Mortgage rates improved this week over last according to Freddie Mac. In their weekly survey of mortgage rates, the average interest rate offered declined approximately 0.125% for a 30-year fixed rate mortgage, for a rate of 5.20%. The average reported rate for a 15-year fixed rate mortgage declined also, although not as much, to close the weekly survey at 4.69%.
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Three Factors
In reviewing the direction of interest rates since the beginning of the year, there are essentially three things to consider that have brought us to where we are today.
Who Really Owns Your Mortgage?
In November of last year, Ben Bernanke and the Federal Reserve announced they would buy mortgage backed securities (MBS) from Fannie Mae, Freddie Mac and Ginnie Mae. Upon the announcement, interest rates plummeted, offering the best mortgage rates U.S. consumers had ever seen. Earlier this year, the Fed announced they would increase their overall buying of MBS to $1.25 Trillion.
The impact of this policy was that through mid-May, mortgage rates were incredibly attractive, offering consumers opportunities at rates of 5.00% and below for a 30 year fixed rate with no points and no origination fees. What prompted this policy was the lack of liquidity in the investment markets providing few buyers for MBS at yields that would correlate into low mortgage rates for consumers. With the Fed stepping in, they could drive rates lower, promoting both home buying and refinancing interest.
The Comments of One Person can Rattle Rates
The second factor influencing interest rates deals with the amount of stimulus coming from Washington. The lower interest rates do not come without a cost as the Fed has to borrow money to pay for all the MBS they are buying. In addition to buying MBS, the other stimulus packages launched since the credit crisis began will increase the amount of debt acquired by the U.S. this year by over $3 trillion.
This program is set to conclude in December of this year and the impact to mortgage rates for anyone seeking financing in 2010 could be painful. The Fed has purchased 85% of all mortgage issuance from the agencies since March. Without the Fed as a buyer next year, it is difficult to see rates not rising in 2010, perhaps a lot.
When U.S. debt increases funded by U.S. treasuries issuance, the supply has to be absorbed and purchased by someone. The basic equation to price is a function of supply vs. demand. So, it would stand to reason that with more treasury debt in existence, the price would have to come down and yields and interest rates would have to increase.
Bill Gross of PIMCO, the world’s largest bond fund manager, commented on this in May. He questioned whether the U.S. would be able to maintain it’s AAA credit rating. his comment and the impact to interest rates in general and U.S. mortgage rates was dramatic. As can be seen in the above chart by the green line, interest rates on a 30 year fixed rate mortgage increased from below 5.00% to over 5.50% in a matter of days.
So, in essence, the amount of U.S. debt, both Treasuries and MBS, are a concern for investors. As there is only so much capital available for the purchase of assets, it would reason that interest rates should be higher to compensate for the risk of purchasing these investment vehicles.
It’s the Economy, Stupid!
The third factor impacting interest rates is the state of the U.S. economy. While ultimately, this drives the previous two factors, it is also what led to the decline of interest rates the last few weeks. The June Employment Report released by Bureau of Labor Statistics, showed that the economy continues to hemorrhage jobs and unemployment continues to rise.
A weak economy is one that is difficult for inflation to exist. Inflation is the enemy to bond holders, eating away at their investment. The interest rates we see day-to-day are an indication of inflation expectations and what investors demand in return for purchasing bonds. The longer it appears the economy will continue to struggle, the longer long term interest rates will remain low.
So, in a nutshell, there you have the struggle for the direction of interest rates today. Any news that potentially indicates economic recovery or concern for U.S. credit worthiness can immediately throttle mortgage rates up or down. In an environment where investors act quickly on “news” changes can occur quickly both rewarding or punishing those that float their rate lock decision.
Choose Your Mortgage Professional Wisely
As a consumer, today it is prudent to lock when a rate works for you. While it may not be the best rate you can obtain, it certainly reduces risk from rapidly rising rates when unexpected news comes along. If you need any proof of this, just ask someone who had to lock their rate in mid-June.
When choosing to work with a mortgage professional, ask them if they are aware of what impacts mortgage rates and what they see occuring during the time your mortgage is in process. Ask them if they subscribe to a service tracking MBS, alerting them if they need to lock your floating mortgage rate before your rate and future payments increase.
If they can not offer you specifics on what has both impacted rates recently and what they see on the short term horizon and do not invest in their business to serve you better, go with someone else. Afterall, it’s your mortgage.
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Jim Sahnger
Vice President
Palm Beach Financial Network
(561) 626-7813
jsahnger(at)pbfn.com.
