Sudden Run-Up in Mortgage Rates Jolts Home Market
A sudden major leap in mortgage rates--a direct result of the tumult in global financial markets--is jolting lenders and upsetting the plans of many consumers across the country who were on the verge of buying homes or refinancing their real estate loans.
The rise over the last few days, lifting mortgage rates in some cases by well over half a percentage point, could kill many pending deals and, in other cases, force consumers to pay more than they anticipated.
Some mortgage experts called the interest rate move the sharpest since the October 1987 stock market crash, while other industry veterans said it was the most abrupt jump they had ever seen. It left analysts divided over whether interest rates, which remain at historically low levels, would settle back down next week or resume their climb.
One of the optimists, David Motley, executive vice president of Colonial Savings, a Fort Worth-based lender, said he thinks the jump that began Wednesday “is a temporary blip.”
“But in the meantime,” he added, “it’s playing havoc with our rates.”
Colonial Savings, which services loans across the country, saw its rate for a 30-year, fixed-rate mortgage with a fee of one “point”--1% of the loan amount--leap to 7% Friday from 6.375% on Tuesday.
Earl Peattie, president of Mortgage News Co. of Morro Bay, which tracks home loan rates in Southern California, said that during volatile periods banks normally will contact him two or three times a day to provide revised numbers. But Peattie said that when he polled lenders Thursday for this week’s survey, some of the banks peppered him with four or five updates. “It was the first time we’ve ever had that situation,” said Peattie, who has followed the industry for 12 years.
The sudden jump swiftly erased mortgage rate declines that occurred over the last two months. If rates fail to reverse course next week, the effect is certain to be widespread.
Already homeowners in the midst of refinancings are feeling the pinch. For example, Robyn Thornburgh of Irvine was counting on saving $200 a month by refinancing the $307,000 mortgage on her five-bedroom home. Her interest rate currently is 7.75%, but she was hoping to reduce it to 7% with a refinancing. At least, that is, until rates shot up.
“Really, all I can do at this point is sit tight and hope that rates come back down. I’m a single mom, I’ve got two kids and a full-time job, and this kind of sets me back a little bit.”
For now, Thornburgh said, she is hoping that Federal Reserve Board Chairman Alan Greenspan “makes some kind of comment, and that rates come down again.”
The leap in mortgage rates is one of the most dramatic ways that the turmoil in international financial markets has crossed over into the “real” economy.
Stock, bond and currency prices worldwide have been whipsawed in recent days, largely by the unwinding of risky cross-border bets by hedge funds, which are unregulated international investment pools.
The 10-year Treasury note, which tends to track mortgages very closely, had one of the worst weeks in memory as its price collapsed. Its yield shot up from 4.16% to 4.80% this week. Normally moves like that unfold over months, rather than days.
The volatility has fed a climate of fear among investors, which has caused them to shrink back from all kinds of investments, including--significantly for consumers--mortgage-backed securities.
Unlike in the past when mortgage rates were set locally by small-town lenders like the one portrayed by Jimmy Stewart in the movie “It’s a Wonderful Life,” today they are set on Wall Street, where traders bid on mortgage-backed securities. Those are investment vehicles created by “bundling” groups of individual mortgages into parcels that can be bought and sold like stocks.
As fearful investors have retreated from mortgage-backed securities, their prices have tumbled and their yields, which move in the opposite direction, have risen sharply.
That, in turn, pushes up the rates for consumers.
Economists agree that, with the U.S. economy weakening, most of Asia already in recession and the Federal Reserve Board apparently contemplating a further cut in the short-term interest rate it controls, it is unlikely that mortgage rates will rise much further.
Rates Had Dropped Amazingly Far
“I don’t see it continuing. It’s mind-boggling,” said David Lereah, chief economist of the Mortgage Bankers Assn. in Washington.
On the other hand, rates had fallen amazingly far.
Until the middle of this week, mortgages “had moved down to rates we haven’t seen since the late 1960s,” said Peattie, of Mortgage News. “We lost some ground, but we’re still at 20-year lows.”
In Southern California, average rates among a sampling of lenders bobbed up from 6.565% Thursday to 6.758% Friday on one closely watched gauge of mortgages, according to Peattie. That category consists of mortgages of up to $227,150, in which consumers pay fees, or points, of about 2% of the loan.
Those rates were up from the 6.153% level in a Mortgage News survey taken Oct. 1.
Mortgage lenders and brokers said they were stunned by this week’s run-up.
Earl Brown, owner of the Dynamic Access mortgage brokerage in Laguna Hills, expressed concerns that many of his pending loans would unravel.
“We had more than 30 loans out there ready to be locked up, but then rates went up without any warning. It was a total surprise. Like everyone else, we thought they would go lower,” he said.
Such a quick rise in mortgage rates, Brown said, “is unexplainable. It’s never happened before. I’ve been searching for two days for answers.”
While some mortgage brokers started the unpleasant task of calling customers to alert them that they faced higher mortgage rates than they previously were quoted, others held off, hoping the market would back down.
“I’m not going to alarm anybody until I have a better feel over the next few days or so as to what’s going to happen,” said Ed Rosenblum, a partner in Flagship Mortgage in the east San Fernando Valley.
Rosenblum said some lenders appear to be temporarily pulling out of the mortgage market, “waiting to see what happens when the dust clears.”
As for those lenders continuing to report their available mortgage rates, wide disparities emerged during the market turmoil.
Rosenblum said that among the lenders he normally works with, rates rarely vary by more than one-eighth of a percentage point. As of Friday, though, he was seeing gaps of one-half of a percentage point.
Most of the rise in interest rates came Wednesday and Thursday, but smaller, continuing increases were reported Friday too.
For Some, It Was Perfect Timing
Not all consumers were upset by this week’s leap in rates. Some were congratulating themselves on their lucky timing.
Christine Angelli, a software engineer buying a house in Santa Monica, locked in her $300,000-plus mortgage at 7% a week ago.
Angelli said her lender told her Thursday that, if she had waited longer to lock in a rate, she might have paid a full percentage point more.
“My honest reaction was ‘woo-hoo,’ ” Angelli said.
On the other hand, Angelli has seen the value of some of her technology stock holdings drop lately, an investment she was planning to use to help pay for her new home. So, she said, she has learned how global markets can cut both ways.
“It’s really an unfamiliar feeling for me to be so directly and personally and profoundly affected by these worldwide fluctuations,” she said. “When the Dow Jones crashes, it affects me. And interest rates going down enable me to get a home.”
