Rates Gone Wild

Well, it looks as if the days of record-setting low interest rates may be gone. Recently we have seen the average rates climb more than 1.5% from their all-time lows. Historically speaking, the rates are still great but they are a far cry from the “4%” that was the buzz in the media. I and many others in the mortgage industry were baffled when the news was continuously reporting on rates dipping down to 4%. We definitely got close, but the fact is (and is now apparent) that the market just won’t support rates that low. I have been talking with a lot of Realtors as well as clients about why rates are moving so quickly and why they don’t stay low. To answer that, you need to understand a little more about rates and how they are set.

Mortgage rates are a lot like other investments. There is no secret meeting of bank CEO’s that get together and decide how to charge the public. In fact, they move up and down according to market conditions. Although there is no one indicator that can be used to exactly predict the movement of rates, there is one indicator that is most helpful. Nearly all loans funded are currently guaranteed by Fannie Mae or Freddie Mac. These “agencies” package and sell mortgage-backed securities (MBS’s) in the form of FNMA bonds (or FHLMC bonds). These bonds are sold on the open market. Lately, because of the enormous refinance boom that we’ve been experiencing over the last few months there is an oversupply of bonds out there on the market and the investor appetite just isn’t there. You don’t need to have taken economics to understand that when the market is flooded, the prices go down. When prices go down on the bonds, rates go up to cover the difference for the banks that need to sell them to raise capital for more loans. That’s a (very) simplified overview on the basics of mortgage rates- but the question on everyone’s mind is: are rates going to recover?

It’s not likely that we are going to get back down to the levels that we saw a while ago. Thursday and Friday of this week we saw some good gains in the bond market, but they haven’t been fully realized at this point with the lender’s rates. My guess is that they are reluctant to lower the rates to entirely match the market due to the high volatility. It seems that with rates, they taketh quickly and giveth slowly- such is the way of banks.