Rates & Covid-19

Mortgage Markets Freeze Up as Volatility Increases

Interest rates have been cut and stocks have dived – so why aren’t fixed mortgage rates any lower? A flood of refinancing demand combined with last week’s volatile credit markets caused mortgage rates to spike on Tuesday and Wednesday.

DENVER, Colo. – Consumers who thought they could snag a rate on a 30-year mortgage in the low 3% range whenever they wanted are facing a rude awakening.

A flood of demand for refinancing combined with volatile credit markets this week caused mortgage rates to spike Tuesday and Wednesday. By Thursday, buyers for mortgage debt had largely stopped making bids, with the exception of a few credit unions, said Lou Barnes, a loan officer with Premier Mortgage Group in Boulder.

“The main thing that consumers need to understand is that in the short term, the market is closed at the moment,” he said.

A high volume of demand from people looking to refinance their mortgages was stressing the market, Barnes said. But mortgage markets have dealt with surges in refinancing before. What changed last week was the extreme volatility in stock and bond markets because of concerns over the coronavirus pandemic.

Buyers of mortgage debt typically purchase hedges to protect themselves from big moves up or down in interest rates. But with Treasury yields swinging around, buying that protection has become difficult.

“The ability to hedge those risks started to break down Tuesday. The answer of the mortgage industry was to raise rates so high that nobody applies,” Barnes said.

Borrowers who were looking at a 3.25% or lower rate on a 30-year mortgage last week were being quoted 4% on Tuesday and then above 4.5% on Wednesday. The mortgage industry was effectively telling people to go away.

By Thursday, bidding on mortgage loans effectively stopped, with the exception of a handful of credit unions, Barnes said. Think of it as a Black Friday sale that got out of hand. The manager first raises the price of the doorbuster flat-screen television from $200 to $400, then closes the store when that isn’t enough to keep the hordes away.

The last time mortgage markets faced this kind of volatility was during the financial crisis in 2008. Back then, lenders and investors were sitting on trillions of dollars in mortgages that were bad or about to go bad. Consumers owed more than their homes were worth and many were losing their jobs. The financial system was on the verge of collapse.

That isn’t the case this time. Most borrowers are sitting on a thick equity cushion, and the number of people behind on their payments is at a record low.

“The banking system is not broken. There is a specialized fear,” he said.

But the mortgage market is broken and needs the Federal Reserve to step in as a buyer, Barnes said. That could happen any day with the Fed offering to buy 30-year mortgages with an interest rate above 3.75% or some ceiling. That would be enough to get buyers back in the game.