Unintended Consequences

James Duffy

 

Nearly four weeks ago, mortgage rates hit all-time lows. 

Then the market went ‘Tilt’, like the pinball machines of old would do, for a couple weeks. The bond market then got better then it has ever been. And mortgage rates – did not. They settled in, but not all-time lows. Why?

Take a look with me at the chart:

As bond yields (in the chart) go higher, rates go lower. So, I highlighted the all time low mortgage rates on March 6th and 9th. Then circled where MBS Bonds ended yesterday. Clearly higher. So, rates should be lower, right?

No.

Now, I was locking rates for people in the mid to low 3% range last week. But I had 6 loan officers from different companies reach out with scenarios for a ‘price check’…’what’s your rate for this scenario?’ They would ask. And we would compare. Everyone knew something was off.

I remember back in 2007 I had a subprime loan that was approved, and clear to close. A day went by and the lender I placed it with did not send docs to the closing attorney.

Then two days. Then three… I could not understand why they would not release the closing package?

The next day they announced they were defunct and would not be funding any more loans. Oh, right. That’s why.

To my colleagues who lived and worked through that, a similar eerie feeling took hold this week, and we were looking for answers. 

And we found it. Servicing. The companies who collect all of our mortgage payments every month, process them, and send on the interest to Fannie Mae, Freddie Mac and Ginnie Mae, so that they in turn can pay that out to bond investors who buy our collective mortgage notes…were being squeezed from several angles at once. I gave a brief explanation that you can watch HERE.

If you want the full story, check out this short and very direct article by Barry Habib.

John Mauldin put it quite succinctly in his newsletter this morning, I quote:

The problem is that the mortgage service providers are the fan belt of the economic engine. It is a $3 part (or was when I was a kid and installed them myself) but the entire engine freezes up if it breaks. The mortgage belt has snapped and we are weeks away from the entire housing engine collapsing. This morning we learned that Treasury Secretary Mnuchin is aware of this “minor issue” and is trying to decide what to do. He needs to decide quickly.

That final sentence is key. The $2 Trillion bailout package needs to find room to give relief to mortgage servicers. If that solution is found, all will be right again.

What do you do if you are in real estate?

And to my Realtor friends, if you have buyers you are working with who have lower credit scores – maybe pre-approved for an FHA or VA loan – do a price check with their lender. They will be in for an unpleasant surprise.

Beyond that. Keep doing what you are doing. Helping people buy and sell homes in this unsettled time. Bravo to you for all that you do on the front lines. I am honored to work along-side you.

About The Author

For years, 18 as of this writing, I have walked beside average men and women of all ages on a specific journey. The journey of home ownership. And what I have discovered in opening up the financial reality of thousands of individuals & couples is a constant mix if fear, hope, confusion and achievement. It really is an exhilarating journey! And I have read innumerable books on personal finance, read the blogs and listened to the podcasts, and spoken to the experts. And there always seems to be a bit of a disconnect between the theory of ‘personal finance’ and the lived reality of what is, truly, personal finance. This is a place where real life meets real money. I hope you will come along on the journey to explore Finance, on the Front Line.

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