October 3, 2022

Are You The “Perfect” Mortgage Borrower?

big bag of indeterminate moneyLow Rates But Large Fees

Only the perfect borrower gets the lowest advertised mortgage rate in today’s market.  Many mortgage borrowers are now subject to various fees based on credit score, loan to value, property type and loan type.   The fees are assessed by the government lending agencies and must be added to the loan by the lender and passed on to Fannie Mae or Freddie Mac  – see Fannie and Freddie – The New Subprime Lenders.

The fees are known as “adders” or “delivery fees”, but the bottom line to the customer is that they can dramatically increase the cost of a refinance.   The various fees can be substantial and are cumulative – it is not uncommon to see total fees approaching 5% of the loan amount.   Keep in mind that that the adders and delivery fees are in addition to regular closing costs and points which can add another 1 to 3% in costs to the mortgage transaction.

Three years ago, most of these fees either did not exist or were at much lower levels and could be absorbed by a slight increase in the rate.  Today, the fees can be so high that not only must the rate be adjusted higher but many of the fees have to be directly charged at closing.

The Perfect Customer

A borrower with a credit score of 720 or higher and a loan to value of 60% or less qualifies at 4.625% with no additional fees.

Examples of Less Than “Perfect”

The following are actual pricing  examples of what a borrower would be charged by Fannie or Freddie on a $250,000 cash out refinance at 80% loan to value (LTV) on a single family owner occupied residence with full income verification.

1.)  Borrower has a FICO score of 660-679.  Fees would total 4.0% or $10,000 on a loan of $250,000.

2.)  Borrower has a FICO score of 680-699.  Fees would total 2.875% or $7,187 on a loan of $250,000.

3.)  Borrower has a FICO score of 700-719.   Fees would total 1.5% or $3,750 on a $250,000 loan.

4.)  Borrower has a FICO score of 720-739.   Fees would total 1.0% or $2,500 on a $250,000 loan.

Rates have declined to all time lows, but depending on your situation, it may be very expensive to refinance.    Before refinancing, find out in advance what fees you may be charged so that all costs can be taken into consideration when determining if the refinance makes sense.   Sometimes, the benefit of a lower mortgage rate is more than offset by the closing costs.

Banks Offering 3.875% Fixed Rate Mortgages

3.875%

TARP Dollars Deployed

Two Washington State banks are now offering 30 year fixed rate mortgages at 3.875%.

SPOKANE, Wash. — Spokane-based Sterling Savings Bank and Walla Walla-based Banner Bank are offering mortgages at interest rates below 4 percent to stimulate sales and help builders move homes.

Bank officials said the low rates benefit buyers and builders, and demonstrate the banks are putting federal government bailout money to work in the Northwest.

Banner received $124 million from the federal Troubled Asset Relief Program, or TARP, while Sterling collected $303 million.

Sterling is working with Golf Savings Bank, its mortgage lending subsidiary, to offer qualified borrowers either a 3.875 percent fixed mortgage rate or a 3 percent lender contribution, up to $20,000.

Golf Executive Vice President Donn Costa said the program helps reduce the inventory of unoccupied homes and firms up prices in markets where sales activity have been slow.

Sterling has set aside $25 million of its federal bailout money to the program, which has allowed it to do 10 times more loan volume than it would have without that money, Costa said.

Expect Mortgage Rates To Continue To Decline

To some extent, this low rate lending program is political theatrics and a public relations effort.   Although the banks in question are offering below market rates, Sterling Savings Bank is only allocating $25 million of its TARP funds to this program after receiving $303 million.  In addition, Sterling is accepting applications for this low rate program only from March 25 to April 15, 2009 and most borrowers will need a 20% down payment to qualify.  The program applies only to new home purchases and not refinances.

Nonetheless, expect to see more offers of low mortgage rates for the following reasons:

-The government is actively pushing  banks to lend TARP funds.

-Both the Federal Reserve and Congress are convinced that reviving the housing market is key to economic stabilization and recovery and will supply the banks with whatever amount of funds is necessary to achieve this goal.

-Continued purchases of mortgage backed securities by the Federal Reserve  (theoretically), will keep mortgage rates low.

-Banks are currently parking massive amounts of excess reserves in low yielding treasury securities.  At some point, especially if the housing market appears to be stabilizing,  funds should start flowing  from treasuries into mortgages. This asset reallocation  would be highly profitable for the banks, given the wide spread between cost of funds and mortgage yields.

In the long term, free market forces will ultimately determine the level of mortgage rates and housing prices.  In the short term,  I would view any  chance to refinance in the mid 3% range as the opportunity of a lifetime.

HUD Imposes Dramatic Restrictions On FHA Cash Out Refinances

FHA Tightens Rules Again

First there was an increase in the required credit scores to be eligible for FHA financing.  (See FHA Increases Minimum Credit Score Requirement).  Now comes a major tightening of the rules on FHA cash out refinances.    HUD Mortgagee Letter 2009-08 announced that the maximum loan to value for any cash out FHA loan has been reduced from 95% to 85%, effective April 1, 2009.

HUD is taking this step due to the continued deterioration in the housing market and to limit their exposure to “undue risk”.

HUD Mortgagee Letter 2009-08

Effective for case number assignments on or after April 1, 2009, the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser’s estimate of value.

Given the continued deterioration in the housing market, and FHA’s need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.

Considering that the default rate on FHA loans exceeds 12%, this announcement is not surprising and  long overdue.   It is interesting, however,  to examine the conflicting signals from the government in regards to mortgage lending, as follows:

1. There is constant talk about the need  to increase the flow of credit and politicians from both sides of the aisle are encouraging the banks to lend money.  At the same time the “we need more lending talk” is going on, the government controlled agency lenders have dramatically increased restrictions on lending – see Few May Benefit From Lower Mortgage Rates and Banks Restrict Mortgage Lending To A+ Customers Only.

2.  Fannie Mae and Freddie Mac have imposed huge “delivery fees” on their mortgages, which has greatly increased the cost and reduced the benefits for many borrowers –  see Fannie and Freddie – The New Subprime Lenders.

3.  The Federal Reserve has already purchased mortgage backed securities.  Chairman Bernanke has stated his intention to dramatically increase such purchases in the future in an attempt to lower mortgage rates.  Since so few people are eligible for mortgages, he might as well save himself the trouble of printing the money that would be necessary to purchase mortgage backed securities.

Sound Mortgage Underwriting Essential

The banking system should have strict underwriting guidelines for approving a mortgage loan.  If proper underwriting guidelines had been adhered to in the past, we would not now have a major banking and housing crisis.  The question is, has the pendulum swung too far in the other direction?

Jumbo Mortgage Rates Reflect Default Risk

Economic Crisis Impacts All Borrowers

Jumbo mortgages, typically loan amounts above $417,000, are defaulting at a rapid pace as the economic crisis affects borrowers at all income levels.  Bloomberg is reporting that jumbo mortgages, typically associated with higher income home owners, are becoming the next black hole for the banking and housing industry.

(Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.

About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off.

Most of the mortgage defaults do not appear to be caused by poor loan underwriting but rather by growing job losses among high income earners.  Due to the higher level of defaults, banks are becoming very reluctant to make jumbo mortgages for either purchases or refinances.  Since Fannie Mae and Freddie Mac  will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses.  All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 20 basis points “for several decades,” according to BanxQuote CEO Norbert Mehl.

The difference between the jumbo interest rate and the prime conforming rate was 181 basis points on Feb. 18, according to Bloomberg data.

“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.”

Conforming Loans At 7%?

An interesting point to note is that the size of a mortgage loan is not the determining factor for the interest rate.  Mortgage rates are based on many factors but the primary reason for higher rates on jumbo mortgages is the lack of a government agency guarantee.  This implies that without price support from the government, conforming mortgages would also be in the 7% range to reflect the actual risk of mortgage lending in today’s environment.

No Relief In Sight For Jumbo Mortgage Homeowners

Given the higher risk on jumbo mortgages due to the factors cited above, homeowners who have high rate jumbo mortgages are unable to refinance to lower rates.  In addition, the proposed mortgage plans meant to help distressed homeowners provides no assistance for jumbo mortgage homeowners.

Jumbo Mortgage, Jumbo Headache – Wall Street Journal

Washington is trying to ease the mortgage crisis by helping people refinance into home loans with better terms. But one group is being left on the sidelines: borrowers with loans too big to qualify for government backing.

President Barack Obama’s housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country

Anything bigger is called a “jumbo” loan — and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.

“Every single day I’m talking to people who have a jumbo loan, and I can’t do anything for them,” says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.

ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.

“If you have been able to … save for a down payment, that to us speaks volumes about your character,” says Bill Higgins, ING’s chief lending officer.

Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Mr. Lazerson says.

Jumbo Mortgage Rates Reflect Lending Risks

Jumbo borrowers are discovering the meaning of “pricing for risk”.  Mortgage lending has become a very high risk business due to the continuing decline of real estate values, the high risk of default due to economic conditions, principal impairment and/or rate reductions from loan modifications, the risk of bankruptcy court cram downs and government supported foreclosure moratoriums.   Some may incorrectly believe they are entitled to a low rate mortgage regardless of risk factors.  This peculiar belief by both banks and borrowers helped to create the destructive credit crisis we are now experiencing.  The banks are doing what they need to do with jumbo mortgages- setting rates to properly reflect risk.

Defaults Everywhere – More Lending Is Not The Solution

Mortgage Defaults Only Part Of The Problem

Mention loan defaults and most people probably think of mortgages.  Home foreclosures due to mortgage defaults are getting the bulk of press coverage and the most attention in Washington.  The credit crisis, however, is not confined to home mortgages.  Lack of consumer demand, reduced incomes, lack of credit and an economy that seems to be getting weaker by the hour, is causing growing defaults in almost every category of lending.  Commercial real estate, credit cards, car loans, student loans, second mortgage loans, business loans and personal loans are all defaulting at shockingly high rates that the banking industry never expected.  The losses from these loan defaults are depleting bank capital, making banks less eager to lend to anyone.

The Wall Street Journal reports today that loan Defaults by Franchisees Soar As The Recession Deepens.

From ice-cream parlors to tanning salons, franchisees’ defaults on loans guaranteed by the U.S. Small Business Administration are piling up in amounts unseen in years. A list of loans at 500 franchises shows the number of defaults by franchisees increased 52% in the fiscal year ended Sept. 30, 2008, from fiscal 2007. Loan losses totaled $93.3 million, a 167% jump from $35 million just 12 months earlier.

The figures, a stark barometer of the downturn’s severity and scope, could give pause to banks that have loan money about where to lend next. Banks that make SBA-guaranteed loans say they use the annual list as guidance in assessing future commitments.

SBA-guaranteed loans are aimed at providing capital to small businesses that often can’t qualify for conventional credit. Those loans, made through commercial banks and other lenders, can total as much as $2 million for as long as 10 years. The SBA essentially insures a significant portion of the loan to encourage lending and small-business entrepreneurship. The recently passed stimulus package raises that guarantee amount to 90% from 75%.

The franchise brands where at least 11 franchisees defaulted on loans during the 2008 fiscal year were: Aamco Transmissions, Carvel Ice Cream, CiCi’s Pizza, Cold Stone Creamery, Curves for Women, Domino’s Pizza, Dream Dinners, Planet Beach tanning salons, Quiznos, Subway and Taco Del Mar.

Over time, some businesses have significantly better loan-performance rates than others. Among the worst-performing franchise brands, as measured by the percentage of SBA-guaranteed loans issued to franchisees over the past eight fiscal years that defaulted: Mr. Goodcents Subs & Pastas, 55%; Philly Connection sandwiches, 51%; Cottman Transmission, 49%; All Tune & Lube auto centers, 47%; Cornwell Quality Tools, 42%; and Carvel and Blimpie, both with 41% failure rates. Each had obtained at least 50 SBA-guaranteed loans during that period.

An interesting aspect of the default ratio is that certain franchise operations have a huge number of defaults.  With more than enough bad debts on the banking industry’s books, one would hope that lending would be severely curtailed or eliminated to franchise operators that are showing over a 40% default rate.  A default ratio of almost half of all borrowers  would seem to indicate a basic flaw in the franchise system’s business model.

The bottom line for franchise operations and probably every other business right now is that more loans may keep the doors open, but at the cost of burying the business owners in debt and making future profitability all that much more difficult.   What businesses really needs right now to survive and prosper is increased sales, something that seems very difficult to achieve under current economic conditions.

Economic Reality Crushing The American Dream

Reality Becoming Impossible To Ignore

There still appears to be a serene sense of calm by the American public.  They hope that the government will be able to solve our economic crisis in short order and restore to us the American dream of nonstop prosperity.

For those who have lost their jobs, the American dream is over.   For those who have seen their equity and real estate wealth disappear, there is growing uncertainty that asset values will recover any time soon.  Those who have ignored or denied reality will lose the most since they are the least prepared to deal with the extended economic nightmare we are facing.

Can the world’s governments put Humpty Dumpty back together again?  For further consideration of where we are and where we might be headed, the following links are well worth the read.

False Hope To Reality

It appears as though we are on the cusp of the next (of several) phases in this global economic crisis. The phase we just went through lasted roughly from August of 2008 through the first of this month.  This phase included identifying our problems, getting through the smoke and mirrors, initial false promises of recovery, and the beginning of finger pointing among the nations. It was a phase where the crisis was centered on the banking system and the financial economy. It was a phase where the majority (but not all) of the problems that we are facing was revealed.

It is time now for the next phase. This is the phase where the people of this country and of the entire world begin to awaken to the reality of our present situation, and that reality begins to find its way into world markets. This is the phase where the depth and breadth of the problems we face will be revealed. With this revelation, any remaining hopes of a quick recovery will be dashed on the rocks of reality, and people will begin to actually deal with the crisis. It is a phase where the crisis deepens, not just in the financial economy and the banking system, but in the real economy and in the very life blood of all economic activity – the currency markets.

It is during this phase where the character of the nation will begin to be tested.

Increasingly I am becoming aware of a growing group of people who are ready and willing to stand for the principles given to us by our Founding Fathers. These include our national sovereignty, the rights of the states, limited federal government, sound money, the ability of people to express their faith openly, and the very idea of freedom and liberty for “we the people.”  We are entering a time period where the DNA will be set for how this battle will be fought as new leaders arise within this group.  And how it is fought will be the determining factor of whether or not it will be successful. This is the history we are poised to begin making in the months ahead.

Debt Addiction Depression Destruction

America is so hopelessly addicted to credit that unlike the family that understands its addiction to heroin has destroyed everything they once had, Americans don’t even yet understand they are addicted.

Americans today view the on-going credit contraction much as heroin addicts view the disappearance of heroin—with anxiety, dread and fear. Americans are so addicted to the flow of credit from the Federal Reserve that they no longer believe they can live without it.

The unnatural availability of credit causes an unnatural expansion of economic activity. This “economic expansion” is later followed by an “economic contraction” wherein the debts introduced by the unnatural availability of credit cannot be repaid. The business cycle is as unnatural as the monetary system upon which it is based.

While it is now too late to undo what has been done, it is not too late to prepare for what is about to happen, a financial collapse that will exceed even the suffering caused by the Great Depression. History is now moving quickly and the end of this epoch is near.

Although the economic collapse is now in motion, there is still time to preserve what savings you still have. This is the end of a three hundred year system of credit and debt based on the debasement of money, a system now in its final stages. As the crisis moves forward, the time left in which to act will disappear. Soon, it will be too late to do so.

Today, two years later, although the collapse has started it has only just begun and cannot be stopped until it has fully run its course; and when it has done so, the global economic, social and political landscape will be dramatically altered. Wall Street was first, Main Street is next and, soon, everyone’s street will be affected.

The Long and the Short Of It

Several years ago – I don’t remember the date – I read an interesting comment: “The great boom that the world is enjoying, is in effect an enormous shorting of cash and going long on debt. Eventually, there will be a short squeeze on cash which will have to be covered by going long on cash and shorting debt.”

Deflation and Depression are actually a manifestation of a massive short squeeze on cash in an attempt to reduce a gross and unsustainable long position on debt.

The Deflation and Depression will continue until the long position on debt is reduced. The long position on debt in the world is so massive, that it will only be reduced by equally massive defaults.

Delaying the inevitable will only drag out the agony of Deflation and Depression for many years. Bringing all the massive liabilities of the banking system onto the Treasury’s indebtedness – while the corresponding assets are worth far, far less than these liabilities – will solve nothing.

Debt must be reduced by defaults and bankruptcies. There is no other solution!

There’s Only One Cure For A Depression

In contrast with a depression, a recession is relatively easy to bring to an end. The genesis of a recession is caused by excessive credit creation on the part of banks and the Fed.

However, the only cure for a depression is time. Not the abrogation of the free market. The seeds of a depression are sown when an extreme over supply of money and credit is allowed to continue for a protracted period of time.  When this phenomenon occurs, it produces a pernicious level of debt to pervade throughout the economy. All sectors of the economy become overleveraged and the need to reduce debt becomes paramount. The economy then experiences a severe contraction in GDP. In a depression, the pull back in borrowing is not caused by interest rate increases from the Fed but an inability of the economy to take on further debt. A depression can last for many years as consumers, banks and the government goes through the painfully long and arduous process of deleveraging.

Unfortunately, the kneejerk response on the part of the government and central bank is to stimulate the economy by spending money and reducing interest rates. That is the very same strategy used to combat a recession. However, their response fails to produce the desired result because it ignores the root cause of the problem—debt levels that have become unsustainable. It is not lower interest rates on borrowed money that the consumer seeks, it is less debt. If fact, all attempts by the government to mollify the depression tend to exacerbate the situation by force feeding more debt when it is least capable of being serviced.

What does history say about the effectiveness of government intervention? In Japan, the Nikkei Dow hit a high of 39,957.44 on December 29th 1989. Then it’s epic real estate and equity bubble burst. The composite average is trading below 7,600 today. Even after two decades of trying to turn their market around, their government’s barrage of stimulus plans and a near zero percent interest rate policy has done little to ameliorate the malaise.

A similar result was experienced by both Herbert Hoover and Franklin Delano Roosevelt after they deployed a plethora of government interventions to combat the Great Depression. After four years of Hoover’s wealth distribution and trade wars, and five years into the New Deal, they both failed to bring the economy out of the depression. Unemployment reached 20% in the years 1937-1938 and the percent change in GDP dropped 18.2%. It wasn’t until we fought and won WWll that the economy began to enjoy a sustainable recover.

Unfortunately, we see the same playbook being deployed today as was used under the Hoover/Roosevelt regime. President Obama is following George W. Bush with the signing last week of his own stimulus plan that totals $787 billion. And of course, this is probably the first in a series of spending plans that are intended to help bring the economy back on track.

The reason all the government’s efforts fail to solve the problem is clear. Time is needed to allow asset values to retreat back to historically normal levels that can be supported by the free market. And time is necessary for debt levels to be attenuated to a level where the can be serviced without having the Fed artificially forcing interest rates down. Any and all attempts to prevent deleveraging and to prop up asset prices will cause years to be added to the healing process. Additionally, all government efforts to “help” end up becoming a huge misallocation of resources as they take capital from the private sector and redistribute it in the most inefficient manner. What’s worse is that the increased government spending adds yet more public sector debt to an economy already reeling from a mountain of liabilities.

This buildup in debt levels was unprecedented in history, thanks to a Real Estate bubble that was used to bail out an equity bubble. It would stand to reason that if the government continues to try to manufacture a recovery, it could take more than a decade to return to prosperity. The question is, do we have the patience to let the free market function and endure several years of hardship, but then emerge as a much stronger country. Or will the compulsion to intervene just propel us yet deeper into the abyss.

Banks Restrict Mortgage Lending To A+ Customers Only

Latest Changes Eliminate More Borrowers From Mortgage Market

As written previously, for those without impeccable credit, adequate income and loan to value below 70%, the low advertised rates are not available.  See All Time Low Rates For A++ Borrowers Only and Few May Benefit From Lower Mortgage Rates.

Much more stringent underwritten guidelines for mortgage approvals were issued today by a major bank as follows:

Important Update Regarding Revised Minimum Credit Score for All Loan Products, Effective Immediately

Effective for locks on or after Tuesday, February 10, 2009, the minimum credit score requirement for ALL loan products is 640. This includes the following loan programs:

· Agency Loan Program

· Agency Affordable Lending Program

· Portfolio Affordable Housing Program

· Texas Cash Out Refinance

· FHA 203b (FHA),

· Veterans Administration (VA), and

· Rural Development (RD) Guaranteed Rural Housing (GRH) Program

Additionally, the following applies:

· a minimum credit score of 640 will be required for ALL scoreable borrowers regardless of the LTV/TLTV.

· A minimum credit score of 640 will be required for all traditionally underwritten and AUS (DU/DO and LP) processed loan transactions, regardless of the AUS approval or recommendation.

These new guidelines are far more restrictive than Fannie Mae, Freddie Mac and FHA guidelines.   The bank and mortgage company guidelines are the ones that really matter because a consumer cannot directly apply to the agencies for a mortgage.

Pricing on mortgages can be described as chaotic.  Guideline changes such as the ones instituted today are basically a message from the banks that the mortgage business is unprofitable to them.   Every customer is seen as a future default.  Simply put, the banks do not want new mortgage business, which is why virtually every major bank has eliminated their wholesale lending operations.   The mortgage bankers who sell their loans to the agencies or larger banks are restricted in lending activities by the lack of warehouse lines of credit.  All of the above factors combined have severely restricted mortgage lending and disrupted the established channels for mortgage lending.  A perfect borrower with a loan to value under 70% can still reap the full benefit of lower rates; all other borrowers will find it very difficult to qualify.

The Fed can buy mortgage backed securities and treasury bonds by the trillions to lower mortgage rates, but with the lending intermediaries either unwilling or unable to make new mortgage loans, the benefit of any rate reductions will be severely limited to  A++ customers.   The borrowers who need the benefit of lower rates the most will see the least benefit since many do not qualify under current guidelines.

Fed Struggles To Lower Mortgage Rates

Fed Determined To Lower Mortgage Rates With Unconventional Methods

Mortgage rates started dropping late last year after the Federal Reserve announced that it would be purchasing mortgage backed securities (MBS) in an effort to lower mortgage rates.  As recently as January 13th, Fed Chairman Bernanke again attempted to talk down mortgage rates in his speech at the London School of Economics by discussing the potential purchase by the Fed of longer dated treasury securities.  Bernanke noted that “In determining whether to proceed with such purchases, the committee will focus on their potential to improve conditions in private credit markets, such as mortgage markets.”

Shortly after Bernanke’s London speech, Charles Evans, Chicago Fed Chief, reiterated the Fed’s determination to lower rates by stating that “With the United States in the midst of a serious recession, it could be useful to purchase significant quantities of longer term securities such as agency debt, agency mortgage backed securities and treasury securities.  We stand ready to grow our balance sheet even more should conditions warrant.  At the current time, the biggest concern is deflation and the Fed can worry about inflation later.”

Given the Fed’s determination to lower mortgage rates, why have mortgage rates jumped 75 basis points over the past week?

Most of the Fed’s current and potential purchases of MSB and long dated treasuries may already be substantially discounted by the market.  The larger question is does the Fed have the resources to force mortgage rates lower given the competing demands for funding by virtually every major sector of the economy? Although mortgage rates have declined , they have not dropped to the extent necessary to give homeowners truly significant savings, especially after the recent run up in rates.

The Fed views lower mortgage rates as crucial in stabilizing a collapsing housing market.  However, if the Fed could have brought mortgage rates down to 2%, they would have, which implies constraints on their ability to manage rates.  These constraints are becoming visible on the Fed’s ballooning balance sheet.  The world is discovering that there are limits on the ability of Governments to bail out every sector of the economy.  (See  Insolvent Banking System Eludes Government Containment.)

Lower mortgage rates may become a sideshow to the larger issue of the solvency of nations, with Britain being the latest example . (Gordon Brown Brings Britain To The Edge Of Bankruptcy) The demands on the British treasury to rescue the entire banking system and economy are so large that the British pound has crashed and the very solvency of Britain is now being questioned.  This unfolding financial disaster in Britain puts a serious dent in the theory that Governments have unlimited financial resources.  The implications for the US Treasury, by extension, are ominous.

Mortgage Rates Surge Upward – Is The Refi Boom Over?

Mortgage Rates Up Sharply Over Past Week

Mortgage rates increased again today as the sell off in the long treasury market continued.  The all time lows in the mid 4% range have quickly disappeared.

A short week ago the best borrower could obtain a par rate of 4.5% – see All Time Low Mortgage Rates.   Today that same borrower  is looking at a rate of 5.25%.    Borrowers who have applied for a refinance and did not lock the rate are in for a payment shock.  On a $250,000 loan, the payment increases by $1368 per year on an increase from 4.5% to 5.25%.  Higher rates and tougher underwriting standards are beginning to stop the mini refinance boom dead in its tracks.

Despite the large recent increase in mortgage rates, keep in mind that the Federal Reserve is determined  to do whatever it takes to bring mortgage rates lower.  Whether or not the Fed will succeed in lowering rates is unknown.

Lower Rates Still Possible

Factors that may ultimately bring mortgage rates to 3.5% or lower include the following (See –  Is 3.5% Possible?)

The Federal Reserve’s direct purchases of mortgage backed securities initiated late last year was successful in its goal of lowering mortgage rates.   The Fed’s direct purchases of MBS has stabilized the mortgage market and lowered rates.  There are arguments being put forth that due to the Fed’s intervention, mortgage rates have artificial price support.  Nonetheless, if the historical yield spread between the bond and the 30 year mortgage is re-established, we may see a 30 year fixed rate in the 3.5% range.  Something to think about for those contemplating a mortgage refinance.

The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant.  The major fact to keep in mind is that the Fed appears to be relentless in its campaign to drive down mortgage rates.   If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago.

30 year fixed rate mortgages in the mid 3% range would cause a huge refinance surge.  Keep in mind that over the past five years, homeowners had multiple opportunities to refinance in the low 5% range.  Unless the borrower is taking cash out, it usually does not pay to refinance for less than a one percentage point reduction.   At 3.5% rates, it would make sense for almost every homeowner with a mortgage to refinance again.

If rates do move into the mid 3% range or lower, the benefits will arguably go to those who need it least.  Based on present underwriting standards, those with poor credit, late mortgage payments, no equity or insufficient income need not apply.  The sad irony here is that the Fed’s costly efforts to reduce rates may do little to benefit the economy or the majority of homeowners.  (See All Time Low Mortgage Rates for A++ Borrowers Only)