The morning after the United Kingdom voted to exit the European Union is turning out to be tough for markets. But one group stands to benefit: U.S. homeowners and those who want to buy.
The 10-year Treasury, which mortgage rates follow, has plunged 20 basis points since the morning. Mortgage rates do lag Treasuries, as seen in the most recent week, but now might be a good time to refinance — or lock in a rate.
For someone in the market for a $200,000 home, the pre-vote rate of 3.46% would have cost $715 for a 30-year fixed-rate mortgage with a 20% down payment, according to Zillow’s mortgage group. If mortgage rates fall 20 basis points, that monthly cost would be $697.
Refinancing would produce pretty much the same figures: if rates declined from the pre-referendum average of 3.42% to 3.22%, a monthly payment would sink to $694 from $711.
Interest rates have stayed so low for so long that it’s worth pointing out that there are still plenty of people who could benefit from refinancing. Data provider Black Knight estimates there are 7.4 million borrowers who could refinance. Many of those are people who had not yet regained enough equity in their homes to make a refinance possible.
Not that mortgage rates are terribly high — the effective mortgage rate on owner- and tenant-occupied residential housing was 3.8% in the first quarter, according to Federal Reserve data.
Periods of upheaval in the mortgage market can be good and bad, said Karan Kaul, a researcher with the Urban Institute . Originators will have more activity as consumers take advantage of better rates to refinance or to buy.
But mortgage servicers, particularly the weaker ones, may suffer. All will see some of their business drift away as more borrowers refinance. New mortgages, whether altogether new loans or just refinanced ones, will likely be placed with servicers that have performed better.
Holders of mortgage-backed securities also suffer when borrowers prepay their mortgages. Income streams based on higher rates now become lower, or vanish altogether.
There’s a concern with an even bigger part of the market: Fannie Mae /zigman2/quotes/208846331/delayed FNMA -3.38% and Freddie Mac /zigman2/quotes/202741363/delayed FMCC -2.35% , the government-sponsored mortgage buyers, hedge interest rate exposure in their own portfolios. Freddie has already had two quarterly losses due to such hedges.
As both enterprises’ capital reserves dwindle further, another quarterly loss could force Freddie to draw funds from the Treasury. That would bring more scrutiny and controversy to housing policy.