Home Buyers get ready to share a little more pain
Mortgage rates are again historically low, with 30 year fixed rates hovering between 4.50 - 5.00%. This is fantastic news, considering we once heard rates would be inching closer to 6.00% by the end of 2010. What happened? Not being an economist, I can only summarize it by saying that the ills we visited upon international financial markets appear to have made our US 10 year notes look pretty attractive when contrasted with other now crippled global investments, buoying our domestic earnings, buying more sunny skies for mortgage applicants. For now, that is. Change is brewing.
As part of the US government's effort to reform Wall Street, Bill HR 4173 includes reforms requiring banks issuing mortgages to hold 5% of the value of loans they securitize in reserve capital. Sure, having a little skin in the game is a good idea. We all think a little harder before we make decisions when our own cash is on the line. How is that going to affect interest rates, you ask?
Here's an example; a bank can easily sell $21 Billion in MBS (Mortgage Backed Securities). Now they'll have to retain $1.05 Billion in cash reserves. How many smaller banks are going to have this kind of cash on hand?
Imagine how crippling this will be when banks will no longer be able to invest these reserve funds as freely as they did in the past. They will be forced to make up that lost revenue somehow. And perhaps even more sobering is the prospect of how many smaller banks will be unable to compete in the mortgage arena at all, because they simply are not liquid enough. They'll surely get out of the home loan business altogether.
We'll inevitably have fewer mortgage resources which, in many cases, is probably a good thing. Those remaining banks still issuing mortgages will have fewer profit making options available for their reserve capital. Sounds like a recipe for higher interest rates to me.
These changes among others are already on their way in the form of HR 4173 which needs only to be signed by President Obama. This bill is nearly law, after its whirlwind odyssey from its introduction in December 2009, passing the House on December 11th and the Senate on May 20th with all final Differences resolved on June 30th -this past Wednesday. Click here to see the full version of HR 4173 Wall Street Reform Bill
If you agree that this will inevitably cause rates to rise, you may want to call your loan officer (from a well funded bank) right now. A 1% increase in mortgage rates can cause a reduction of $25,000 - $40,000 in buying power for the average Orange County buyer. Why would anyone pay more for less?
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