A Crazy Week in the Mortgage World

This week might have been the most volatile period of time I've ever seen in the mortgage markets. Not only did I watch interest rates soar from 4.875% to roughly 6.25% in under 4 days (yes, there is a reason Noah talks about Stage 10 - the treasury impact on rates), but I now find myself asking the billion dollar question: What's next?

I'm going to try and keep this short and sweet (well, bitter sweet at least), here is what I see:

1. Today's 30 Year rate ---> 5.625%
2. Confidence? ---> Minimal
3. Bond Supply? ---> Enormous
4. Mortgage Originations? ---> Light
5. Government Intervention? ---> Immediate

EDIT @ 4:39PM: 3 MID-DAY PRICE CHANGES - RATES DOWN TO 5.25%!

For any of you reading this, that were waiting for a 4.50% rate when your mortgage professional was offering you 4.75% with zero points and it made sense for you to refinance, remember that contrary to Gordon Gecko's belief, greed doesn't always work.

The good news for those that are currently locked and have an application pending in the bank, you will be closing soon. Rates are obviously up and new origination activity is light, this means that your loan officer/broker will now have time to actually close your deal.

I find myself asking what is next these days. How much help do we actually need, will it work, and was this expected?

I understand that the Fed can come in and buy a ton of MBS/Treasuries and support their "quantitative easing" program, but this is a temporary band aid to an unstitched bullet wound - this is not a solution. At what point do we stop printing paper and realize that inflation will cross paths with us?

Mish discussed a Mortgage Market Lockup, via Mark Hanson at Field Check Group, as a side effect of this huge treasury move:

With respect to Wednesday’s episode in the mortgage market -- yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse.

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”.e, leading many to ultimately shut down the ability to lock loans around 1pm PST.

The negative consequences of 5.5% rates are enormous. Because of capacity issues and the long timeline to actually fund a loan 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 lender without a rate lock. This is because consumers are incented by much better pricing to lock for a short period of time…12-15 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 timeline. 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.

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.

I can't discount what Mark Hanson's contact is saying as far mortgage brokers submitting applications without rate locks and banks dropping large funds on loans that will never come to fruition, as it is being done. But this is not the smartest way out.

Clearly (especially in the current place and time) if the rates go up, I'm sorry to say but if you are a broker, you're screwed. Personally, I don't submit applications without rate locks as the entire mortgage environment is way too volatile. Had this been the refi boom of 2002 I probably would have, but not in times where MBS swings 10 ticks up or down on any given day.