Thursday, March 19, 2009

Playing Limbo with Mortgage Rates

How low will they go, but more importantly – for how long?

March 19, 2009 -- BLOOMFIELD, MI – The Federal Reserve met yesterday and shocked the markets with their announcement of aggressively buying government debt to kickstart the economy.

Oh, by the way, they also announced they were leaving the Fed Fund Rate at the previous target amount of 0-0.25% as expected.

The real news was obviously the buying of debt. The markets reacted with Treasury & Mortgage Backed Security (MBS) prices soaring, pushing yields and rates down to their lowest levels since January 8, 2009.

Note: the chart above shows MBS prices which are the opposite of interest rates. So the higher the better, green is good news!

The challenge for many homeowners looking to take advantage of this rally and refinance is – timing. I’ve been advising my clients and warning prospects to get their mortgage applications in ASAP. We can float the interest rate while getting the loan approved by underwriting. Several of my clients took my advice and we’ll be looking to lock their loans today and close quickly.

Those that didn’t take my advice will be facing an uphill battle of trying to get their documents to us, so we can generate an application, which they then have to sign & get back to us with an application fee, so we can then lock their interest rate in. Not only that, underwriting turn times are terribly long currently and many 30 day locks may be blown. We’ll be looking to do 60 day locks for new clients because of this, but that means an 1/8% higher interest rate.

If you’re reading this and thinking of refinancing, please understand that just like the economy is going through challenges we’ve never seen, the same is true in the mortgage industry. It’s not business as usual! Those that have gone through a refinance in the past need to understand it’s much more difficult in today’s environment.

There are fewer choices for funding sources & products, pricing rarely allows “no cost” refinances, application to close cycles are much longer and underwriters are asking for a whole lot more documentation. Are we still doing loans? Yes, both purchases and refinances. In many ways, we’re back to the way things were done in the mid 1990’s.

Federal Reserve Buying Binge
So, what caused rates to plunge?

Well, the Fed announced that they’d be buying $300 billion in Treasuries, an additional $750 billion in MBS (on top the $500 billion pledged in December) and $200 billion in FNMA & FHLMC debt.

That’s 1.25 trillion dollars in debt!

How can the Fed do this? Remember the Federal Reserve is not part of the government, but can print money. They’ll be printing tons of money to fund all this! Taking this amount of Treasuries & MBS out of the market will affect the supply and demand dynamics of the market, which is why prices for both jumped yesterday (lowering rates).

Inflation is the major concern though. All this borrowing will eventually lead to higher interest rates once the economy recovers. I hope the Federal Reserve stays on top of this.

Please give us a call or email us if you have any questions on any of this or have a referral for us.

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor. He’s spoken for HUD, has written numerous articles and is a mortgage industry advocate for loan originator licensing and consumer education. He can be reached at 248-356-3739, or read his blog:

1 comment:

  1. Good Article, good perspective as well.