During the last two weeks of 2009, rates made a pretty significant move upward. We have been warning about potential regarding volatility with regard to the bond market. The past few months before the end of the year were void of this volatility. Despite this, the markets moving significantly should not have caught us by surprise. Many will say that there was very light volume in the markets during these two weeks. Certainly light volume can exacerbate tendencies toward volatility in the short run. However, even if rates move back down, we believe there is a lesson to be learned here. Rates have been at historic lows from late 2008 all through 2009. We know why this phenomenon occurred. The Federal Reserve Board lowered short-term rates and provided massive amounts of liquidity to the system in the face of the credit crisis.
However, one should remember that the Fed controls short-term rates. Long-term rates, such as rates on home loans, are subject to the whims of the markets. The Fed even has played a strong hand in the long-end of the market by purchasing massive amounts of mortgage-backed securities (MBS) and Treasuries during 2009. We do know that the Fed cannot keep purchasing our debt forever. Eventually, their influence will wind down in this regard. Indeed it has already been reported that MBS purchases by the Fed have slowed down. When this influence is removed we will again be fully subject to the whims of the markets.
So let’s go back to the bond market. As long as the economic news was bad, and it was for most of 2009, the markets stayed in line. But as soon as the news started getting better, there was less of a need for the markets to stay in line in this regard. Basically, when rates are at historic lows, there is nowhere to go but up. We are not saying the move we saw in the past few weeks represented a permanent turn in the market. But eventually that turn will take place. Outside another event that causes a turn for the worse with regard to the credit markets, the economy is on the mend. We always must account for such events—natural disasters, terrorist attacks, a foreign country defaulting on their debt or something else. Any time a major event happens, all trends go out the window.
Therefore, we enter the year 2010 with more potential for rates to rise than fall. Rates do not rise in a straight line, and that is what will contribute to volatility. We will continue to see the markets put pressure on rates when there is positive economic news and the Fed trying to beat rates back down so that the recovery does not end prematurely. How does this affect a person on the street?
For one, act with a sense of urgency that you need to convey to your prospects. Anyone who is planning to purchase a home should take note of not only these low rates, but also lower home prices and a tax credit that will not last forever. We cannot tell you whether the tax credit will be extended again, but you should act as if there is no chance.
Second, stay on top of the markets. If you blink, you could lose thousands of dollars with regard to your pipeline. We asked our expert analyst, Eric Holloman of RateLink, how their company accomplishes this for their clients. Eric said, “We formed RateLink almost two decades ago because we saw the pain suffered by loan officers and clients when the markets went haywire. With new technologies, keeping up is becoming easier. Now many of our clients have chosen to receive instantaneous text messages of market changes so that they can be completely mobile and still not be surprised. Others try to stay online when they are in their offices.”
We had so many challenges in 2009. These include, lenders tightening up, home values falling, a spike in unemployment and more. Dealing with rising rates was not one of the challenges. Now, as we move into 2010, it is likely you will deal with this challenge as well. The question is, are you prepared?
Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s Certified Mortgage Advisor Program can be found at www.webinars.originationpro.com. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com.