Friday, April 10, 2009

Holes don't go to China, nor do mortgage rates

This entry goes into the "news you can use," class. Manipulated markets always snap back. The the Tulip bulb market of 1637, silver market of the late 1970's, and now, the mortgage market of 2009.

The U.S. home mortgage system has been a nightmare for some borrowers recently. But setting aside the questionable, if not illegal, actions of banks, investment firms, and mortgage charlatans, the American system of locking in a long term rate while having the option of refinancing if rates fall has made US home mortgages one of the more appealing borrowing structures in the world.

This assumes the borrower could afford to borrow in the first place and is not victim of his own over reaching with some of the teaser hybrid loans that brought the system to its knees. Today, plain vanilla is the best flavor.

Right now, the panic of continually degenerating economic news in housing and its knock on effects on banks has put money on sale if one has steady income, and reasonable credit history.

Rates are changing daily, even hourly, so work with a knowledgeable and trustworthy broker. In the words of one analyst, "shop the broker, not the rate." A sharp broker working for you can lock in a rate on a dip that you would never see over the course of casual rate shopping. We have worked with several in Pennsylvania, so they do exist.

Rates will vary and move based on individual issues such as FICO score and buydown points. Doing homework ahead of time can pay dividends for an opportunistic borrower whether a first mortgage or a refinance.

These rates are extremely attractive. But they are skewed. For example, interest only loans are close to 6.25% while 30 year rates are as much as 2% lower. This spread is unprecedented, as are 30 year rates at 4.25-4.5%.

Rates are low and people should take advantage of them while they can. But it's important to understand why rates are low.

Fannie Mae debt is on a tear. Remember that yield and price move in inverse fashion. Thus a price rally in bonds equates to lower yields. Yesterday the Fannie Mae 30/60 (thirty year term/sixty day delivery) was at 4.46% The massive government buying of mortgage backed securities is driving the prices up and the rates down.

However, these prices are artificial. The government is buying Fannie Mae and Freddie Mac debt to force down yields and stabilize home prices. Could it reach still lower? 3.50%? Perhaps. But if it does it will likely be of extremely short duration as suddenly every mortgage in America will benefit from refinancing. If you haven't done your homework you will likely miss it. So do your homework, be prudent and conservative. If you plan in remaining in your home for more than a few years, this could be a windfall moment when you look back.

John Barnyak