Why Have The Interest Rates Gone Up?

What is going on with Mortgage rates? Why are they going up instead of down?

Since I am not a lender, I have asked my good friend and lending partner Hunter Markwardt to talk about what he is seeing in the lending world. Hunter is an Executive Loan Advisor for RPM Mortgage and we will discuss this important subject that’s taking the industry on a very strange course.

What is going on with Interest rates right now?

In just two weeks, the Bay Area housing market ground to a near-halt as a result of COVID-19 and the shelter in place order issued first by San Francisco, then the entire state of California.

According to the California Association of Realtors, while the Bay Area’s sales pace fell 1.3% in February, median prices had risen 5%, with a 10% YOY price increase in San Francisco. However, according to CAR economist Leslie Appleton-Young, “the housing market condition is expected to deteriorate” in the coming months. Socketsite reports San Francisco’s listing inventory has fallen 20% in just three days as sellers pull their homes off the market.

The Real Estate Industry is trying to Adapt

Because of the on going pandemic and enhance isolation of people around the world, the real estate industry is one of the hardest hit sectors of the economy. These past couple of weeks different groups of real estate agents have been all over the internet looking for solutions on how to continue business in this day and age where physical contact and people gathering must be avoided.

Though, there are still motivated sellers (and buyers). They have taken their activities online which has increased the use of virtual showings and live streaming open-houses to avoid physical contact.

Fed Funds Rates down = mortgage rates up?

The Fed made a big move by cutting the Fed Funds Rate down to 0%. This move encouraged lenders to continue to lend in order to keep the economy from grinding to a halt. However, this does not mean your interest rate will now be 0%.

According to Hunter Marckwardt “Taking interest rate to zero and then pumping out half a trillion dollars to treasury bonds and $250 billion to buy mortgage backed securities, but to a very defined group which is Fanny and Freddy products. In our market, this is important because those loans must be conforming and they max out at $765,000. Anything above $765,000 is a different product set which is on the jumbo side which is also disrupted.

Lenders are backing out or don’t want to take these jumbo loans because they are unsure if they will even receive payment on these loans. 

When the government comes out and helps home owners by allowing them to forgo mortgage for 6 months for FHA backed loans, servicing companies still have to send check on monthly basis to the end user. This creates a cashflow problem for them and they would rather not lend then be in a negative cashflow situation.

As Hunter mentioned: “Every time you pull one lever with good intentions it will always have negative effects to others.”

So Why Are Rates Up?

The expected response from any business who cant be profitable is to pull out of the market entirely. For lenders that means that they stop accepting loan applications or making loans in general. 

Instead of saying “We are out of business” most lenders increase interest to a point that they become unattractive and account for the perceived risk. That’s why we see a huge disconnect between the Fed Funds rate and the rate your lender offered you on your refi or purchase. 

Will the 2 Trillion Dollars package help?

The two trillion dollar package is going to turn the mortgage side of the business upside down unless there is a form of relief for these servicing companies.

 When there’s total chaos, lenders just retreat because they don’t know what they’re holding so they just try to hold nothing.

Why lenders are avoiding financial repercussions?

They take interest rate to a certain level that disincentivize anybody that use them.

When you are the servicer of the loan, you might pay a couple of points to own that loan and hope over the course of 4-6 years period of time the payments that are made to service the loan make up for your initial payment. 

When the lenders see that the interest rate is so volatile with a quick refi very possible or the with-holding of mortgage payment,  they cannot safely account for the risk and they retreat. It’s really a simple time value of money equation (below). They are just trying to solve for the present value based on a set of future payoffs. 

Time Value of Money Equation

Why Have Interest Rates Gone Up?

Lenders are simply not willing to take the risk of losing money by taking on loans they can’t predict the payoff for. They raise rates to account for that uncertainty which is effectively driving them out of the market.

What are the Solutions that can be done?

Like every crisis or problem that we are go through, this too shall pass. 

When uncertainty and volatility rules the day, faith in that is all we have.

Until we head in a more predictable direction, look at your own goals, risk tolerance and financial situation. Stay true to that. If you can protect your mindset, you can keep you head screwed on straight focus on your goals. If you do that, you’ll come out of this better than you went in.

Take this as an opportunity. If you are ready for it, you can do very well in these moments.