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Logan Mohtashami on jobs data and the bond market

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Mortgage

How record-low mortgage rates changed everything in 2020

Year ends with the lowest mortgage rates ever at 2.66%. Here's a look at how we got there

While the United States may not have been prepared to combat a deadly virus, a quick and robust response from the Federal Reserve, along with changing consumer preferences, created a perfect storm that resulted in a record year for the housing and mortgage industries. Mortgage rates would fall to record lows 16 times throughout 2020, with origination volume expected to eclipse $4 trillion.

When the pandemic started, no one in the housing industry had projected the best year on record. Quite the opposite.

Here’s a detailed month-by-month analysis of what caused mortgage rates to fall so dramatically, and how it affected virtually every sector within the housing market.

January

Investors began to show an increased concern about the economic impact from China’s coronavirus outbreak, driving rates to a three-year low of 3.51%, according to Freddie Mac’s Primary Mortgage Market Survey (PMMS).

With borrowers hopping on these low rates, economists began to see a glimmer of heightened refinance activity after a low turn-out for refi’s in December predicted a possible end to the refi boom.

But consumers were still interested in that new home smell. Sales of new homes spiked 18.6% year-over-year as borrowers locked in low rates on new lots – combined with a five-month supply of homes, housing expected a strong spring season.

February

Heightened uncertainty about the virus sent money flowing back in to the U.S bond market. Increased competition for mortgage-backed securities resulted in lower yields, and ultimately, lower rates for borrowers. In fact, the yield on the benchmark 10-year U.S. Treasury note fell to a record low this month.

Though rates fluctuated in a 5-basis-point range throughout the month, by the end of February, they settled to another three-year-low at 3.45%.

But economists still weren’t convinced that those record lows could get much lower. Analysts at Capital Economics expected stretched lender capacity and increased caution would widen the spread in yield, however, not fully translate in to lower rates.

March

America braces itself, as do lenders. Prior to the national emergency issued on March 13 and the 1.8 million people placed in temporary layoff, the month began with rates hitting Freddie Mac’s 50-year survey low of 3.29%. Spoiler – this will not be the last time rates break their own record.

Crucially, on March 23 Federal Reserve Chairman Jerome Powell announced the central bank would make “unlimited” MBS purchases, pushing the average 30-year fixed mortgage back down to 3.5% by the end of the month following an up-and-down several weeks.

“As these purchases roll forward, you will see the Treasury market and the MBS market returning to normal market function, and that will actually support economic activity,” Powell told reporters on a March 15 call.

Still, that didn’t stop most lenders from limiting new originations and hoarding cash. Layoffs within the industry followed, some companies shut down, and the iBuyers pressed pause. All the while, servicers waited for the nightmare scenario to play out.

April

Another month of zig-zagging and another all-time record low, rates in April finish at 3.23%.

But a catch-22 had formed: though record-low rates were available, millions of potential borrowers couldn’t tap in to them. Spiking unemployment numbers made borrowing riskier, and the tightening of standards by lenders big and small left many consumers on the outside looking in.

May

Surprise – it’s another record low! Rates fall to 3.15% and help purchase demand rebound from a 35-year-over-year decline in mid-April to an 8% increase by the end of May.

Low rates also continued to feed the refinance frenzy for many segments of borrowers while buyers created for a very early summer homebuying season.

Record low rates also begin their gradual squeeze on home prices.

June

Despite a tumultuous period for the economy, housing had proved itself steady.

Keeping the ball rolling, the Federal Reserve continued to support the mortgage markets by purchasing about $4.5 billion a day of securities containing home loans packaged by Fannie Mae, Freddie Mac and Ginnie Mae.

Concerns over a housing meltdown had mostly allayed, and lenders were making a killing on vanilla 30-year purchase loans and refinancings. Mortgage rates bottom out once again to 3.13% and hold firm during the last two weeks of June thanks to declining inflation pressures and heightened homebuying attitudes.

While the jump in refis was expected after the Federal Reserve‘s bond-buying shrank yields on mortgage-backed securities, the spike in demand for purchase loans was a surprise, said Mortgage Bankers Association Chief Economist Mike Fratantoni.

Lenders and servicers begin beefing up their employment to cater to all the borrowers vying for a piece of the low-rate pie. Tens of thousands of workers were hired to handle unprecedented capacity issues. Though some of the big companies hired inexperienced staffers by the busload, experienced underwriters were commanding salaries well over $100,000, often with five-figure bonsues.

Taking advantage of the low interest rates, some lenders began offering products at never-before-seen levels. United Wholesale Mortgage caught headlines by offering rates as low as 2.25% for VA loans (though, to be fair, ultra-low-rate products aren’t always what they seem).

July

For the first time in survey history, rates fall below 3% – breaking their own record three times this month to an all-time low of 2.98%.

Record lows in mortgage rates incentivized more households to refinance – a move many economists said helped put more money in their pockets for consumer spending while the country fought unstable unemployment rates.

By this point, Powell said the Fed isn’t even remotely thinking about raising rates.

“We’re stepping in to provide credit at a time when the market has stopped functioning,” Powell said.

July also reported that thanks to low rates, the second quarter of 2020 experienced a 12-year high in homeownership.

Some lenders, unable to keep up with capacity, began throttling their pipelines.

August

After hitting a record low for the eight time at the beginning of August to 2.91%, rates managed to remain low, still hovering below 3% for the entirety of the month.

However, inventory is struggling to keep up with demand (lenders are too; some lenders can’t close loans in under two months).

Bidding wars are putting upwards pressure on home prices and some lenders are even dangling a 1.99% carrot for the 30-year conventional rate in borrowers faces.

The environment also convinced a slew of mortgage lenders to go public, much to the delight of their investors, who are typically private equity firms. Rocket Companies was the first, but Guild, Caliber, LoanDepot, UWM, Finance of America, Better.com, SoFi, AmeriHome all make plans to IPO. By the end of 2020, only Guild and Rocket actually entered the public markets.

Meanwhile, refinancings rose to 65.7% of total applications by the middle of the month. With so much refi activity, the GSE’s decide to take their share and impose a 50 bps fee on refinance mortgages that they buy. And lenders and LOs totally took it in stride! Kidding! People freaked out!

September

Spring buying, turns in to summer buying, turns in to fall buying season. Rates break their own record 10 days in to September at 2.93%. But demand is still hurting homebuyers’ chances.

While rates are causing borrowers disdain in some of the more competitive regions, lenders are reaping the benefits. Rocket Companies revealed this month a $3.5 billion profit in the second quarter of the year and even forecasted between $82 billion and $85 billion in loan originations for the third quarter.

Plans for low rates to last also revealed themselves after 13 members of the Federal Reserve’s Federal Open Market Committee said they expect to keep the central bank’s benchmark rate near zero through 2023.

October

Record-low rates become the new normal as rates plummet to 2.8% by the end of the month. At this point in time, mortgage rates are on average more than a full percentage point lower than rates over the last five years.

While one end of the market continued to flourish from demand, a surprising 34% of home sellers said they were staying out of the market due to COVID-19’s uncertainty in a Zillow survey, and approximately 3 million homeowners were in forbearance plans.

November

Weaker consumer spending data, which accounts for the majority of economic growth, drove mortgage rates to their 13th record low at 2.72%.

Fannie Mae’s Home Purchase Sentiment Index, a composite index designed to track the housing market and consumers’ desire to sell or buy a home, also revealed that consumers and the industry alike are confident that a low rate environment will hold.

Historically, presidential elections can play with the market as investors ponder the direction of the economy. However, observers from across the housing and mortgage space said interest rates will continue to hover near historic lows for the next several years, regardless of who occupies the White House.

December

A vaccine has been deployed but the trajectory of the economy is still up in the air. Rates break their own record a whopping three times this month to eventually settle at 2.66% as of the 24th.

According to Sam Khater, chief economist of Freddie Mac, the housing market is poised to finish the year strong as low mortgage rates continue to fuel homebuyer demand and refinance activity.

Throughout the month, mortgage rates managed to retain their record low numbers despite higher Treasury yields – resisting a typical correlation.

A mid-month statement from the Federal Open Market Committee revealed that the Federal Reserve plans to keep interest rates low until labor market conditions and inflation meet the committee’s standards. Chairman Powell said to get inflation back to 2% though is going to “take some time.”

***

Thursday marks the final rates report for 2020 and HousingWire is chock full of predictions from economists and housing aficionados for what rates will do in 2021. Check those out below, and happy new year!

  • Following the release of the Fed’s intention to keep short-term rates at zero for the foreseeable future, Fratantoni said the MBA fully expects the Fed to maintain low interest rates at the zero level bound for years to come.
  • Frank Nothaft, chief economist at CoreLogic, expects initial rates on ARMs will remain low, and 30-year fixed-rate loans are likely to remain below 3% during early 2021 and average about 3.1% during the next two years.
  • Mark Fleming, chief economist for First American Financial Corporation noted in 2021, consensus forecasts estimate the 30-year, fixed mortgage rate will likely be 3% – with forecasts ranging from 2.8% to 3.3%, boosting home-buying power and keeping purchase demand robust.
  • HousingWire analyst Logan Mohtashami, predicts mortgage rates should rise over the year as the economy achieves better footing. 

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