A 4.5% conforming fixed rate? Don’t count your chickens…
These are certainly very dynamic and fast moving times in the mortgage market these days! Just when you think things are settling down a bit, another curve ball comes our way. The most recent one came to us courtesy of Secretary Treasurer Hank Paulson yet again.
As you know, the Treasury has already announced a plan to buy mortgage backed securities (MBS) issued by Fannie Mae and Freddie Mac. Yesterday, they came out and said that they would ideally like to step up those purchases in order to drive mortgage rates down to 4.5% for conforming loans. I would love to see that happen as much as the next person…but there is NO guarantee that rates will actually get there. A couple of points to consider:
- The Treasury DOES NOT set home mortgage rates…period! Mortgage rates are based on where mortgage bonds trade in the open market. There are many economic and other external factors that contribute to the trading of these bonds. While their aggressive purchase of the securities could help drive rates down, it is not the only factor.
- It is very difficult, if not nearly impossible, for any one entity to set a target interest rate on home mortgages because of the reasons stated above.
- The MBS market is obviously skeptical of the ability for the Treasury to impact rates down to 4.5% as the market reaction to the announcement was quite muted…and, in fact, rates have ticked UP slightly today.
We certainly are not in a typical trading environment for mortgage backed securities as we are still experiencing significant volatility which is causing rates to move rapidly. If you are buying a home or refinancing and have locked in a rate that you are happy with now, you should grab it while you can. There is no guarantee that rates will go lower and in waiting for an incremental drop that may never come, rates could move up fast and furiously in this environment as well.
Most mortgages now come with no prepayment penalty so if down the road rates do come down further, you can always refinance again and can even do it with no closing costs…just ask your mortgage professional about that option.
Stacey Fleece is a Mortgage Loan Consultant with Countrywide Home Loans in Mill Valley in Marin County, California.
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Ginger Wilcox
People often forget that what they hear on the national news doesn’t necessarily apply to jumbo loans as well. These loans often carry higher rates and more restrictive terms.
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Aaron Wheeler
I would like to comment on a few items in the post to paint a complete picture of the state of the MBS (mortgage backed security) market:
(1) While it is true that the Treasury does not set home mortgage rates, they do possess a very, very large checkbook. Using that checkbook, they can simply become a large-scale buyer of MBS. As they bid the prices up, the yields come down (There is an inverse relationship between price and yield). As we approach zero interest monetary policy, the Fed reaches a point where it cannot lower rates any further, so buying these assets becomes another useful tool to help get rates down. This is referred to as quantitative easing.
(2) Don’t forget the power of the media (and they have considerable power) to change the direction of trades throughout the day. With the power of a few keystrokes, a reporter can post a headline that can either cause yields to surge or to send them into a tailspin. Bloomberg is an excellent source for commentary on the bond market.
(3) Since the announcement of large scale MBS buying before the Thanksgiving holiday and the recent announcement of the “Treasury 4.5%” plan, MBS yields have plummeted from 5.3% to the low 4% level. As reported on Bloomberg late Friday, many dealers believed that the market was overbought and sold off into the close to lock in profits and hedge their bets over the weekend. You can watch intra-day MBS action by going to http://tinyurl.com/fnmambs and clicking on the “1d” chart. You’ll see the sell-off on the chart. This does not necessarily mean that rates are going up again.
All of the above applies to MBS that are issued by the two GSE’s (government sponsored entities), Fannie Mae and Freddie Mac, for conforming and high-balance conforming loans. Ginger is correct that this does not apply to jumbo loans. There is no real market for jumbo MBS at the moment. Most of the jumbo loans out there right now are being held on the books of the bank/credit union rather than being sold into the secondary market. We really need to see a recovery in jumbo market as well to move forward.
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Jay McGillicuddy
What a difference a couple of weeks make. I was with buyers today that said their lender quoted them 4.5%. You just never know what tomorrow will bring.
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