So, since Nov 3rd when the details of QEII were released, we have seen a very rapid rise in mortgage rates. On a national basis, the Freddie 30 year fixed rate has moved from 4.20% to 5.05% this week. The 10 year Treasury has risen above 3.70% and Inflation seems to be the word of this month.
Last year at this time the 10 year was at 3.73% and it hit 4.00% on April 5th. It then started a fairly rapid descent all spring and summer to its low of 2.38% on October 8th. There were several economic events that brought this about, but the question in every mortgage company’s and consumer’s mind is “Will history repeat itself this year”?
Wishful thinkers will say YES, as many think the stock market is overbought, the mid-east situation is still very unstable, inflation remains low according to the FED, unemployment is stubbornly high and the housing market is continues to be very sluggish. Until these issues are resolved, rates can’t rise too far or consumer demand will fall and economic growth will not be sustained.
HOWEVER, there are a few wrinkles that have nothing to do with Macroeconomics that will be in play in the coming months and years. As part of the Dodd-Frank Bill, Loan officers compensation is about to undergo a dramatic change.
Loan officers will no longer be paid based on certain loan characteristics such as interest rate. The intention is to have consumers with like profiles receive the same interest rate when quoted from one loan officer to another within the same company. One the surface this makes sense. In practice, it is very unfriendly to the consumer and limits consumer choice and is un-competitive for the marketplace. Loan officers already have a fiduciary responsibility to their clients to put them in the best loan for them, while compensation to the loan officer is not a major factor. This is a higher standard than the financial planning or brokerage environement which must merely come up with a suitable product, not the best product for their clients.
The anticipated effect of this change, coupled with the reduced volume of loan transactions due to rising rates, will further increase the profit pressures on lending institutions, thereby requiring them to make their loans more profitable. This may be done through reduction of expenses and overhead (read layoffs) or higher rates to the consumer, and will eventually lead to fewer choices to the consumer as companies go out of business. The large lending institutions will then be free to control the market even more so.
A bigger factor is the Fannie/Freddie GSE reform now being detailed by the Treasury. This plan, which maytake affect over several years, will reduce/eliminate the goverment’s backing of the mortgage market, except perhaps through FHA, VA and USDA loans. When the government moves to a private secondary market, those investors are going to want a greater return on their investments and rates will almost certainly rise and may do so dramatically. It was less than 10 years ago when 7.25% was considered a great rate!
Current programs such as a 30 year fixed rate may vanish in favor of the adjustable rate mortgages which move with the interest rate market and would be more profitable for investors. Additionally, for those programs that are somewhat or fully guaranteed by the government, I would expect the fees associated with these programs to rise substantially.
The GSE reform options include reducing the Agency Jumbo Limit to $625,000, down from $729,000 in the highest cost areas. In Massachusetts those are Martha’s Vineyard and Nantucket Islands off Cape Cod. The highest max loan amount in other counties is $523,750. Will this reduction of loan size have a big impact? I don’t think so, current rates may be .250% to .500% higher with portfolio lenders that offer loans over these limits, but these jumbos have come way down in rate compared to the depths of the financial crisis. Most of the risk is relieved through very strict underwriting guidelines.
I have Portfolio lenders that are offering ARM rates on loans to $1MM 5 year interest only under 4% still for the right borrower! Now while ARMs may not be the right product for everyone, they are for certain individuals and these folks are saving tremendous sums compared to where rates were just a couple of years ago.
A big concern for for future homeowner’s with GSE reform will be the minimum down payment requirements. There is talk that borrower’s may be required to put down 10 or 20% to qualify. Some major lenders have suggested 30%. Yeah, that’ll work… If that becomes the requirement you can kiss home ownership goodbye for the next generation or so, and rents will rise very rapidly.
I certainly recognize the need for GSE reform. Taxpayers have been getting killed by the losses from the mortgage giants and the bleeding will not stop anytime soon. The plan as outlined today will gradually make changes to the GSEs over 5-7 years. But hopefully the market will understand what will be happening well in advance of the changes occuring.
So what do I think? I think 5.875%-6.125% for a 30 year fixed rate by year’s end, 6.50% by end of 2012 and closer to 7% by 2013. By that time hopefully there will be a more clear path to GSE reform.
I want low rates, its good for my business, helps pay for my mortgage and keeps the house heated. All of this rate speculation could be meaningless if Congress decides to finally act on the deficit. If they do, then rates could stay low for a very long period. One thing is for sure, my 3 kids are going to see a very different economic and housing landscape when they are ready to buy a home.
To see the the full report on Reforming America’s Housing Finance Market, click here .
I welcome comments and other’s point of view. I also welcome subscribers to The Massachusetts Mortgage Blog.
Are the Lowest Rates in History, History? Obama Administration Outlines GSE Reform Options
So, since Nov 3rd when the details of QEII were released, we have seen a very rapid rise in mortgage rates. On a national basis, the Freddie 30 year fixed rate has moved from 4.20% to 5.05% this week. The 10 year Treasury has risen above 3.70% and Inflation seems to be the word of this month.
Last year at this time the 10 year was at 3.73% and it hit 4.00% on April 5th. It then started a fairly rapid descent all spring and summer to its low of 2.38% on October 8th. There were several economic events that brought this about, but the question in every mortgage company’s and consumer’s mind is “Will history repeat itself this year”?
Wishful thinkers will say YES, as many think the stock market is overbought, the mid-east situation is still very unstable, inflation remains low according to the FED, unemployment is stubbornly high and the housing market is continues to be very sluggish. Until these issues are resolved, rates can’t rise too far or consumer demand will fall and economic growth will not be sustained.
HOWEVER, there are a few wrinkles that have nothing to do with Macroeconomics that will be in play in the coming months and years. As part of the Dodd-Frank Bill, Loan officers compensation is about to undergo a dramatic change.
Loan officers will no longer be paid based on certain loan characteristics such as interest rate. The intention is to have consumers with like profiles receive the same interest rate when quoted from one loan officer to another within the same company. One the surface this makes sense. In practice, it is very unfriendly to the consumer and limits consumer choice and is un-competitive for the marketplace. Loan officers already have a fiduciary responsibility to their clients to put them in the best loan for them, while compensation to the loan officer is not a major factor. This is a higher standard than the financial planning or brokerage environement which must merely come up with a suitable product, not the best product for their clients.
The anticipated effect of this change, coupled with the reduced volume of loan transactions due to rising rates, will further increase the profit pressures on lending institutions, thereby requiring them to make their loans more profitable. This may be done through reduction of expenses and overhead (read layoffs) or higher rates to the consumer, and will eventually lead to fewer choices to the consumer as companies go out of business. The large lending institutions will then be free to control the market even more so.
A bigger factor is the Fannie/Freddie GSE reform now being detailed by the Treasury. This plan, which maytake affect over several years, will reduce/eliminate the goverment’s backing of the mortgage market, except perhaps through FHA, VA and USDA loans. When the government moves to a private secondary market, those investors are going to want a greater return on their investments and rates will almost certainly rise and may do so dramatically. It was less than 10 years ago when 7.25% was considered a great rate!
Current programs such as a 30 year fixed rate may vanish in favor of the adjustable rate mortgages which move with the interest rate market and would be more profitable for investors. Additionally, for those programs that are somewhat or fully guaranteed by the government, I would expect the fees associated with these programs to rise substantially.
The GSE reform options include reducing the Agency Jumbo Limit to $625,000, down from $729,000 in the highest cost areas. In Massachusetts those are Martha’s Vineyard and Nantucket Islands off Cape Cod. The highest max loan amount in other counties is $523,750. Will this reduction of loan size have a big impact? I don’t think so, current rates may be .250% to .500% higher with portfolio lenders that offer loans over these limits, but these jumbos have come way down in rate compared to the depths of the financial crisis. Most of the risk is relieved through very strict underwriting guidelines.
I have Portfolio lenders that are offering ARM rates on loans to $1MM 5 year interest only under 4% still for the right borrower! Now while ARMs may not be the right product for everyone, they are for certain individuals and these folks are saving tremendous sums compared to where rates were just a couple of years ago.
A big concern for for future homeowner’s with GSE reform will be the minimum down payment requirements. There is talk that borrower’s may be required to put down 10 or 20% to qualify. Some major lenders have suggested 30%. Yeah, that’ll work… If that becomes the requirement you can kiss home ownership goodbye for the next generation or so, and rents will rise very rapidly.
I certainly recognize the need for GSE reform. Taxpayers have been getting killed by the losses from the mortgage giants and the bleeding will not stop anytime soon. The plan as outlined today will gradually make changes to the GSEs over 5-7 years. But hopefully the market will understand what will be happening well in advance of the changes occuring.
So what do I think? I think 5.875%-6.125% for a 30 year fixed rate by year’s end, 6.50% by end of 2012 and closer to 7% by 2013. By that time hopefully there will be a more clear path to GSE reform.
I want low rates, its good for my business, helps pay for my mortgage and keeps the house heated. All of this rate speculation could be meaningless if Congress decides to finally act on the deficit. If they do, then rates could stay low for a very long period. One thing is for sure, my 3 kids are going to see a very different economic and housing landscape when they are ready to buy a home.
To see the the full report on Reforming America’s Housing Finance Market, click here .
I welcome comments and other’s point of view. I also welcome subscribers to The Massachusetts Mortgage Blog.