November 6, 1998

Wake-up call for borrowers

By TOM KELLY
The Real Estate Advisor

Home loan-borrowers once associated "payment shock" only with adjustable rate mortgages. That was the dreaded -- and sometimes infuriating -- period when the first adjustment cycle arrived, kicking monthly payments sky ward from their deeply discounted initial rates.

However, a few short weeks ago, 30-year, fixed-rate borrowers looking to "lock" their rate on a new purchase loan or refinance were crushed when a surprise interest rates "spike" of one-half to three-quarters of one percentage point in fewer than 72 hours leading to a condition that Washington Mutual's Peter Struck described as "a pig moving through a snake."

It was the first time in the past decade that actual rate changes filtered down to consumers three different times in one day.

How did this happen to our lulled-into-low-numbers mortgage market? Should borrowers looking to get a refinance out of the way before the holidays (perhaps pulling some cash out for that trip to grandma's) zero in on a rate now or wait until after the new year?

"It was a very crazy time," said Struck, who has headed Washington Mutual's portfolio management department since 1984. "Could it happen again? Possibly. Will it happen again soon? I think that's very unlikely."

Just when most consumers thought rates would remain in their 20-year low ranges, jumping conditions in a variety of markets pushed home-loan money to near 7.25 percent from nearly 6.50 percent, bringing interest-rate fears and concern to the kitchen table or the first time in two years.

The weakening of the United States dollar, coupled with a surprise improvement in the Japanese yen and other securities abroad brought chaos to mortgage money that was seemingly untouchable by the uncertainty of foreign currencies.

"There were two major factors present that eventually hit head-on," Struck said. "There was a definite ill-liquidity in the marketplace that began in August with the Russian ruble. Wall Street experienced huge losses and traders cut back their positions not just in mortgage markets but in fixed-income markets as well.

"The problem was exacerbated because of the number of consumers who wanted to refinance. Lower rates were definitely improving the mortgage markets. When our Treasury rates took a turn for the worse, mortgage bankers had to lock the loan requests that had been floating with the market. The pent-up demand for mortgage money created a situation much like a pig moving through a snake."

The situation was indeed curious, perhaps even unique. Rarely, if ever, have consumers been so willing to "float" with the mortgage market. Because home-loan rates had headed down more than up the past few months, borrowers were confident to pass on loan "locks" ( a guaranteed rate given on a specific day for the term of the loan) and float with the market. These consumers were gambling that rates would come down before it was time to close on their loan, saving them hard cash over the life of the loan.

The gamble did not pay off. When rates shot up, loan managers locked their "floaters" fearing rates would go even higher. There was no other logical move to make -- rates were historically low yet there was nothing on the horizon indicating a clear calm was near. The wild time brought higher payments to many consumers caught in the fray, pushed others away from the refinance market and forced lenders to rethink how they could better handle the process.

"I think we have been handling the huge waves in the refinance process more efficiently," Struck said. "But you still have these huge spikes in volume that can be extremely difficult to handle if everything is not in place. It would be like asking Boeing to double is airplane product over a short period of time when all the parts aren't available."

Don't forget the basic supply and demand theory, Economics 101. When rates are low more people are able to qualify for home ownership because lower rates mean lower monthly payments. It also means more lenders and traders will be dabbling in the mortgage markets. This all happened when money was already scarce, making the mortgage cash that was available absolutely more expensive.

If you are buying a new home, focus on your needs in a home then find sensible financing and lock it up. If you are refinancing, don't assume a greedy edge and be lulled to sleep in this still terrific rate environment. We recently received a wake-up call.

Previous columns:

• Some folks fall through cracks in refinancing, 10-23-1998
• An update for real estate's 'Bible', 10-16-1998
• A look at why we move, 10-09-1998
• Thinking again about refinancing?, 10-02-1998
• Rates are low: It's time to act, 09-18-1998
• How to get help from the 'Big Agent in the Sky', 09-11-1998
• 125% loans getting people in trouble, 08-28-1998
• Renting your home out for 14 days can be lucrative, 08-06-1998