Fasten Your Seat Belts as Mortgage Rate Volatility is Expected to Continue!

March 17, 2020 - Thomas J. Donnegan

It’s been a wild ride. The last few weeks have tested even the most seasoned mortgage professionals. The financial markets have experienced tremendous volatility, and we have seen a spike in interest rates. But before you trade in your Mortgage Loan Originator License for a Greeter Position at Wally-Mart, it’s important that we keep things in perspective. 

For starters, even though mortgage rates have increased, it’s important to remember that rates were at historic lows just two weeks ago. And even with the recent surge, rates are still at levels similar to where they were just one month ago. Contrast this with where we were a year ago when rates were a full 1% higher than they are today.

Pigs Get Fat and Hogs Get Slaughtered!

This may be little consolation for customers who were floating. However, there will always be borrowers who believe that they can time the market and decide to hold out for an additional one-eighth to rate. And even though their lender may have encouraged them to lock, it’s funny how the Originator still end up being the bad guy when interest rates go up. 

There is a saying in finance that “The pigs get fat, and the hogs get slaughtered.” This is a good reminder not to get too greedy when it comes to interest rates. 

Critical Conversations

It is critical that Originators have the following conversation when consulting with borrowers:

“If you lock today and rates go down, it’s basically water under the bridge. Literally, the same thing could happen the day after you close. But if you choose to float and rates go up, you will end up writing a larger check, EVERY MONTH!”

What Caused Mortgage Rates to Spike?

When discussing the current interest rate environment with borrowers, it may be helpful to explain what led to the recent volatility.

1.    Flight to Quality

In recent weeks, fears regarding the Corona Virus, and its potential economic impact, pushed investor away from stocks and into safer investments, such as bonds. This phenomenon is known as a “Flight to Quality.” As money flowed out of stocks and into bonds, it pushed bond prices up, and yields, or interest rates, down to the historic levels we saw just two weeks ago. However, as fear spread, investors began to panic, moving money out of bonds, and into cash, which hurt bond and drove rates back up.

2.    Supply and Demand

The second factor impacting rates is basic supply and demand. Two weeks ago, refinance activity posted the largest week-over-week increase in history! This flood of refinance volume led to an over-supply of mortgage bonds, forcing sellers to lower their prices in order to attract buyers. And as we’ve discussed, lower prices on mortgage bonds translates into higher rates for consumers.

Advice to Originators During Times of Uncertainty

So, what does this mean for you and your customers? For starters, expect volatility to continue for the short-term. Borrowers should be cautioned against floating in order to protect themselves against any additional rate increases. Lenders also need to close loans as quickly as possible, to protect their pipelines from fallout due to fluctuating rates. It is more important than ever that Originators take complete applications upfront and set proper expectations with their customers. 

But most importantly, we need to STAY CALM! As an experienced mortgage professional, your clients look to you for guidance and expertise. You’ve got this!!!

About the Author:

Thomas Donnegan is a Regional Manager with Land Home Financial Services, Inc. and a thirty-year veteran of the mortgage industry. He also coaches loan originators on how to build their business. Tom can be reached at: [email protected] .