Mortgage Rates – It Could be as Bad as You Can Imagine
With respect to yesterday’s in the mortgage market — yes, it is as bad as you can imagine. No call can be made on the near-term, however, until we see where this settles out over the next week of so. If rates do stay in the mid 5%’s, the mortgage and housing market will encounter a sizable stumble. The following is not speculation. This is what happens when rates surge up in a short period of time – I lived this nightmare many times.
Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day. Jumbo GSE money — $417k – $729,750 — has been blown out completely with some lender’s at 8%. I have seen it all in the mortgage world — well, I thought I had.
A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle…pretty obvious from the start but kind of scary to live through it … today felt like LTCM with respect to liquidity.”
The consequences of 5.5% rates are enormous. Because of capacity issues and the long time line to actually fund a loan in this market, very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone.
A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lenders without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-30 day rate locks carry the best rates by a long shot. But to get this short-term rate lock, the loan has to be complete enough to draw loan documents, which has been taking 45-75 days over the past several months depending upon the lender’s time line. Therefore, millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.
Furthermore, many of these ‘applicants’ with loans in process were awaiting the magical 4.5% rate before they lock — a large percentage of these suddenly died yesterday. From the lows of a month ago to today, rates are up 20%. To make matters worse, after 90-days much of the paperwork (much taken at the date of application) within the file becomes stale-dated and has to be re-done with new dates — if rates don’t come down quickly many will have to be canceled out of the lender’s system.
To add insult to near-mortal injury, unless this spike in rates corrects quickly, a large percentage of unlocked purchases and refis will have to be denied because at the higher interest rate level, borrowers do not qualify any longer. For the final groin kicker, a 5.5% rate just does not benefit nearly as many people as a 4.5%-5% rate does. Millions already have 5.25% to 5.75% fixed rates left over from 2002-2006.
This is a perfect example of why the weekly Mortgage Applications Index is an unreliable indicator of future loan fundings and has been for a year and a half with the market so volatile. As a matter of fact you will see this index crumble over the next few weeks at the same disproportional rate as it increased over the past several months if rates don’t settle lower quickly.
With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop.
Lastly, consider sentiment — this is a real killer. This massive rate spike may have invalidated hundreds of billions spent to control the mortgage market literally overnight. This leaves the mortgage and housing market very vulnerable.
Mortgage loan officers around the country are having a very very bad day today explaining to their clients why their rate was not locked and how rates are going to come right back down. They are also taking calls from borrowers with locked loans to confirm that the loan is indeed locked, inquiring as to when it will be approved or fund, and to rush the process in order to fund the loan by end of the lock-in term. This creates a customer service log-jam that chews through lender capacity quickly making the loan process even longer. Loans with second mortgages that need to be subordinated, are in a world of their own. Essentially, everything becomes a rush. Subsequently, loan officers will not feel like getting too aggressive taking new loan applications at least for the next month unless this corrects quickly.
Press surrounding this event will be the talk of Main Street immediately and cast a serious doubt over the housing recovery story that has been the common theme for months. An overnight housing market sentiment killer wildcard is something that nobody was factoring in.
We have to see where all this settles over the next few days before making a near to mid-term call on the outright damage because at this point, Fed or Treasury shock and awe is almost certain — another common theme has been ‘if it doesn’t work throw much more money at it’.
Obviously they have been following this closely for the past few weeks, as conditions began to deteriorate, and have likely been waiting to see where the upper range was before shocking in order to get maximum benefit…that would be a humongous short squeeze in Bonds driving rates lower. The problem is…if they do shock her and it is sold into with the same fury that we have been seeing, there may not be an act two.
The bond and mortgage market got complacent with the ultimate in moral hazard’s — the Fed’s got my back. Complacency is a killer. Where we stand in two weeks in unknowable.
Re-leveraging Through Exotic Interest Only Financing
Those that must close a loan, who were not locked and who need a rate in the 4%’s will be forced into an Agency 3/1 or 5/1 fully amortized or interest only. Obviously, interest only affords the most leverage but is in part what got us here in the first place. Maybe that is the plan behind all of this — today’s rates for good borrowers are still in the high 4%’s.
Best Regards,
May 29th, 2009 at 1:48 am
Don’t forget RE taxes – another reason a lower price is important.
Also, please avoid personal attacks. Homes are an emotional subject for many people, but that is not an excuse to get personal.
Best,
Henry
May 29th, 2009 at 4:41 am
A 50% US deficit, unprecedented US/fed borrowing – the world has gone mad.
Kind of funny the banks missing out on a refi boom because of this.BenB will have to find another way to manufacture profits for them now.
Wonder what impact this will have on Tiny Tims PublicPrivate plan. The gummint will still give them free non-recourse money but the already diminished value of the toxic assets will be pushed even lower
May 29th, 2009 at 5:00 am
if you only can afford a mortgage at 4 1/2% but not at 5 1/2 % you should not buy a house anyway…
May 29th, 2009 at 7:20 am
Could not agree with “post from Europe” more!
May 29th, 2009 at 7:50 am
Here is something funny, make sure to catch the last sentence:
(San Diego, CA) — There’s encouraging news again today for San Diego area homeowners. The median price of an existing single-family home rose five-point-two-percent last month, from just over 323-thousand dollars in March to over 340-thousand dollars in April. The California Association of Realtors is reporting sales dipped just over two-percent in April compared to the month before but they were a whopping 62-point-6-percent higher than the same time last year. San Diego home prices have a ways to go before catching up with the 443-thousand-520-dollar median price of a year ago.
May 29th, 2009 at 8:22 am
@ex_owner_now_renter
Comment 25
Hey you are taking my first comments about Diamond Bar out of context and using that argument against Wonton.
Plus the school comment was not necessary. Where was your head in Econ 101 when u purchased your home in 06.
My original statement supported my rationale to purchase a home that is priced at 2003 level (with low interest rates).
Who has not made a blunder in the bubble cast the first stone.
May 29th, 2009 at 8:49 am
How likely does everyone think it is that the RE bubble will be successfully re-inflated by a return to “exotic” loans? How long could that bubble last? It seems to me that, in light of the much-lower pricing of today, the scale of the negative-equity problems that this new batch of IO clowns will have is going to be much less burdensome and lead to a softer and slower “bursting” once (if?) that bubble bursts. I agree with ex-renter, with all the IO gimmicks, FHA gimmicks, the shitty employment, the Alt-A avalanche, the baby boomer retirement bomb and the walk-away phenomenon – which I just can’t see “not” happening (and soon) – how can a TRUE housing “recovery” begin anytime before 2012? even 2012 seems like a hard chart to draw.
May 29th, 2009 at 9:50 am
Who didn’t see this coming?
The government goes massively into debt, raising inflation expectations. China demands higher rates on long term bonds. The government can’t sell as many 10yrs as it wants. Fixed long term mortgage rates go up. Housing market is hurt more. More people feel poor. Now they won’t spend. Government goes farther into debt to stimulate the economy, raising inflation fears further. . . . . . . . .
May 29th, 2009 at 9:53 am
“Just think..until yesterday.. you were like what’s wrong with 450K.. that shows your thinking..”
And I still say “what’s wrong with 450K”? You don’t get it, do you ex_owner? I did not say that I would personally buy a $450K house in Diamond Bar. My point is, if someone wants to buy in Diamond Bar for $450K, what is wrong with that? Who am I and who are you to criticize? It about personal responsibility, and if a person feels that now is the right time to buy, and Diamond Bar is good place to live, so be it, there isn’t anything funny about it. You just can’t seem to accept the fact that somebody out may be more successful than you and can buy his first home at $450K. You’re bitter.
“I will get another chance at homeonwership..if I decide to…no wories in my part..”
No worries?? Oh come on, of course you worry. I can see it in your desperate posts. This is what you worry about: Price will continue to drop the next 12 months, but you’re not allowed buy. Then prices will stabilize and move up. Years from now when you’re finally allowed to buy, you would have missed the bottom and will face a much higher price than you can afford.
May 29th, 2009 at 11:07 am
Naaahhhh Wonton.. you’re wrong again..
This recovery you’re talking, and prices going higher…is years away.. I’m saving like the rest of people that (learn/learning a lesson) and got caught.. in the buying frenzy at the peak..(trying to get one home for my family..at 400K making 125K combined income!.. I could have bought 600K, a million If I wanted.. I didn’t .. I stuck with what I could afford, and lost my down payment, investment in landscaping ..etc)
GAS was 4.50$, wife lost a job…. as I said I somewhat feel PartyBoy’s situation.. but I would have stayed even then, should my budget not become a minus, savings gone, and credit cards maxed, wife not loosing job..
I’ve paid rest of debts, and I’ve got cash now! I’ve got a life , and my credit is getting better!
This housing is going nowhere without the masses coming back in and buying.. and I’m talking about EX-OWNERS and soon EX-prime owners..
We all we’ll get another chance..as people,banks,gov learn their lesson and the debt is out through forclosures!.. so don’t worry for me.. and prices will be nowehre higher before we get in.. they actually will be lower!
May 29th, 2009 at 11:18 am
add to your equation:
- next 8 years of retiring folks (want to sell!)
- underwater owners’s shortsales (want to sell!)
- banks’s forclosures (want to sell!)
- unemployment going higher!
- negative GDP
- cuts in sallary pays!
- people saving
- suply and demand model not balanced
- rates going higher
- resets coming
- 24 million empty homes in US
YOU DO THE MATH, are prices going up tomorow? next year, year after that?
I may have made a mistake in 2006….. don’t be so arrogant, with your 90K..and one day confident of buying/next day.. umm? I duno.. got to wait some more ..I’ve got close to 1/4 of your 90K already! cards paid off! and still spending in this economy!
I’ll be catching up to you! and invite you over a beer in 3 years.. to see how your 2009/2010 “investment” is doing ..
May 29th, 2009 at 11:20 am
where is the demand in “supply and demand” model? Definately not buyers like WONTON, or DAVID
let the EX-OWNERS come back!.. present schedule starts: 2012
May 29th, 2009 at 1:48 pm
For people out there who really truly want to keep their home but have been hit with unfortunate circumstances (and were fine before their issues), I am truly sorry.
But for the crooks, charlatans, scum, and bastards out there who are flipping, buying to make a lot of money quickly, or are simply greedy and feel entitled to a handout…I hope they burn.
May 29th, 2009 at 3:29 pm
ex-owner, you’ve been screaming “let ex-owners come back”. Why would you want to come back if you think prices will fall for years to come?
May 29th, 2009 at 4:30 pm
So stagflation won’t be around!
May 30th, 2009 at 7:16 am
“post from Europe Says:
May 29th, 2009 at 5:00 am
if you only can afford a mortgage at 4 1/2% but not at 5 1/2 % you should not buy a house anyway…”
Exactly. It goes back to the root of the problem in this country – Too many people spending money that they don’t have, on stuff that they don’t need.
Some folks are finding it difficult to downsize, I guess.
May 30th, 2009 at 10:12 am
The one with cash will be the landlord. Chinese investors have a lot of cash.
June 1st, 2009 at 11:05 am
Bill Maher is right. America is filled with greedy people. For those who thought that rates would sink under 4%… well you got what you deserved. I am glad I closed on my 4.375% refi last week.
June 1st, 2009 at 1:39 pm
Well, a gold star to dave.
Although not filled with them, there are apparently plenty of pompous arses in addition to the greedy.
cheers…
June 1st, 2009 at 3:45 pm
I don’t care what Bill Maher says…he’s a douche.
June 3rd, 2009 at 9:03 pm
I didn’t know europe was problem free… wow
Icenland broke, Hungary borowing from IMF, UK bigger problems, Spain.. most of GDP on housing.. hmmmmmmm… watch your own shit Europe!
June 3rd, 2009 at 9:07 pm
Where were they burning expensive cars? hmm forgot..someone remind me.. oh Germany… I see what about eastern europe.. they must be doing great! geeee… the double standard!
June 10th, 2009 at 2:16 pm
Rates are killing me. I posted on May 28 about cancelling a contract to buy where I had a 4.75% rate lock with Wells.
First I was told that as long as I closed [on another house] by July 10 [60da of lock] I would be OK. Then told I had to be in contract within a week. Then told [at the time] in contract by tomorrow or the underwriters are pulling the plug.
So three weeks later Wells volunteers a new rate lock of 5.875%, 1/2pt orig fee. [FICO 806, loan $500K, 20% dn].
Now I may cancel my latest offer.
Some have speculated that rising rates will get potential buyers off the fence, but with this [rate of change] in rates, I don’t think many had time to get off the fence. I found a second place pretty da*n fast, and am already discouraged.
harrumpff!
June 12th, 2009 at 6:32 am
I stumbled onto this page and i must say, even though i feel i will NEVER be a home owner, the conversation you people have going has been the most interesting one i have ever read online!
June 12th, 2009 at 8:44 pm
Returned home just an hour ago from mortgage broker’s office, where I signed papers on a refi — 4-1/2% fixed, interest only 5yr ARM, no pre-payment penalty, $528 monthly (down 250 bucks from my existing monthly 5-yr ARM payments). I noticed in the paperwork that the mortgage HAD ALREADY BEEN SOLD to another lender, even before I signed the papers.
My agent seemed awfully uptight when he called at noon (today’s a Friday), and urged me and my wife to get to his office ASAP this PM. I had suggested we put it off until Monday, but he vigorously nixed that idea. I had a vague notion his concern had to do with the sudden jump (I mean leap) in the 30-yr fixed rate.
Now I can see why, after reading the story above and the comments it provoked. We were 22 days into the qualifying process after locking in the 4-1/2 rate, leaving quite a bit of breathing room until the 30th day — or so I thought.
Visions of the underwriters pulling the plug come Monday must have been dancing in his head like sugar plums about to go rancid.
I’ve had half-a-dozen mortages during my 74 years, with one at 13%, and this is the first market-timing victory that ever “fell in my lap,” so to speak. That’s why the Dewars tastes especially rewarding this evening — each sip better than the last….
August 15th, 2009 at 3:15 am
Therese Johnson, Therese Johnson-Shaw, Therese Shaw, Therese Trinadad is a FRAUD!!!
NEVER EVER CONDUCT BUISNESS WITH HER!!! EVER!!!
November 23rd, 2009 at 8:33 am
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December 26th, 2009 at 11:43 am
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March 14th, 2010 at 5:30 pm
OK, so David The Renter is back to provide an update with my situation since my last post way at the beginning of this discussion thread.
I eventually did purchase my home with a 5.6% 30 year fixed loan. (of course 20% down too)
7 months later, two houses in my block has gone down to foreclosure. Checked out zillow just for kicks and my house value is still the same as when I purchased it.
@Ex_Owner_Now_Renter
Some fodder for your trash talking contributions.
I did have to put in an additional 10K on improvements to the house and I still need major repairs on the electrical infrastructure.
Other than that, I don’t have a sprinkler system so I have to stand in the front AND back yard for a minimum of one hour every week to water my lawn.
But it felt good to receive 8K credit for my taxes.
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April 22nd, 2010 at 9:31 pm
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April 27th, 2010 at 2:54 am
I cant wait till the recession is over and this short sale mess goes away.
May 4th, 2010 at 8:13 pm
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May 4th, 2010 at 10:03 pm
apropos David the Renter: I have also returned to say I bought a REO house last Aug, $605K, 20% dn, 5.25%.
I wish I only put 10K extra, it was more like 130K in remodeling
But it’s very nice, and I will love living here for hopefully 15yrs. And I’m fixing sprinklers myself!
cheers – best to all looking or waiting to buy…
May 28th, 2010 at 7:33 pm
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June 11th, 2010 at 8:06 am
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June 13th, 2010 at 12:24 am
United States pending house sales went up in April wildly as purchasers signed contracts to get a federal tax credit. The National Association of Realtors’ index for pending sales of used homeselevated by 6.0% to 110.9 in April, the industry group said Wednesday. The gain was the third consecutive one. Economists surveyed by Dow Jones Newswires had expected pending home sales would jump in April by 5.0%. First-time home-buyers rushed to beat the April 30 deadline for the tax credit. The incentive was an extension of a subsidy originally enacted in February 2009.
June 15th, 2010 at 8:15 pm
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September 2nd, 2010 at 2:38 pm
I am eager to see what the new government assistance programs will do for homeowners.