Fed cuts rates near 0% — mortgages aren’t so lucky

For a couple of days, mortgage borrowers were able to lock in 30-year fixed rates as low as 3%.

But then something odd happened.

Despite multiple Fed rate cuts and COVID-19 driving a possible U.S. recession, mortgage rates did an about-face.

Just one week after hitting record lows, the average rate on a 30-year fixed-rate mortgage jumped to almost 3.8%.

So despite a second Fed rate cut — bringing the target fed funds rate near zero — you should not expect a 0% mortgage rate or anything close to it. Here’s why.

What happened to last week’s record-low rates?

Mortgage rates bottomed out two weeks ago, hitting a record-low average of just 3.29% for a 30-year fixed-rate loan.

Those all-time low rates caused refinance activity to surge.

Last week, refinance applications went up by 79% compared to the week before — or 479% compared to last year.

Even before record-low rates hit, many lenders had full workloads. This was coming off months of low rates and a hot real estate market.

Even before record-low rates hit, many lenders had full workloads… with last week’s surge, lenders haven’t been able to effectively process new mortgage applications.

With last week’s enormous surge, lenders haven’t been able to effectively process new mortgage applications. This led to a big strategy shift for lenders.

To combat this rush in volume, lenders began raising their interest rates well above the prevailing market rate to deter even more applications.

Bumping their rates gives lenders some breathing room so they can deliver on the loans they already have in their pipeline.

But unfortunately, it means those who missed the short low-rate window are now applying under totally different circumstances — and much higher rates.

If you’re seeing mortgage rates in the 4s, you’re not alone

For borrowers turning in mortgage applications this week or next, rates in the low 3s (or even high 3s) might not be an option.

On Friday, March 13, many lenders were quoting rates at 4.5% to 4.75%.

Some lenders even did something unprecedented — they stopped quoting rates.

A search on Redfin resulted in literally zero lenders appearing in a search for a 30-year refinance.

The page featured the following disclaimer at the top:

For those that applied last week, the news is a little better. You might have locked in a low rate. But you may still have to contend with delays as lenders get bogged down.

Lenders might ‘cherry-pick’ loan files

Prospective buyers should contact their lender about their pre-approval. If you were pre-approved at 3.25 percent, today’s rates may reduce your affordability.  

Prospective buyers should contact their lender about their pre-approval. If you were pre-approved at 3.25 percent, today’s rates may reduce your affordability.

Your mortgage rate has a big impact on your buying power, so locking at a higher rate than you were pre-approved at could change your budget significantly.

In addition, this unheard-of turn of events will impact those with less-than-perfect credit, or other outside-the-box aspects of their loan profile.

Although not publicized, lenders may ‘cherry-pick’ the best, fastest, and easiest applications and skip tougher loan files.

This turn of events will impact those with less-than-perfect credit, or other outside-the-box aspects of their loan profile. If you had a harder time getting approved, be extra communicative with your lender now.

So if you worked hard to overcome roadblocks on your mortgage application, make sure you’re extra vigilant about responding to incoming requests from your lender. Don’t let a late signature push your application to the back burner.

And for all borrowers, closing times are being impacted by the influx of applications.

Both Realtors and mortgage borrowers are accustomed to a fairly standard turn time of 30 days to complete a loan. 

For would-be homebuyers that have yet to apply, 30-days may not be possible right now.

One of the largest U.S. mortgage originators, Bank of America, is now taking 41 days on average to close a purchase loan, and 60 to close a refinance, said sources.

And a person familiar with Wells Fargo said the megabank was taking more than 120 days to get loans closed.

What you can do to combat rising rates and lender delays

First, remember that rates are still very low compared to the rest of history.

If you missed record-low rates but lock below 4%, your rate is still less than half the historic norm. That’s nothing to shake a stick at.

For those waiting to apply and wondering what to do as rates rise, here are a few steps you can take:

• Check rates daily
• Look for smaller, local lenders with more capacity
• Ask for rates in-person instead of looking online
• Find a lender processing purchase applications first
• Ask about rate lock extension fees and “float-down” options

The best defense is a good offense. Contact your lender to find out exactly how rising rates will impact you and your mortgage application.

If you want to refinance your mortgage but you’re discouraged by an inability to find rock-bottom rates, have patience and keep checking back.

Find smaller, local lenders who may still have capacity.

Since many lenders have removed online rate offerings, you might avoid online sites for a time. Instead, you may want to walk into a brick and mortar establishment.

Many lenders will prioritize purchase loans over refinances, even during refi booms.  

If you’re a buyer and have made an offer, find a lender who is processing loan files “purchase first.”

Speak with your loan officer about how they are handling the influx of business, and whether they prioritize purchase transactions or refinances.

Last but not least, don’t forget to ask your lender about your rate lock, and who will cover any potential extension fees.

>> Related: Can you unlock a mortgage if rates drop?  

What’s ahead for lenders and mortgage rates?

While many lenders are increasing their rates to deal with capacity issues, the next question is how long will this phenomenon last?

Will lenders bring their rates back down once they return to manageable workloads? Or will it end up that the record low interest rates have already come and gone for good?

According to Mortgage Bankers Association economist, Joel Kan “As home loan rates remain near historic lows due to the economic impact of COVID-19, the MBA projects purchase and refinance demand will continue to climb.”

The spike in demand prompted the MBA to boost its forecast for 2020 refinancing originations to $1.2 trillion, a 37% increase from 2019 and the strongest refinance volume since 2012, Kan said.

“As lenders handle the wave in applications and manage capacity, mortgage rates will likely stabilize but remain low for now.” –Joel Kan, Economist, Mortgage Bankers Association

“As lenders handle the wave in applications and manage capacity, mortgage rates will likely stabilize but remain low for now. This, in turn, will support borrowers looking to refinance or purchase a home this spring.”

When lenders process last week’s surge of loan applications, the possibility is there for rates to be cut once again to remain competitive.

Your next steps

The past few weeks have been incredibly volatile in terms of interest rates.

There have already been unprecedented actions by the Fed to try to boost the U.S. economy. And no one can say for certain how markets will respond to COVID developments in the coming weeks.

If you’re waiting to apply for a mortgage, have a little patience.

Low rates are likely not far gone, but lenders will need to train new hires and clear their pipelines before they’re keen to take on new loans again.

If you already applied, stay on top of your application. Make sure you know when your rate lock expires, and talk to your lender about an extension if it looks like your closing date will be pushed back.

And be responsive. You can’t control how fast your lender moves. But you can stay organized on your end and respond to requests as fast as possible. That’s the best thing you can do right now to help your cause.

Verify your new rate (Mar 17th, 2020)