Asia's lingering financial flu, Russia's economic Chernobyl, and a record-making Wall Street washout sent investors into a near panic this week, as mortgage borrowers waited in the wings hoping to benefit from global market volatility.

The Dow Jones Industrial Average fell 512 points on Monday, marking its second largest ever one-day decline and wiping out 1998 gains. The technology-company heavy NASDAQ fell too -- a record 140 points.

"This is a very unusual situation. We have not seen this international affect on our market," said Warren Myer, CEO of San Jose, CA-based Mortgage-Net.com. Nervous investors flocked to divest themselves of mutual funds, contributing to mass trading of U.S. company stocks for cash and safer U.S. Treasury securities, driving up bond values.

If bond values continue to swell, yields will fall and along with them mortgage interest rates. That's because of what's called the "secondary mortgage market." Lenders package and sell mortgages to investors shopping the secondary mortgage market. To attract investors, the secondary market must compete with similar long-term investment markets, so it uses the Treasury bond market as a benchmark to determine values. When the economy brakes, as it did this week, the fear of inflation (which eats into fixed return investments like bonds) is more subdued and the bond market rallies with higher prices and resultant lower yields.

Monday, the price on the 30-year Treasury bond was higher by more than a point, pushing the yield down to 5.27 percent. Ten-year notes were up too, dropping the yield down to 4.97 percent, according to Bill Steele, financial editor of Mortgage Market Information Services. If lenders can sell off mortgage loans for less, they could soon pass the savings onto home buyers and owners looking to refinance for a lower monthly payment or a shorter term mortgage.

Some market experts aren't so sure. Since the Asian financial crisis began many months ago, foreign money flowing into the U.S. has wound up in the safe haven of Treasury bonds, with little impact on mortgage rates. Why? Many factors contribute.

• The Federal Reserve hasn't changed interest rates since March of 1997. "If the Fed does drop the rate from 5.5 percent, we might see some lower mortgage rates," Myer said.
• Already cashing in on low rates -- at about 6.75, fixed for 30-year loans -- home owners are refinancing their loans making them less attractive to investors on the secondary market. "Investors are saying, 'If they are going to refinance in the next six months, what's the point?' " said Earl Peattie, president of Morro Bay, CA-based Mortgage News Co.
• Low rates pushed lower still by the likes of E-Loan, HomeShark and Get Smart, and other cut-rate brokers using the Internet to attract borrowers, has helped feed a refinancing binge that's choking lenders' application processing machinery. "The industry is really bottle necked. Even if they dropped the rates they couldn't handle the volume. They would be happy to increase rates just to reduce the volume," Myer said.

Published: September 2, 1998

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