A 53 basis points jump in the 30-year mortgage rate in a week has us scratching our heads as to when last we saw this kind of jump.
An easier question to answer is why. There can be no mistaking the news the Federal Reserve is considering ending its longstanding propping up of the mortgage market (and the general economy) has caused this massive leap.
So the question becomes, can the Fed rectify the situation? It can if it wants to. And it should.
A 53 bp jump is about a 20% jump in a week’s time, a level of volatility that would cause eyes to rise even on the stock exchanges that rise and fall with each passing financial wind. (And in fact this news caused quite a wobble in the stock indexes as well, both downward and then back up.)
It is a massive spear in the chest to a refinancing market that was already edging away. If rates continue to rise sharply, that might cause fence sitters to reconsider their desires to buy real estate (although the initial bump is also going to help fence sitters who want to buy and lock in rates before they get even higher).
Is the mortgage market robust enough to say no thanks to the Fed’s easing, which has kept rates at record lows for years. Does anyone remember when the 30-year fixed rate went for 13.5%, or even higher? There’s a real damper on home finance, we can tell you from experience.
Notwithstanding, the mortgage business has done a nice job in continuing to make markets in at least the conventional side of the mortgage business. Predictions it would wither away and produce less than $1 trillion in finance a year have proved to be just not true.
But, it thrives only in these markets, the ones supported by Freddie Mac, Fannie Mae and Ginnie Mae. It is conspicuously weak in the nonconforming sector. So perhaps it is not wise to close down the quantitative easing spigot just yet.
There will always be federal backstopping of the mortgage market, unless an administration and/or Congress comes along to reverse decades of bipartisan support. The GSE consumer discount, the deductibility of interest and mortgage insurance premiums, the availability of deposit insurance for deposits that are used for mortgages, the Lower Income Housing Tax Credit on the multifamily side, the list of federal support is long.