Coronavirus and the effect on mortgages

As the coronavirus continued to spread rapidly in February, investors began adjusting their portfolios to less risky assets –  treasuries, bonds and mortgage-backed securities (MBS). As a result. mortgage rates dropped for a bit to some of the lowest rates in history. This led to a huge jump in refinance applications.

The demand for refinance loans was higher than the supply of mortgage capacity at lenders and banks. So, rates came back up as lenders raised rates to slow applications.

Banks and lenders funded billions of dollars in mortgages to sell as Mortgage Backed Securities (MBS). At the same time, others sold these assets to raise capital. This caused the secondary markets to become flooded. This oversupply meant buyers were not purchasing the assets as quickly as they hit the market. As a result, the price of MBS coupons plummeted. The drop off in MBS value caused mortgage rates to jump 1-2% within a few days time.

In March, the government issued social distancing directives and businesses were forced to close. Millions of workers were laid off or furloughed and analysts realized that homeowners without jobs may not be able to pay their mortgage payments. Seeing the economic impact caused by the closure of businesses, the Federal Reserve held an emergency meeting and dropped the Fed Funds Rate to near zero percent.

As refinance applications jumped, mortgage servicers became concerned. They need 3-4 years of collecting payments to break even on their purchase of servicing rights. When clients refinance, there are major losses for servicers.