Can Mortgage Rates Go Any Lower?

Well, here we are on "hump day" and mortgage rates are still detached from the price fluctuations of the secondary mortgage market. Instead, the ups and downs of consumer borrowing costs continue to be driven primarily by the capacity constraints of major lenders,  the market makers for mortgage rates.

One misconception is record low mortgage rates have drawn out a hoard of "fence sitting" borrowers who are bustling with excitement to refinance.  Yes, media coverage of record low mortgage rates has attracted attention from some homeowners, but the crowds just don't compare to the mini-frenzy we witnessed in early 2009. This tells us the capacity constraints of major lenders are not totally due to an increase in loan applications.

With the larger lenders allocating newly hired labor to loan modification & loss mitigation departments, lending operations staff have been left to "fend for themselves". Support staff are expected to be multi-tasking, multi-talented, highly productive members of the team. Mistakes can be costly and often times even "kill" a deal.  Anxiety is high. Stressing the situation further are recently implemented "quality control" standards. These risk management practices slow the origination process because they mandate an acute attention to detail. Plain and Simple: all i's must be dotted and all t's must be crossed. The entire origination process has slowed down a step or two. Consumers, this is why your loan officer may have recommended a 45 day lock period, they have learned to expect the unexpected.

I've been thinking a lot lately about the question: Can Mortgage Rates Go Any Lower???

I've approached the question from several angles. The "double-dip" great recession option is still on the table. That means we can't rule out the idea that benchmark Treasury yields might return to record lows and take mortgage rates along for the ride. That theory doesn't hold much water in my opinion though, this is largely due to technical considerations surrounding the securitization of mortgages. But there's a wild card we haven't talked about in while: If the economy does "double-dip", the Federal Reserve has made it clear they will "act accordingly" to prevent the spread of contagion. With the Fed essentially out of conventional policy bullets,  the door is open for more quantitative easing, aka more MBS purchases.

If that scenario played out, the "best execution" 30 year fixed mortgage rate could move as low as 3.875%. The one hang up I have with this outlook is the fact that we already experienced an environment like this and mortgage rates failed to move lower than current levels. Remember last year when the Fed was buying MBS and benchmark Treasury yields were at record lows?

One reason why this time might be different:  the competitive lending environment. A loan pricing war amongst the major lenders...

Let's say mortgage rates don't decline further and refinance demand eventually exhausts itself. If this were to happen and purchase activity didn't pick up enough to offset the production slowdown, lenders would be looking for ways to stimulate activity and the Fed would be looking for ways to redistribute wealth around the economy. A new wave of refinances would occur if mortgage rates fell to 4.00%. Two birds, one stone?

This seems like a logical option, unfortunately there is a major mismatch between the credit/collateral demanded by lenders and the credit/collateral supplied by borrowers. So unless we find a way to reduce the risks of origination, many borrowers will remain locked out of the refinance market, even if rates fall to 4.00%. 

With that in mind, we have to start thinking about the idea of another attempt at HARP & DU REFI PLUS. Perhaps we might see the Fed launch some variation of a privately-funded, streamline refinance program that includes a de minimis government guarantee on the loan paper?  Either way the government will still be involved in some capacity. One of the biggest reason mortgage rates have been so resilient lately is their implicit/explicit government guarantee. Mortgage-backed securities have benefited from their own "flight to safety", especially from overseas investors.

That's where we go full circle on my "rates going lower" theory. I suppose the first step of this scenario coming true is the "double-dip". Some folks say the deflationary spiral has already taken hold, others say we're dealing with a crisis of confidence and the underlying economy is actually building momentum. Working in the housing market I am exposed to excess amounts of negativity, but I also see evidence of a bottom. Either way, I know the Federal Reserve is standing "at the ready" if conditions take a turn for the worse.

The best 30 year fixed mortgage rates remain in the 4.375% to 4.625% range. The "best execution" rate for a well-qualified borrower is still 4.50%, for both conventional and FHA/VA. No borrower should be quoted a rate over 5.25%