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The lack of liquidity in the bond markets has drawn significant attention from policymakers, but agreeing on what is causing it, and whether new regulations required by Dodd-Frank are to blame, may be impossible.
August 24 -
The $3.9 billion-asset Luther Burbank Savings has opened retail loan origination offices in several Southern California cities to produce more jumbo mortgages. It is one of several lenders in the region that think jumbo loans are worth the risks to achieve growth.
August 18
The recent global market turmoil could be good news for banks and mortgage lenders if a further drop in long-term interest rates sparks another wave of refinancing.
It also could spell trouble for lenders that have not properly hedged the value of their servicing rights, however, and the benefits of lower rates are far from assured.
U.S. Treasury yields, which mortgage rates are tied to, slumped to a four-month low Monday, as investors remained anxious about China's woes and the slower pace of global growth and sought a safe haven in government bonds. The 10-year Treasury yield fell as low as 1.95% during the session, down six basis points from late Friday.
For now, mortgage rates would have to drop at least 25 basis points or more from recent levels to spark a major wave of refinancings.
"A big chunk of 2013 and 2014 loans are just out of the money to refinance," said Scott Buchta, head of fixed income strategy at Brean Capital.
The stock market plunge has some investors assuming that the U.S. economy is heading into a recession, with the potential for massive layoffs at manufacturing firms that could be crippled by lower commodity prices.
Ivy Zelman, the CEO of Zelman and Associates, a housing analytics firm, said the sell-off hitting homebuilders, mortgage insurers, title companies and financial stocks, is an overreaction. With yields on 10-year Treasury notes falling to 2%, the market is assuming much slower economic growth ahead, she said.
"It's more about slowing economic growth than about rates," Zelman said. "There's a lot of knee-jerk reactions."
The biggest concern is that manufacturers would start laying off employees, resulting in job losses.
"If people lose their jobs, they can't buy a house," Zelman said.
Uncertainty about whether the Federal Reserve will raise short-term rates in September or delay a rate hike until December or early next year has contributed to the market volatility.
Some nonbank mortgage servicers will be aggressive at soliciting borrowers to refinance. Since most banks and mortgage lenders are seeing a steady flow of home purchase and refinance volume, they may be loath to lower mortgage rates much further, since doing so would cut into profits.
"Lenders have right-sized and reduced capacity to the point where they're more profitable now with less," Buchta said. "They have steady flows and they're managing to the pipeline [of loans] and profit margins."
Banks and mortgage lenders have been profiting this year from mini-waves of refinancings combined with an uptick in home purchase applications, which have risen nearly 20% from a year earlier.
Lynn Fisher, a vice president of research and economics at the Mortgage Bankers Association, wrote in a research note last week that most of the pick-up in refinance activity was driven primarily by investors seeking jumbo loans above the conforming loan limit of $729,750. Jumbo rates have dipped about five basis points in the last two months.
Refinance requests, as measured by the MBA's index, rose 7% for the week ending Aug. 14, from a week earlier, to the highest level since May 2015. Refis now make up 55.5% of all mortgage applications.
Some mortgage servicers have already been hit hard by dips in interest rates and have been forced to take writedowns and even sell servicing rights. The volatility has been particularly hard for nonbanks like Nationstar Mortgage in Lewisville, Texas, and Walter Investment in Tampa, Fla., that had to take writedowns this year when more borrowers refinanced and prepaid their mortgages than expected.
