Terror puts mortgage market in uncharted territory
The question on mortgage-hunters'
minds is how the terrorist bombings in New York and Washington will
affect rates. Here's the short answer: They'll probably drop.
Here's the longer answer: Predicting mortgage rates
is always an educated guess, but it's even more of a guess this
week because Tuesday's terrorism is unlike anything that has happened
before. The terrorists destroyed a major financial center.
The closest thing to a precedent was the terrorist
bombing that damaged the World Trade Center on Feb. 26, 1993. Mortgage
rates then were unaffected, according to Bankrate.com data. That's
because investors eight years ago judged that the terrorist action
would have a minuscule effect on the overall economy, and they were
But the 1993 bombing killed six people and most people
who had offices in the twin towers were able to recover files in
their computers and cabinets. Tuesday's destruction of the World
Trade Center caused huge loss of life, including untold numbers
of people who help run the financial markets. No one can calculate
the loss of knowledge, expertise and data.
In recognition of those horrible facts, stock and
bond markets were closed Tuesday and Wednesday. Long-term mortgage
rates tend to follow long-term yields on Treasury bonds. Since bond
markets were closed, mortgage bankers had incomplete information
with which to update mortgage rates.
The trend in mortgage rates already had edged downward,
according to the Bankrate.com national survey of large institutions.
During the week ending Sept. 12, the 30-year fixed
rate fell 1 basis point to 6.93 percent and the 15-year fixed rate
dropped 2 basis points to 6.47 percent. A basis point is one one-hundredth
of 1 percent.
Banks are in business
In the period after the terrorist attacks, it was business as usual
for most mortgage shoppers. The day after the bombings, Bankrate.com
queried 100 banks for the weekly mortgage survey, and all 100 quoted
mortgage rates. A few scattered banks not included in the survey
were not quoting rates.
"We're locking loans," says Chuck
Holroyd, executive vice president of marketing at IndyMac Bank in
Irvine, Calif. "The upfront loan locking and pricing and getting
rate quotes is totally unaffected." He added that the number
of mortgage applications dropped by half on Tuesday compared to
the day before.
Most lenders sell the mortgages they make into what's
called the secondary market. Fannie Mae and Freddie Mac, the two
largest market players, typically buy loans from banks and other
mortgage lenders and either hold those loans or help combine them
into mortgage-backed securities. These MBSs are a form of bond traded
on Wall Street. The prices loans fetch and the yields at which MBSs
trade help determine the rates charged to mortgage borrowers.
Because the bond market shut down after the New York
terrorist attacks, it was unknown whether lenders would continue
to lend. But rather than stop making mortgages, Holroyd says, some
are simply pricing loans based on Monday's market trading. Others
were coming up with mortgage rates based on their own formulas.
When the dust settles
Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio,
says he expects investors to flee from stocks in "the very
short run" and put their money in Treasury bills, notes and
bonds because those instruments are viewed as a safe haven. That
will cause Treasury yields to drop, so "I think we can anticipate
a drop in mortgage rates," Mayland says.
Because mortgage bankers don't have the bond information
they need they "either take some risks or defer," Mayland
says, adding, "I'm not sure how many people are going out today
and buying a home and acquiring mortgage financing today."
What about the longer term? Bryan Taylor, president
of Global Financial Data, a database of economic information that
goes back more than 200 years, doesn't believe that the attacks
will have a long-term effect on the economy. In an analysis
posted on his company's Web site, he says he thinks that in the
short-term oil prices will rise and stocks will fall, following
the usual pattern that we see when the United States is involved
in a war.
But within a few weeks, stock and bond markets tend
to head back to where they were before fighting started, and Taylor
believes the markets will follow the same sort of pattern after
these terrorist attacks.
Mayland notes that European stock markets generally
closed in positive territory on Wednesday, so they recovered from
the shock of the attacks quickly. If the U.S. stock markets drop
much after they reopen, Mayland expects the Federal Reserve to jump
in and cut interest rates earlier than expected. That would reduce
adjustable-rate mortgages, which Mayland says are becoming "a
more interesting and viable product."
Bankrate staff writer Michael D.
Larson contributed to this report