Record Low Mortgage-Rates Skyrocket: The coronavirus originated from Wuhan, China in December 2019.
- The virus rapidly spread to other parts of the world including the United States
- The US economy was the strongest in history until the coronavirus outbreak hit the US like a category-5 hurricane
- The virus turned the US economy upside down
- Prior to the virus affecting the US, the United States had the best and strongest economy in history
- The Dow Jones Industrial Average was hitting new all-time highs daily
- Eventually, the Dow surpassed the 29,000 mark
- Other equity market indices followed the Dow Jones and hit all-time record highs
- Unemployment rates hit an all-time low
- Unemployment numbers were the lowest in 50-years
- Home prices were increasing year after year
- Due to rising home prices, the FHFA and HUD increased Conventional and FHA loan limits for four years in a row
- Job numbers came in at a historic record high of 273,000 in February 2020
- Worries of recession, unemployment, or a housing market crash was non-existent
- The country was on an 11-year bull market economy with not a sign of a recession and/or the economy slowing
- Then disaster hit
- The coronavirus devastated the US economy and put all Americans in a state of fear and uncertainty
- The stock markets lost over 30% of its value in weeks
- Now many are worried about another housing market crash and a repeat of the 2008 financial crisis
- The current state of the mortgage lending industry is chaotic and uncertain
In this article, we will discuss and cover how Record Low Mortgage-Rates Skyrocket Due To Capacity And Liquidity issues by lenders.
Record Low Mortgage-Rates Skyrocket By Lenders After The Fed Cut Rates To Zero
The Federal Reserve Board implemented two emergency rate cuts in just a period of a couple of weeks due to the coronavirus pandemic.
- The second emergency rate cut is when the Fed cut rates to zero
- In general, when the Fed cut rates, mortgage rates follow in the same direction
- However, lenders have been increasing mortgage rates during the coronavirus pandemic and economic meltdown when they should be decreasing rates
- Many mortgage borrowers are puzzled about this
- For a week or so, borrowers were able to lock 30-year fixed-rate mortgages as low as 3.0%
- Then within a matter of a few days, mortgage rates shot up to almost 4.0%, depending on loan level pricing adjustments
- When the Fed cut rates to zero, mortgage rates kept on going up
Many borrowers who submitted mortgage applications and did not lock rates are now on suspense and hold. They need to wait until rates drop for them to proceed with the mortgage process.
Record Low Mortgage-Rates Skyrocket Overnight After Hitting Record All-Time Lows
So what happened to mortgage rates after falling to historic all-time record lows of 3.0% a couple of weeks ago?
According to Michael Gracz of Gustan Cho Associates, mortgage borrowers who did not lock mortgage rates when they hit the all-time low a few weeks ago, are on limbo until rates drop again. Mike Gracz said the following:
Mortgage rates bottomed out two weeks ago, hitting a record-low average of just 3.29% for a 30-year fixed-rate loan. Those all-time low rates caused refinance activity to surge. Last week, refinance applications went up by 79% compared to the week before — or 479% compared to last year. Even before record-low rates hit, many lenders had full workloads. This was coming off months of low rates and a hot real estate market. Even before record-low rates hit, many lenders had full workloads… with last week’s surge, lenders haven’t been able to effectively process new mortgage applications. With last week’s enormous surge, lenders haven’t been able to effectively process new mortgage applications. This led to a big strategy shift for lenders. To combat this rush in volume, lenders began raising their interest rates well above the prevailing market rate to deter even more applications. Bumping their rates gives lenders some breathing room so they can deliver on the loans they already have in their pipeline. But unfortunately, it means those who missed the short low-rate window are now applying under totally different circumstances — and much higher rates.
Record Low Mortgage-Rates Skyrocket Over 4.0%
Mortgage lenders have adjusted their loan level pricing adjustments (LLPA) to ridiculous levels.
- Prime borrowers with 740 credit scores, 30% down payment and/or 70% LTV, low debt to income ratio, and no pricing hits can still get mortgage rates in the high 3.0%
- However, one pricing adjustment may jack rates up an extra 50 basis points
- Prime borrowers with 800 credit scores but higher than 70% LTV will get a huge pricing hit where their rates will be in the mid to high 4.0% to 5.0%
- Many lenders have stopped quoting rates unless they want to lock the loan right away
- Rates are so volatile
- Many loan officers are waiting hourly, day after day waiting for mortgage rates to drop
Massimo Ressa of Gustan Cho Associates said the following:
A search on Redfin resulted in literally zero lenders appearing in a search for a 30-year refinance. The page featured the following disclaimer at the top: “Quotes missing or too high? Our lenders are over capacity right now due to the latest interest rate cuts. We recommend checking back later.” For those that applied last week, the news is a little better. You might have locked in a low rate. But you may still have to contend with delays as lenders get bogged down.
Why Lenders Are Increasing Rates When Mortgage Rates Are At All-Time Lows?
There are two reasons why mortgage lenders are increasing rates when mortgage rates are at all-time lows.
- Capacity Issues
- Liquidity Concerns due to the economic meltdown in the financial markets
Some lenders have shut down taking on new mortgage applications and funding until further notice.
- Non-QM lenders have completely suspended their operations due to liquidity issues
- Just like the 2008 financial crisis, many non-QM lenders have shut down their operations
- There are concerns many may be going out of business
- To this date, we do not know of any single non-QM wholesale lender who is taking on new loan applications
- Economists expect mortgage rates to come back down and to get priced accordingly in the coming weeks
- Many experts are concerned about the non-QM mortgage markets
- Many are concerned to see how many of them will shut down permanently
- They are concerned about how many will survive the coronavirus pandemic mortgage meltdown
This is a breaking story. We will keep our viewers at Gustan Cho Associates updated on this story in the coming days and weeks.