The Mortgage Industry on the Brink

With the infected rate climbing rapidly, and much of the country in seclusion, it’s far too early to say the longer term impact this situation with have on the US and global economies.  However, many are publicly stating that the worst in the stock market is behind us.  Even a risk strategist at JP Morgan feels enough has been done by the Fed and the government stimulus package to justify adding in risk selectively (stocks).  I find this to be a very bold and premature statement to make.  When in truth, most of the hardest hit people haven’t yet missed a mortgage or car payment, nor have they had to make the decision of whether to use their unemployment check to pay for food or to keep the heat on.  As time goes on, and people become more restless, we can expect to see a bit of a revolt.  Whether the targets of this will be against people ignoring the CDC’s ‘stay at home’ suggestions, or it be against our government leaders, I don’t think it will take long before tensions build.  In the end, I see very little for stock investors to celebrate.  I see more price declines coming.

As mortgage bond prices hit their all-time highs, many are wondering why mortgage interest rates aren’t at all time lows.  We have a pop up page when you enter our website that explains a large part of the reason.  However, there is one key component that is coming into play at the moment that has the mortgage industry as we know it on the heels of extinction.

When a consumer chooses to lock in an interest rate, lenders purchasing a hedging investment to help cover losses in the event rates climb before they are able to place the closed loan on the open market.  With rates dropping so quickly, consumers have been breaking locks in search of lower rates.  Although this seems like a wise financial decision to the consumer, there are tremendous hedging fees that are never recouped when a loan closes.  The massive hedges out there have led to investment firms issuing margin calls to cover the losses.  In many cases, these have been in the tens of millions of dollars.  Since most companies don’t have that much money, many are on the verge of going out of business.  This problem shouldn’t be downplayed or understated.  So keep in mind, where a rate is locked, it is important to ensure that loan closes.

With bond prices at all time highs, and lenders not able to offer rates that should correspond to such high bond prices, we will maintain a locking bias.