Why aren't all mortgage rates below 3%?
The question many buyers may be wondering is why all lenders aren't offering such rock-bottom rates. In March, the Federal Reserve slashed short-term interest rates to between 0% and 0.25% to ameliorate the economic carnage wrought by the coronavirus. So why haven't mortgage rates followed suit?
The main reason: Mortgage lenders are inflating mortgage rates because of the substantial financial risks that the coronavirus has introduced. Higher rates provide profits—as well as a bit of a financial cushion during uncertain economic times.
(It's also important to note that mortgage rates are more closely tied to U.S. Treasury bonds. When bond prices are low, mortgage rates go up, and vice versa.)
"We should be under 3% and we're not," says Indianapolis-based mortgage lender Don Frommeyer of CIBM Mortgage. He chalks it up to overall uncertainty about the road forward. "Everybody’s spooked about what’s going to happen.”
Lenders want to free up capital to make new loans, so they typically don't want to hold on to the mortgages they make. They bundle the loans they make and sell them on the secondary mortgage market to investors. But buyers of these mortgage-backed securities, or mortgage bonds, as they're called, want to make sure they're making profitable investments.
If borrowers default on their mortgages, make partial payments, or skip payments entirely because they've lost jobs or income during the pandemic, then investors don't get paid. So they're less likely to want to accept ultralow mortgage rates, which also cuts into their profits, during a financial crisis. And lenders depend on investors to scoop up their loans.
"People might have a harder time paying their mortgage right now. That’s why the rate on mortgage goes up," says realtor.com's Hale. "Investors are demanding a higher interest rate because they’re taking on more risk.”
More than 36 million folks have filed for unemployment since the crisis roiled the American economy roughly two months ago. That's resulted in roughly 4.1 million homeowners requesting forbearance on their mortgages as of May 10, according to the most recent data from the Mortgage Bankers Association. This allows them to miss monthly, housing payments for a period of time.
Will mortgage rates in the 2% range boost the housing market?
Even interest rates in the mid-2% range may not be enough to spur buyers to make what may be the biggest purchase of their lives in the middle of what's shaping up to likely be another recession. With unemployment reaching levels not seen since the Great Depression and fears that it will likely get worse, many potential buyers are understandably nervous about signing up for 10-, 15-, or even 30-year mortgages.
Plus, many lenders are requiring borrowers to have higher credit scores and down payments given all of the financial uncertainty. That's going to make it even more difficult for many folks to get a mortgage and snag those ultralow rates.
"It [is] an opportune time to borrow money," says Hale. But "we're probably going to see fewer buyers given all the economic uncertainty."
And the new requirements "are naturally going to create some hurdles for buyers to jump over," she adds.