders default on payments if no federal assistance comes
The mortgage industry is currently seeking help from Congress to allow mortgage lenders to sell first-payment default loans to investors. As more and more people’s incomes are cut back or eliminated, the number of first-payment defaults has risen, just like the number of defaults on rent payments.
Until there is more clarity on how the government plans to assist mortgage lenders with payment defaults and forbearance requests, most lenders are executing extreme caution with the number of new loans they take on. It’s also why lenders’ demand is limited and rate fluctuation is extreme. Until the future looks clearer – both with the mortgage industry’s pleas to Congress and more generally – we expect to see this trend continue for the foreseeable future.
5. Prepare for your refinance now
All in all, rates are still attractive. Since rate movement is highly volatile and inconsistent right now, market timing plays an even more important role than usual.
If you’re currently looking to refinance, get your paperwork in order and call your Solidify mortgage advisor today. We’ll help you get ready to move on your loan quickly so you don’t miss out on savings.