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This episode with Mark Aalto was very timely, it will answer a number of questions about what's happening with interest rates. We saw them drop significantly. We then saw them spike up unexpectedly. And then we had the Fed step in and drop their interest rates all the way from zero to 0.25%. In this episode we discuss why that happened, and what we can expect moving forward. This episode is going to help you not only understand what's happening, but it's going to give you very simple language through which you can communicate to your clients and help them to understand.
Show Notes
Justin Stoddart
Hey, welcome back to the Think Bigger Real Estate Show. I'm your host, Justin Stoddard. Today's episode, we're gonna cover three points. Why did rates go down? Why did they spike back up? And now what can we expect with the recent fed changes of moving the rates from zero to 0.25? I have with me today an amazing individual that's going to help us with that. Here's what I want you to know is that the purpose of this show, again, is to help you to think bigger. My personal mission is to inspire you actually to wake you up to the potential that's inside of you, and then to inspire you and help you to live in pursuit of that potential. Today's guest again, his name is Mark Aalto. He's been a loan officer for over 27 years, been in the industry for over 29 years. And during that timeframe, he's done between 4,500 & 5,000 loans. Needless to say, he's been a student of the market he's been a student of patterns and what causes rates to go up what causes rates to go down, and we are happened to be in very uncertain times right now and that we are trying To figure out what the Fed is going on with rates, Mark, you, thank you for coming on. Mark, thank you for coming on the show today.
Mark Aalto
It's my pleasure, man. It's always nice to well, you always inspire me, man. So it's good to be part of this. And I hope that I can shed some light and help a little bit with what's going on and why and all that other good stuff. You
Justin Stoddart
know, I appreciate you mark, because you really hand selected to kind of be the spokesperson today because you're very much a kind of a giving soul. You know, you're constantly reaching out educating the marketplace, helping people to really understand, hey, here's the changes, here's what you can expect. So because of your kind of outward reach constantly educating all of us, I thought, you know, you're the, you're a perfect person to bring on to really help us understand kind of first question, which is, you know, rates dropped all the way down to 3.29%. Can you give us just an understanding as maybe what caused that and and kind of what causes rates to go down like that?
Mark Aalto
Well, and just to kind of start this off, so uncertainty is nothing new, right. And the bond market is ultimately, what rates are tied to. So I don't know that I'm necessarily the most technical loan officer out there in terms of explaining all this stuff. But hopefully this will be in a way that folks will understand. So if you want to rewind a little bit, so we rewind back to November of 2016. So the night before, it was, a lot of people thought that Hillary was going to be elected. And this is not political on my part, I want to make sure that everybody knows that you saw the stock futures, which is how people are looking to see what the stock market's gonna do. The next day was literally way down. And so a lot of us as loan officers thought, Hey, you know, rates are going to go from three and a quarter, which is around where they were, at the time, even lower. And what ended up happening instead is that Trump got elected, which is something that the market didn't expect. That's the important piece is not so much that a person got elected. Instead, it was a person that people didn't expect to get elected. And so over the course of just three days, we had rates go up about three quarters of a percent. In other words, volatility is nothing new to this industry. And basically from that point, In November of 2016, until about November 8 2018, rates were on a gradual climb. And so as loan officers, we would just basically take an application and lock it as soon as we could, because we knew that rates were going to get worse. And so what's happened basically, since November of 2018, is rates have been gradually going down. And the reason why that's important is because it has been gradual, it's not been sudden, it's been something where, when it comes to the markets in general, they don't like a lot of volatility. And so so here's something that I think everybody should know, that can help you out. So when there are periods of times when there's volatility, people that invest in the stock market, we're talking about people that have a lot of money or even might be mutual funds, hedge funds, all that other good stuff. What they end up doing is they were looking for a safer place to put their money. They're worried that basically by investing in the stock market, it's not the right place to put their money. They're looking for something safer. The safest thing is treasuries, right. So if you're looking for something that's a guaranteed investment, treasuries are the most safe thing that there Is the next the next rung up, something that's going to pay you a little bit higher rate of return, but still is considered safe are mortgage backed securities. So that's just a very broad background and a way of saying, okay, when when the markets are crazy when there's a lot of tumultuous stuff going on, people have a flight to safety and traditionally mortgage backed securities or a flight to safety. So what you saw from November of 2018, until, you know, about two weeks ago, was that mortgage backed securities were attractive because whether it was trade chalk talks with China and all the different stuff that was going on with that, whether it was a Coronavirus, all these different things, people were looking for a safe place to put their money because they were worried about the stock market. Now, if you talk to a loan officer last Monday versus today, it would have been totally different conversation because we just had a day after day after day after day of rates improving and the mortgage backed securities doing better. So in other words, we're we track what goes on in the bond market. The bond market is what actually makes rates do what they do so. So last Monday, we actually had a situation where rates were with a lot of lenders were right around 3%, three 3% to three and a quarter percent since last Monday, we've just had so much volatility, the mortgage backed securities, the bond market has been going absolutely the opposite direction. I know this was a way more long winded answer to what your original question was, which is just basically what caused them to go down, right. So what caused them to go down was it was something gradual, there was uncertainty, people were looking for a safer place to put their money.
Justin Stoddart
So In short, if I could simplify that, and again, I think part of what we're doing here is that probably most real estate agents understand this, you know, to a large degree, but really what we're doing is giving them very simple language that they can then take and give to their clients, right? Because even if it makes sense in their brain, they've got clients that are totally confused as to what's going on. They're trying to give them some sort of assurance, they feel confidence to continue forward and and make the proper move for they and their family. So I'm going to simplify this you correct anything that I say? So if I were speaking to my clients, let's say that I'm a real estate agent, I'm speaking to my clients, I would say that typically the mortgage rate has an inverse relationship to the stock market, the stock market goes down, then rates tend to go down as well. Right?
Mark Aalto
Correct. Yes.
Justin Stoddart
Because people are concerned about the stock market, they're moving their money to mortgages, right? to bonds, right? Which is in causing those rates to drop, right?
Mark Aalto
That's correct.
Justin Stoddart
Okay. So then, again, if the stock market starts to go back up, then people have more confidence they started start to put their money in the stock market. Money leaves mortgage backed securities, causing rates to go higher. Right. So it's not inverse. It's actually like direct correlation, stock market goes down, you can expect rates to go down stock market goes up, you can expect rates to go up. Is that is that a totally simplified version? And if not, please correct anything I've said there.
Mark Aalto
I think it's absolutely fine. And one thing to remember is that I mean, the inverse relationship was is the bond market. So when the bond market goes up, and the stock market goes down, that's usually what you've got. What happened last week, though, is that the stock market went down and the bond market went down. And that's not normal. And on top of that, like the 10 year Treasury, which is what a lot of people look at, when it comes to where they think that rates are going to go, was at all time lows. So normally, normally, normally, normally, the bond market rates, there are long term investment, long term investments hate inflation. That's why when the stock market does well, typically rates get higher, because basically, when the stock market is doing better, it's normally going to put pressure on inflation, if that makes sense. So what happened last week And what's happening in general in our industry right now is we we are having huge capacity issues. And this is just, you know, I mean, we don't necessarily want to talk about, hey, this channel is better than that channel. In other words, I'm a broker. Some people might be a retail lender, some people might work for credit unions, some people might work for a bank, every single outfit that's out there that does mortgages, is having capacity issues. And part of that is just because, you know, maybe it's social media, maybe it's the great job that realtors are doing to alert their customer base that rates have dropped. The whole thing is just that, like, our industry is just completely flooded. So today, the bond markets improving right, the bond market improved by at one point it was up by 150 basis points, which is a ton. So just put it this way, that's a very, very, very large climb in one day. The problem is, though, is that one of the reasons why rates are higher than they shouldn't be. It's just because we have huge capacity issues. We can't deal with the volume.
Justin Stoddart
So that's what caused and again, this is really moving on to question number two, right, which is race We're at 3.29 people are starting to lick their chops like, hey, it's refinance time. And all of a sudden it's like at five, right? I mean, it took like a huge jump. And what you're saying is, it didn't really have anything to do necessarily with the bond market, it was just that lenders in general were like, at capacity like, we don't have enough supply of qualified people to do any more refinances. The only way you're gonna be able to do this is if you pay more points is that is that kind of a safe way to put that?
Mark Aalto
Well, I think it's a little bit more drastic than that, to be honest. So like, if you were normally if you go into bankrate.com you're like, there's no way people can get those rates, right. I mean, you have a lot of people that are like, you know, three and a quarters on their advertising to 25 you know, the things are crazy when you go to bank rate right now and they're advertising 6% or 5%. That's basically them just saying, you know, look, we can't handle anymore business right,
Justin Stoddart
Stop, stop. No more. I can't do it go away.
Mark Aalto
Right. Exactly. And you know, even as loan officers are working long days, you know, You know, and I know, they're really good people in our industry that are literally getting up at like four in the morning working until 10 at night and just doing this as helping as many people as they possibly can. That kind of came to a screeching halt at various times last week. So maybe, maybe the lenders I worked with on Monday, were some of the first ones to raise their rates maybe on point, you know, maybe a little bit later in the week. But the challenge now is that there are lenders out there that are the outliers that are giving the lower rates, they're going to get absolutely swamped with applications, and then at some point, they'll have to raise their rates just because they can't keep up. Yeah. It's it's really crazy,
Justin Stoddart
Somebody that you still have to have qualified, trained people to do that work. And now people are working overtime, right? There's a certain cost that's incurred upon an industry, when like you said, it's flooded with that much demand. But at some point, costs are going to increase simply to support the amount of demand that's coming in. So that's what that's what caused the spike, correct?
Mark Aalto
Well, yes, but it's all the spike is also it's not just artificially higher so that people are trying to make more money. It's artificially higher because people are just basically saying they can't, they can't take on anymore. Another thing people need to realize is that one of the things that we deal with in the lending industry is basically what's called an EPO. And EPO is an early payoff. So basically, you've got people that did financing, say in November 2019, let's say that they're coming back to do a refinance right now, whoever did that original loan right now is going to lose a ton of money. So what's going on with some of these lenders is they're probably looking at the fact that if they don't raise their rates, and they don't discourage the refinancing, they're gonna have a ton of early payoffs. And what a lot of people don't realize is that refinance markets aren't necessarily something that make everyone a lot of money. Yes, loan officers do really well in refinance markets, because we're commission based, but if you look at the lenders that are making money by holding on to those loans, when they don't hold on to those loans, like for two years, you know, it's let's say it's six months. I mean, I don't know if our realtor friends know this, but as loan officers in a lot of cases, we actually have to pay back our commission. If a loan is paid off in six months, so that's how it impacts us. But the whole reason it impacts us is because the industry itself loses money when people pay off their loans too quickly. So it's capacity. It's also early payoffs. But another thing to take a look at those, like, let's take an example of a local lender, and I'm not picking on these guys, okay, so I work for Pack Res, or Pacific Residential is a great lender, so I'm not seeing anything negative. The way that they do loans is as a correspondent, which basically means like, Justin, if you wanted to flip houses and you had a line of credit, you would use your line of credit to buy the house. And then once you renovated it, you would sell it, it would basically be something where you would repay your line of credit, then you could do it more. That's the way that mortgages work with the correspondent, they have a large line of credit, they they borrow against it, they fund their loans, and then they sell those loans. What happens when that line of credit is not enough? Or what happens when they can't pay it back fast enough? Those are some of the capacity issues too. So it's, you know, it's just, it's a whole myriad of stuff all happening at the same time.
Justin Stoddart
That's it. All right. So yesterday, the Fed comes in and makes a big announcement. They're lowering rates from zero to 0.25%. Right now, that's not mortgages help us understand the difference quickly. And also, what what we might be able to expect with rates like do we expect rates to now go below three because of this change?
Mark Aalto
Well, technically, they should. But the challenge, though, is, like you said, the federal funds rate is the rate that banks are borrowing from one another. And in order for the US to do this, they also had to have agreements from other nations all over the place. So this is, again, this isn't just a United States thing. This is a global thing right now. And you get to some of those other underlying causes coming up here as well. But what happens is when there are times when the federal funds rate or the prime rate dropping can influence rates, it's when it's unexpected. So again, it's all about the volatility so we were expecting half a percent, let's say it's 1%, one and a quarter percent, whatever it was, the fact that it's so much higher than what we expected, should be enough to give us better rates. The challenge, though, is that we already have low enough rates, right? The challenge is capacity. And if it's a matter of liquidity, which is something altogether different than some of the changes that were made, were things that should help rates and I actually thought individually as a person that we would see lower rates from lenders because of liquidity issues.
But I promised you, I try not to get too technical here. I'm getting technical. So one of the things that the Fed also did, let's let's look at it just as supply and demand. So when you have issues with liquidity, it's typically something where you don't you don't have enough supply or you don't have enough demand one of those two, right. And so what the Fed also did is they they delegated $200 billion to purchase mortgage backed securities. In other words, they're becoming a big buyer of mortgages. Right that should increase the liquidity And so today when you look at like the the bond market, the bond market is way higher. So I mean, the liquidity is there, the demand's there, the challenges now those it's still capacity. So as long as capacity is the issue, you won't see lower rates. That's and so we get through all these refinances that we already have, and once we're through those ones, I would anticipate that we will see rates get lower when we're getting on to our next round. So in other what 30 to 45 to 60 days, depends on how long the lenders take to close the loans. But yes, I would say that and you know, again, one of the things that I would definitely urge for all of us is to think about what sorts of timeframes may be increasing, you know, are we going to have our friends in escrow be strained? You know, are we going to have appraisers have longer teurn times, I would anticipate that the refinances in particular will take longer to get through the system. And obviously, the main thing is we want to make sure that purchases aren't impacted and most lenders are going to do something to make sure that that doesn't happen.
Justin Stoddart
Yeah, yeah, well, it's it is interesting, right, as you are currently working from home, which is not your typical, work place, right? To, again, simply to adhere to the CDC recommendations of, you know, and I, I commend you for that, you know, we, as a company have a continuity plan in place to ensure that business continues, even if, you know, the majority of our workforce is working from home, and there's been some scrambles and some conversations behind the scenes of ensuring that our workforce is able to be completely competent, and with all the tools that they need, during, you know, during any type of, you know, situation where, you know, we're asked to be quarantined and separated from all co workers, you know, business goes on, so I know that they're, you know, kind of the, the, the underlying thread of all of that is that we don't know exactly, despite company's best efforts and interests and ensuring that work goes on at a normal pace just to keep up with, you know, the current demand. There's also this component of How is our working situations going to change to accommodate the passing and kind of dealing with this pandemic?
Mark Aalto
And that's the whole thing is that the situation is very fluid. And I mean, you can read a lot about what's going on. My concern, you know, if we learn anything at all from the past, it's a, of course, that there are certain elements of it that we don't really want to repeat. My biggest concern right now is is, you know, basically wages, employment, I really hope that we do not have I really hope that we do not experience the same sort of layoffs and job loss that we did the last time around, because that's truly what In my opinion, will lead to some economic issues in our particular industries. This is not at all to downplay the fact that there are people out there that are absolutely going to be suffering, whether it's people that work on a hourly basis, whether it's people that are in the restaurant industry, there are a lot of industries They don't have time off, but don't have the ability to take time off. And when you're forced to take time off, that is one of those things that can be really difficult on folks. So the challenge on something like this is that it's really easy for any of us, me included to to look back and see what happened and just say, Well, I understand why rates went up already, but it's a lot harder to forecast what's going to happen next.
Justin Stoddart
Yeah, I think, tons of uncertainty, I was privy to a investor call from or highlights I should say, from an investor call with Goldman Sachs. And the end all be all is this feels a lot more like 2001 than 2008. Right. The the underpinnings of the of the economy are very strong. Obviously, there's tons of uncertainty with everything that's happening here. And yet, because in 2008, again, the the underpinnings of our economy were weak, right? It was built upon sand and I feel like If we can look back and use anything from our history to try and predict what this might look like, still tons of uncertainty, nobody knows for sure. But I think we could probably look more at 2001 than 2008. Would you agree with that?
Mark Aalto
Well, I would and I think the the thing that the thing that I'm thinking of here is just that, what I hope is that our efforts and again, I don't want to get down too much the rabbit hole on the on the, you know, Covid situation, but I hope that our efforts are far enough in front of what's coming down the path to help us out. So, you know, is this, you know, I would say that the second quarter of this year is going to be it's going to be bad for the economy. What I hope for is that the third you know, third quarter and moving forward will be good and again, I'm way outside of my lane at this point. Ultimately, I'm here to help realtors, I'm here to help, you know, consumers. My job is to help people get into houses. So you know, as to what the economy is doing itself. It will impact all of us, I just hope that we're taking action soon enough to where we get through this period more quickly.
Justin Stoddart
Yeah, yeah, no, I think we're all in agreement on that. Mark. I know you're also just from the decorations behind you, we know that your family may have had family is important to you. And I would just love to ask this question. What's your favorite part about being a dad since that's near and dear to my heart? And the reason why we do all this stuff, right is to support families and causes we care about what's your favorite part about being a dad Mark?
Mark Aalto
Well, you know, it's funny because a lot of times I've had family members or other people that I know talk about parenting. Sometimes I hear people say, Hey, man, you think this is bad. We'll wait until this and wait until that and wait until the other thing and quite frankly, I have enjoyed the whole process. It's been a really great journey. So I think as much as anything, it's just the self discovery aspect of it. I didn't ever know that I would enjoy being a dad as much as I do. So, I mean, you have that experience like six times over. So sorry, I'm not making fun of you, but I don't know how you do it, man. I don't
Justin Stoddart
No, I just married a superhero. That's the only way. It's whatever possible. So let me ask this final question mark, you're a big thinker. That's how you've been asked to come on to think bigger real estate show today. Now, what does a guy like you do to continue to be a big thinker to to continue to expand your own possibilities? Teach us.
Mark Aalto
Ah, wow. Well, to be honest with you at this point, I'm much more focused on mentoring and helping the people that are around me. I have a couple people that I'm working with on my team right now, that just mean the world to me. And I just want to do what I can to make their journey in this process a little bit less chaotic than mine was and if I can help them, get ready for some of those next big, big pushes, that's the thing for me. So my time horizon of doing this is maybe another five to 10 years although who knows the stock market but you know, those are Amy and Mike, the people that work for me, I want to set them up for success and I'm very focused on making sure that they have those tools to do this in the future.
Justin Stoddart
That's powerful mark. Again, Mark. Also with advantage mortgage, thank you so much for taking the time to come on and share your expertise in between 40 505,000 loans, you've learned a thing or two, obviously, all of us are in in uncertain waters now, but just your understanding of the principles of what causes mortgage rates to do what has been very helpful for all of us, hopefully, there's some key points that people could take away, both for their own financial situation as well as for, you know, if you're a real estate agent, there's some things here that will help you to advise your clients to lead your clients. And I believe that sales at its highest form is leadership. And there's probably never been a time where your clients need your leadership and need your advice and your counsel more than ever. So Mark, thank you for giving us the tools and the you know, the language and the understanding to be able to you know, to do that better than we have ever before. So appreciate you very much my friend. Thank you for always being such a great contributor and supporter, and I want to remind and give everyone this final charge which are three simple words and they GO THINK BIGGER! Mark, thanks so much for helping us do that today. And we will be in touch my friend.
Mark Aalto
Thanks. I really appreciate it.
Hey, welcome back to the Think Bigger Real Estate Show. I'm your host, Justin Stoddard. Today's episode, we're gonna cover three points. Why did rates go down? Why did they spike back up? And now what can we expect with the recent fed changes of moving the rates from zero to 0.25? I have with me today an amazing individual that's going to help us with that. Here's what I want you to know is that the purpose of this show, again, is to help you to think bigger. My personal mission is to inspire you actually to wake you up to the potential that's inside of you, and then to inspire you and help you to live in pursuit of that potential. Today's guest again, his name is Mark Aalto. He's been a loan officer for over 27 years, been in the industry for over 29 years. And during that timeframe, he's done between 4,500 & 5,000 loans. Needless to say, he's been a student of the market he's been a student of patterns and what causes rates to go up what causes rates to go down, and we are happened to be in very uncertain times right now and that we are trying To figure out what the Fed is going on with rates, Mark, you, thank you for coming on. Mark, thank you for coming on the show today.
Mark Aalto
It's my pleasure, man. It's always nice to well, you always inspire me, man. So it's good to be part of this. And I hope that I can shed some light and help a little bit with what's going on and why and all that other good stuff. You
Justin Stoddart
know, I appreciate you mark, because you really hand selected to kind of be the spokesperson today because you're very much a kind of a giving soul. You know, you're constantly reaching out educating the marketplace, helping people to really understand, hey, here's the changes, here's what you can expect. So because of your kind of outward reach constantly educating all of us, I thought, you know, you're the, you're a perfect person to bring on to really help us understand kind of first question, which is, you know, rates dropped all the way down to 3.29%. Can you give us just an understanding as maybe what caused that and and kind of what causes rates to go down like that?
Mark Aalto
Well, and just to kind of start this off, so uncertainty is nothing new, right. And the bond market is ultimately, what rates are tied to. So I don't know that I'm necessarily the most technical loan officer out there in terms of explaining all this stuff. But hopefully this will be in a way that folks will understand. So if you want to rewind a little bit, so we rewind back to November of 2016. So the night before, it was, a lot of people thought that Hillary was going to be elected. And this is not political on my part, I want to make sure that everybody knows that you saw the stock futures, which is how people are looking to see what the stock market's gonna do. The next day was literally way down. And so a lot of us as loan officers thought, Hey, you know, rates are going to go from three and a quarter, which is around where they were, at the time, even lower. And what ended up happening instead is that Trump got elected, which is something that the market didn't expect. That's the important piece is not so much that a person got elected. Instead, it was a person that people didn't expect to get elected. And so over the course of just three days, we had rates go up about three quarters of a percent. In other words, volatility is nothing new to this industry. And basically from that point, In November of 2016, until about November 8 2018, rates were on a gradual climb. And so as loan officers, we would just basically take an application and lock it as soon as we could, because we knew that rates were going to get worse. And so what's happened basically, since November of 2018, is rates have been gradually going down. And the reason why that's important is because it has been gradual, it's not been sudden, it's been something where, when it comes to the markets in general, they don't like a lot of volatility. And so so here's something that I think everybody should know, that can help you out. So when there are periods of times when there's volatility, people that invest in the stock market, we're talking about people that have a lot of money or even might be mutual funds, hedge funds, all that other good stuff. What they end up doing is they were looking for a safer place to put their money. They're worried that basically by investing in the stock market, it's not the right place to put their money. They're looking for something safer. The safest thing is treasuries, right. So if you're looking for something that's a guaranteed investment, treasuries are the most safe thing that there Is the next the next rung up, something that's going to pay you a little bit higher rate of return, but still is considered safe are mortgage backed securities. So that's just a very broad background and a way of saying, okay, when when the markets are crazy when there's a lot of tumultuous stuff going on, people have a flight to safety and traditionally mortgage backed securities or a flight to safety. So what you saw from November of 2018, until, you know, about two weeks ago, was that mortgage backed securities were attractive because whether it was trade chalk talks with China and all the different stuff that was going on with that, whether it was a Coronavirus, all these different things, people were looking for a safe place to put their money because they were worried about the stock market. Now, if you talk to a loan officer last Monday versus today, it would have been totally different conversation because we just had a day after day after day after day of rates improving and the mortgage backed securities doing better. So in other words, we're we track what goes on in the bond market. The bond market is what actually makes rates do what they do so. So last Monday, we actually had a situation where rates were with a lot of lenders were right around 3%, three 3% to three and a quarter percent since last Monday, we've just had so much volatility, the mortgage backed securities, the bond market has been going absolutely the opposite direction. I know this was a way more long winded answer to what your original question was, which is just basically what caused them to go down, right. So what caused them to go down was it was something gradual, there was uncertainty, people were looking for a safer place to put their money.
Justin Stoddart
So In short, if I could simplify that, and again, I think part of what we're doing here is that probably most real estate agents understand this, you know, to a large degree, but really what we're doing is giving them very simple language that they can then take and give to their clients, right? Because even if it makes sense in their brain, they've got clients that are totally confused as to what's going on. They're trying to give them some sort of assurance, they feel confidence to continue forward and and make the proper move for they and their family. So I'm going to simplify this you correct anything that I say? So if I were speaking to my clients, let's say that I'm a real estate agent, I'm speaking to my clients, I would say that typically the mortgage rate has an inverse relationship to the stock market, the stock market goes down, then rates tend to go down as well. Right?
Mark Aalto
Correct. Yes.
Justin Stoddart
Because people are concerned about the stock market, they're moving their money to mortgages, right? to bonds, right? Which is in causing those rates to drop, right?
Mark Aalto
That's correct.
Justin Stoddart
Okay. So then, again, if the stock market starts to go back up, then people have more confidence they started start to put their money in the stock market. Money leaves mortgage backed securities, causing rates to go higher. Right. So it's not inverse. It's actually like direct correlation, stock market goes down, you can expect rates to go down stock market goes up, you can expect rates to go up. Is that is that a totally simplified version? And if not, please correct anything I've said there.
Mark Aalto
I think it's absolutely fine. And one thing to remember is that I mean, the inverse relationship was is the bond market. So when the bond market goes up, and the stock market goes down, that's usually what you've got. What happened last week, though, is that the stock market went down and the bond market went down. And that's not normal. And on top of that, like the 10 year Treasury, which is what a lot of people look at, when it comes to where they think that rates are going to go, was at all time lows. So normally, normally, normally, normally, the bond market rates, there are long term investment, long term investments hate inflation. That's why when the stock market does well, typically rates get higher, because basically, when the stock market is doing better, it's normally going to put pressure on inflation, if that makes sense. So what happened last week And what's happening in general in our industry right now is we we are having huge capacity issues. And this is just, you know, I mean, we don't necessarily want to talk about, hey, this channel is better than that channel. In other words, I'm a broker. Some people might be a retail lender, some people might work for credit unions, some people might work for a bank, every single outfit that's out there that does mortgages, is having capacity issues. And part of that is just because, you know, maybe it's social media, maybe it's the great job that realtors are doing to alert their customer base that rates have dropped. The whole thing is just that, like, our industry is just completely flooded. So today, the bond markets improving right, the bond market improved by at one point it was up by 150 basis points, which is a ton. So just put it this way, that's a very, very, very large climb in one day. The problem is, though, is that one of the reasons why rates are higher than they shouldn't be. It's just because we have huge capacity issues. We can't deal with the volume.
Justin Stoddart
So that's what caused and again, this is really moving on to question number two, right, which is race We're at 3.29 people are starting to lick their chops like, hey, it's refinance time. And all of a sudden it's like at five, right? I mean, it took like a huge jump. And what you're saying is, it didn't really have anything to do necessarily with the bond market, it was just that lenders in general were like, at capacity like, we don't have enough supply of qualified people to do any more refinances. The only way you're gonna be able to do this is if you pay more points is that is that kind of a safe way to put that?
Mark Aalto
Well, I think it's a little bit more drastic than that, to be honest. So like, if you were normally if you go into bankrate.com you're like, there's no way people can get those rates, right. I mean, you have a lot of people that are like, you know, three and a quarters on their advertising to 25 you know, the things are crazy when you go to bank rate right now and they're advertising 6% or 5%. That's basically them just saying, you know, look, we can't handle anymore business right,
Justin Stoddart
Stop, stop. No more. I can't do it go away.
Mark Aalto
Right. Exactly. And you know, even as loan officers are working long days, you know, You know, and I know, they're really good people in our industry that are literally getting up at like four in the morning working until 10 at night and just doing this as helping as many people as they possibly can. That kind of came to a screeching halt at various times last week. So maybe, maybe the lenders I worked with on Monday, were some of the first ones to raise their rates maybe on point, you know, maybe a little bit later in the week. But the challenge now is that there are lenders out there that are the outliers that are giving the lower rates, they're going to get absolutely swamped with applications, and then at some point, they'll have to raise their rates just because they can't keep up. Yeah. It's it's really crazy,
Justin Stoddart
Somebody that you still have to have qualified, trained people to do that work. And now people are working overtime, right? There's a certain cost that's incurred upon an industry, when like you said, it's flooded with that much demand. But at some point, costs are going to increase simply to support the amount of demand that's coming in. So that's what that's what caused the spike, correct?
Mark Aalto
Well, yes, but it's all the spike is also it's not just artificially higher so that people are trying to make more money. It's artificially higher because people are just basically saying they can't, they can't take on anymore. Another thing people need to realize is that one of the things that we deal with in the lending industry is basically what's called an EPO. And EPO is an early payoff. So basically, you've got people that did financing, say in November 2019, let's say that they're coming back to do a refinance right now, whoever did that original loan right now is going to lose a ton of money. So what's going on with some of these lenders is they're probably looking at the fact that if they don't raise their rates, and they don't discourage the refinancing, they're gonna have a ton of early payoffs. And what a lot of people don't realize is that refinance markets aren't necessarily something that make everyone a lot of money. Yes, loan officers do really well in refinance markets, because we're commission based, but if you look at the lenders that are making money by holding on to those loans, when they don't hold on to those loans, like for two years, you know, it's let's say it's six months. I mean, I don't know if our realtor friends know this, but as loan officers in a lot of cases, we actually have to pay back our commission. If a loan is paid off in six months, so that's how it impacts us. But the whole reason it impacts us is because the industry itself loses money when people pay off their loans too quickly. So it's capacity. It's also early payoffs. But another thing to take a look at those, like, let's take an example of a local lender, and I'm not picking on these guys, okay, so I work for Pack Res, or Pacific Residential is a great lender, so I'm not seeing anything negative. The way that they do loans is as a correspondent, which basically means like, Justin, if you wanted to flip houses and you had a line of credit, you would use your line of credit to buy the house. And then once you renovated it, you would sell it, it would basically be something where you would repay your line of credit, then you could do it more. That's the way that mortgages work with the correspondent, they have a large line of credit, they they borrow against it, they fund their loans, and then they sell those loans. What happens when that line of credit is not enough? Or what happens when they can't pay it back fast enough? Those are some of the capacity issues too. So it's, you know, it's just, it's a whole myriad of stuff all happening at the same time.
Justin Stoddart
That's it. All right. So yesterday, the Fed comes in and makes a big announcement. They're lowering rates from zero to 0.25%. Right now, that's not mortgages help us understand the difference quickly. And also, what what we might be able to expect with rates like do we expect rates to now go below three because of this change?
Mark Aalto
Well, technically, they should. But the challenge, though, is, like you said, the federal funds rate is the rate that banks are borrowing from one another. And in order for the US to do this, they also had to have agreements from other nations all over the place. So this is, again, this isn't just a United States thing. This is a global thing right now. And you get to some of those other underlying causes coming up here as well. But what happens is when there are times when the federal funds rate or the prime rate dropping can influence rates, it's when it's unexpected. So again, it's all about the volatility so we were expecting half a percent, let's say it's 1%, one and a quarter percent, whatever it was, the fact that it's so much higher than what we expected, should be enough to give us better rates. The challenge, though, is that we already have low enough rates, right? The challenge is capacity. And if it's a matter of liquidity, which is something altogether different than some of the changes that were made, were things that should help rates and I actually thought individually as a person that we would see lower rates from lenders because of liquidity issues.
But I promised you, I try not to get too technical here. I'm getting technical. So one of the things that the Fed also did, let's let's look at it just as supply and demand. So when you have issues with liquidity, it's typically something where you don't you don't have enough supply or you don't have enough demand one of those two, right. And so what the Fed also did is they they delegated $200 billion to purchase mortgage backed securities. In other words, they're becoming a big buyer of mortgages. Right that should increase the liquidity And so today when you look at like the the bond market, the bond market is way higher. So I mean, the liquidity is there, the demand's there, the challenges now those it's still capacity. So as long as capacity is the issue, you won't see lower rates. That's and so we get through all these refinances that we already have, and once we're through those ones, I would anticipate that we will see rates get lower when we're getting on to our next round. So in other what 30 to 45 to 60 days, depends on how long the lenders take to close the loans. But yes, I would say that and you know, again, one of the things that I would definitely urge for all of us is to think about what sorts of timeframes may be increasing, you know, are we going to have our friends in escrow be strained? You know, are we going to have appraisers have longer teurn times, I would anticipate that the refinances in particular will take longer to get through the system. And obviously, the main thing is we want to make sure that purchases aren't impacted and most lenders are going to do something to make sure that that doesn't happen.
Justin Stoddart
Yeah, yeah, well, it's it is interesting, right, as you are currently working from home, which is not your typical, work place, right? To, again, simply to adhere to the CDC recommendations of, you know, and I, I commend you for that, you know, we, as a company have a continuity plan in place to ensure that business continues, even if, you know, the majority of our workforce is working from home, and there's been some scrambles and some conversations behind the scenes of ensuring that our workforce is able to be completely competent, and with all the tools that they need, during, you know, during any type of, you know, situation where, you know, we're asked to be quarantined and separated from all co workers, you know, business goes on, so I know that they're, you know, kind of the, the, the underlying thread of all of that is that we don't know exactly, despite company's best efforts and interests and ensuring that work goes on at a normal pace just to keep up with, you know, the current demand. There's also this component of How is our working situations going to change to accommodate the passing and kind of dealing with this pandemic?
Mark Aalto
And that's the whole thing is that the situation is very fluid. And I mean, you can read a lot about what's going on. My concern, you know, if we learn anything at all from the past, it's a, of course, that there are certain elements of it that we don't really want to repeat. My biggest concern right now is is, you know, basically wages, employment, I really hope that we do not have I really hope that we do not experience the same sort of layoffs and job loss that we did the last time around, because that's truly what In my opinion, will lead to some economic issues in our particular industries. This is not at all to downplay the fact that there are people out there that are absolutely going to be suffering, whether it's people that work on a hourly basis, whether it's people that are in the restaurant industry, there are a lot of industries They don't have time off, but don't have the ability to take time off. And when you're forced to take time off, that is one of those things that can be really difficult on folks. So the challenge on something like this is that it's really easy for any of us, me included to to look back and see what happened and just say, Well, I understand why rates went up already, but it's a lot harder to forecast what's going to happen next.
Justin Stoddart
Yeah, I think, tons of uncertainty, I was privy to a investor call from or highlights I should say, from an investor call with Goldman Sachs. And the end all be all is this feels a lot more like 2001 than 2008. Right. The the underpinnings of the of the economy are very strong. Obviously, there's tons of uncertainty with everything that's happening here. And yet, because in 2008, again, the the underpinnings of our economy were weak, right? It was built upon sand and I feel like If we can look back and use anything from our history to try and predict what this might look like, still tons of uncertainty, nobody knows for sure. But I think we could probably look more at 2001 than 2008. Would you agree with that?
Mark Aalto
Well, I would and I think the the thing that the thing that I'm thinking of here is just that, what I hope is that our efforts and again, I don't want to get down too much the rabbit hole on the on the, you know, Covid situation, but I hope that our efforts are far enough in front of what's coming down the path to help us out. So, you know, is this, you know, I would say that the second quarter of this year is going to be it's going to be bad for the economy. What I hope for is that the third you know, third quarter and moving forward will be good and again, I'm way outside of my lane at this point. Ultimately, I'm here to help realtors, I'm here to help, you know, consumers. My job is to help people get into houses. So you know, as to what the economy is doing itself. It will impact all of us, I just hope that we're taking action soon enough to where we get through this period more quickly.
Justin Stoddart
Yeah, yeah, no, I think we're all in agreement on that. Mark. I know you're also just from the decorations behind you, we know that your family may have had family is important to you. And I would just love to ask this question. What's your favorite part about being a dad since that's near and dear to my heart? And the reason why we do all this stuff, right is to support families and causes we care about what's your favorite part about being a dad Mark?
Mark Aalto
Well, you know, it's funny because a lot of times I've had family members or other people that I know talk about parenting. Sometimes I hear people say, Hey, man, you think this is bad. We'll wait until this and wait until that and wait until the other thing and quite frankly, I have enjoyed the whole process. It's been a really great journey. So I think as much as anything, it's just the self discovery aspect of it. I didn't ever know that I would enjoy being a dad as much as I do. So, I mean, you have that experience like six times over. So sorry, I'm not making fun of you, but I don't know how you do it, man. I don't
Justin Stoddart
No, I just married a superhero. That's the only way. It's whatever possible. So let me ask this final question mark, you're a big thinker. That's how you've been asked to come on to think bigger real estate show today. Now, what does a guy like you do to continue to be a big thinker to to continue to expand your own possibilities? Teach us.
Mark Aalto
Ah, wow. Well, to be honest with you at this point, I'm much more focused on mentoring and helping the people that are around me. I have a couple people that I'm working with on my team right now, that just mean the world to me. And I just want to do what I can to make their journey in this process a little bit less chaotic than mine was and if I can help them, get ready for some of those next big, big pushes, that's the thing for me. So my time horizon of doing this is maybe another five to 10 years although who knows the stock market but you know, those are Amy and Mike, the people that work for me, I want to set them up for success and I'm very focused on making sure that they have those tools to do this in the future.
Justin Stoddart
That's powerful mark. Again, Mark. Also with advantage mortgage, thank you so much for taking the time to come on and share your expertise in between 40 505,000 loans, you've learned a thing or two, obviously, all of us are in in uncertain waters now, but just your understanding of the principles of what causes mortgage rates to do what has been very helpful for all of us, hopefully, there's some key points that people could take away, both for their own financial situation as well as for, you know, if you're a real estate agent, there's some things here that will help you to advise your clients to lead your clients. And I believe that sales at its highest form is leadership. And there's probably never been a time where your clients need your leadership and need your advice and your counsel more than ever. So Mark, thank you for giving us the tools and the you know, the language and the understanding to be able to you know, to do that better than we have ever before. So appreciate you very much my friend. Thank you for always being such a great contributor and supporter, and I want to remind and give everyone this final charge which are three simple words and they GO THINK BIGGER! Mark, thanks so much for helping us do that today. And we will be in touch my friend.
Mark Aalto
Thanks. I really appreciate it.
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Justin Stoddart
What is Think Bigger Real Estate?
The road to success for real estate agents is well-marked. The road to significance is not. Here, we help you to Think Bigger than just your business. We inspire you to seek success AND significance, income AND impact. We do that by interviewing the biggest thinkers and highest achievers in the real estate industry, extracting the secrets to having it all.