Until about three months ago, it was basically unthinkable that interest rates would ever fall below their record low of 3.31%, which was set in November 2012. But then the coronavirus happened.
And as the virus was wreaking havoc on the world and its economy, interest rates not only broke that record; they’ve since settled comfortably below the previous all-time record level and stayed under 3.3% for three straight weeks.
But is it possible that interest rates are on the verge of falling to levels no one ever thought they’d see: under 3%?
The short answer: Absolutely.
In fact, one of the biggest lenders in the country is already offering interest rates as low as 2.5% to certain borrowers.
Last week, United Wholesale Mortgage made national news when it announced that it would be offering interest rates as low as 2.5%. Never before had a lender as big as UWM, the country’s biggest purchase mortgage lender and largest wholesale lender, offered rates that low.
Given that, the program made waves both inside and outside of the mortgage business.
Some mortgage brokers quickly and vociferously stated that UWM’s announcement was nothing more than empty words, suggesting that borrowers wouldn’t be able to get the low rates that UWM was touting.
Several mortgage professionals told HousingWire that UWM’s mortgage rate sheet (the information provided by the lender with details on its lending programs) stated that in order to get a rate as low as 2.5%, borrowers would have to fork over thousands of dollars in fees (perhaps more than 2% of the overall loan amount) beyond whatever money they were planning to use for their down payment.
But, as one prominent broker told HousingWire, it basically comes down to whether a borrower wants to do that or not. Those fees could certainly be added into the mortgage itself and financed over time.
Put simply, it comes down to how much a borrower really wants to get a 2.5% interest rate and how much they’re willing to pay to get it. And according to some in the mortgage business, UWM’s program was far more than empty words. “We are gonna close the hell out of these loans, it’s a fantastic product,” one broker told HousingWire.
When announcing the program, UWM CEO Mat Ishbia said that not all borrowers would be eligible for the 2.5% interest rates, but the company is offering conventional 30-year fixed rates between 2.5% to 2.99%.
But as Ishbia noted, the company may soon not be the only one offering interest rates below 3%. In fact, Ishbia said that other lenders will likely follow suit, lowering their own rates to what UWM is offering or even lower.
But no lender, not even one as big as UWM, can move the prevailing market interest rate down all by itself.
Investors and the rates of return they’re willing to accept are the true determining factor for mortgage rates. And investors aren’t likely to gobble up sub-3% mortgages if there are other options that produce a higher return on investment.
So, how does the mortgage market get from interest rates of approximately 3.25% to well below 3%? Not without help.
Enter the Federal Reserve.
As HousingWire’s Kathleen Howley recently detailed, the Federal Reserve is currently buying billions of dollars of mortgage-backed securities on a daily basis, part of an effort to stabilize the country’s financial system and provide liquidity to the market.
That bond-buying calmed the mortgage market (after an initial shock that sent interest rates all the way back up to 3.65%) and has since driven mortgage rates lower.
The mortgage bonds the Fed is buying are built on loans backed by Fannie Mae and Freddie Mac, which enables the GSEs to continue to buy more loans from lenders, which then enables those lenders to continue originating new mortgages.
Even a company as big as UWM does not have the financial capability to hold its mortgages on its books. Therefore, the lender sells many of its mortgages to Fannie or Freddie. UWM then takes that money and makes more mortgages.
But Fannie and Freddie can’t hold all those loans either, certainly not with their small capital buffers. Thus, the GSEs securitize those loans and sell them to investors.
In this case, that means the Fed, which is driving interest rates down and ensuring that the mortgage market can continue functioning. That’s liquidity in a nutshell.
So, how is a company like UWM (or any other lender for that matter) able to offer an interest rate below 3%? It has to be sure it has a buyer for that loan and that that buyer has an investor willing to buy the bond that loan is included in.
Again, enter the Fed, which has taken action in the last two weeks indicating that it is now ready to buy mortgages with interest rates below 3%.
The Fed’s bond buying is conducted by the Federal Reserve Bank of New York, which publishes a schedule every week of its expected bond buying activities.
And last week, the New York Fed revealed that it would start buying 30-year mortgage bonds in the 2%-2.5% range. Previously, the Fed had not bought bonds below 2.5%. And the Fed plans to continue buying agency bonds in the 2% range this week.
And if lenders are assured that there will be a buyer for their sub-3% mortgages, one can make a pretty safe bet that they’ll start offering borrowers interest rates below 3%.
Those actions and other market indicators are leading several prominent market observers to suggest that 30-year mortgage rates could soon fall below 3%.
Fannie Mae’s recently released housing forecast suggests that interest rates could fall to 3% flat by the end of this year before falling to 2.9% early next year and staying that way throughout 2021.
Realtor.com is predicting that interest rates will fall below 3% this year, a sentiment shared by CoreLogic Chief Economist Frank Nothaft.
Back in March, just as the Fed was ramping up its bond buying, Nothaft told HousingWire that interest rates were set to plunge.
“It may not be tomorrow or next week, but I think longer term as we look to the spring, yes, I think we could see rates moving down to new lows and possibly below 3%,” Nothaft said in March. “It’s certainly possible.”
And with the Fed’s recent actions, UWM may not be on a mortgage rate island for long. What was once unthinkable could very soon become reality. And if that happens, the mortgage business could be in for a bigger year than it’s already expecting. Buckle up.