Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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Time will tell how coronavirus impacts the housing market – Here are 2 areas to monitor in the meantime

As always, look to purchase application data

Recently, I find myself reminiscing about the times of B.C. 

Not the era “Before Christ” of the Gregorian calendar, but those glorious days “Before Coronavirus,” when March Madness Basketball was around the corner, the weekly jobless claims were solid and purchase application data just showed its seventh-straight week of double-digit growth year over year at cycle highs in demand!  

Logan Mohtashami
Logan Mohtashami,

Do you even remember what you were complaining about in the days of B.C.? 

Yes, we had some real problems in our society that needed our concentrated attention – and guess what? Those issues still exist. But no one is thinking about them now because we are all too busy hoarding toilet paper and hand sanitizer. 

Alas, the era A.D. (After Disease) is upon us, and to say the economic landscape has been chaotic is an understatement. This has been especially true of the mortgage market. 

On Monday, March 9, the 10-year Treasury bond yield hit a record low rate of 0.32%, went up 22 basis points by the end of the day, then went up another 28 basis points by the close on Wednesday. Following suit, mortgage rates jumped 0.5%-1%. 

This meant that a well-qualified buyer who was quoted a rate of 3% on Monday would be quoted a rate of 4% on Friday if they didn’t lock. I’ve heard from agents that some of their buyers are canceling escrow because they believe home prices may crash and some sellers are canceling their listings because they don’t want potentially infected people in their homes for an open house. 

This is all anecdotal, but it speaks to the chaotic atmosphere that we are currently in.

How COVID-19 is impacting housing professionals

What is not anecdotal is the near-meltdown of the entire mortgage market last week, due to the huge, albeit brief, dip in rates to historic lows. The fall in rates leads to a massive influx of borrowers able to refinance. This created two problems for the loan industry. 

First, this influx tested the capacity of the system to handle so many refinance requests.

After the initial fall in rates, we saw mortgage rates spike even though the 10-year yield remained well under 1%. In an attempt to titrate the number of loans coming into the system for refinancing, lenders increased the delta between mortgage rates and the 10-year yield — and this is why rates went up sharply, so quickly. 

The issue of capacity was the tip of the iceberg, however.  

Lenders needed to make this rapid adjustment in rates, not only to cure their capacity problem but to stem the flash flood of early pay-offs (EPOs). Some number of early-payoffs are expected and baked into the business model as a source of risk. But the velocity and magnitude of the change in rates meant the majority of loans in 2019 and 2020 could be at risk of an early payoff before the system could make adjustments to prevent this from happening. 

Earlier than expected payoffs are a problem for the industry because investors of mortgage securities expect a certain number of months or years of interest to be paid on the loan in order to recover the cost of the investment and generate a profit. 

Because prepayment penalties are no longer allowed, borrowers can refinance their loan as early and often as it makes financial sense for them.  

Needless to say, the system isn’t designed for such a rapid decline in rates. Should someone – or many someones – have anticipated the possibility that if yields fell to below 1%, this could lead to a flood of early pay-offs and a collapse of the value of mortgage securities?  Should a circuit breaker be in place to prevent this from happening? Or was the extreme nature of this virus just a one-off event that created the meltdown last week.

The Federal Reserve did another emergency rate cut down to zero and promised 700 billion to buy bonds and MBS, partly because they were horrified with the bond market and mortgage rate reaction last week. 

How COVID-19 will impact housing

Moving forward, there are two things I am going to keep an eye on to gauge how much this crisis will affect the housing market for the year:

1. Purchase contracts falling through

I will be watching for cancelations of purchase contracts for both new and existing homes. We can expect this to happen in the next 30 days if mortgage pricing does not improve. Not to mention that we are at the stage now that more and more of our traditional normal events are being closed. 

As of this week, we are going to major social distancing phase in which life in America is going to be very different for us. This was a concern I had just a few weeks ago regarding the housing market vs. COVID-19.

Having said that, when purchase application data adjusting to population hit an all-time low in 2014, we still have over 5,400,000 total home sales and new and existing homes. When rates were as high as 4.75%-5% we didn’t see a collapse in homes sales.

In fact, existing home sales only lost 170,000 in sales year over year. Today, we are in a much better place than in 2014 in terms of demographic demand and more people working. Rates, even at 4%, are still relatively low and purchase application data is at cycle highs with seven straight weeks of double-digit growth. 

However, if people are in fear, you have no idea how the public will act like. None of us foresaw that the hoarding of toilet paper was going to be a story in 2020. Even with low rates, we simply don’t know the scale of what home buyers or sellers will think with this historic horrific event in the short term.

 As always, I advise on keeping an eye on the weekly purchase application data, as seen below. 


2. Possible construction changes

The second thing I will be keeping an eye on is builder behavior. 

Will builders halt production on new homes to protect their workers or other reasons? Housing permits (as seen below) have been on fire since the early part of 2019, so this would be a drastic move. However, it is not unimaginable considering the climate. If March Madness can be shut down anything can happen.


For the economy in general, the first quarter of 2020’s GDP doesn’t have the full impact of the virus. The second quarter will capture the beginnings of the full effect of the virus,  which will show a dramatic shock to the economy. 

By the third quarter, I anticipate the numbers to improve, only from a low base indicating that the worst of it is over. I am a firm believer in my September 1, 2020 timeline. By that date, the headlines of the virus news will be much better and we will have started the process of getting back to “B.C.”

This means the fourth quarter should be working from a more stable situation. 

For the next three and a half months, however, we will be declaring war on this virus. All of us will come together as a nation to defeat it. We will do this by getting more tests done, social distancing and helping each other to stay healthy. 

Stay positive and stay healthy, my friends.

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