My New Blog

I've been asked by several people watching mortgage rates on some websites, why it appears that fees are increasing and if it has reciprocal relationship to the lower rates being offered?  My short answer is kind of, sort of.  The following is what I've surmised watching the markets and in dealing with end lenders. 

Currently, mortgage backed securities (MBS), which are the fixed income vehicles that long term mortgage rates are tied to, are trading at historically high levels (this is generally good for mortgage rates) because the Fed is infusing that market with billions of dollars. As a consequence, mortgage rates have been trending down, and in terms of a baseline rate we’re seeing rates in the mid to high 4’s (truly historically low levels).

Now, usually lenders practice rebating (or what's called yield spread premium)to encourage originators, whether internal, correspondent or through third party (TPO), to sell higher rates, which allows lenders to make more money over the long term.  In general, brokers derive their revenues from these rebates rather than collecting fees directly from borrowers, which many borrowers are loathe to pay.

However, because lenders are essentially beyond capacity right now (many are taking as long as 45-60 days to underwrite loans), they are not incentivizing rates to encourage originations.  Mortgage applications are at a 4 year high, which lenders operationally can’t handle anyway, so why would they need to provide rebate to originators.  Basic supply and demand, though, done in context of an underlying mortgage securities market that buys and sells these end loans.  So even though the available rates are at historic lows (again, mid to high 4’s), lenders are not providing the rebates that originators rely on to make a living.  Consequently, originators are passing more of the cost of closing loans to the borrowers themselves.

Until lenders can improve operational efficiencies and can close loans in a more timely manner (10-15 days), we’re not going to see the low rates AND low fees, which the general public is more used to.  Even with higher note rates, lenders are still not offering rebates, which again is clearly an indicator of something operational rather than as a result of the fixed income markets. 

It will probably take another few months for lenders to re-staff to optimum capacity, meanwhile the Fed may begin ratcheting down its MBS manipulation and we will eventually see rates begin to climb back up, though, with more rebates.

Today U.S. stocks declined the most in more than a week, led by banking and real estate shares, as growing speculation the government will bail out Fannie Mae and Freddie Mac rattled the mortgage market.

As has been happening in Wall Street for the better part of year, traders are overreacting to speculative news regarding financial institutions.  Rumors destroyed Bear Stearns, IndyMac and now it looks like they are adversely affecting the world's largest residential lending bodies.  Both Fannie Mae and Freddie Mac are government backed agencies, and account for over $1 trillion of residential loans, so no, the federal government would never let those institutions fail.  They have suffered because of poor performing loans and no one should be taken by surprise with this information.  I can't but feel that there is some market manipulation occurring here that is enriching those parties that know how to game the system, i.e., short trading. 

Residential finance and real estate will recover.  Wall Street and the government seem unprepared in dealing with our current economic state. 

Housing & Economic Recovery Act of 2008

The Federal Government is now providing a $7500 tax credit for all qualifed first-time homebuyers purchasing between April 8, 2008 and July 1, 2009.  

There are income limits which are as follows: $150,000 married, $75,000 single.  The tax credit is phased out if your income is higher than those limits. 

Now the tax credit will be paid back to the government at $500/year over 15 years, interest free, so technically it's really a temporary credit.  Nevertheless, it amounts to an interest free loan from the federal government, which is a positive and it helps make home buying that much more attractive in a difficult market. 

There are some fantastic bargains available out there, and now there's just a little more available to take advantage of those bargains.  

Many have asked what market trends influence mortgage rates?  It's a fairly complicated question and contrary to the general public perception, it has little to nothing to do with the Fed's funds rate, which is what we hear on most media outlets.  Perhaps the simplest or easiest way to track mortgage rates is to keep a look out at treasury bonds on bloomberg.com.  If you see bonds trending higher, and conversely yields heading lower, then generally we'll see improvements in mortgage rates, meaning they'll go lower. If bonds go lower (and yields higher), then mortgage rates will increase. 

Obviously, there are some exceptions to this because there are other factors that will influence rates.  For instance, bonds may be performing very well because the stock market is down, but if it's financial stocks that are dragging down the market because mortgage backed securities are performing poorly (such as with the market today) then you will still see increases in mortgage rates.