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Your Interest Rate Update

October 21, 2008

High low, high low, it's volatile as we go...

Much like 500 point intra-day swings are becoming common place in the stock market, volatility continues as the norm with Mortgage Backed Securities. Just a week ago mortgage rates had risen to the highs of 2008, with 30yr fixed around 6.5%. Now, a scant 5 business days later, we're back to 5.75% and thinking/hoping that another short window of opportunity may open where we touch 5.5%, or maybe lower, for 30-yr fixed money.

Keep in mind, just like the dips we saw in September, and February/March before that, these windows open and shut quickly. In the middle of September, we had about a 2-day window where rates fell to 5.5% then climbed back to 6% just as quickly. February and March's low of 5.25% lasted for just a day or two as well, with 5% appearing for a scant three hours one morning!

So, if those low points spell opportunity for you, get your ducks lined up in a row, and be ready to pull the trigger. And, make sure you're in touch with a professional loan officer who follows the daily movement of Mortgage Backed Securities, so you're best positioned to catch those interest rate dips.

It never ceases to amaze me how many people miss great opportunities hoping to save an extra .125% that, alas, rarely seems to materialize. Or, those who are watching the wrong trends, such as Treasury Yields, which don't always move in the same direction as Mortgage Backed Securities.

The good news, however, is that there's usually another dip around the corner. If you missed the last one, be patient. Another should materialize. Or will it? Have the rules changed?

Ever the optimist, I always believe rates will continue to rise and fall based on the usual factors of 1) supply and demand, 2) inflation (or lack of it). Sometimes there can be long gaps between highs and lows, but...over all, I think that trend will continue. But, what if my belief that banks (and the ever increasing amount of Government Sponsored Enterprises) must increase their profitability and repair their balance sheets to stay alive - and there are only two ways to do that - proves correct?

That could mean that even as borrowing costs for banks, whether from Central Governments (Fed Funds Rate target, etc.) or from each other (LIBOR, for example) get lower, mortgage rates and other consumer financing may not follow. Why would that be? More profitable margins for the banks are the answer.

As we know, banks make money in a couple places. Generally, they borrow money at one rate, and lend it out at a higher rate. If you're Mr. Bank CEO, and you're tasked with rebuilding your company's balance sheet and returning to profitability, you have two ways of doing so: 1) cut costs 2) increase revenue/profits. That's it.

We're seeing the cost-cutting with continued lay offs, sale of losing assets, etc. but...that's another story. Meanwhile, if you can increase your margin between your cost of borrowing and your rate of lending, wouldn't you? I would. Especially when 6%, 6.5% and even 7% money to the consumer is still VERY cheap.

That could usher in an era where despite seeing super low Fed Funds target rates and LIBOR rates (remember LIBOR is a rate at which banks lend to each other and also acts as the index for a huge volume of other loans too), mortgage and other consumer interest rates (credit cards, auto loans, etc.) could remain slightly higher than we may otherwise expect.

During the last period of historically low Fed Funds target rate, between 2001 and 2004, when the Fed Funds rate ranged from 1% to 2.25% fixed mortgage rates followed that down-trend and stood at 40-year lows between 4.75% to 5.5% for the same period. ARMs were even cheaper. But, it could be different this time. Banks might decide to not pass on the full benefit/spread between rates at which they're borrowing, and at which they can lend.

Remember, that a difference of .5% on a $300,000 loan is about $100/mo. In isolation, for most borrowers, that's not a huge deal breaker in their ability to finance a home. That same .5% rate difference only equates to roughly 5% change in purchasing power. Again, that's usually not enough of a shift to afford someone a drastically different type of home or neighborhood. Chances are you'll probably find a very similar home and neighborhood for $285k as you would for $300k, or for $150k vs. $140k and so on.

But, to me, Mr. Bank CEO who's lending $50 billion/year for 30-yr fixed mortgages, that .5% difference means roughly $15.5million PER MONTH to my bottom line. That's not chump change.

So again, if I'm a lender, and my cost of borrowing drops to historic lows again, what's my motivation to pass that along to you, the borrower? If supply of credit is low, and we've seen how much it's diminished in the last 12-24 months, can't I afford to charge a little premium? There really isn't much motivation for me to pass those savings on to you. I might just pocket that extra spread to help my company return to profitability and bring my balance sheet back to solvency. Just a thought, anyway.

Now, the counter argument is pretty easy, and I discuss it every day: "But Eric, we need to see cheap money, so people can borrow easily which will encourage financing and help to create a bottom to the housing price (and other asset value) corrections. So, of course banks will lower their rates accordingly. Right?" Right. Because they're always looking out for you, huh?

It's cheap money, and loose underwriting guidelines - allowing many people who were way over extended on the personal and corporate level - to continue borrowing beyond their ability to repay that got us in this mess in the first place. As I've said, credit is a great thing, and is the lubricant to a vibrant economy. But, as we've seen so many times, too much of a good thing can have pretty adverse consequences when used irresponsibly.

We've just hit the reset button on our economy and financial practices, erasing much of the paper wealth that was "created" between 2001 and 2007. Hopefully, in addition to the massive government efforts to pump liquidity back into the markets and get the US and global economies on their way back to recovery, those who run our financial institutions and the agencies that regulate them will find a good balance between establishing transparency and regulations, while not stifling economic innovation.

I'm confident they will. I'm equally confident in the resiliency of our National, and global economic framework that there is light at the end of this tunnel. And, as I've said throughout, there are always great opportunities for those with the eye and financial wherewithal to capitalize on them. As we work through this, I'll do my best to keep you informed so you can make educated decisions based on what best fits your needs, goals, and time lines.

As always, call or email if you or anyone you know has questions about financing residential or commercial real estate. Here are your rates for the week (or at least as of today). Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
40 yr fixed mortgage	7.250%	1	7.490%	$300,000.00	$ 1,919
30 yr fixed mortgage	5.750%	1	5.990%	$300,000.00	$ 1,751
15 yr fixed mortgage	5.500%	1	5.700%	$300,000.00	$ 2,451
3/1 ARM	5.500%	1	5.690%	$300,000.00	$ 1,703
5/1 ARM	5.625%	1	5.835%	$300,000.00	$ 1,727
5/1 ARM Int Only	5.875%	1	6.135%	$300,000.00	$ 1,469
Jumbo (ask me about the new limit, per your zip code)
40yr fixed mortgage	8.875%	1	9.135%	$550,000.00	$ 4,190
30 yr fixed mortgage	8.500%	1	8.760%	$550,000.00	$ 4,229
15 yr fixed mortgage	8.000%	1	8.255%	$550,000.00	$ 5,256
3/1 ARM	6.250%	1	6.430%	$550,000.00	$ 3,386
5/1 ARM	6.750%	1	6.970%	$550,000.00	$ 3,567
5/1 ARM Int Only	7.500%	1	7.750%	$550,000.00	$ 3,438
Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.