July 6, 2020
For reasons that escape me, people think others have secret insight on predicting rates. The recent question from those in the industry is whether rates will go any lower from their currently low perch. If anyone truly knew where rates were headed, they’d be enjoying the amenities of their private island as they counted out money rather than answering emails about it. But it is important for Orion’s brokers to know the current consensus, and what is moving them. Spoiler alert: most so not see mortgage rates being able to go much lower, primarily due to the cost of originating mortgages and the rate of return from the rates paid on the mortgages.
There are a lot of players that want to “wet their beak” in the space. When borrowers make monthly principal and interest payments to servicers responsible for collecting those payments, the servicer takes a fee. In the case of conventional loans sold to Fannie or Freddie, currently the lion’s share of the market, Fannie or Freddie also receive their cut. That means for a 30-year fixed rate around 3 percent, the ultimate investor is only getting a return of 2.5 percent or so.
The better question to ask is how much demand there will be for 30-year investments with returns of 2.5 or lower. After the mortgage servicing industry almost went belly up a couple months ago due to having to forward payments in forbearance, they increased their desired return to account for increased cash flow risk. That puts upward pressure on rates. This does not take into account many other variables such as purchasing the MBS at a premium or discount, but does show how investor return on investment is greatly impacted by payment collections.
Millions of homeowners across the nation are currently in forbearance, currently nearing 10 percent of outstanding mortgages, which has pulled billions of dollars per month out of cash-flow through the servicing industry, and to investors. The next step is for homeowners to be faced with a settlement statement from their servicers for a lump-sum amount that will be due when the forbearance period is over. Most servicers will then proceed to contact borrowers to work out payment modifications that will pay down/off the outstanding balance that will be in addition to their contracted payment. Other servicers may, can, will, file notices of default and begin the process of foreclosing. All of this increases the expense of handling mortgages.
Coming out of forbearance means homeowners will either have a higher mortgage payment for the next year or two, or sell their home to pay off the mortgage and back amounts due. Either way, there are costs to servicers that are more expensive than normal mortgage payment collections at a time when their receipts are down. The kicker is that many of the mortgages being paid off in the current refinance cycle were made less than a year ago, many by our brokers. It generally takes about one year for a loan servicer to recoup the acquisition costs, meaning that servicing companies are losing money on millions of loans.
These pressures have resulted in a “push-pull” on mortgage rates. Orion’s brokers know that we need a functioning industry with smooth flow between investors, agencies, lenders, brokers, and borrowers of funds borrowed, funds loaned, payments made and payments collected. There is very little left that the Federal Reserve, or the Federal government, can do to further reduce rates in the retail sector. MBS investors are looking at extremely low returns currently and are unlikely to accept lower returns. Finally, rates are dependent on the economy and overall economic activity, largely based on consumer spending. As we head into July, and parts of the country closing back up, economic activity is questionable. If that continues, there will be little reason for mortgage rates to do much of anything for the foreseeable future.