With the travel ban, suspensions and cancelations of sporting events, school closings, and more, the Covid-19 virus is causing widespread panic. After about two weeks of market volatility and gyrations, yesterday the stock and bond markets experienced their worst day in decades.
Mortgage-Backed Securities (MBS), the primary driver of mortgage rates, sold off significantly, then recovered and rallied after the Fed announcement, then gave back all of its gains and sold off even further. These dramatic gyrations in the MBS market are causing HUGE fluctuations in mortgage rates like we’ve never seen before.
The reasons driving this extreme volatility are complex. I believe it’s important you understand these reasons so you can act appropriately and can avoid making emotional, knee-jerk decisions you may later regret.
In recent days and weeks, the mortgage markets have been dealing with a huge increase in people applying for mortgages hoping to take advantage of record-low rates. This has caused dramatic volume delays across the country. As these loans close, the increase in mortgage debt on the secondary market created by these refinances has overwhelmed the MBS market. Market forces have pushed dramatically lower MBS bond prices (lower prices equals higher rates) in order to find buyers. Its basic supply and demand. In order to create more demand for these Mortgage-Backed Securities, yields had to increase.
Exacerbating the problem with mortgage rates, the markets have been experiencing a liquidity shortage. Stock investors are selling and moving to cash. Investors who borrowed against their stocks are dealing with margin calls. Americans and companies are preparing to pay their income taxes. And unfortunately, many Americans in panic are withdrawing cash from their bank accounts to stockpile at home. When financial institutions experience a simultaneous shortage of liquidity and draw down their reserves, they sell-off assets to generate cash.
Today the Federal Reserve tried to fix the problem by buying assets (usually short to long-term US treasuries) from banks, thus injecting cash into the market. The Fed announced it would pump more than $1 trillion into the market in a dramatic ramp up of market intervention. This increase in liquidity further decreased the demand for investors to purchase treasuries – and more importantly – Mortgage-Backed Securities – thus driving rates even higher.
What does all of this mean to you, the mortgage borrower?
While the MBS market is in a world of pain, this too shall pass. At some point, the stock market will find its footing and the precipitous drops in stocks will stabilize. New mortgage applications being submitted to lenders will stabilize and decrease. This will allow the MBS market to absorb the over-supply of Mortgage-Backed Securities. The MBS market will settle into a more normal trading range, and mortgage rates will again drop.
My advice to all mortgage borrowers is to be patient. It may take days, or weeks. But I’m confident rates will slowly improve and we will again be looking at record low mortgage rates.
Feel free to call me in my office if you would like to discuss this further.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, The Daily News, Anton Press, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.