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.

Mortgage Bonds Dropping Sends Rates Higher

Fixed rate loans rose by about .25% today as mortgage bonds were hit. There was some bad news in financial sector (again) with Citi and Bank of America both posting major losses.

Citi reported $8.29 billion in losses for the fourth quarter. They are on the record stating 2008 as their worst year ever. It's worth qualifying that by saying that they've been around since 1812; I'd say that's a while...

Bank of America lost a mere $1.79 billion in the fourth quarter to round out one of their worst years. They stated that this is their first yearly loss in seven years. Please excuse me if I don't congratulate them for their stellar performance. I own some B of A stock and, let me tell you, it's a dog (and not even a cute dog). On the positive side- they did bail out Countrywide and Merrill Lynch. Word has it that they are going to get a bunch more money from the government (read: Joe the Tax Payer).

Back on point:
Today saw money shift from the bond market back into the stock market which drove the 4.0% FNMA bond down 44 bps (basis points: 100bp = 1%). Rates are up across the board as a result. This is totally lame for people that had to lock today but if you didn't hear from me about locking your loan, there's a reason.

I think this is a temporary dip in the market and suggest waiting it out. The government is busy spending their $500 billion on mortgage-backed securities which definitely is, and will further help bond prices. To date they have only spent about $33 billion, so there's a long way to go. Also, we are seeing some of the lowest inflation since 1957. In 2008 the inflation rate was about 0.7%. When you consider that mortgages are long-term loans, inflation is VERY important. Historically rates rise when inflation rises- just look at the 1980's.

Float or Lock: Part 1

In today's market it can be very tough to know when to lock and when to float. In case you're not familiar with the terminology, here's a quick explanation...

Locking simply means that you are in essence "reserving" your interest rate with a lender with a specific loan program selected. Once you lock, you have done just that- you're locked in.

Floating is just like it sounds- you are following the market and will make your decision when you are good and ready. Floating can be beneficial, but also risky. If the market gets worse and you get to the point that you have to lock, then you are subject to whatever rate the market dictates.

The market has been holding steady below 5% lately, so there's no pressure to lock right now. Mortgage bonds lost a little today but are up a smidge on the week so far. Mortgage bonds are the primary indicator of interest rates, so they are always the largest focus when I'm looking at the market. Remember, rising bonds mean falling rates. I'll probably write more about that in another post some time...

In part 2 I'll go into what actually happens when you lock your loan. You'll be shocked! (probably not, but it is pretty interesting)