By now, most of you have heard that the Federal Reserve has stepped in, and has slashed its benchmark interest rate to near 0%. This is not the same as mortgage interest rates being lowered. It’s a move meant to help bank to bank lending, and intended to add liquidity to the market in order to help our economy.
I have many skills, but I am not economically educated enough to explain the finer details of how this works.
I can however, explain the broader picture of what’s going on with the mortgage industry as a result. And how it will affect each and every one of us.
Mortgage interest rates having been rising at a crazy pace for the past two weeks. Hopefully we’re near the maximum of where they will go.
Lenders are struggling to keep up with the high volume of refinance applications coming in, many due to public misinformation. This has been part of what’s driving the pricing of the interest rates up, despite the Federal Reserve’s efforts to stabilize our economy.
Some loan officers will explain the higher mortgage interest rates as a supply and demand issue. This is not entirely accurate.
Lenders are not price gouging because they can. They’re not charging higher interest rates because they want to make more money with less volume.
Lenders are businesses. They’re employers. They’re struggling with figuring out how to allow their employees to work from home and still make a paycheck. They’re struggling to deal with financial losses caused by all the early payoffs on mortgages they are servicing. They’re struggling to deal with providing decent underwriting turn times, especially on purchase loans that are time sensitive.
Everyone is under a lot of pressure right now, there is no doubt about it.
Things will get worse before they get better, but we can handle it all. As long as we set proper expectations, and prepare accordingly.
Some negatives we can anticipate in the up coming weeks:
- Working from home will cause a drop in productivity, which will in turn cause longer turn times. Parents that are now at home with their young children because of school closures can relate.
- There are job positions that can’t be done remotely, but that are key to the mortgage origination process: appraisers, title companies, mobile notaries. Some of these key players may refuse to go out and perform their duties. Some may be so overwhelmed that a backlog will start to form. Maybe we’ll figure out an alternative solution, maybe we won’t.
- FHA/VA and USDA loans are government loans that will be impacted by any reduction in workforce or temporary closures of government offices.
- County recorder offices may close down in smaller counties that are not setup online. Fortunately in Utah most everything is done online, but remote counties can run into issues.
- Verifications of employment will be harder to perform, as businesses slow down or temporarily suspend their operations; this will impact both the loan process, and potentially the borrower’s ability to qualify for a mortgage loan.
Some borrowers may find themselves unable to make their mortgage payments. Hopefully this will be addressed by Fannie Mae and Freddie Mac, so I’m not truly concerned about mortgage defaults. The secondary market and our government will most likely step in with emergency procedures and exceptions as needed.
Imagine the worst, and hope for the best. Prepare accordingly.
So where do we go from here?
If you’re in the market to PURCHASE a home
This might be your opportunity. Or not. It’s such uncharted territory that it’s hard to predict what will happen. I’m still seeing multiple offers due to low inventory, but a lot of homes fall in and out of contract. The wildly fluctuating mortgage interest rates might have something to do with it.
Know that lenders are working on prioritizing purchase loans. In some cases, pricing incentives are given to soften the current interest rate environment.
Make sure your real estate agent is up to date with the current turn times of both the mortgage industry and the appraisal industry. Protect your earnest money, and plan your move accordingly. Work with loan officers that are responsive and can set proper expectations.
If you are a homeowner looking to Refinance
Option A: If you’re currently locked in at a rate you like, and that saves you money, then consider yourself lucky and proceed with it. Skip a mortgage payment or two, consolidate debt, and use the increased cash-flow for essentials. Like overpriced toilet paper. And audiobooks so you can tune out your family. Just kidding (unless you can relate to it!)
Stop chasing the rumors about mortgage rates dropping to zero, it’s never going to happen. Take the gains now, reassess later. But do make sure you’re not paying ridiculous amounts of fees to make that happen. When in doubt, ask for a second opinion. I’m happy to look over any Loan Estimate and flag excessive fees charged by my competition.
Option B: If your rate is not locked in yet, and you’re not in financial distress waiting to refinance, then hang tight and be patient. Your loan officer is watching the developments in the market, and will proceed with locking and closing your loan as soon as it makes financial sense.
Listen to your mortgage professional. If you don’t have that kind of relationship, then keep looking. There are a lot of mortgage companies to choose from. Avoid applying as a result of any junk mail pitch that mentions “notice of available funds” and other types of scammy, misleading advertising. To make it stop, opt out of pre-screened offers, and stop the credit bureaus from selling your information (see trigger leads).
If you’re a Real Estate Agent
Use all the resources you have available so you can in turn educate your sellers and your buyers. Talk to loan officers. Not the ones that say “yes” to everything, but the ones that give you the cold, hard truths. Reach out with questions on social media groups. Most of all, set proper expectations on both turn times and interest rates. Communication is the key, and we need more of it now than we ever did.
Because of the face to face nature of your job, ask for help if you may be immunocompromised. Your broker is your first point of contact. If they’re not helping, then find a different broker! There are plenty of good agents out there that will pitch in and hold an open house if you need it, or show your clients a home or two.
A final note on the bright side.
Situations like these that we’re currently living have the potential to bring the best or the worst out in people. It comes down to a personal choice that we each have to make.
We have the technology to minimize most of the damage. Patience and empathy will go a long way.
Hopefully when it’s all said and done, we’ll realize as a society that we can count on each other, and that we need to change some of the ways we do things. Healthcare being a good place to start.
As for mortgage rates, they’ll stay low for a while, and they’ll go lower once the uncertainty about the Coronavirus subsides.
Once refinance volumes slow down enough to be more manageable.
Once we come up with a vaccine.
Take the time to slow down. Enjoy spending time with your families. Don’t stress excessively about the things you can’t control.
This too shall pass.