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Why It’s Best to Apply for a Mortgage When Things Are Slow


A working paper from the National Bureau of Economic Research revealed that it might be best to apply for a mortgage when no one else is.

The analysis, “The Time-Varying Price of Financial Intermediation in the Mortgage Market” (if you like light reading you should check it out), found that price changes on the secondary mortgage market aren’t fully passed on to consumers if volume is high.

In other words, if lenders are busy, they aren’t offering their lowest mortgage rates. In a sense, this is somewhat ironic, in an Alanis Morissette kind of way.

Savings Aren’t Passed Along When Demand Is Strong

  • When demand for a certain product, such as a home loan, is particularly strong
  • There is less (or no) incentive for lenders to pass along even more savings
  • This is similar to how retailers won’t lower prices if they’ve got plenty of buyers
  • Why should they if they’re already slammed?

The researchers refer to this cost as “intermediation,” which they define as the middleman between the borrower and the purchaser of the loan (the investor), essentially the lender.

This intermediary buys the mortgage from the borrower and then sells it to an investor. They provide the principal balance to the borrower and offer a rebate, otherwise known as a lender credit.

The rebate can cover closing costs associated with the loan so the borrower doesn’t have to pay them out of pocket.

Conversely, the borrower can take less or none of this rebate (or even a negative rebate) and instead go with a lower mortgage rate to save money over time.

Higher Rates on Days When Mortgage Applications Are Up

In any case, there is a rebate associated with each mortgage rate on a mortgage ratesheet that spells out whether the loan will provide the borrower with funds to cover their costs, or instead cost them at closing.

What the researchers found out was that mortgage lenders were passing along less of this money to borrowers on days when mortgage applications were high.

For example, on the day before QE1 on March 24th, 2008, there were only 35,000 daily mortgage applications, which is historically quite low.

As such, there was plenty of capacity to take on new mortgages, and thus when mortgage rates moved lower most of the improved cost was sent along to borrowers.

In other words, because volume had been so low, mortgage lenders were more eager to lure in customers, so they passed along more of the rebate to prospective customers.

Your Mortgage Rate Might Be Higher If Demand Is Also High

  • Mortgage rates might be higher if demand for home loans is also elevated
  • Ultimately lenders have limited capacity to deal with an influx of applications
  • And as noted, less incentive to lower interest rates if they’re already receiving a ton of business
  • It might be worth your while to pay attention to the MBA’s weekly mortgage application index

When QE1 was later expanded on March 18, 2009, the number of daily applications went from 60,000 the previous day to 100,000 following the announcement. This time, the pass-through to borrowers was lower because lenders already had their hands full.

This also tells us that there are diminishing returns to monetary policy. If the Fed kept trying to stimulate the mortgage market, lenders would have to pump the brakes to ensure they had the capacity to underwrite the loans and do their job.

There also just isn’t much incentive to keep lowering prices (rates) if demand is super high. What’s the point if the phone is already ringing off the hook?

Lenders also don’t like to bring on more staff for short-lived events, especially if rates rise and demand cools off in a short period of time, which it did on several occasions over the past few years.

Mortgage rates are highly volatile, and can change from day to day and even daily.

Maybe There Could Have Been a 2% 30-Year Fixed Earlier

  • During the mortgage boom years between 2009 and 2014, mortgage rates hit record lows
  • But is it possible they could have been even lower at that time?
  • Low enough that some lucky homeowners may have received 30-year fixed rates in the 2% range?
  • Rates have since drifted to record lows but it seems they’re often held back

The researchers also found that the price of intermediation rose steadily from 2009 to 2014, a price increase that amounted to 30 basis points per year.

They pinned the rise on a decrease in the valuation of mortgage servicing rights, thanks to higher legal and regulatory costs, and revised capital requirements.

This, along with the sensitivity to loan volume, resulted in a total cost of roughly $135 billion to borrowers over that time period.

Put another way, when mortgage rates hit record lows, it’s possible they could have been even lower had lenders actually passed on more of the price improvements from the secondary market, which they typically do.

Instead, they kept more for themselves, either for profit and/or to address the lower value of mortgage servicing rights.

That meant borrowers could have potentially received a 30-year fixed in the high 2% range when rates bottomed, instead of say 3.25%.

What Time of Year Is Best to Apply for a Mortgage?

That brings us to the next logical question. Is there a better and worse time to apply for a mortgage throughout the year?

This isn’t totally clear. Ultimately, mortgage rates ebb and flow and can be driven by completely unique events each year.

For example, no one probably foresaw COVID-19 tanking mortgage rates. However, I did do my own research and found that mortgage rates are lowest in December.

And guess what? They’re highest in April, which just so happens to be the traditional peak of the home buying season!

It turns out those sneaky lenders might be on to something…

So maybe, just maybe, you’re better off applying for a mortgage when no one else. Aside from perhaps getting a better deal, you could also receive more attention and close your loan a lot quicker.

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