
How is COVID-19 Affecting Mortgage Rates
2020 has already been very interesting. The outbreak of the infamous “COVID-19” virus has influenced financial markets in a way no one has ever seen before. The initial outbreak caused a dramatic dip in the stock market, which caused a decrease in the bond market, thus lowering interest rates to a point we haven’t seen in 8 years.
The short term effects
On the surface the mortgage rate decrease caused a whirlwind of refinance activity as lenders dug deep into their portfolios and refinanced everyone who had closed on a home loan before June 2019. This lull lasted about 3 weeks, as the lenders pipelines got clogged up with new business the Federal Reserve made a bold move and cut interest rates another 1/2%.
This was the icing on the cake as lenders who already had millions of dollars locked in with their investors started to get calls from their clients demanding rate renegotiations. With no choice but to accept these lenders lost millions as they loaned out money for less than they paid.
Lenders have a 6 month period after a purchase loan closes where they cannot lose the loan. They make no money if the loan is refinanced or sold within that time, it’s called an “early pay off” and it’s expensive. Often times they have to pay fees to their investor if this happens. With a sudden rate drop they had an influx of early pay offs come in as people refinanced into new mortgages. This added to their losses dramatically.
The result of the low rates and Fed cuts
Because of these massive losses the lenders only choice was to suddenly raise rates to slow the business coming in. By doing this they eliminated the refinance market and stopped those early pay offs from rolling in, they also now have the opportunity to catch up on the previous losses by hedging more money. The Federal Reserve lowered the cost of money the lenders have to pay back, but the lenders raised the cost of money the consumer pays, this margin is what the lenders make on each bundle of loans.
Here is a video explaining the affect COVID 19 has on the world Market:
The Take Away
Many people are assuming the worst, but like all major and minor catastrophes in our history, there is a silver lining. Rates will come back down and the market will correct itself as peoples psychological fears fade. The trick is to hang on and not buy into the media frenzy right now. If you are looking for a home, keep looking because a dip like this causes real estate prices to fall.
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Justin Scott
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