COVID-19 Current Concerns Impacting Mortgage Rates

 Nowadays, the biggest worldwide concern is the uncertain Coronavirus´ effect over economies. In the U.S., it has emerged the need to understand how the mortgage sector is going to work these days.

To initially understand the present circumstances in that area, it is essential to know some decisions made a few weeks ago. The Federal Reserve (Fed) declared an abrupt cut of half a percentage point due to the imminent alert raised by the Coronavirus. It’s the first time that the FED takes this type of actions since the financial crisis of 2008.

Jay Powell, leader of the Federal Reserve, explained that the measure is justified given that it was taken after officials knew that the COVID-19 was having a real effect on the economy. The President of the U.S., Donald Trump, is one of the main supporters of the move, arguing that other governments, like the Australian, have been competent in taking similar actions.

To catch hold of all these actions, recent decisions assumed from now on by the Fed imply dropping its reference point interest rate to zero and starting a brand-new cycle of financial relief. The first decision is to release $700 billion as part of an easing plan to shield the economy from the COVID-19 effects.

However, positions are divided; other voices are rising too. For example, Solita Marcelli, the commissioner Chief Investment Officer for the Americas at UBS Global Wealth Management, admits that “they need the support of fiscal measures. I don’t think that alone, on its own, the (rate cut) is going to be able to uplift the negative economic impact” (CBNC, March, 03. 2020). For his part, Chris Rupkey, the Head Financial Economist at MUFG Union Bank, censured the cut considering it rude and not correctly analyzed.

What will be the consequences for the mortgage sector?

With all these facts on the table, many questions appear as well as determinant consequences to the mortgage sector.

Data reveal that mortgage standards in the U.S. have shot down to the lowest record among the COVID-19 pandemic, which becomes an advantage for latent buyers and homeowners who could be interested in refinancing. Redfin, an influential Real State Agency, shows on their recent Survey, that 53.9% of potential clients have stimulated their house buying aims due to the decrease in rates. On the other hand, 20.2% of the probable sellers evaluated indicated that the current decline in prices motivates them to take into consideration refinancing and holding on to their houses instead of selling.

As it’s understandable, the influence of low mortgages varies among sellers. In this sense, a seller who has been examining the possibility of scaling down to reduce their residence budget could refinance to a cheaper monthly fee and manage to hold their actual house. Meanwhile, sellers who evaluated expanding to an upscale house are now capable of boosting their budgets with low contract rates.

Since analyzes are to the order of the day, Daryl Fairweather, the head economist of Redfin, declares that: “lower mortgage rates make homebuying more affordable, and that´s a certainty for buyers right now” (Redfin, March 01, 2020). Although, as soon as the outlook becomes more precise about the broad repercussions on trade and people´s income, it will be easier to prognosticate the future of homebuying intention. The likely estimation is that as higher the influence as minor the buying intention.

The Freddie Mac Primary Mortgage Market Survey, also offered information regarding this topic, declaring that the average contract of the interest rate for 30 and 15 years fixed-rate mortgages, declined significantly from last recent years, fluctuating from 4.3 average rates on 16th March 2017 to 3.36 on 12th March 2020 (FreddieMac March, 12, 2020).

What is the impact on mortgage refinance applications?

An obvious question faced in the sector as result of the lower mortgage rates could be: what is the impact over mortgage refinance applications?

The Mortgage Bankers Association, MBA, announced that Mortgage Refinance Applications incremented in 55.4% respect to one week before, the largest increase since April 2009, and was 479% superior to the corresponding week the preceding year (MBA March 11, 2020).

Joel Kan, MBA’s associated Vice President of Economic and Industry Forecasting supports the facts, assuring that “market uncertainty around Coronavirus, led to a considerable drop in the U.S. Treasury rates last week. Homeowners rushed in, with refinancing applications, jumping 79 percent- the largest weekly increase since November 2008” (MBA March 11, 2020).

According to these circumstances, the MBA bureau has decided to double its 2020 refinance start point projection to $1.2 trillion, which represents a 37 percent increment from the 2019 evaluation. Kan looked optimistic concerning these financial facts, suggesting that knowing the variability in applications and their ability to deal with the sector, mortgage rates, will presumably lead a balance but for now, are going to stay low.

Nevertheless, not all the lead a agree. While the refinance application request is increasing day after day, bankers have been dealing with the volume of requests in the last two weeks. The worst part is that they don’t expect the booming demand to drop quickly, due to the previous measure from the Federal Reserve of cutting rates that could prolong proximately, maintaining durable rates low at least for several months.

How will the mortgage sector manage all the new demand?

Mike Fratantoni, head economist at MBA, explained that lenders are looking for more workers, admitting that there is not a professional workforce perfectly well prepared on the streets, so, the action is to hire people that need preparation. The process is gradual, as homebuyers and people asking for refinancing are both facing time lag for loan processing and customer services from loan officers. Projections will get more complicated later on (MBA MArch 12, 2020).

As it’s completely impossible to predict the length of this situation and how it will impact the sector if it extends until the second half of the year, chances are that measures will have to be regularly revised and redefined to adapt to the panorama in real-time.