It’s been an anxious week for America (in fact, the world!). Adding to this anxiety, the financial markets – especially the Mortgage-Backed Securities – have continued their roller coaster ride with unprecedented swings in both directions.
Last week I published an article explaining what was happening in the mortgage markets. (Click here to read URGENT MARKET UPDATE FOR ALL MORTGAGE BORROWERS.) Yet so much has been happening – and so quickly – that I thought a follow-up was in order so mortgage borrowers can understand what is driving mortgage rates to swing so wildly.
Historically, when stocks behave badly, the bond market is usually a safe haven. Traders pull their money out of stocks and park them in the relative security of bonds. This causes bond yields, and thus mortgage rates, to drop. However, recently this has NOT happened. The Stock Market’s dive lower has resulted in a lot of margin calls and that is causing many to dump everything, including Bonds and Treasuries, to come up with money.
In an emergency meeting this past Sunday, The Federal Reserve decided to lower the Federal Funds Rate to zero. Many people thought this would help mortgage rates. It does not. There is no correlation between Fed rate changes and mortgage rates. However, the Fed also announced they would again begin Quantitative Easing to add liquidity to the markets. They do this by buying up bonds and mortgage-backed securities. This move would help soak up the vast oversupply of mortgage-backed securities on the market and drive rates down. Thus, on Monday the MBS market drove MBS yields down significantly!
But then the next day, the White House and Congress floated the idea of a Coronavirus Relief Plan which included cash payments to all Americans and many companies. This estimated $1T in stimulus must be paid for somehow. The way the Treasury does this is by selling bonds. Thus, now the markets projected significantly more supply coming onto the market already glutted without sufficient demand. This caused prices on bonds to surge in the opposite direction and interest rates to rise.
Often times, debt suppresses rates, but at manageable levels of acceleration. Here, there was a shock to the system, flooding the market with paper. Yields on bonds (and as a result mortgages) must rise to create demand from bond buyers.
Then we had Treasury Secretary Steven Mnuchin, who said in a television interview that if we don’t institute some of the measures being discussed, unemployment could go to 20%. The market looked at that and asked, “Will mortgages be paid? Will we have delinquencies or foreclosures?”
While this current crisis is very different than 2008 and Americans have stronger cash reserves this time around, job security and potential repayment issues spooked the markets. If you are a creditor, like the Bond Market, you have to take that risk and calculate that into your price. These reasons have been pushing rates higher, even in the face of stocks declining.
By all normal measurements, mortgage rates should be lower. And I believe they eventually will drop again to record-low levels. No one can say for sure how long this will take. Like I said last week, these challenges shall pass. The markets will recover. We all must remain patient until the roller coaster ride is over.
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.