One of the biggest risks of making predictions is the fact that you could be wrong. If you make a wild call and it turns out to be right, then you look like a genius. But if you step out there and make the wrong call, you might end up with egg on your face. That said- here it goes- we will not see 3.5% interest rates (for 30 year fixed loans). Currently, there are a number of economists and industry analysts who believe that rates are headed to that level. I am just not one of them. Here are some reasons why:
- Rates are already at historic lows. Rates are the lowest they have been since Freddie Mac began tracking in the early 1970′s. And most indicators show that they are the lowest they have been in the last 50 years.
- Mortgage Backed Securities are benefiting from the “flight to safety.” With global economic uncertainty still high, MBS’s are benefiting from this. As strong corporate earnings continue, this feeling may subside.
- Lenders are operating at near capacity. Most large lenders and investors (think Citibank, Chase, GMAC and Bank of America) have more loans coming in both internally for their own branch networks and externally from mortgage bankers and brokers. With the recent mortgage meltdown, lenders of all sizes are operating with smaller staffs. With capacity at an overload, lenders are tempted to let loan prices get worse to slow production.
- More loans equals longer turn times. Many lenders are looking at increasing turn times to approve files. This increase requires longer and longer pricing locks which affect what rates they can offer to borrowers and still keep pricing intact.
- Rates are market driven and not artificially set. Unlike the Federal Rate or Prime rate, these rates are an indication of the market. Any investment encounters potential risk and mortgage backed securities are no different. There “should” come a point where the risk versus return equation should keep investors from pushing rates lower.
In some other news this week, there are renewed calls for the FHA to address problems in the reverse mortgage program. Borrower costs, in the form of closing costs, rate adjustments and origination fees were addressed in the last few years. Fees and other costs were cut to help more borrowers obtain less expensive financing. There is an even bigger problem- reverse mortgages depend on increasing home values in order for the overall program to remain solvent. As prices have fallen, the FHA has had to limit the amount of loan proceeds available to borrowers. This has placed an additional strain on borrowers who need the program to supplement their incomes. The FHA has also been forced to raise premiums for the program and look at requiring escrow deposits as many seniors do not have the monies for taxes and insurance. All in all, with more and more people approaching retirement, we need to look at this program and make it work better for everyone.
More than 60% of current mortgages are at 5.75% or higher- that means many people can benefit from the current rates. Unfortunately, it is estimated that 25% of borrowers (and up to 50% or more in Florida) are underwater in their current loan. The current low rates may help those who currently owe 90-110% of their homes value. Loan programs designed to help those borrowers have been available for two years or so but with the pricing adjustments required, the loans simply did not offer enough rate abatement for most customers. With rates in the mid-4% range now, borrowers with little or no equity can see a rate of the low 5% range.
Rates remained excellent over the last week and fell for the third straight week. As I said, I don’t think rates will fall forever and I don’t think they will be low forever. While a 4.375% rate is better than 4.5%, the savings on a $100,000 loan are only $7 per month or about $2500 over the life of the loan. In short, pull the trigger and lock your loan!
