Special Report: Coronavirus and Mortgage Rates
The COVID-19 pandemic has brought sweeping changes to the world, including significant disruptions in financial markets. In response, President Trump declared the pandemic a national emergency, implementing plans to increase testing and restrict travel to Europe. Across the U.S., schools, restaurants, bars, sporting events, and other nonessential businesses have temporarily shut down, leaving Americans navigating isolation and social distancing.
The economic fallout has been stark, with stock markets experiencing historic declines. Amid this turmoil, the Federal Reserve announced it would slash interest rates to near zero, creating a potential opportunity for homebuyers and those looking to refinance. Initially, mortgage rates dipped to record lows, but they have since seen their largest spike since January 2020.
This volatility has left many wondering about the relationship between the coronavirus and mortgage rates and why mortgage rates don’t fall as dramatically as treasury yields.
Why Mortgage Rates Don't Mirror Treasury Yields
There are two key reasons mortgage rates behave differently from treasury yields: repayment risk and supply and demand.
Repayment Risk
Mortgage-backed securities (MBS) carry repayment risks that treasuries do not. Mortgage rates must adjust more cautiously to account for these risks.
During declining interest rate periods, MBS lose value as more homeowners refinance, effectively removing their loans from MBS pools.
Conversely, during growth periods, MBS regain value as refinancing activity slows and more new loans are originated.
This repayment risk means that while treasury yields may fall sharply, mortgage rates adjust at a slower pace to mitigate the impact on lenders and investors.
Supply and Demand
The mortgage market’s ability to process loans is another critical factor. Even the largest lenders can handle only a finite number of loan applications.
Mortgage rates are set to balance supply and demand. Currently, demand for loans far exceeds the industry’s capacity to process them.
Lowering rates further would only increase demand beyond manageable levels, creating bottlenecks in the system.
It’s also important to note that the short-term interest rates set by the Federal Reserve don’t directly dictate mortgage rates, which are influenced by long-term factors. This lag explains why mortgage rates may not immediately reflect significant changes in the Fed’s policies.
Navigating Mortgage Rates During COVID-19
The connection between the coronavirus and mortgage rates underscores the complexity of the housing market during a global crisis. For prospective buyers and refinancers, understanding these dynamics is essential to making informed decisions.
For personalized guidance on mortgage rates or to explore your options, connect with one of the experienced title and escrow specialists at Plymouth Title Guaranty Corporation.
