Mortgage rate rise stuns the industry Consumers, lenders caught as market fluctuates wildly

October 13, 1998|By Robert Nusgart | Robert Nusgart,SUN STAFF

What a difference a week makes.

On Oct. 5, consumers shopping for a mortgage could find lenders offering 30-year, fixed rates at once unthinkable lows of 6.25 percent to 6.5 percent. Homeowners were rushing to refinance. The Freddie Mac Primary Mortgage Survey of lenders nationwide was at 6.49 percent. That mark hadn't been that low since January 1968.

But as quickly as that window of opportunity opened for historically low rates, it slammed shut with a vengeance as events in financial markets a world away Thursday and Friday drove mortgage rates back over 7 percent.

The lightning turnaround caught many industry observers by surprise and left lenders scrambling to lock in customers' rates.

"I don't remember it happening quite like this. But in 10 years I've never seen four price changes in one day," said Neil Sweren of American Home Loan Inc. and past president of the Maryland Association of Mortgage Brokers. "Every minute we would get a message to ignore the last rate sheet."

Even at Freddie Mac, the mega-supplier of mortgages to lenders, there was amazement.

"As the results of the survey [on Thursday] were being collected, mortgage rates were rising. And by the time we released the figures, they were outdated already," said spokeswoman Eileen Fitzpatrick.

The foreign funds that sought shelter in U.S. Treasury bonds for the past several weeks, driving mortgages to those generational lows, reversed course late last week when there were signs that the Japanese government would move to bolster its ailing financial markets. And that had a domino affect, said Keith Gumbinger, vice president ofHSH Associates, a New Jersey firm that tracks and analyzes mortgage rates.

"It's a combination of things going off at once," Gumbinger said. "The dollar bombed out. The mortgage-backed securities holders dumped some of their holdings, basically because Japan thinks it might have started a bailout.

"To say that people were taken by surprise by this would be mild."

Gumbinger also cited a pair of forecasts from two Wall Street brokerages that "mentioned the recession word and that upset investors who were hedging their positions in the dollar vs. yen markets."

"The dollar had been at very high levels, and investors had been betting that the dollar was going to remain at high levels and the economy was going to remain strong," Gumbinger said. "Those forecasts upset that apple cart. The dollar plunged. As the dollar started to cave, dollar-denominated securities started to sell off and that exacerbated the sell-off that had already occurred from mortgage-backed [securities] and from the Japanese banking plan."

Gumbinger said his firm's national survey showed an average 30-year, fixed-rate mortgage at 6.59 percent as late as Wednesday afternoon. By Friday afternoon the average had risen to 7.04 percent.

"That initial sell-off in treasuries hadn't hit the mortgage pricing on the street [Wednesday]," Gumbinger said, "but by Friday afternoon it was a full-fledged rout, nearly a half a percentage point from Thursday to Friday."

"Basically, the market turned so fast that we went from 6.5 percent to 7 1/8 , and we did that within 48 hours," said Tom Champion, manager of the Lutherville branch of Norwest Mortgage. "We made a move upward of a quarter-percent within, probably, 45 minutes to an hour.

"It's one of those things, and you just deal with it," Champion said.

The rise left many of Sweren's customers dazed.

"It was like people didn't believe it," he said, adding that 7 percent is still an exceptional rate. "It's still lower than where they were three months ago."

Gumbinger said the increase likely affected 50 percent of the homeowners who were in the midst of refinancing but failed to lock in a favorable rate and were gambling that rates would go lower.

"The markets caught the [mortgage] market by surprise and people got burned trying to time the bottom of the market," he said.

"Interest rates went down too far, too fast, and that does happen," he said. "Interest rates should be in a given range. Well, the market goes past that range, and then goes back the other way and then settles back.

"However, the market is now sensitized. They are very nervous," Gumbinger said.

But Gumbinger said he expects mortgage rates to stabilize around 6.93 percent at the end of next week.

"The Thursday-Friday sell-off has probably gone a little bit too far. We expect by the end of the week that things will settle down a little bit."

Pub Date: 10/13/98

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