After mortgage bond prices peaked at all-time highs a couple days ago, they have since backed off, adding upward pressure to mortgage interest rates. For the first time, I can say that I am actually happy to see mortgage rates pressured higher. Let me explain. The past few weeks have brought tremendous volatility to mortgage interest rates. Without understanding the collective damage caused, many consumers have broken locks in search of lower rates after they have fallen. Since large mortgage lenders short mortgage bonds on the open market to hedge against rates moving higher, the drop in rates triggered significant margin calls which absorbed the cash large mortgage lenders have to fund home loans. Without the income from closing a loan to offset the hedge cost, every hedged locked loan that didn’t actually close cost lenders a significant amount of money. Hopefully, from this large lenders will be able to change the law on what happens when a locked loan doesn’t close. It just isn’t worth sacrificing our industry to allow consumers to easily and inconsequentially break locks. My heart goes out to the mortgage lenders who are currently facing margin call issues. Hopefully they will get some help from the Fed to support their continued existence.
Stocks are currently about even for the day. However, there has a been a lot of volatility in the stock market already this morning. With the death count from the Coronavirus expected to climb sharply over the next couple of weeks, it’s hard to believe that stocks have held at current levels. The market has recovered roughly 50% of its losses, which still means we could be in a downward trend. I don’t trust the recent run higher and personally believe we will see stocks fall in the near term. Assuming we are approaching a 15% unemployment rate, there is little to justify current stock prices.
We will maintain a locking bias.