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Mortgage Rates - Fed determined to boost market liquidity

March 19th, 2020 1:27 PM by Sam Kader MLO# 130505

4/1/20 Wednesday The coronavirus continues to wreak havoc on the global economy with India, the largest democracy in the world the most recent to order a nation-wide 3 week lock-down over a billion people. Cases in China and Italy have likely peaked but the US remains at least a few weeks from the peak. Jobless claims last week saw the largest increase in history with 3.3 million new claims. For context, the highest new claims report in the great recession was around 700,000. The unemployment report on Friday may give some insight in the extent of the economic crisis. Mortgage rates have steadily declined over the last week but not quite down to the record we saw in early March. As equities continue to fall, money has been pouring into "safe haven" assets such as government bonds putting pressure on yields. With governments around the world offering record stimulus packages - the specter of inflation may finally rear its ugly head.

3/27/20 Monday 
 Flexibility seems to be the keyword as government agencies try to adjust to a lot of new realities. The Federal Housing Finance agency has already empowered the GSEs (Fannie Mae and Freddie Mac) to be flexible about obtaining appraisals, verifying borrower credit factors and working with distressed borrowers. 

As you may have heard over the last few days, the Fed is in overdrive mode in buying Mortgage-Backed Securities (MBS). Based on the verbiage in the announcement, the Fed is effectively buying unlimited MBS to calm the market down. We have seen rates improving across the broad albeit we have not reached rates at the same level as prior to 3/13/20. 

3/23/20 Monday  Rates moved wildly last week with massive swings from day to day and hour to hour. This week - the Federal Reserve announced on $300 billion in Treasury and Mortgage-Backed Securities purchase. Treasury Secretary - Steven Mnuchin said that policymakers are committed to providing relief to American workers and businesses impacted by the coronavirus and will take all necessary steps to support and to protect the U.S. economy.  In general, rates are improving today. 

3/19/20 Thursday 
-  Despite the Federal Reserve's buying, the market remains illiquid with Mortgage Backed Securities (MBS) investors aren't buying and lenders are still keeping their rates artificially high for fear of loosing in this volatile market. Markets are expecting for the Fed to take further action (in addition to its recent "Quantitative Easing (QE)" policy by buying more assets including corporate bonds to drive rates lower and to inject liquidity in the market.  The markets are unsettled right now with prices and yields sloshing around on an hourly and daily basis. Unless you have to and unless you have a strong stomach for it - do not follow rates on a daily basis but check back in a week. 

3/16/20 Monday
 - No you can't get that new "0% Mortgage" you heard about. 0% is referring to the Fed Funds Rate - an overnight rate that financial institutions loan to one another. Fed Funds Rate is set by the Central bank or the Federal Reserve System. Mortgage rates are different than the Fed Funds Rate. What's driving mortgage rates? The short answer as of right now is lender's capacity to process it's backlog. Lenders raised interest rates purposely to discourage customers and reduced advertising to cope with massive loan volume. We will eventually get back to a more logical level of correction but it will take days or weeks. Beyond lender's capacity, they are margin requirements, funding line availability, servicing valuations and the cost of hedging amidst current market volatility. 

3/15/20 Sunday  – The Fed announced that it will begin buying $200 billion of Mortgage-Backed Securities (MBS) that would stabilize and lower mortgage rates. This is part of a brand new $700 billion round of Quantitative Easing (QE) in response to the COVID-19 pandemic. Simultaneously, the Fed is also lowering the Fed Funds Rate to 0.00% - 0.25% encouraging banks to go to the discount window and in hopes of spurring lending to cash-strapped businesses. 

3/14/20 Saturday – By the end of last week, markets across the board were showing increasing signs of stress with high volatility and widening yield-spread.  The pace of the move has been the fastest since the last 2016 presidential election. Two main reasons are bond market panic and mortgage market over-supply. 

Market panic when 10-Year Treasury yield fell precipitously to new all-time lows. One of the reason for such volatility is that when rates are this low – refinancing activities result in accelerated principal pre-payment and ultimately investors lost in potential future interest payment/profit. Investors then pay less for the same type of mortgages (say for Conventional 30 Year Fixed). Lower investors demand results in lower Mortgage Backed Securities (MBS)  prices and higher mortgage rates. Historically, mortgage rates always move in tandem with 10-Year Note yield. However, this week is an exception - they de-coupled. 10-Year Yield had the biggest 1 day move since the Volcker era. It went from 0.72% to close at 1.08% (mind you yield usually moves in an increment of 0.125% in a normal market).  

In relation to market panic above - mortgage market over-supply (due to refinancing activities) puts downward pressure on prices which translates to higher rates. Investors that buy mortgage backed securities (MBS) from new refinances have been so overwhelmed with bond supply that sellers have desperately lowered prices to entice buyers. Investors/buyers have less appetite to own 30-year-fixed-rate mortgages yielding 3% or less. Once again, lower prices on MBS translates to higher interest rates for consumers. 

In the past both FannieMae and FreddieMac would have come in and bought these Mortgage Backed Securities providing market liquidity but now only the dealer community and the banks are the only ones making markets and they are at capacity already. The solution (as in the past) is for the Fed to intervene and to enter the market directly and buy MBS to relieve some of the pressure by using its balance sheet to buy agency securities until the market stabilizes. 



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