In the Netflix series “Stranger Things”, there is another dimension where things don’t work normally, called “backwards”. This is where mortgage rates are now: upside down.
In the space of two weeks, mortgage rates fell 15 basis points (from 3.71% on February 26 to 3.56% on March 4) and rebounded 21 basis points this week to 3.77 %. Meanwhile, the 10-year Treasury yield (which is the benchmark for mortgage rates) fell to 0.318% on Sunday and surged on Tuesday, jumping 24.2 basis points to 0.743%. Since mortgage rates generally follow 10-year Treasury bills, the spread between them should be considerably smaller.
The explosion of the refi has a major effect on the rates
The simple answer is that the markets don’t work the way they normally do. COVID-19 has fueled market demand for safe haven asset classes like Treasuries, driving down yields. Mortgage rates have also fallen since the first cases of COVID-19 were reported on December 31, but rates have not fallen as sharply as the yields on T-notes.
There are two reasons for this :
- Lenders are struggling to meet demand from people who want to refinance their mortgages to lower their interest payments
- Downstream investors who hold bundles of mortgage-backed bonds are concerned about the churn rate due to high refinancing activity.
Let’s take a look at the demand first.
Refinance Applications exploded last week, up 79% from the previous week, accounting for 76.5% of the total share of mortgage applications, according to data from the Mortgage Bankers Association, or MBA. Refinancing requests increased 479% year-on-year.
“Typically the spread (between T-bills and the 30-year fixed mortgage) would be around 1.8 basis points, and it’s now 2.5 basis points and above; it’s symptomatic of a wave of refi, ”says Mike Fratantoni, MBA chief economist.
The recent rush of borrowers to refinance has overwhelmed lenders to the point that many are dissuading new business by raising rates, as we saw this week. So, lower mortgage rates don’t make sense to lenders because they have a hard time digesting the business they already have.
Another force on rates is the demand for mortgage bonds. Bonds depreciate as borrowers refinance at lower rates, reducing what investors earn. As mortgage bond auction activity declined last week, rates rose.
“The increase in refinancing activity – which robs investors of the original mortgage of years of interest payments – could contribute to an investor preference for Treasury bonds over mortgages,” he said. said Jonathan McCollum, director of federal government relations at Davidoff Hutcher & Citron LLP.
How long will the abnormal activity last?
While the spread between 10-year Treasury yields and mortgage rates is unlikely to narrow anytime soon, experts don’t think this is a new normal. Instead, it’s largely a product of the sudden novel coronavirus outbreak, an extremely rare event that no one has seen coming and cannot predict when it will end.
When Treasury yields start to climb again, the spread between Treasury bills and mortgage rates will begin to close. This is because mortgage lenders want to maximize this refi boom, so they are unlikely to raise rates as yields return to normal levels. This will help restore balance.
“We’ve seen this trend before: in a few months, if Treasury yields go up, the spread will come down and you’ll get a longer refi tail; the spread is wider at the start, ”says Fratantoni.
What should borrowers do
Millions of existing mortgage borrowers are eligible for refinancing, which means they can save money if they refinance their mortgage at the current low rates. This is the good news. The bad news (temporary) is that you will have to queue.
“Almost everyone is a good candidate for refinancing if you plan to stay home long enough, but there is a traffic jam on the mortgage refinance highway,” said Greg McBride, CFA, chief financial analyst at Bankrate.
During refinancing booms like this, borrowers can expect to wait around eight to ten days longer than average to close their loan, which means some loans won’t close for 55 days or more. But this sudden surge in refinancing activity has all the makings of an even longer wait.
“This refi boom has the potential to be one of the biggest ever,” said Fratantoni. “Considering the increases I mentioned, lenders are completely inundated. “
If you’re considering refinancing, get your papers in order and make sure your credit score is good enough to get the best rate possible, says McBride. Patience is the key, you may have to wait months to process your loan. Some lenders offer 90-day rate freezes to make sure everyone in the line gets a low-rate share of the action.
What borrowers should not do
As worries of a recession grow, people are encouraged prepare their finances Therefore. This includes things like limiting spending, saving money, and paying off debt. But, using the equity in your home, through products like cash refinances, to pay off high interest is probably not a smart move, McBride says.
“All you really do is move the debt; you are now moving from unsecured debt to secured debt. It’s not a job that’s attractive in an economic downtown or a recession, ”says McBride.
Keep in mind that although Bankrate rates national survey are higher this week, many lenders have increased their posted rates to discourage inquiries as they are very busy. It is important to call each lender to find out if they can do better than a rate you see online; they often can.