Highest rates in one year; Big drama for real estate investment loans

Rising rate headlines are nothing new, but there was a double hit this week … or triple, depending on your point of view.

Whammy 1: Highest rates in a year

It’s March 2021 and now you would have to go back to March 2020 to see higher mortgage rates. It will take a while for the mainstream media to catch up with this new reality because the most cited mortgage rate survey tends to lag behind sudden moves like this.

Whammy 2: It’s been a bumpy ride

And that brings us to “whammy 2”. This move has been surprisingly abrupt. Not only have rates risen as fast as they have in the last 2 months, there have also been several false starts where it seemed like rates were taking a break only to jump much higher in a single day.

Friday was one of those days. The first 4 days of the week were among the most hopeful and resilient we’ve seen in 2021. Yields on 10-year Treasuries (a benchmark for the momentum of longer-term rates like mortgages) are they held safely below their recent 1.62% ceiling, even trading below 1.50% briefly on Thursday.

Things changed abruptly on Friday. The complete absence of any overt short-term motivation makes this hit even more frustrating. In other words, there were no big new developments that caused the jump. It was simply the way merchants traded.

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The above chart may not sound like a big deal, but it’s just a small section of a larger trend. And that larger trend represents a notable acceleration from the previous trend of rising rates. Incidentally, this week’s delivery recovers 10-year returns above its pre-covid bottom for the first time.

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Speaking of covid, that is ultimately why traders operate this way! The acceleration in 2021 has to do with a greater distribution of vaccines, sharp decreases in the case count and the approval of more covid relief stimuli (which hurt rates in two ways: increasing economic activity / inflation and adding supply of the Treasury). Here’s another look at the same graph, this time with an emphasis on the “covid effect” and the subsequent rebound.

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If mortgage rates don’t appear to have received as much warning as the Treasury charts suggest, it’s because they didn’t! In fairness, we cautioned against complacency when rates were still at record lows, but it’s one thing for a newsletter to highlight the risks and quite another to see rates rise half a percent in February alone.

Why did rates wait to “get the note” on Treasuries? Simply put, the mortgage market was unable to keep up with the broader bond market. Mortgage rates were able to keep falling and stay lower because they were still trapped by the bond movement. We have referred to this several times as “the cushion” and here is another aspect.

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Whammy 3: Additional Costs for Investment Properties and Second Homes

The first 2 whammies are bad enough (or good enough, if you’re willing to see higher rates as the logical by-product of fighting covid). The third fortunately only applies to a small section of the mortgage market, but for those with second homes or investment properties, it may sting a bit.

In the last days of the previous administration, the Treasury and the FHFA modified the terms of Fannie and Freddie’s rescue agreement in such a way as to limit the amount of certain types of loans that could be acquired. This week, Fannie Mae finally formalized the announcement and began contacting lenders who had too many second / investment loans on their books.

The result? Multiple Lenders rates / fees immediately increased on these loans, some for enormous amounts (like 5+ points or $ 20k on a $ 400k loan). Those who did not respond immediately are expected to follow suit in the near future, even if not all will be as severe as early adopters.

What does this mean for you? Simply put, if you have a unlocked Investment property or second home loan that is in the works, it may have become much more expensive. However, that won’t be the case for everyone (not at first, anyway), so definitely check with your mortgage professional to see what your options are.

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