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The United States’ trade relationship with China has deteriorated, economists have upped their predictions of an impending recession and manufacturers, unsure of the future, have pulled back. The stock market has begun to wobble.
Yet one sector of the economy is surging in the face of uncertainty: the mortgage industry.
“It’s been a massive boom, wind-in-sails-type situation,” Todd Jones, president of Paramount Bank Direct, said of the number of mortgages his company was processing. Jennifer Hughes Hernandez, a loan officer at Legacy Mutual Mortgage, said she’d been working evenings and Saturdays to keep up with the number of refinance requests coming in.
“We’re just seeing it build and build and build,” said Chad Helmcamp, owner of BWC Lending.
That’s because when the economy is uncertain, investors see returns on debt as more reliable than returns on other investments, such as stocks. The dynamic makes investors more willing to buy mortgages, secured by real property, at a lower return than they would otherwise. That flight to security has caused the steepest annual drop in mortgage rates in more than
According to mortgage-finance company Freddie Mac, holders of up to $2 trillion worth of debt could benefit from refinancing when rates drop below 4 percent.
seven years.
In the first week of August, when the Dow Jones Industrial Average plunged 767 points, or 2.9 percent, the average rate for a 30-year fixed-rate mortgage fell to 3.6 percent, the lowest rate since 2016.
“And then our phones start to ring,” Helmcamp said. The average rate was 4.94 percent just eight months ago, meaning a homeowner who put 20 percent down on a median-priced $235,000 home in November could save $147 a month under the current conditions.
One of Helmcamp’s clients, Owen Murray, took advantage of the lower rates to switch from a 30-year loan with 4.6 percent interest to a 15-year loan with 3.125 interest. Murray said his monthly payments would stay roughly the same, but he and his wife would be able to pay off the loan five years sooner. “That’s a pretty big difference,” he said. “My wife and I, we’re going to end up saving something like $150,000 in interest over the life of the loan.”
And every time an economic tremor shakes investors and drives mortgage rates lower, the pool of people such as Murray for whom a refinance makes financial sense grows dramatically. According to mortgage-finance company Freddie Mac, holders of up to $2 trillion worth of debt could benefit from refinancing when rates dropped below 4 percent. If rates drop below 3.5 percent — which Sam Khater, chief economist at Freddie Mac, called “very possible” — that figure would rocket to $4 trillion.
Homeowners are taking note. On Aug. 14, when the Dow had its worst day in 2019, falling more than 500 points, the Mortgage Bankers Association announced mortgage applications — which include refinances — had increased 21.7 percent from the week before.
‘Hiring to accommodate’
The development is a drastic turnaround from the fall, when the Fed was showing its confidence in the economy by raising rates.
Lenders, believing mortgage rates were on an upward trajectory, were tightening their belts as refinancing activity dwindled. Loan broker employment has been on the decline for more than a year, according to federal statistics; there were 5 percent fewer brokers in June than there had been a year before. Vendors servicing the loan industry were also impacted, as Khater, who previously worked at the data analytics company CoreLogic, could attest. “(Lenders) had less business, so they had less budget to analyze their data,” he explained.
Now, the unexpected resurgence of refinancing activity has come at the peak of home-buying season.
“We’re hiring to accommodate,” said Jones of Paramount Bank Direct, ticking off positions that the company is recruiting. “Processors, underwriters, closers, post-closers.”
“That’s a dramatic shift in the market that was not expected,” said Tom Rhodes, the chief executive of Sente Mortgage. “You’ve got everything from Brexit, you have China, you have a mess in Argentina. And when that happens, everyone comes to the safety of the U.S., and rates fall.”
According to Freddie Mac’s most recent weekly survey, the average rate for a 30-year fixedrate mortgage is 3.55 percent, only 24 basis points above the market’s historical low in 2012. “We’re very close to the lowest rate ever,” Khater said. “That’s a big deal. That’s a very big deal.”
‘Incredibly volatile’
Economists say this wave of refinancings will not be as risky as the one that preceded the housing crash in 2008, largely because of stricter underwriting practices. After the crash, the Dodd-Frank Wall Street Reform and Consumer Protection Act (portions of which have been rolled back) required lenders to determine borrowers’ ability to repay loans.
Many consumer protections remain, and credit score standards have remained much higher than they were during the housing bubble, a sign of reduced risk. Arthur Jobe, a senior economist at CoreLogic, pointed out that the typical credit score homeowner receiving a cash-out refinance loan in 2018 was 726, up from 695 in 2007.
Because homeowners have to pay a fee to refinance, lenders use various rules of thumb for how much of a rate cut it takes for one to make financial sense. Hughes Hernandez, the loan officer at Legacy Mutual Mortgage, said refinancing might make sense if they reduced monthly payments enough to cover the refinancing fees within two years. Other lenders used the drop in mortgage rates as a rough guide, suggesting a refinance could be worth it if the new rate is 0.5 or 1 percentage point lower than what a homeowner is paying. Changes in credit or home value can also impact the terms of the refinance.
And for those in the market for a refinance, Rhodes recommended keeping the pulse of the economy and watching out for any global shocks such as escalations in the trade war with China. Freddie Mac releases only weekly averages of mortgage rates — and by the time rates have made headlines, they’ve already changed. People interested in how mortgage rates are changing can track 10-year Treasury Notes, which, like mortgages, are seen as a safe investment and have a yield that falls with economic uncertainty.
“It’s not like the Federal Reserve lowered rates and it’s fixed,” Rhodes said. “Right now, it’s incredibly volatile. You might find these pockets of opportunities that may last a few days.”