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The Mortgage Market crash of March 2020 and what it means to you!

    

What just happened!?

This has been a pretty awful last several days.  The mortgage markets have crashed... the secondary markets have been shaken.  In some cases, interest rates have gone up over a full percent in a matter of days.  What happened and what does this mean for you? 
 
I want to talk about 3 things.  Lender Capacity, Lender Liquidity and the Danger that remains.  I will also issue a warning and advice based on my personal experience going through some very similar times, i.e. the financial crisis of 2007-08.
 

marketsCapacity

March 2, 2020.  It all started with lenders getting too busy.  Rates dropped so fast, there were estimations that over 90% of all mortgage holders qualified for a refinance.  Lenders went over-capacity in a matter of days and then it was chaos.  Lenders (and their loan officers) could not keep up with all the refinance requests.  They just didn't have the manpower, or capacity, to handle the business.  Then it became a liquidity issue.  Those same lenders realized quickly that they would not be able to fund all these refinance applications, so they had to increase rates or stop taking refinance applications all together.  Extreme measures were put in place immediately.  Then things got worse.
(Caption courtesy MBShighway.com)
 

Liquidity

The REALLY great rates lasted about 4 days. Then lenders started realizing there was a bigger problem.  There funding was being cut off.  Just imagine that you made a huge purchase on your American Express card for something you really needed, then AMEX calls you a week after the purchase saying they wouldn't actually pay the supplier for your item and that your card was frozen.  The supplier then comes after you to pay cash for the item.   In very simplistic terms, this is a glimpse of what is happening to many lenders across the country.  Funding sources have either been suspended or massively repriced.  The issue at the investor end of things is the LIQUIDITY and VOLATILITY of the secondary mortgage markets.  It's simple supply and demand.  If there is waning demand for MBSs (mortgage backed securities) and the Fed isn't stepping in, then how are loans ultimately funded?  The answer is, some won't be.
 

Warning

I posted on Facebook urging people to take action while they still could.  I blogged on March 9, to get in while you still can.  Amazingly, I still am getting messages from those I locked in before rates went up saying they wanted to wait as they heard rates were getting better.  Sorry, I digress... that's not my warning.
 
Here is my warning.  I fear that some lenders will not be able fund loans, even though their borrowers are locked in.  Unless there is DRAMATIC interference by the Federal Reserve, this will start happening within the next 30 days.  Remember my AMEX analogy? 
 
This happened in 2007.  Once upon a time, there was a company called American Home Mortgage.  You can read all about their story here.  What was amazing is that it was the 10th largest retail mortgage lender in the country.  On July 31, 2007, the company announced that it can no longer fund home loans.  Wait... what?!  Correct, they just STOPPED funding loans.  Home buyers were sitting at closing and being told, "sorry there is no money here to complete your transaction".  Literally thousands of home buyers (and refinances) were STRANDED at the closing table or abandoned after locking in due to no LIQUIDITY.  
 

Advice

My first advice is don't panic.  Our financial system will not collapse and there will exist lenders that have managed this chaos very well.  I'm proud to say that my company, Caliber Home Loans, has done an amazing job.  Many other companies have done a great job as well, so don't lose heart.

My second piece of advice is to find a well capitalized lender, and loan officer, that you can trust.  Get your rate locked in and let it be.  Shopping rates will hurt you and our industry. I don't care what Lending Tree says... having lenders beat each other up competing with each other is not good for the consumer.

Final Thoughts

I'll leave you with an excerpt of my Facebook post. 

"Allow me to paint an analogy of trying to get a mortgage and lock in an interest rate in this market.  Trying to refinance (or get a loan) right now is like running to jump on a moving train as it's leaving the station. The decided ones are able to grab on to the back of the train as it speeds up.  It wasn't exactly what they envisioned, but they got on the train.  Some aren't moving fast enough and when they saw the train was going faster and faster they couldn't catch it.  Some decided to wait for the next train, but it never came.  Some that were on the train, got off at the wrong exit.

My dear client or friend, getting a super-low mortgage has left the station. The train is still moving slow enough to get on board for a good rate.  (Especially if you are purchasing a home) Please act now.  One other thing, do not think that this COVID-19 pandemic will thrust rates further down.  The BOOM in super-low rates lasted exactly 4 days.  It's over.  The train has left the station."

Have questions, comments or need mortgage advice?  Visit us at www.loanwithrick.com.

 

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