Some of my clients called, asking if I could lower their interest rates. Many of them said that they heard Federal reserve had lower interest rate to zero, therefore, they should be able to refinance to a rate such as 2% fixed rate etc.
When federal reserve lowers its interest rate, it simply means that banks overnight borrowing rate from Fed is zero. How do the lenders decide their interest rates? It is all driven by the market: if the market is demanding the mortgage back security, lenders will lower their interest rate to attract more borrowers. On the other hand, if fewer investors were buying these securities. Lenders cannot get their money back; they would have to raise the interest to make their loans more attractive to the investors. That is why when Federal reserve raised interest rates early last year, but the mortgage instead dipped.
This is what is happening now: there are very few investors are on the market buying these mortgages backed security right now. Why? Investors anticipate that mortgage default rate may go higher over the next few months as more and more people lost their jobs
In fact, the private money market, the rates have already risen substantially: just 3 to 4 weeks ago, I had seen rates were as low as high 7s. Now, they start at 10s and could be as high as 15.
Going forward, even as we contain the Covid-19 from spreading and flatten the curve, I still do not see investors would rush back the market to purchase the notes, since it would take a while for unemployment to be recovered. We will probably see high interest rates for the rest of the year.
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