Mortgage rates jumped dramatically during the past week, rising to an average of 6.37% for a 30-year conforming fixed-rate mortgage - 41 basis points above the average rate just one week earlier. According to Bankrate.com's weekly national survey of large lenders, rates on 30-year jumbos soared to 7.55%. The jump in rates represents the single largest weekly increase since April 1994. Let's try and gleam some light as to why this is happening, shall we?
Reports revealed Wednesday that mortgage application activity has fallen significantly as rates have risen amid a renewed focus on inflation.
But inflationary concerns aren't the only catalyst behind the mortgage rate increase, according to traders on Wall Street. A key factor now driving mortgage rates, apparently, is growing sentiment that even conforming mortgages will be less interchangeable than they have been in the past, curtailing liquidity on the secondary market.
(Investors trading to other Investors + faster rate = more revenue/less interest = more liquidity = stronger economy)
While the Securities Industry and Financial Markets Association (SIFMA)has said it will keep newly-conforming jumbo mortgages (which should be implemented into the mortgage industry within the next 30-60 days) trading in a specified-pool rather than including them with conforming mortgages, investors still face a growing uneasiness over just what else is going to be thrown at the market.
Currently Congress is already considering a housing stimulus package (The Foreclosure Prevention Act of 2008) that would make modifications of mortgage principal allowable in Chapter 13 bankruptcies, for one; while news today revealed that the Office of Thrift Supervision is considering the creation of a Negative Equity Certificate, which "plans to help mortgage borrowers who owe more than their homes are worth and to discourage them from abandoning those properties."
While all of these reforms to the mortgage industry should get us back on our feet, a primary concern for traders and investors alike is that too much modification to mortgage backed securities will further hinder trading of these assets and stunt the pace of reform that is needed to build a stronger economy.
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