One lending executive says he's seen nothing like it since the Russian bond default in 2000
A return to turn-of-the-century bond yields continues to cause pain for the mortgage market.
The 10-year Treasury yield hit 5.34% early Thursday before backing off later in the day. It marked the highest yield for that index since April 2002. The fact that it rose five basis points from the day’s open before later falling to five basis points below the open indicates one of the biggest challenges for lenders and brokers.
Bond yields have been anything but stable in recent weeks, and that instability is reshaping how lenders and brokers approach pricing a loan day to day.
A lender quoting a rate on Monday morning has no guarantee that same number will still make sense by Monday afternoon. A rate lock in the morning might look genius or foolish later in the day.
One lender executive says it is not the rate itself causing the most pain in today's market, but how violently that rate can move within a single day.
Michael Brenning (pictured top), chief operating officer of eLend, said a high-rate environment and a volatile one are two very different problems to manage.
"It's ruinous and distracting for originators and lenders," Brenning told Mortgage Professional America. "I don't care that rates are at 7%. What I care about is intraday, intra-hour; we can see a 10-year that's gone from 5% to 5.25% to 5.10%, then closes at 5.20%. That's the volatility that's crazy for us."
The impacts of bond yield volatility
Brenning said that volatility translates directly into margin calls moving tens of millions of dollars in either direction within a single day.
"If rates rip higher, we're getting margin back from our broker-dealers," he said. "We're hedging. They're delivering us money. But if rates rip lower at the end of the day versus the day before, they're calling us for a margin call and asking us for the money back, based on how much our hedge moved. We'll have tens of millions of dollars come in and go out within a 24-hour span based on what's going on in the marketplace."
He pointed to a specific day this year as an example of how fast that volatility can force a lender to move.
"The market moved 100 basis points Wednesday," he said. "We lost a point in MBS pricing across Ginnie and GSE loans. That day we did three pricing changes. We opened, we repriced for the negative, repriced for the positive, repriced for the negative, and closed. I've not seen a market like that probably since the Russian bond default in 2000."
That same volatility, according to Brenning, is what disrupts a broker trying to lock a loan in real time.
"Let alone having to have our secondary capital markets team changing rates three times throughout the day, the interference that causes to the broker community," he said. "They've joined the system to lock with us or others, and it's down because the desk has pulled pricing off because the markets moved."
Winning the fourth quarter
Brenning said that volatility, layered on top of already-high home prices, insurance costs, and property taxes, is going to make for a difficult fourth quarter across the industry. His advice to originators is to treat that stretch as an opportunity rather than a reason to pull back.
"The fourth quarter of the year is like the fourth quarter of a football game,” he said. “It's where you make your money. It's not going to be where you make your commission in the fourth quarter, but the work that you do in the fourth quarter sets you up for the first quarter.”
That payoff, according to Brenning, depends on what an originator does with the slower weeks between now and the end of the year.
"Now is the time to build new realtor relationships," he said. "Your competitor is not going to outwork you in the fourth quarter. There are fewer people calling on realtors, fewer people calling on CPAs and potential referral sources. It's your time to get out there, hammer it, and build your book of relationships to pay off in the first and second quarter next year."
The current affordability squeeze, he said, is not simply a repeat of past high-rate periods, even though the headline number looks familiar, because the overall market conditions have changed considerably.
"This isn't the first time we've had 7% mortgage rates in the United States," he said. "What is the tough piece is the last time rates were at 7%, 7.25%, house prices were 50%, 75% lower. The average home price has gone up 150%, 200% since COVID. You tack that on with a 7% mortgage rate, and that's the painful point in payments, along with the rise in insurance, along with the rise in property taxes. It's this triple whammy effect of affordability."
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