As I have mentioned many times before, the only way we could get mortgage rates down this low was with the Fed buying up mortgage backed securities and creating an artificially inflated market, aka the “mortgage rate bubble”. They have been the creators of the bubbles in the past through their actions, so why should this one be any different?
Well, the headlines not too long ago stated that Paulson and Bernanke wanted mortgage rates to be as low as 4.5%, some mortgage originators even developed their own agenda of 3.5% mortgage rates as another bait and switch advertising campaign. But reality is quite different and the Fed knows that. Or do they? We can see what their MBS purchase pattern looks like and you can see they are not trying to drive mortgage rates down at all right now. In fact, it looks more like they are trying to keep mortgage rates from spiking higher, bringing into question whether or not they are already realizing that mortgage rates are headed higher and likely quickly, so they need to dampen that burden on the economy.
Here is a chart I did that shows their actions each week, allowing you to see where their purchasing concentration is. Click on the picture to get the full sized graph.
As you can see, the Fed was buying mortgage backed securities with lower coupon rates in the beginning. They are still concentrating their purchases of Freddie Mac mortgage bonds in the lower coupon rates, but even here they have crept away from the 4.0 and only last week dropped back into the 4.5% MBS. The Fannie Mae purchases are quite different, however. The Fed’s focus on Fannie Mae mortgage bonds has drifted, and stayed in the higher coupon ranges, namely the 5.5% coupon and bleeding into the 6.0% MBS last week.
So what does this all mean? In all likelihood, the Feds are expecting mortgage backed securities market pressure to drive mortgage rates higher. In fact, they may even be concerned about their actions turning into inflation down the road and the market reaction to that fact. That means they have little power to drive mortgage rates lower and the best they can do is to maintain mortgage rates, or more realistically, keep mortgage rates from spiking.
With the shift of the purchases towards the higher coupon bonds, one of two things are taking place. They likely are attempting to maintain stability in the markets as much as possible. The other possibility is, in my opinion, a little less likely, that is they are purchasing higher coupon rates because those loans are likely to get refinanced and paid, thus allowing them to recoup their investment fairly quickly. With the Fed playing with “fake” money, aka printing new money to build their balance sheet (Bernanke favors this tactic to create inflation), I doubt this is what they are focused on, not to mention that it is a gamble they may not pay off.
Decide what you may, but the reality is the Fed is not going to drive mortgage rates lower through the purchase of mortgage backed securities. That means, all those people out there looking to refinance or even purchase homes at the lowest mortgage rates already missed the boat.
Confucius says: “He who waits for the lowest rate will never see it”
In Texas we say, “You snooze, you lose.”
Plus the banks benefit too much from the spread between prime and actual mortgage rates.
Well said Tom.. “He who waits for the lowest rate will never see it”… This is absolutely true. You keep waiting waiting waiting for the lowest rates & wait for a lifetime for the lowest rates.
such an interesting post thanks for writing.
It sounds like air is escaping from the rate bubble.
I’ve noticed pending sales are up in our area, so maybe some buyers are aware that the rates may go up.
Why can’t the government force the banks to reflect the lower rate, and to start lending again? After the taxpayer bailout its the least that should happen.
What’s the trade-off here between low mortgage rates and low real estate prices? Far as know, prices are still dropping, and likley going to continue dropping through 2009, and maybe even 2010. So how does one go about factoring in mortgage rates and prices to come up with the best time?
You are too late. Mortgage rates are currently at 4.625% without this ridiculously ill conceived concept. Mortgage rates are not and have not been the problem with this mess. Lowering rates artificially for buyers does nothing to address the problems which are caused by existing non-performing loans. We need the government to get out of the way and quit monkeying around with the process. Foreclose on the non-performing loans where the borrower cannot afford what he bought, let the servicers decide if it is worthwhile to modify a loan, and stop the states from offering these silly moratoriums which only make things worse and weaken the financial system further by sharply reducing incomes.
Regards,
Michael McLaughlin, Cary real estate
If you look at the graph you can see that the mortgage rate has decreased. My personal view is that the mortgage rates are going to lower in the next few months.
The government needs to provide more meat on the bone and detail a clearly defined plan of how this will be resolved. In England, all the intial round of bailout fund did was strengthen the banks balance sheets!
I agree that the borrower should be responsible for what they owned. But government cannot just set there and watch people lose houses. So even it is silly and not right for them to step in, they should do something. But it is really good to invest in real state this time, the prices are so cheap. Cheers, Michael McLaughlin, Cary real estate
The inventory of homes on the market is decreasing at increasing rates. Your prediction could very well be true regardless of the popular belief that the rates would go lower in the next few months. If the general thinking was always correct, crashes and corrections would never happen.
I think such an investment is all about timing, you’ll get the timing right if you’re lucky enough and when it reverses, it could ruin you.
We need the government to get out of the way and quit monkeying around with the process. I think, they likely are attempting to maintain stability in the markets as much as possible. They should do something.
Calypso Resort Towers
I think, it is the correct time to invest in real estate. due to economic crisis, price of real estate is getting down in Asia, specially in SouthAsia. So, I feel that this is the correct time to invest into real estate.
This article is typical of all mortgage industry workers, trying to scare buyers waiting for lower rates into refinancing right now. It all makes sense from mortgage broker’s perspective, if buyers are waiting for rates to fall, they(mortgage brokers) have no business in the interim period.Hence the scare tactic of “If you wait too long you miss the boat”. Mortgage rates are not going up, period. Fed is buying treasuries till 1st Apr. Mark my words, the best time to refinance is this Thu (2nd Apr) 30 year fixed rates will be 4.5 without points/origination costs for people with 720 credit. Already today(30 Mar) the 10 year T bonds yield has fallen. Tomorrow rates will go lower by 0.125. They will remain same on Wed(1st Apr). On Thu they will go down another 0.125 giving a person with good credit a rate of 4.50.
I am not a broker, I am a home owner looking to refinance. I have seen this game by so-called “independent analysts” many times. They are all paid by banks to say what they say. Just think, this blogger said on 10 Feb that “rates will not fall and Fed cannot manipulate rates lower”. This was hogwash as you can see by today’s rates. Common citizens need to wake up and stop beoing fooled by these so-called “analysts”. These same type of wall street “analysts” were saying in Jan 08 that the market bottom has reached and recommending people to buy into the market otherwise they will miss the rebound. My guess is that they knew full well that the market was going to collapse but they wanted “suckers” to buy into the market. The common people have no recourse if we follow the leads of these guys and we find out later that they were wrong, by then it is too late to do anything. Take for e.g. Jim Cramer regarding stocks or this poster regarding rates. What if I had read this bs in Feb and refinanced at those rates (approx 5.xx for 30 yr at that time) Obviously I wouldn’t have been able to go back tho this poster today and tell him you were wrong and you cost me money. People, we need to think for ourselves, use our common sense and stop listening to “analysts”.
Wow, this post caught a lot of attention and I am glad to see that. I enjoyed ready the many comments and thank you all for the contributions, though Mike’s is a little off for some reason, maybe he is bitter?
@Mike – Wasn’t sure if I should give you a response or not at first, but decided it was needed after all. The timing of this post was well in advance of the recent upping the ante of MBS purchasing by the Fed to $1.25 trillion and I underestimated Big Ben and company. And yes I analyze the markets. Yes, I am wrong sometimes. No, I do not originate loans currently (haven’t for over 6 months but I still maintain my company and mortgage presence mostly as an advocate for mortgage seekers). I bet you would never have guessed that last one based on your comment.
The point of the post is mostly that the Fed is actually trying to manipulate the markets, but they cannot be the sole buyers of mortgage backed securities in order to drive down mortgage rates. On top of that, the pricing model is such that lenders can hedge against increased risks in the markets and they may or may not pass all of the benefits on to the clients in the form of lower mortgage rates. The 10-year T-note has nothing to do with mortgage rates, in fact mortgage rates often times move opposite to the 10-year.
Now, rather than restate many of the things that have happened since this post, please read through my weekly Mortgage Market Updates posted here and feel free to check out my daily market updates over at Florida Mortgage Daily and even check out my breakdown of the latest Fed move where I post my opinion on why they felt they needed more money to buy MBS, which is posted over at Florida Mortgage Report.
I do want to thank you for expressing your opinion as it does drive home the fact that markets change quickly, and homeowners need daily guidance, not just the hype of the day.
i really don’t understand , why the mortgage rate is so high. Well, even if the Fed won’t buy the mortgage, I guess lender can lower their mortgage if they want…just to keep good clients on and to encourage new clients to borrow. Resorts 360
Its strange to see mortgage rates creep up in such economic conditions.
I am glad this article has all matter that a serious thinker want to think on mortgage matter. I am really wonder that mortgage rate is too high at the time of recession. Every body want to sold their properties but no one buyer there. At this time how a bank could think to raise mortgage loan?
Florida Vacation Rentals
Here is an update to my previous comment Mike. As expected, your predictions did not come true and mortgage rates still have not hit 4.5% (without paying points) yet, and remain unlikely to do so. Even this morning’s jobs report isn’t able to overcome market forces and that is with the Fed stepping up their MBS purchasing.
If the Fed truly wanted to drive mortgage rates down (as opposed to just keeping them steady as I have said), they would be doubling their purchasing each week to overpower the sellers. The only times they have “driven” rates lower was when they first announced their MBS buying and their latest announcement to more than double that commitment and yet the market seems to slowly bring the rates back higher. Hhhmmm.
As I said in my prior comment, thinsg have changed since this post was written, but I do maintain daily updates over at my personal blog and weekly updates here which you should read if you want to get current information. Interestingly enough, it has changed significantly overall from when I wrote this one.