why are the rates not coming down and what is really going on
Didier Malagies • March 31, 2020
why are the interest rates not coming down, read below and learn why
This is what really is going on in the market! read and learn
Mortgage Crisis and Fed Unintended
Consequences
The Coronavirus Meltdown
The current Coronavirus crisis is having a critical impact on the Mortgage Industry,
which could potentially make the 2008 financial crisis pale in comparison. The
pressing issue centers around capital that’s required by Mortgage Lenders to be
able to function and meet covenants that are required for them to continue to lend.
Here’s How The Mortgage Market Works
Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator
to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or
may not be the same company that originated the loan. The borrower submits
payments to the Servicer, however, the Servicer does not own the loan, they are
simply maintaining the loan. This means collecting payments and forwarding them
to the investor, paying taxes and insurance, answering questions, etc. While they
maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a
government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae
(GNMA). The loan then gets placed inside a large bundle, which is put in the hands of
an Investment Banker. That Investment Banker converts those loans into a
Mortgage Backed Security (MBS) that can be sold to the public. This shows up in
different investments like Mutual Funds, Insurance Plans, and Retirement
Accounts.
The Servicer’s role is very critical. In order to obtain the right to service loans, the
Servicer will typically pay 1% of the loan amount up front. The Servicer then
receives a monthly payment or “strip” equal to about 30 basis points (bp) per year.
Because they paid about 1% to obtain the servicing rights and receive roughly 30bp
in annual income, the breakeven period is approximately 3 years. The longer that
loan remains on the books, the more money that Servicer makes. In many cases,
the Servicer might want to use leverage to increase their level of income.
Therefore, they may often finance half of the cost of acquiring the loan and pay the
rest in cash.
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Servicer Dilemma
As you can imagine, when interest rates drop dramatically, there is an increased
incentive for many people to refinance their loans more rapidly. This causes the
loans that a Servicer had on their books to pay off sooner…often before that 3-year
breakeven period. This servicing runoff creates losses for that Mortgage Lender
who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the
greater the loss. Servicing runoff, or even the anticipation of it, can adversely
impact the market valuation of a servicing portfolio. But at the same time, Lenders
typically experience an increase in new loan activity because of the decline in
interest rates. This gives them additional income to help overcome the losses in
their servicing portfolio.
But the Coronavirus has caused a virtual shutdown of the US economy, which has
created an unprecedented amount of job losses. This adds a new risk to the
servicer because borrowers may have difficulty paying their mortgage in a timely
manner. And although the Servicer does not own the asset, they have the
responsibility to make the payment to the investor, even if they have not yet
received it from the borrower. Under normal circumstances, the Servicer has plenty
of cushion to account for this. But an extreme level of delinquency puts the Servicer
in an unmanageable position.
“I’m From The Government And I’m Here To Help”
In the Government’s effort to help those who have lost their jobs because of the
Coronavirus shutdown, they have granted forbearance of mortgage payments for
affected individuals. This presents an enormous obstacle for Servicers who are
obligated to forward the mortgage payment to the investor, even though they have
not yet received it. Fortunately, there is a new facility set up to help Mortgage
Servicers bridge the gap to the investor. However, it is unclear as to how long it will
take for Servicers to access this facility.
Servicing runoff, or even the
anticipation of it, can adversely
impact the market valuation of a
servicing portfolio.
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But what has not been yet contemplated is the fact that a borrower who does not
make their very first mortgage payment causes that loan to be ineligible to be sold
to an investor. This means that the Servicer must hold onto the asset itself, which
ties up their available credit. And with so many new loans being originated of late,
the amount of transactions that will not qualify for sale is significant. This restricts
the Lender’s ability to clear their pipeline and get reimbursed with cash so they can
now fund new transactions.
Mark To Market
This week - Due to accelerated prepayments and the uncertainty of repayment, the
value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in
value prompted margin calls for the many Servicers who financed their acquisition
of servicing. Additionally, the decreased value of a Lender’s servicing portfolio
reduces the Lender’s overall net worth. Since the amount a lender can lend is based
on a multiple of their net worth, the decrease in value of their servicing portfolio
asset, along with the cash paid for margin calls, reduces their capacity to lend.
Unintended Consequences
The Fed’s desire to bring mortgage rates down isn’t just damaging servicing
portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to
hedge their risk. Let’s look at what happens when a borrower locks in their
mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of
Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price,
The Fed’s desire to bring mortgage
rates down isn’t just damaging
servicing portfolios because of
prepayments, it’s also wreaking
chaos in Lenders’ ability to hedge
their risk.
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interest rates improve and move lower. A locked rate on a mortgage is nothing
more than a Lender promising to hold an interest rate, for a period of time, or until
the transaction closes. The Lender is at risk for any MBS price changes in the
marketplace between the time they agreed to grant the lock and the time that the
loan closes.
If rates were to rise because MBS prices declined, the Lender would be obligated to
buy down the borrower’s mortgage rate to the level they were promised. And since
the Lender doesn’t want to be in a position of gambling, they hedge their locked
loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price,
causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by
the Lender’s gains of their short positions in MBS.
Now think about what happens when MBS prices rise or improve, causing mortgage
rates to decline. On paper the Lender should be able to close the mortgage loan at a
better price than promised to the borrower, giving the Lender additional profits.
However, the Lender’s losses on their short position negate any additional profits
from the improvement in MBS pricing. This hedging system works well to deliver
the borrower what was promised, while removing market risk from the Lender.
But in an effort to reduce mortgage rates, the Fed has been purchasing an
incredible amount of Mortgage Backed Securities, causing their price to rise
dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of
MBS to show huge losses. These losses appear to be offset on paper by the
potential market gains on the loans that the lender hopes to close in the future. But
the Broker Dealer will not wait on the possibility of future loans closing and demands
an immediate margin call. The recent amount that these Lenders are paying in
margin calls are staggering. They run in the tens of millions of Dollars. All this on top
of the aforementioned stresses that Lenders are having to endure. So, while the
Fed believes they are stimulating lending, their actions are resulting in the exact
opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit
ideal parameters, have all but dried up. And many Lenders have no choice but to
slow their intake of transactions by throttling mortgage rates higher and by reducing
the term that they are willing to guarantee a rate lock.
Furthering the Fed’s unintended consequences was the announcement to cut
interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s
communication failed to educate the general public that the Fed Funds Rate is very
different than mortgage rates, it prompted borrowers in process to break their locks
and try to jump ship to a lower rate. This dramatically increased hedging losses from
loans that didn’t end up closing.
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Even Stephen King Could Not Have Scripted This
It’s been said that the Stock market will do the most damage, to the most people, at
the worst time. And the current mortgage market is experiencing the most perfect
storm. Just when volume levels were at the highest in history, servicing runoff at its
peak, and pipelines hedged more than ever, the Coronavirus arrived.
Lenders need to clear their pipelines, but social distancing is making it more difficult
for transactions to be processed. And those loans that are about to close require
that employment be verified. As you can imagine, with millions of individuals losing
their jobs, those mortgages are unable to fund, leaving lenders with more hedging
losses and no income to offset it.
What Needs To Be Done Now
Fortunately, there are many smart people in the Mortgage Industry who are doing
everything they can to navigate through these perilous times. But the Fed and our
Government needs to stop making it more difficult. The Fed must temporarily slow
MBS purchases to allow pipelines to clear. Lawmakers need to allow for first
payment defaults, due to forbearance, to be saleable. And finally, the Fed must
more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the
same.
We have faith that the effects of the Coronavirus will subside and that things will
become more normalized in the upcoming months.
It’s been said that the Stock market
will do the most damage, to the most
people, at the worst time.
Check out our other helpful videos to learn more about credit and residential mortgages.
A bridge loan is a short-term loan used to "bridge the gap" between buying a new home and selling your current one. It's typically used by homebuyers who need funds for a down paymenme before their existing home sells. Here's how it works: You own a current home and want to buy a new one. You haven't sold your current home yet, so your cash is tied up in its equity. A bridge loan gives you access to that equity—before the sale closes—so you can make a down payment or cover closing costs on the new home. The bridge loan is secured by your current home, and repayment typically comes from the proceeds once it sells. Key Features: Term: Usually 6–12 months. Interest Rates: Higher than a traditional mortgage. Repayment: Often interest-only during the term, with a balloon payment (full payoff) at the end. Loan Amount: Usually up to 80% of the combined value of both homes (existing + new). Example: Your current home is worth $400,000 with a $250,000 mortgage (so $150,000 equity). You want to buy a $500,000 home. A bridge loan lets you borrow against some of that $150,000 equity to cover the new home's down payment while waiting for the current home to sell. Is this conversation helpful so far? tune in and learn https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329
After years of identifying the housing market as unhealthy — culminating in a savagely unhealthy housing market in early 2022 — I can confidently assert that the housing market in 2024 and 2025 is on better footing. This transformation sets an extremely positive foundation for what’s to come. Some recent headlines about housing suggest that demand is crashing. However, that’s not the case, as the data below will show. Today on CNBC , I discussed this very point: what is happening now is not only in line with my price forecasts for 2024 and 2025, but it’s why I am so happy to see inventory grow and price growth data cool down. What we saw in late 2020, all of 2021 and early 2022 was not sustainable and we needed higher mortgage rates to cool things down — hence why I was team higher rates early in 2021. The last two years have ushered in a healthier market for the future of existing home sales. Existing home sales Before the existing home sales report was released Thursday, I confidently predicted a month-to-month decline, while estimating the existing home sales print to be just a tad above 4 million. That’s precisely what occurred — no surprises there, as every month in 2025 has consistently exceeded 4 million. However, it’s important to note that our weekly pending home sales data has only recently begun to show growth compared to last year. We have an advantage over the data from the National Association of Realtors since our weekly pending home sales data is updated weekly, making their report somewhat outdated. The notable surprise for me in 2025 is the year-over-year growth we observe in the data, despite elevated mortgage rates. If mortgage rates were ranging between 6%-6.64%, I wouldn’t have been surprised at all because we are working from the lowest bar in sales ever. Purchase application data If someone had said the purchase application data would show positive trends both year to date and year over year by late April, even with mortgage rates not falling significantly below 6.64%, I would have found that hard to believe. Yet, here we are witnessing consistent year-over-year growth . Even with the recent rate spike, which has clearly cooled demand week to week, we are still positive. If mortgage rates can just trend down toward 6% with duration, sales are growing. Housing inventory and price growth While my forecast for national price growth in 2024 at 2.33% was too low and in 2025 at 1.77% may be too low again, it’s encouraging to see a slowdown in price growth, which I believe is a positive sign for the future. The increase in inventory is also promising and supports long-term stability in the housing market. We can anticipate that millions of people will continue to buy homes each year, and projections suggest that we’re on track for another nearly 5 million total home sales in 2025. As wages rise and households are formed, such as through marriage and bringing in dual incomes, this influx of inventory returning to normal levels provides an optimistic outlook. This trend in inventory data is truly heartening. Conclusion With all the data lines I added above, you can see why I have a renewed optimism about the housing market. If price growth significantly outpaced inflation and wages, and inventory wasn’t increasing, I’d be discussing a much different and more concerning state of affairs. Thankfully, that’s not the case. Historically, we’ve observed that when home sales dip due to higher rates, they may remain subdued for a while but ultimately rise again. This is common during recessions, as I discussed in this recent HousingWire Daily podcast . As you can see in the existing home sales data below, we had an epic crash in sales in 2022 but found a base to work from around 4 million. This trend has shaped the landscape of housing economics since post-WWII, reminding us that resilience and recovery are always within reach. 
1. Cash-Out Refinance How it works: You replace your current mortgage with a new, larger loan and take the difference out in cash. Pros: Often lower interest rates compared to other methods. Longer repayment terms. Cons: Closing costs (typically 2–5% of the loan amount). Resets your loan term (could be 15, 20, or 30 years). Tougher underwriting for investment properties vs primary residences. 2. Home Equity Line of Credit (HELOC) How it works: You get a revolving line of credit based on your property’s equity. Pros: Flexibility — borrow what you need, when you need it. Pay interest only on what you draw. Cons: HELOCs for investment properties are harder to get and may have higher rates. Variable interest rates (payments can increase). 3. Home Equity Loan ("Second Mortgage") How it works: A lump-sum loan secured by your property's equity, separate from your existing mortgage. Pros: Fixed interest rates and predictable payments. Cons: Higher rates than primary mortgages. Separate loan payment on top of your existing mortgage. 4. Sell the Property How it works: You sell the investment property and realize your equity as cash. Pros: Immediate full access to equity. No debt obligation. Cons: Capital gains taxes may apply. You lose future appreciation and cash flow. 5. Portfolio Loan How it works: A loan based on a group (portfolio) of your properties' combined value and cash flow. Pros: Useful if you have multiple properties. Lenders may be more flexible on qualifications. Cons: Complex underwriting. Higher costs. 6. Private or Hard Money Loan How it works: Short-term, high-interest loan based on property value, not personal credit. Pros: Fast funding (days instead of weeks). Less strict underwriting. Cons: Very high interest rates (often 8%–15%+). Short loan terms (often 6–24 months). 7. Seller Financing (if you're buying another property) How it works: If you own a property free and clear, you could "sell" it and carry financing, creating cash flow and upfront cash through a down payment. Pros: Passive income from note payments. Cons: Risk if the buyer defaults. Key Factors to Think About: How quickly do you need the cash? How much do you want to borrow? How long do you want to be repaying it? How the new debt impacts your overall portfolio. tune in and learn https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329
