Saturday, March 22, 2008

Mortgage Market Update for the week of 3/18

A Fed rate cut could send some mortgage rates even higher.

Tuesday March 18, 5:01 pm ET By David Goldman, staff writer

The Federal Reserve cut interest rates by three-quarters of a percentage point Tuesday, but don't expect mortgage rates to go down too. In fact, home loans could be heading higher.
Consider recent history: The Fed issued an emergency cut of short-term rates in early January, and then trimmed more just a few days later - but the 30-year fixed mortgage rate has responded by bouncing up from 5.6% to 6.4%.

The Fed's main tool is control over the short-term fed funds rate, which determines what banks charge each other for overnight loans. Long-term mortgage rates are mostly tied to the 10-year Treasury yield, which is determined by bond traders worldwide.
"There is a long disconnect between the fed funds rate and fixed mortgage rates," said Keith Gumbinger, vice president of mortgage and consumer loan information publisher.

Inflation drives long-term fixed rates. When the Fed cuts short-term rates, the intent is to lower borrowing costs for corporations so that they'll invest and hire. But this economic growth can lead to inflation.

That in turn leads bond traders to demand higher rates on their long-term bonds - and that drives up mortgage rates too.

"Mortgage rates are determined by how fearful the market is of inflation," said Gumbinger.
The Fed began a series of cuts to its key interest rate last September, taking the rate to 2.25%, from 5.25%.

ARM borrowers may get help. There is more of a connection between Fed rate cuts and short-term and adjustable rate mortgages (ARMs). In fact, homeowners with ARM loans could see lower rates from further interest rate cuts.

Adjustable rate mortgages are pegged to a number of different indexes, including the one-year Treasury yield and the international Libor, or London Interbank Offered Rate, which tend to move with the Fed funds rate.

With Tuesday's rate cut, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners.

For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan.
But after Tuesday that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride. "The Fed rate cuts far are more significant to [borrowers with ARMs] in terms of staving off delinquencies on loans," he said.

Long-term rate solution. Sending long-term fixed rates back down will be more complicated than fixing inflation, because the continuing housing crisis is also exacerbating the rise in long-term fixed rates.

Generally mortgage rates are about 2 percentage points higher than the yield on the 10-year Treasury, which currently stands at 3.29%.

But the housing market is in such turmoil that rates are even higher right now, with lenders concerned that borrowers will not be able to pay back loans.

"The 30-year fixed rate mortgage should be at 5.5%, but instead it's above 6%," said McBride. "The 30-year jumbo loan [a large mortgage that is not federally guaranteed] is a full two percentage points higher than it should be."

So for long-term fixed mortgage rates to go down, the Fed must successfully make banks more willing to lend again.

If you have any questions at all, please give me call.


Geno A. Tucci, Sr.
United Mortgage Services, Inc.
(c) 630/640.5031


PJ said...

Hi Geno,

I have been checking rates I am being offered by banks in recent days. During the last few days, the rates for a 30-yr fixed rate mortgage for borrowers with very good credit have gone down significantly. 50 bps in my case. Do you think the Fed's injection of funds in the market has caused this? Do you think there's more to come? What would to recommend to buyers like me who are waiting for rates to go lower?

Geno A. Tucci, Sr. said...

PJ -

The purpose and intent of my post was to help people understand a little better what can cause rate changes. Not necessarily to try and time a rate dip or pick a bottom.

We are in very volatile and uncertain times and the rates don't seem to be following the normal "rules".

What I recommend is that if you are comfortable with your payment at the rate you are able to secure, then go ahead a lock it in. You can always refinance down the road if rates dip again.

I hate to see my clients miss the very attractive rates we have now by trying to time the market.

Once they do snap back, it will be very quick.

If I can be of any further assistance, please give me a call.