Will The Election Outcome Impact Record-Low Mortgage Rates?
The path from mortgage rates to the White House is a circuitous one. There is no direct route, as the president doesn’t control rates, but there are factors the president controls—in tandem with Congress—that can have a major influence on them.
As we pass the Nov. 3 election, mortgage rates are still hovering near record lows. The 30-year fixed-rate mortgage is at 2.81%, according to Freddie Mac’s latest Primary Mortgage Market Survey.
These are the lowest rates on record, and they’re generating lift to the housing market, as refinance applications are up 80% year-over-year and mortgage applications to buy a home are up 24% compared to last year, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Heightened lending activity is a ballast in today’s shaky economy.
The question is: What will happen to rates after the election? We talked to a few experts in the housing and mortgage industries that weighed in on how the presidency can sway the economy and in turn affect mortgage lending and rates.
A Few Factors Consistently Influence Mortgage Rates
We know that mortgage rates are driven by a few things: Treasury yields, the economy, the Federal Reserve (policy, not the prime rate) and the housing market. However, these factors don’t necessarily operate in any kind of prescribed pattern. Rather, like a Rube Goldberg device, one action can set off a chain of events that impacts rates. In 2020, that action was a global pandemic.
Before President Trump declared Covid-19 a national emergency, the housing market was strong. Home prices were steadily rising and mortgage rates were steadily falling from their five-year peak of around 5% in Nov. 2018, landing at 3.36% one day before Trump issued the emergency declaration on March 13. In some ways, buyers and sellers were splitting the difference. Buyers got low rates and sellers were making money. This was keeping the real estate market hot.
After the pandemic settled in, mortgage rates continued to slide, home prices continued to rise and lending activity went through the roof. Housing has been the hero of the Covid economy—leading it out of a recession—as sales spiked 59.3% in the third quarter.
This could’ve been a very different situation for the housing market if not for a few key actions from the Federal Reserve, Congress and the president.
How Congress, Trump and the Federal Reserve Rescued the Housing Market
When Congress passed the $2.2 trillion economic stimulus bill known as The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) and Trump signed it into law on March 27, they altered how Covid impacted the economy, saving millions of workers, homeowners and small businesses.
The CARES Act offered forbearance for homeowners who could no longer afford their mortgage payments due to furloughs and layoffs, and it saved lenders from a tidal wave of defaults and foreclosures, which would have caused lending to slow down if not completely seize up.
Forbearance again are on the rise, ticking above 3 million as of Oct. 27, according to a recent report by Black Knight, a mortgage data analytics company. This is about 5.7% of all active mortgages, representing approximately $619 billion in unpaid principal. Without the CARES Act, this health crisis could have caused a massive upheaval of the housing market, leaving people without a home, ruining credit and causing major losses in the lending space.
In tandem with the CARES Act, the Federal Reserve pledged to buy mortgage-backed securities by the billions per month, which put downward pressure on mortgage rates and injected liquidity into the market. The result was that lenders began lending at a much higher rate than they did even before Covid.
These moves have helped keep lending institutions from pulling back, and they have also kept a lid on mortgage rates, two key factors in jumpstarting the economy. But the CARES Act, which helped prop up the mortgage market, could eventually hurt it. Further, the economy at large, as well as the housing market, could take a hit if Congress and the president—whomever that is— don’t take further action.
What May Prompt Lenders to Stop Lending
The stock market has proven turbulent recently, as investors have been nervous about the lack of progress on a new relief package, the looming election and a resurgence in Covid cases. Indeed, this uncertainty is driving investors to the relative safety of Treasuries, which usually affects mortgage rates.
“Over the last few days, we’ve seen a lot of people going to Treasuries, and it does pull down rates. If you look at the global picture there are a lot of negative rates. However, there is a floor,” says Bryan Shaffer, principal and managing director at George Smith Partners, a real estate investment firm. “If rates go too low people feel very uncomfortable. We saw in both the commercial and residential side that 3% is the comfort level, lenders don’t like to go below there.”
Still, the forbearance relief, which prohibits lenders from offloading loans that are delinquent via foreclosure, eventually could prompt lenders to raise rates and tighten credit, which would hurt the economy.
“If mortgage delinquencies spike and lenders are prevented from foreclosing, it could affect their desire to make new loans, limiting the availability of credit for new borrowers or raising the bar for loan qualifications,” says Gary Beasley, CEO at Roofstock, an online marketplace for residential real estate investors.
If lenders perceive that people won’t be able to pay their mortgages and there’s no safety net in the form of more relief, lending could freeze, which could have irreparable consequences to the economy.
Currently, government sponsored enterprises Fannie Mae and Freddie Mac are buying about 70% of mortgages, including qualified loans in forbearance (this has been extended until Nov. 30), which is helping the housing market stay afloat, says Michael Sema, CEO and founder at mortgage lender Get a Rate.
Even with this support system in place, another lockdown, even regionally, would have a profound effect on lending.
“Banks definitely get nervous when thousands or millions can lose their job at once without an end in sight. And of course the longer this goes, the slower the recovery in the broader economy, the higher the potential impact on housing,” Sema says.
That’s why experts are calling for more relief, even though third-quarter GDP growth was positive.
“We hope the policy implications of third-quarter GDP growth are minimal. The strong rebound won’t deter the Fed from keeping its foot on the accelerator, but the risk is that the rebound reduces the urgency among lawmakers to pass fiscal stimulus,” Ryan Sweet, senior director at Moody’s Analytics, said in his Economic Roundup analysis. “The economy needs additional fiscal support, as the easiest part of the recovery—the reopening of the economy—is behind us.”
Whether Congress approves relief—and what a relief package would look like—may well depend on what happens Tuesday.
Borrower, Business Relief and Stimulus is Key For Lending Activity
Since the CARES Act expired in July, Congress has not been able to agree on a follow-up plan. The Democratic-controlled House initially passed a robust $3.4 trillion relief bill called the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act in May, which called for a $600-per-week added unemployment benefit, $75 billion in mortgage relief, $100 billion for rental assistance and $75 billion for the Paycheck Protection Program, a relief program for small businesses.
However, the HEROES Act was ultimately rejected because of “non-Covid-related demands and far-left policy riders,” Senate Majority Leader Mitch McConnell said in a statement.
Shaffer believes that a big Democratic victory where Democrats flip control of the Senate and the White House, would mean a big stimulus package, which could help the housing market continue to grow.
“The most interesting thing is the Senate, which is controlled by conservative Republicans who don’t like these spending programs, has this ideology that we can’t spend our way out of this problem. They want people to get back to work. But, that’s shortsighted,” Shaffer says. “The problem with Trump is that he hasn’t been able to get senators behind him to extend PPP and some of the stimulus programs that worked.”
Shaffer speculates that even if the Democrats can’t flip the Senate, a President Joe Biden might be able to push a stimulus package through because he has friends on both sides of the aisle.
Jarred Kessler, CEO at EasyKnock, a company that offers sale-leaseback options for homeowners, agrees that a Biden presidency would mean help for the housing market.
“Joe Biden winning the election would be beneficial to the housing market, because of his push for a second stimulus bill, which I believe would likely rescue tenants instead of extending the eviction moratorium,” Kessler says.
Although Moira Taylor, co-owner and mortgage broker at Taylor Made Realty, doesn’t think the presidential election will have an enormous influence on mortgage rates, she does think that how they handle the economic pressures borrowers are facing will make a difference in the lending space.
“With unemployment being at an all-time high, not only will the interest rates need to remain low or be lowered, but a program must be put in place to stop massive foreclosures,” Taylor says.
Looming on the horizon are the 3 million forbearance that will eventually expire. If Covid drags on, cratering the economy, many homeowners in forbearance might not be able to repay what they owe or resume making payments. While loan modification might be an option for some borrowers, there’s no guarantee that homeowners who need additional help will get it.