by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Mortgage-backed securities have been on a tear, improving more than a half a point in the last week. This means that the 5.25% rate, offered at 1 point last Friday, should be offered at a half a point today….BUT….
…that isn’t the case at all. Mortgage rates may very well rise while the mortgage-backed securities market improves. I told you that the only relevant indicator of mortgage rates is the mortgage-backed securities market. Why would I reverse my position?
This conundrum is a Freshman year Macroeconomics 101 case study; supply and demand. Rates have improved since the Fed hinted at a 4.5% world. Demand has risen, for mortgage money. Lenders have cut back their workforce or disappeared altogether. There just ain’t enough folks to process the paperwork so “supply” is down.
Lenders are making it clear that they just hate refinance transactions, because of nebulous valuations, in their pricing. Expect refinance transactions to become even more expensive, in 2009. What this means is that your soon-to-be-neighbor , who is buying a home with a 3% down payment, may very well get a 5.25% rate while you, who has more equity (in a similar home), may be offered 5.75% for a refinance.
Lenders won’t get fooled into believing that business will pick up next year so they won’t be adding to the workforce. Market volatility may encourage profiteering as long as rates stay low.
Tom Vanderwell says:
Brian,
Very well said. A couple of us at the bank had that exact discussion in the last couple of days.
Tom
December 10, 2008 — 6:04 pm
J Boyer Morristown NJ says:
Interesting, so you are saying that mortgage refinances will be more expensive over the short run and possibly medium run as well.
December 10, 2008 — 6:59 pm
Leon Belenky-Ocean Four in Sunny Isles says:
Couldn’t have said it better myself. Overall, I do hope refinances will only be more expensive for a short time, but again, time will tell.
December 10, 2008 — 9:55 pm
Kevin Sandridge says:
Great article, Brian. I hadn’t thought about the lender pain re: staffing and work backing up as a factor in the rate issue. Thanks for the point of view shift!
December 11, 2008 — 12:36 am
Dan Melson says:
I’m glad I’m not the only one who’s been telling his clients this.
Aggregate lender mortgage processing capacity has shrunk by at least sixty percent from five years ago (I think more like eighty percent), when the competition for loans drove the rates and prices down.
There are very few lenders actually competing on the basis of price right now, as in staking a marketing position based upon low rates. Even the most solvent of lenders who never offered Make Believe Loans has a problem due to lowered real estate valuations, and need to make more money on the money they lend, simply because there are so many non-performing loans. This means that lenders need a bigger mark-up over the base MBS rate for the same aggregate profit to shareholders.
December 11, 2008 — 8:05 am
John Sabia says:
It just gets more and more ridiculous.
December 11, 2008 — 12:00 pm