September 19, 2021

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Mortgage News

What a sudden spike in inflation means for mortgage rates, industry margins

For the past few months, inflation has been the specter that economists and analysts mentioned when discussing news about government incentives and persistently low interest rates. People wondered why, for all the money that was pouring into the economy, inflation still appeared to be below the Federal Reserve’s target rate of 2%. This week, that specter came to fruition in the form of a 4% + inflation rate, reflecting the rising cost of a range of goods, from household items to used cars.

The sudden onset of inflation is a difficult time for the mortgage industry as rising interest rates and competition have already increased seen great lenders cut in their margins. To find out why we are seeing inflation now and what it could mean for originators and the rates they are selling, MPA spoke to Doug Duncan, chief economist at Fannie Mae (pictured), who stated that this surge in inflation was not due to the Blueness. Rather, it is the product of a number of factors weighed by the bond markets.

“The bond market needed to clarify whether more than one vaccine was implemented, whether they would be distributed quickly, whether they would be effective, whether they would be resistant to new strains of the virus, how consumers, policymakers and companies would react. Said Duncan. “They also have a new administration that is creating new regulatory leaders and how that would affect financial markets. It also proposes additional $ 1.9 trillion incentives and questions about how quickly that would penetrate economic activity. The market was weighing all of these decisions to form an expectation about where rates would go and when it came to a conclusion that resulted from that momentum in one direction and that is where rates went. The question now is to what extent this change in interest rates is an inflation expectation versus a growth expectation. “

Duncan noted that we are likely to see a combination of inflation and growth expectations in the bond market that are likely to force higher rates as they are responsible for both real growth and inflation. However, to this mix are added a number of problems in the supply chain that are faced with a huge surge in consumer demand. Duncan cited the current shortage of auto microchips as a prime example of how problems in the supply chain are driving prices up. As the monetary policy incentives put more and more pressure on the demand side and the supply side stagnates somewhat, the risk of inflation continues to rise.

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If the bond market has the right idea, Duncan said, then we should expect the 10-year treasury to rise again, which will lead to rising mortgage rates. According to Duncan, this increase should lead to even deeper savings in the margins of the mortgage banks as well as to a reduction or complete “fixed disposals”. Whether companies are closing down entirely or simply laying off employees, Duncan believes the overall capacity of the industry will shrink.

Even if rates rise in the face of inflation, Duncan noted that the Fed is unlikely to pile up by hike its key rates. So far, the Fed has said it is ready to let inflation run while the economy and labor market are still recovering, and while the rate and time frame remain vague, Duncan believes Fed Chairman Jerome Powell will not the rising interest rate environment will contribute to this.

How Mortgage professionals Duncan believes they need to get back to fundamentals. Refis will be the first thing to dry up, and mortgage professionals will need to review their buying and referral relationships to withstand a coming storm.

“I think you’re in the mortgage business of making mortgages for people who want to buy homes,” said Duncan. “The refinancing is sauce that is only offered to households as an option. Today the tendency should be to plan higher rates. I would watch the inflation indicators very closely and listen to what the Fed says to see if their position on any policy change weakens. I would position myself to make my business on the buy side more efficient. “