Mortgage rates this week have been changing every hour! On Tuesday morning they had dropped back down to 3.50% after the Fed's announcement on Sunday. But, on Wednesday rates ended at 4.25%. On Thursday they hit 5% during the day and ended in the evening at 4.625%. This morning we are at 3.875%.
Why? The bond market over the last 3 days has come face to face with reality...and it's scary. With the planned fiscal stimulus of potentially over $1 trillion, how will the federal government pay for this? The Treasury will have to sell new debt, probably most of it as 10 or 30-year debt which competes directly with mortgage bonds. All this expected new supply has caused bond prices to plummet and rates to soar.
Second, Treasury Secretary Munchin scared the markets on Wednesday when he said the unemployment rate could hit 20% if we don't take very decisive action. This freaked out bond traders and investors. Why? A much higher unemployment rate means a greater risk of default for bond investors.
Third, there is absolutely NO VALUE being given for servicing premiums. Normally as a mortgage lender, we earn 1% to 2% in servicing premium when we sell the loan. Today there is nothing earned! This has helped cause rates to soar. And it's basically impossible to not charge discount points today for any borrower on a conforming loan amount, even borrowers with 740+ Ficos. So, borrowers closing costs are increasing along with their rates. Why is this happening? Bond investors and traders know that this period of time of higher mortgage rates is a short bump in the road and mortgage rates will drop big-time again in the near future.
This morning the Fed is buying $75 billion of Treasuries which is positively impacting the Treasury market as the 10-year yield is down .13% to 1.00%. And the Fed is buying $32 billion in mortgage bonds, but this is nowhere near enough as the mortgage bond market is down over 70 basis points.
One of the smartest men in the mortgage bond market world is Barry Habib whom I have followed for nearly 20 years and he thinks mortgage rates will stay above 4% for the next 2-3 weeks or until the growth rate in new infections level off at least. I agree with his assessment.
The only way I can see mortgage rates dropping substantially over the next 2-3 weeks is if the Fed doubles or triples the amount of debt they will purchase. As of Sunday, they committed to $700 billion and I said on Monday that I didn't think this was enough. I believe they need to triple this number.
Will, the Fed do this? Time will tell. But, I think the writing is on the wall for them. I can tell when the Fed is buying mortgage bonds over the last 3 days as pricing improves dramatically and rates may drop. But, as soon as the Fed quits buying mortgage bonds prices crater and rates soar.