A Follow Up To Yesterday’s Massive Interest Rate Spike
Yesterday I talked briefly about how the quickly rising 10 year Treasury is starting to be become a concern and its implications for the economy. This post does an excellent job of describing the underlying consequences caused by the increase in rates:
The negative consequences of 5.5% rates are enormous. Because of capacity issues and the long timeline to actually fund a loan very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone A significant percentage of loan applications (refis particularly) in the pipeline are submitted to the lender without a rate lock…millions of refi applications presently in the pipeline, on which lenders already spent a considerably amount of time and money processing, will never fund.
With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop.
Lastly, consider sentiment — this is a real killer. This massive rate spike may have invalidated hundreds of billions spent to rig the mortgage market literally overnight. This leaves the mortgage and housing market very vulnerable. Mortgage loan officers around the country are having a very bad day today explaining to their clients why their rate was not locked and how rates are going to come right back down. They will not feel like getting too aggressive taking new loan applications at least for the next month unless this corrects quickly.
We have to see where all this settles over the next few days before making a near to mid-term call on the outright damage because at this point, Fed or Treasury shock and awe is almost certain…The problem is…if they do shock her and it is sold into with the same fury that we have been seeing, there may not be an act two.
The credit markets look like they were little changed today, but this is something to keep an eye out over the next month or so as it will definitely lead to “unforeseen” adverse consequences in the coming months if it’s not corrected.
Update: For a contrary take, look here. I noted this yesterday but then brushed it aside since we aren’t seeing increased business projections and the people that keep track of this sort of thing are pointing to a supply/demand explanation based on massive increase in supply. This is a perfect example about how looking at data can lead to two radically different but supported conclusions. However, I think it also explains why economists have been so blatantly wrong — they are arguing from a fixed historical perspective rather than investigating the underlying dynamics, and those dynamics are drastically different than we’ve experienced in 60 years. Still, only time will tell. This post is just a snapshot of time, so that in a year or two I can’t look back and say “of course, it was obvious!” because it’s not.