A brief explanation of why mortgage rates increased

I have had lots of folks asking questions right now and wanted to pass along some thoughts from an insider in the mortgage industry.

So….What’s happened over the last few weeks:
• There are 3 big ingredients in the mortgage world that everyone watches…interest rates, 10 year Treasury and the Mortgage-Backed Security (MBS) market….and the correlation between the three (or how the 3 interact with each other).
• For the first two months of 2020, the average daily origination volume was $3.9 billion for the industry…that average doubled to $7.8 billion in the first two weeks of March – a lot of pressure was being placed on business workflows and trust in the market
• It peaked on Tuesday March 10th at $13.1 billion – WOW!!
• During this time the 10 Year Treasury rallied from 1.16% to an ALL-TIME LOW of .36% – and indication that mortgage rates should be falling….and they did briefly – but have since adjusted upward.
• However…Lenders, Broker/Dealers and MBS investors found themselves with HUGE capacity constraints, being committed to a bunch of low-interest rate loans…that – as it turned out – nobody wanted to buy from them in the end….creating very little demand for the MBS market’s investments.
• All of a sudden.…liquidity (buying and selling) in the MBS market was not there and the interaction of the 3 ingredients we mentioned separated to levels unseen since the collapse of 2008.
• The market participants began trying to slow the flow of new business by increasing rates….looking for support in the MBS market. At a time when rates should have been lower, they are higher than expected.

In summary – at the first of March, things were as expected…but the market moved so fast, in an avalanche style, that market participants could not react timely….and over the last week or so the market isn’t behaving as expected. Rates remain elevated as investors and MBS traders digest all this.

Some things of which you should remind yourself and your clients:

• As you know, the reduction in the discount rate by the Fed does not mean mortgage rates have dropped. The two are not really related.
• This imbalance in the market shall pass – the Fed’s action to purchase $700 billion in the Treasury and MBS markets will – in time – restore investor’s trust in the market and “normal” market behavior will follow.
• Work your pipeline, talk to your agents, take TBD applications, so you are ready when the market returns to expected behavior…let’s get ready, because it is coming

Some things you should know and expect:

• You should expect to see pricing continuing to be a roller-coaster (and often elevated). Investors and industry participants are really controlling volumes and workflows, due to capacity limitations. The market is still volatile and will continue to be over the short run.
• Service levels from 3rd party providers is showing strain….as some providers are starting to decline assignments. Capacity issues exist in all phases of the process.
• We have a huge level of loan volume to close in the next few weeks and many courthouses are restricting access….this could be a big challenge.