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Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.

By now, most of you are aware that the 10-year US Treasury yield has risen above 3.00%. In fact, after breaking above the psychologically significant level of 3%, it easily busted through a resistance level of 3.04% which had not been breached for many years. At the time of this writing the 10yr was hovering around the 3.10% level. Most analysts believe that it will be an easy and quick climb to get to 3.5% which will have detrimental effects on the market. Specifically, the rates on mortgages, which are not inherently tied into the UST market, but moves in tandem with this market, has climbed to 7-year highs. For the average consumer, this means higher payments on all types of outstanding debts with variable rates and for pending mortgages.

While I have written about this in the past, well before it came to fruition, I again want to go on record as saying that if the 10yr doesn’t drop below 3.04 quickly, the mortgage market the way we have known it over the past few years will be no more. Year over year mortgage refinancing is down almost 20% and represents only 35% of the total new mortgage applications. Rates are almost 60bps higher than where they were from this time last year. These numbers are extensive and are causing panic at many local banks who are not in a position to handle the decline in revenue and volume. It is the lowest level of refinancing activity since August 2008. Mortgage applicants were already having a hard enough time not seeing a “3” in front of their rate and were in denial at having to accept a rate with a “4” in front of it. If the 10yr doesn’t subside quickly, that will jump to a “5-handle” and people will soon be wishing for a 4 in front of their rate. However, there are more than just psychological factors in play.

On Tuesday the market awoke to a shock when the 10yr, for no good reason crossed over the 3% threshold and kept swiftly climbing higher throughout the day. We were quick to act, and locked-in as many loans as we needed, knowing that the risks heavily outweighed the status-quo. While we were able to protect our current pipeline successfully, the number of calls and inquiries that we were getting from people who did not have a loan in the process with us was alarming. In a day and age where information is so readily available and disseminated, it didn’t take too long for news to travel about the spike in mortgage rates. We were able to help and guide some who were not being attended to carefully elsewhere, but there is only so much that we were physically able to handle, especially with those who were in process elsewhere for their financing.

Of all the alerts and headlines that crossed my screen from the media, one in particular that grabbed my attention was from CNBC which read, “Rising rates could be problematic because the typical money manager working today has not dealt with them before.” Yes, rates are hitting multiyear highs at a time when most portfolio managers have never dealt with this phenomenon before. In fact, the average tenure for an active “equity manager” is only eight years. While the 10-yr rose to its highest level since 2011, the short-term two-year yield traded near levels not seen in about a decade, raising serious concern about how portfolio managers will navigate this changing investment landscape. Specific to these figures, historically, when the spread between the 10-yr and 2-yr goes to zero or negative, it has often signaled a recession ahead. We are less than fifty basis points from that happening, and we are at the lowest levels since 2008 with these figures.

I’ve read quite a few vastly differing opinions on what caused the spike, which shows me that no one has the answer. The variables that come into play the most though are inflation and market sentiment. As bonds started to slide and broke technical support, it triggered a lot of computerized trading as well as investor concern, which snowballed quickly. While we are in uncharted territory for many “mortgage youngsters” out there, for the veterans, this is our time to provide real time guidance on how to successfully navigate through this transitioning market. There are still many opportunities in the marketplace … you just need to know whom to ask.
Special shout out and happy birthday to Barbara Smilow and Lydia Sultanik!

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