Even as concerns mounted regarding the coronavirus pandemic, mortgage rates increased this past week as lenders sought to stem the tide of people looking to refinance their home loans.
The 15-year fixed-rate mortgage, meanwhile, fell two basis points to an average of 2.77%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 3.01%, down sharply from 3.18% last week.
Last week, 30-year fixed-rate mortgages hit an all-time low since Freddie Mac started tracking loan rates in 1971. That triggered an avalanche of mortgage applications from borrowers looking to lock in the lowest interest rates they’ve likely seen in their lifetimes. Refinancing volume hit its highest level since April 2009, the Mortgage Bankers Association reported Wednesday.
Mortgage rates were driven lower largely by the steady decline in bond yields in response to concerns about the economic impact the COVID-19 coronavirus outbreak would have. Mortgage rates typically track the yield on the 10-year Treasury note TMUBMUSD10Y, -14.62% , which actually touched an all-time low of 0.39% this past week.
So, why then did mortgage rates increase? That comes down to a lender’s capacity. Experts had warned that most lenders did not have the staff to handle an increase, in part because lenders had been letting go of employees in 2018 and 2019 in anticipation of higher rates causing lower demand for loans. “Most big lenders were scaling back their mortgage business,” said Vishal Garg, founder and CEO of Better.com, an online direct mortgage lender.
‘Each employee is processing 2.5 to 3 times as many loans as they were a year ago.’
Without the staff to handle the deluge of applications, lenders are facing an uphill battle to close loans. Some companies are now offering rate locks as long as 100 days, in anticipation of how long it may take to close loans at the moment, said Tendayi Kapfidze, chief economist at LendingTree TREE, -6.89% .
“Basically, each employee is processing 2.5 to 3 times as many loans as they were a year ago,” he said. “That really tells you the kind of jam lenders are in.”
Therefore, lenders have turned to the main tool in the arsenal to reduce demand: Rates. Many major lenders have opted to increase rates in an effort to dissuade people from applying for mortgages right now and give them a chance to work through the applications they’ve already received.
But those who are looking to buy a home or refinance their existing mortgage who have not applied yet need not despair. The Mortgage Bankers Association now expects that lenders will write $1.2 trillion in refinances this year, double its previous forecast. That would represent the largest volume of refinances since 2012. Therefore, economists expect that rates will remain low, and possibly go down again, for the foreseeable future.
“All else equal, if refinancing activity begins to slow, then rates will almost certainly trend back down,” said Zillow ZG, -9.49% economist Matthew Speakman.
“But of course, all else is not equal, and markets are now in the midst of their most tumultuous stretch since the financial crisis,” Speakman added. “More dramatic moves for mortgage rates appear likely, as investors continue to try and best position themselves to deal with the challenges posed by this environment.”