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A sharp drop in mortgage interest rates has sparked a sudden and unexpected refinance boom that has lenders large and small scrambling to handle the volume.
That stress on the lending market, as well as increased risk to mortgage investors from all those refinances, is actually keeping mortgage rates higher than they could be.
The average rate on the 30-year fixed loosely tracks the yield on the 10-year U.S. Treasury bond, but it is no longer keeping up. The 10-year plummeted to yet another record low overnight, but mortgage rates, while also at a record low, are slower to fall.
Mortgage rates hit 3.11% on Monday, according to Mortgage News Daily.
“Demand has ramped up in a way that many lenders have never experienced,” said Matthew Graham, chief operating officer at Mortgage News Daily, which tracks rates every morning. “Some of them have taken to raising rates in order to deter new business. Others have completely stopped accepting new applications.”
One borrower who called Bank of America on Saturday was told there would be a two-hour wait to speak with a loan officer.
At Cross Country Mortgage, a small lender in Boca Raton, Fla, phones were ringing before 8 am Monday. They have increased hours and are trying to find more staff to handle the volume, which is now triple the usual.
“It’s absolute pandemonium,” said Matt Weaver, vice-president of sales at Cross Country. “It is a supply and demand situation. The industry right now is certainly inundated with requests. Let’s put it this way, we are like Home Depot during a hurricane.”
The average rate on the 30-year fixed loosely tracks the yield on the 10-year U.S. Treasury bond, but it is no longer keeping up.
Weaver says his firm is able to lower rates more than the bigger banks, because it has less volume, but there are also unusual profit and risk scenarios at play.
“It’s very complicated as to why mortgage rates aren’t a lot lower. One reason is lenders are dragging their feet, more for profit reasons than for concerns about handling the volume,” noted Guy Cecala, CEO of Inside Mortgage Finance. “If a lender’s costs of funds – either from MBS (mortgage backed securities) pricing or deposits – moves lower, but they keep mortgage rates higher than they normally would be, they profit off the larger than normal spread.”
Weaver agrees that lenders have to watch their profit margins, along with the added volume.
“In these low times of course lenders have the juggling act of balancing margin vs. market demand, vs. the 10-year Treasury,” said Weaver, who added that his firm needs to handle pricing in a way that makes sure “profitability still remains there.”
At the big banks, rates are slightly higher than at smaller lenders. While no one we contacted would comment on why, they did speak to the enormous volume.
“We’ve paused email marketing campaigns on refinancing due to the thousands of customers who are already aware of the low rates and applying for them on Chase.com,” said Amy Bonitatibus, Chief Marketing Officer, Chase Home Lending.
A Wells Fargo spokesperson said they are ramping up staff to deal with the onslaught.
“We continue to hire underwriters, processors and closers into our fulfillment group and we’re also executing on opportunities to shift team members from other non-fulfillment groups into our fulfillment operation,” said Tom Goyda, a spokesman for Wells Fargo.
And as for rates: “Lenders look at a lot of factors when setting mortgage rates and they are most directly tied to MBS yields, which have seen a widening spread relative to the 10-year Treasury yield,” added Goyda.
Investors in mortgage-backed bonds are at increasing risk because so many people are refinancing. When a loan is refinanced, it is paid off early, and the investor loses out on several more years of interest rate payment returns. As the risk rises, they will pay less for those bonds and therefore the yield on MBS rises – and mortgage rates rise.
“Investors are so spooked about what is going on that they don’t care about yield and are ignoring MBS and sticking with just Treasury bonds,” added Cecala.
It will take “time and market stability,” to get mortgage rates back to following the 10-year Treasury, said Graham.
“If these Treasury yields become common, lenders can gradually lower mortgage rates without risking rampant refi activity,” he said. “Eventually, mortgages would return to a normal distance from Treasuries.”