A Few Thoughts About Mortgages…..

by Tom Vanderwell

Mortgage Officer

Author website

Since I already sent an update out earlier in the week outlining what the Fed did and how it can/will impact the economy and the mortgage markets, I’m going to focus on a couple of other topics this time.

First I’m going to talk about the four most important things to know about mortgage rates. Then, in the lower section, we’ll take a look at a good strategy to consider when thinking about when to lock in an interest rate.

The four most important things to know about mortgage rates:
What influences them – contrary to popular opinion, mortgage rates are not tied to the 10 year Treasuries any more. For years they used to be and that made predicting short term market movements easy. Now they don’t and it’s much harder. So what does impact them? A couple of quick thoughts about that: 1) Market sentiment – is the market feeling good about things or bad? 2) Political manipulation – does the market feel that Washington is trying to run over Wall Street or is it the other way around? 3) Expectations vs. reality – it’s not so much that the news is bad as it is a question of whether it’s worse or better than it was expected. 4.) Inflation/Deflation and the value of the dollar. 5) Investor appetite for mortgage backed securities (aka how good are loans performing?

Why mortgage rates won’t go down to 4%. According to what I heard and saw, there were experts on places like the Today Show and Good Morning America who were proclaiming that mortgage rates were going to go down to 4.0%, probably by Monday. There are a couple of reasons why that won’t happen: 1) The Law of Supply and Demand – the government is literally flooding the market with additional debt. If there is more debt “chasing”fewer investors, that’s going to push rates upward. 2) The Value of the Dollar – the dollar has taken a beating in the last few days and as the dollar gets cheaper compared to other currencies, interest rates have to go up. 3) Falling House Prices – the government’s baseline scenario for the banking “stress test” calls for an additional 14% drop in housing prices this year. As the value of the collateral securing mortgage loans drops, that pushes upward on rates. 4.) Investor performance – If Fannie Mae and Freddie Mac are losing money like crazy, we will see upward pressure on mortgage rates until they return to profitability and we have confidence that the “new” underwriting guidelines are providing a good return on the investment.
Rates might go down but fees are going up – It used to be (just a scant 18 months ago,) that anyone with a credit score of 680 or higher could get the best rate possible. Now it takes a 740 or higher score to get that. There are lots of different fees and add ons and pricing bumps that Fannie and Freddie are adding which are making rates a lot more expensive when you get into the individual scenario. So, while there is a chance that rates will be lower in 3 months, the chance that many people can’t take advantage of that due to increased fees is also good. If it makes sense, grab it now.

The law of supply and demand has an impact on mortgage rates. Supply and demand in the sense of this question: “Are there enough people and enough manpower left in the mortgage world to get things done?” The mortgage world made staffing adjustments last fall assuming this would be a slower market than it is. They don’t want to hire people back because rates could (will) go up and then they’d just have to lay them off again. So it’s going to get harder and harder to get things done and take longer and longer.

For a couple of months, I’ve been telling people that I think there’s a 60% chance that rates will go up and a 40% chance that they will do down. I’m now officially changing that. Due to two main things:

• The Fed’s Trillion Dollar plan to begin buying Treasuries and Mortgage Backed Securities.
• The vindictive and angry mood that is developing in Washington and on Main Street

I’m now switching to a 70/30 forecast. I believe that there is a 70% chance that rates will go higher and a 30% chance that they’ll go lower. How high? Let’s put it this way, for the next 90 to 120 days, I’d put them under the 5.5% range on a 30 year fixed. After that, I expect we’ll see them higher than we are now.

So what do you do? See below for some thoughts……

A Rate Lock Strategy

So, in light of those thoughts about the likely direction of mortgage rates, what do I recommend? A couple of thoughts:

• If you are in the market for a mortgage, your main focus should be on minimizing risk rather than squeezing out the last little bit of profit if rates drop further. Don’t get greedy because when rates go up, they go up a LOT faster than when they go down.If you are buying a new house, lock your rate the day you have a purchase agreement signed.
• If it makes sense to refinance, don’t wait until next week, next month or next year, do it now. You might get a lower rate but you will probably end up with higher fees so you’d end up behind.
• Make sure your lender will lock in your rate long enough to get things done.
• Do some simple math to determine whether it’s worth it to refinance. Loan amount X rate difference= savings per year. Closing costs/savings per year = Number of years it takes to break even. How long are you going to be in the house? Oh, and for most states, closing costs of more than approximately $2,000 for a 0 pt rate are too high.
• If you think you are close to the 105% loan to value for the new mortgage refi plan, call your existing lender’s customer service department and ask who they sold your loan to (Fannie or Freddie). If it’s Freddie, you have to deal with your current servicer to get that program. If it’s Fannie, you are free to shop around as long as you can qualify for the mortgage.

As a friend of mine likes to say after giving an opinion, “That, and $3.50 will get you a cup of coffee.”

Tom Vanderwell