Coronavirus vs Interest Rates

coronavirus

It started in early March when, in the midst of the COVID-19 pandemic, Saudi Arabia and Russia initiated an oil price war – tumbling prices by 34% (down to $31.73 per barrel). Today this price war continues, with crude at only $20.71 per barrel. The pandemic and oil price combination has sent the stock market into a tailspin. With equity investors continuing their flight to safe-haven holdings, the DJIA has dropped almost 30% from the Feb. 12 high of 29,551.

Although 10-Year Treasuries (the rate that typically sets the direction of fixed mortgage rates) have averaged 2.27% over the past 5 years, a record low 0.318% 10-Year yield was recently reached.

But if mortgage rates usually reduce when investors flee the stock market, why did 30-year fixed mortgage rates increase from 3.15% to as high as 4.15% during this commotion???

For several reasons due to huge uncertainty, volatility and panic – all of which increased costs to lenders… which in turn were passed on to borrowers in the form of higher mortgage rates:

  • Profits to mortgage servicing companies (who manage borrowers’ monthly payments and escrows for lenders) reduced after many mortgages were repaid/refinanced early – i.e., servicing fees to lenders increased due to uncertainty regarding underlying value and content of their serviced mortgage portfolios
  • Pools of residential mortgages (mortgage-backed securities/MBS’s) became difficult to value given the higher probability of default or forbearance – so some investors are paying less to (or have stopped buying from) the lenders who are selling mortgages
  • Lenders, who promised rate locks to borrowers and sell their loans to investors after closing, are having to pay higher fees to hedge against rising rates (to protect loan value), and are subjected to margin calls when the value of their collateral reduces from Federal Reserve Treasury Bond purchases

Here's the Point: In a market with unprecedented volatility, there are several reasons why mortgage rates actually go in a direction opposite to what you might expect.

Should You Lock Your Interest Rate?

lock_in_rate

Good question! Maybe the best place to start is to read what the experts are saying. But even before that, you’ll need to determine who you think the experts are and which are the most reliable.

Let’s assume for the moment that the national agencies listed below are the experts – since most people generally tend to rely on them for making interest rate projections. But now let’s have a look at their track records…

At the beginning of each year listed below, they made predictions of what the 30-year fixed mortgage rates would be in the fourth quarter of the same year. You will see that their 2018 predictions were much better than their 2019 predictions (rates listed are for the most qualified borrowers):


2018 Q4

Prediction

2019 Q4

Prediction

Mortgage Bankers Association (MBA)

4.8%

5.0%

Federal National Mortgage Association (FNMA)

4.2%

4.8%

Federal Home Loan Mortgage Corporation (FHLMC)

4.6%

5.3%

National Association of Realtors (NAR)

5.0%

5.3%




Average Prediction of the Experts:

4.7%

5.1%




Year-End Actual 30-Year Fixed Mortgage Rates:

4.6%

3.7%

If you had relied on the “experts” and rushed to purchase a home for $200,000 (with a 20% down payment) and locked in your interest rate at 4.6% at the end of 2018 (thinking that rates were headed to 5.1% in 2019), your monthly mortgage payments of principal and interest would have been $820. But had you waited to lock at the 3.7% 2019 year-end actual mortgage rate, you would have saved $84 per month or just over $1,000 per year in mortgage payments.

If you had you ignored the experts and waited to lock your interest rate until the end of 2019 (instead of the end of 2018), you would have saved over $30,000 of interest costs over the life of a 30-year mortgage!

Here's the Point: Do your homework before locking your rate. But when the timing and the numbers work for you, don’t second guess your lock decision (because even the experts get it wrong).

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