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Bracing for impact: What the current market volatility means for mortgage brokers and borrowers

It’s amazing what a couple of days can do to the human psyche.

Market volatility

If you had gone on vacation on Thursday to a remote island with no Internet, and you landed back at Pearson airport Monday night and turned your phone on for the first time, you would be in for a rude awakening.

Over the last two trading days, stock markets have erased trillions of dollars in equity value, the Japanese stock market has had its largest collapse since Black Monday, and traders, investors and financial professionals are all wondering what happened.

Now, none of this is really surprising. I have written blog after blog after blog explaining that the volatility was going to pick up, and that you-know-what was gonna hit the fan.

Well, here we are. The only thing that surprises me is how surprised people are that the last couple days have happened. It has to happen. This is how cycles work—and for those of you that want lower interest rates, this is how you get them.

Of course, lower interest rates won’t save the world this time, but what we are seeing unfold is exactly what has to happen to get rates down. Literally, financial markets and the economy have to fall off a cliff.

The largest problem with finance as a whole is the problem with bias. Never ask a barber if you need a haircut, and never ask a mortgage lender if they want lower rates.

The answer will always be the same. Lenders want lower rates to juice volume, or so they think will happen. On Monday morning, Jeremy Seigel, professor Emeritus at Wharton School of Business, went on CNBC and called for the U.S. Federal Reserve to immediately cut the overnight rate by 75 bps, and then cut another 75 bps in September.

Now, I took a couple classes with Mr. Siegel, and I have spoken with him a couple of times. Nice guy, and smart, but calling for the Fed to cut rates by 75bps immediately is probably the dumbest thing I have heard in a while. Now, notice I didn’t say it won’t happen, I just said it was a bad idea.

Since what’s old is new again, let’s take a stroll down memory lane, shall we? The recessions of 1990, 2001, 2008 and 2020 were all preceded by large rate cuts by the Fed and the BOC. Hmm, notice a pattern?

Every time a large rate cut comes out of nowhere, markets take that as a signal that we are screwed, and the selling gets worse. Bad news begets more selling, which begets more bad news and round and round we go in a self-fulfilling negative feedback loop.

Of course, many will claim this is a normal correction in the course of markets. I disagree. Normal-functioning markets do not see intraday declines of double digits.

You don’t simply slice 12% off the value of world stocks because of a normal correction in three days. However, the great thing about an opinion is that I can have an opinion, you can have an opinion and it doesn’t mean either of us is right. But, why in the heck should any of this matter to a mortgage broker?

Lessons for mortgage brokers in all of this chaos

A lot of things are working together right now that could bring some problems to the mortgage world. I will explain a couple of them you may not be aware of, and how they could impact you.

  1. Bond volatility. When bond yields get volatile like they are, lenders are not going to react as quickly as they normally do. Rates take the elevator up, and the stairs down, but now that there is volatility, they won’t move. Lenders get scared when bonds start making large intraday moves. Hedging costs get expensive, and risk goes up. If you’re not aware, Canadian banks are pretty risk averse. It is risky to hold billions of dollars of bonds and notes that can change by the minute in a big way.

    So, spreads will increase. For every 2 basis points that bond yields move lower, you will be lucky to get 1 bp in mortgage rate reduction—eventually. This will pad the spread, and make up for the perceived risk. Banks also have a tendency to clamp down on underwriting. Need an exception? Better luck finding a unicorn walking down a dirt road. This is going to make it harder and harder for all but the best clients to find funding. Now, please understand, this won’t happen tomorrow, but you will notice that credit becomes tighter and tighter and tighter.

  2. With world markets in a bit of turmoil, credit starts to retract. Some may call it a credit event, but I won’t. A credit event, in my opinion, is 2007 when we saw credit dry up overnight. This is not that, but credit will start to reduce between banks, financial markets and eventually to borrowers. As the BOC is still performing Quantitative Tightening, they are also still sucking liquidity out of the system, and if banks also start to restrict funds flowing out, you may find it is a dry desert for new funds. A credit event may come if we continue down the path of the last few days, but I am not ready to call that yet.

  3. The wealth effect. The wealth effect will start to reverse course quickly. When people see their house going down in value, they see their investments dropping and their retirement accounts getting smaller instead of bigger, this has a mental effect on people. People that see this start to hunker down financially, put off large purchases and stop buying things, like, well, houses for one.

    With so much uncertainty out there, the general population will slow down with purchases of a lot of things, big-ticket items being one. If we see markets continue with the volatility like we have the last few days, it will start to create negative sentiment in the marketplace. Someone will get nervous, need to sell and drop their price. Others follow, and we are back to the downward spiral. Appraisals start to reflect lower values, which prices new home sales in the market, and once again, round and round we go.

  4. Volatility: Things will stay wild. That doesn’t mean straight down, but you will see large swings in stocks, currencies, bonds, crypto—you name it. In fact, on Tuesday I bet we see a large bounce in the stock markets. This does not mean it is all over. Yields will look like they are attached to a yo-yo string. Every Fed governor that speaks will move yields. Every time someone calls for an emergency rate cut, yields will move. Every time government reports are released like CPI, employment, etc., yields will light on fire. This is normal for this stage of the cycle.

    Use it to your advantage: Get your buyers pre-approved and lock in rates. If they go up a lot, you look like a genius. Deal with lenders that have rate drops. There is a good chance you could be 25 to 50 bps lower at funding if things go bad. Again, you look like a hero to your client. Transfers and renewals that were sent out a few weeks ago, we can finally compete with!

Predictions

Oh how I love it when all the talking heads get on the media. Some will jump on and scare the you-know-what out of you, claiming the stock market is going to zero. Thirty minutes later, a talking head will say the stock market is going to double from here. Neither of them are correct.

Somewhere in the middle is probably more accurate. Do not let these people on the television determine your predictions. Some will say interest rates are going negative, others will say we are headed back to the 1980s’ double-digit interest rates. Neither will happen, so don’t get sucked in. Stay level headed.

Your clients, at least a lot of them, will get sucked into the news, and start to worry. They need trusted advice, and they need to make sense of it all. Be that source of trusted advice. Read as much as you can from different sources to get a handle on where you feel things are going, and prepare for that.

I fully encourage people to read and listen to as much as they can so they can be as educated as possible. Bruno Valko from RMG puts out some fantastic info on his emails. If you want to know Canadian data that could change mortgage rates, Bruno is probably the best place to go. Ron Butler usually has some pretty good pieces out on X.com, and “The Tok.” Go subscribe. There are hundreds of economists that you could watch, listen to and learn from to become better at your craft.

There are going to be some rough days ahead, and there are going to be some good days ahead. Learn to balance out the good with the bad. I am hoping that the Fed and the Bank of Canada stay out of the fold, and do not intervene with rates. The market needs to get weaned off the financial boob of low interest rates.

Markets need to find their own level without intervention. When central banks intervene, there are always unintended consequences.

Just because we may recover from this little August sell-off doesn’t mean we are in the clear. We are heading into a dangerous time of the year—September and October, and things could get really real, especially with a U.S. election in November


This article was originally posted for subscribers of MortgageRamblings.com. Those interested can subscribe by clicking here. Opinion pieces and the views expressed within are those of respective contributors and do not represent the views of the publisher and its affiliates.

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Last modified: August 6, 2024

Ryan Sims is a mortgage agent based out of London Ontario. Ryan started in the financial services industry at the age of 15, taking on a part time role at RBC. After graduating high school he moved throughout various positions at RBC, finishing in the Collections Department in Downtown Toronto. After moving out of RBC, Ryan spent time with Citi Group, before moving back to Southwestern Ontario to start his own financial planning practice. Ryan recognized through his various roles that there was a large gap in the financial services industry and wanted to change that. He was one of the first planners in Ontario to hold an insurance license, a mortgage agent license, and an investment license, allowing him to tackle all areas of clients’ financial lives. After 17 years of running his own business, and working tirelessly for his clients, Ryan sold his financial planning practice in 2021 at the age of 40. A graduate of Seneca College, Ryan holds degrees from the Investment Funds Institute of Canada, The Canadian Securities Institute, and is a current holder of an Ontario Life Insurance license, and an Ontario mortgage agent license. Author of www.mortgageramblings.com, Ryan's multiple licenses, and past experience make him a great source for credit markets, stock and bond markets, financial planning, and consumer behaviour. Ryan has successfully passed the behavioral finance program, and the Fintech Digital Finance program from The Wharton School of Business at the University of Pennsylvania. Ryan is married to his wife, Kinga of 20 years, and has 4 boys ranging in ages from 13 to 20, and spends most of his time in his adopted home – the US Gulf Coast.

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