Mortgage rates tumble as lenders face increasing difficulties

As mortgage rates continued their slide last week, lenders faced new challenges while trying to keep up with refinancing demand and cope with costly margin calls as a result of the Federal Reserve’s increased buying of mortgage-backed securities.

According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average sank to 3.33 percent with an average 0.7 point. (Points are fees paid to a lender equal to 1 percent of the loan amount and are in addition to the interest rate.) It was 3.5 percent the week before and 4.08 percent a year ago. In the past month, the 30-year fixed rate has fallen to a record-low 3.29 percent, rebounded to 3.65 percent two weeks later and now gone back down.

The federally chartered mortgage investor aggregates rates from 125 lenders across the country to come up with national average mortgage rates. It uses rates for borrowers with flawless credit scores. It is important to note the rates quoted are not available to every borrower.

The 15-year fixed-rate average dropped to 2.82 percent with an average 0.6 point. It was 2.92 percent the week before and 3.56 percent a year ago. The five-year adjustable rate average rose to 3.40 percent with an average 0.3 point. It was 3.34 percent a week ago and 3.66 percent a year ago.

Mortgage rates continued “a torrid stretch of wild swings that has gone on for the better part of the past three weeks,” said Matthew Speakman, a Zillow economist. “Aggressive interventions by the Federal Reserve initially helped address some volatility in rates brought upon by underlying strains in the secondary markets for mortgages. And actions taken by other government agencies offered support to many borrowers who were at risk of missing monthly payments because of [coronavirus] impacts. But these well-intentioned measures may have produced new challenges for mortgage lenders and servicers, who now face the prospect of short-term cash shortages due to missed payments and disruption to usually reliable risk hedges.”

Uncertainty surrounding the coronavirus outbreak has bred volatility in mortgage rates. The usual indicators of where rates are headed — namely the yield on the 10-year Treasury — are no longer reliable predictors. Instead, what is having a greater effect on mortgage rates is the capacity of lenders to handle the huge volume of refinances brought on by lower rates and the increasing amount of mortgage-backed securities the Federal Reserve is buying.

A mortgage-backed security, or MBS as it is often known, is a bundle of mortgages that is traded on a secondary market. It’s a lot like a Treasury. A mortgage rate is largely based on MBS prices. The higher the price, the lower the rate. The MBS market usually is one of the most liquid, meaning its assets can be bought and sold without causing significant price changes. However, until the Fed stepped in, a lack of buyers had caused the market to seize up.

While the Fed’s action solved an immediate problem, a new one has popped up. The erratic price changes have caused margin calls on mortgage lenders to reach record levels. The margin calls are depleting the lenders’ working capital and jeopardizing their business.

“Lenders are dealing with multiple issues at this point,” wrote Michael Becker, branch manager at Sierra Pacific Mortgage in Lutherville, Md. “Capacity to handle the volume of loan applications; liquidity constraints brought about by margin calls largely as a result of the Fed buying mortgage-backed securities; and, most importantly, uncertainty in regards to the potential forbearance of mortgage payments and the damage that is doing to the value of mortgage servicing rights. In this environment, it’s hard to predict the direction of mortgage rates as there are wild swings day to day and from lender to lender.”

Bankrate.com, which puts out a weekly mortgage rate trend index, found that more than three-quarters of the experts it surveyed predict rates will go down in the coming week.

“The news is expected to get worse, both economically and otherwise, keeping bond yields and mortgage rates low,” said Greg McBride, chief financial analyst at Bankrate.com. “The functioning of credit markets will also be key to rates remaining low.”