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Your Interest Rate Update

March 17, 2009

Well, it's been a month since my last update. Not because there hasn't been any news about the economy, bail outs, etc. but really in spite of that, mortgage rates have clung to this 5% range (4.875%-5.125% for 30yr fixed money).

Despite the stock market finding a new floor, blowing past the previous lows of November 2008 - just days after my last update - mortgage rates didn't really improve much. Likewise, they didn't really worsen as the stock market rallied last week.

The reason rates didn't change much boils primarily back down to the two main drivers of interest rates:

1) Supply/Demand

2) Inflation, or fear of it, eroding the return of that fixed investment

So, yes, although money was pouring out of equities during the market's most recent nose dive, and being parked in bonds and mortgage backed securities, there's just so much volume of new bond issuances (less so, certainly with mortgages) that prices really didn't rise, pushing yields lower. In fact, since the New Year, bond yields have actually risen (meaning prices have fallen) significantly.

What has kept mortgage rates from rising back up to the 6% range has primarily hinged upon the Fed's program of purchasing Mortgage Backed Securities. They're soaking up a lot of the supply, keeping rates from rising. Right now, that plan is set to expire in June.

I'm betting that in tomorrow's FOMC policy statement they'll either extend that program outright, or at least hint that's a possibility.

That's one dynamic, covering the supply/demand side of mortgage rates.

The other dynamic is that investors fear that all the new money flooding the system in an effort to reflate our economy, will lead to inflation down the road. Since our mortgage rates are fixed for 30yr years - primarily - it doesn't matter to an investor when inflation hits. It's a matter of how hard and for how long. Most economists believe we'll return to growth some time in late 2009 or 2010. That growth can lead to inflation. (Other economists think we'll be in a long period of cyclical deflation, but...that's another story). A little inflation will be welcome, but...too much, and there's a problem.

I believe it's those factors that are primarily keeping rates around 5%. And, that's still great!

Now, let's look at what can move those rates higher or lower as we move into Q2 09. It's going to be the same two factors, of course.

On the supply side, the Fed has to keep issuing bonds and growing its balance sheet to pay for the bailouts, budget proposals and ensuing deficits, etc. Who's going to buy them?

Remember that song, Chi-ina Chi-ina? That's who. Primarily, at least.

China is far and away the biggest holder of US debt. They have currency reserves of roughly $2 Trillion, 60% of which is in US assets. China's top banking regulator said recently the country will pay attention to safety, liquidity and profitability when deciding whether to buy more U.S. debt. "How much we will invest in U.S. Treasuries will depend on the three elements," said China Banking Regulatory Commission Chairman Liu Mingkang at a press conference in Beijing. (Bloomberg.com 2/26/09).

As long as China is willing to step up to the plate - and they kind of have to b/c we buy all their goods - that will help finance our bond issuance, and help to keep rates in their current range. However, if they stopped buying so much of our debt, rates would have to rise quickly in order to entice them, or other investors, back to the table. But, unless that happens, despite the Fed having discussed buying its own bonds and treasuries on three occasions since December 1, 2008, I expect they'll continue holding off.

Here's a recent statement to illustrate: "At this point in time, the Fed has judged that buying long-term Treasuries is not the most efficient means of easing financial conditions," Federal Reserve Bank of New York President William Dudley said after a March 6 speech in New York. (3/16/09 Rich Miller, Bloomberg.com)

Here's another perspective from Korea: "The U.S. is borrowing so much that it may have trouble paying the money back," said Jaemin Cheong, a bond trader in Seoul at Industrial Bank of Korea, the nation's largest lender to small- and mid-sized companies. "Yields are headed higher," Cheong said in an interview. "More issuance will be needed to support the economy. The possibility of default is more and more as time passes."

So, it's my contention that the Fed will only step in and directly purchase US bonds, treasuries etc. IF foreign demand wanes. Should that demand hold up, then the Fed will continue keeping its focus on other tactics.

Having said that, Fed Chairman Ben Bernanke's former colleague (they shared an office wall way back when) is implementing a treasury purchase program in Great Britain. How their policy plays out could impact Chairman Bernanke's ideas on the subject. At this point in time, everything is fluid as they use different tools and evaluate each measure's impact.

But, unless and until either the Fed starts buying more bonds, soaking up that supply OR we see another precipitous drop in equities creating a "flight to safety" - which can certainly happen given the economic headwinds we face - I don't see mortgage rates moving much lower than today's levels.

On the housing front, it's really more of the same, too.

Nationally, Moody's Economy.com says that of the nearly 52 million U.S. homeowners with mortgages, about 13.8 million, or nearly 27 percent, owe more than their homes are worth after many months of declining prices.

California had 1.9 million borrowers with negative equity at year-end, more than any other state, followed by Florida's 1.28 million. About three in 10 borrowers in both states were underwater. (Jonathan Stempel, Reuters 3/4).

I read today that some experts are forecasting a full 50% of homes with mortgages will be underwater by year's end.

The administration, launching what it calls the "Making Home Affordable" initiative, said that borrowers seeking loan modifications will have to provide their most recent tax return and two pay stubs, as well as an "affidavit of financial hardship" to qualify for the $75 billion loan modification program, which runs through 2012. Borrowers are only allowed to have their loans modified once, and the program only applies for loans made on Jan. 1 2009 or earlier. Up to 4 million borrowers are expected to qualify. Mortgages for single-family properties that are worth more than $729,750 are excluded.

Separately, up to 5 million borrowers who have mortgages held by government controlled mortgage finance giants Fannie Mae and Freddie Mac should be eligible to refinance through June 2010. (AP 3/4/09)

However, there still is no true remedy for homeowners who are more than 5% upside down. Again, I think by the end of this year we'll be hearing about wholesale debt forgiveness. As hard as that pill may be for some of us to swallow, it may be a necessary step to stem the tide of ongoing foreclosures. Time will tell.

Despite all that, we will get through this. You hear me say it time and time again. For those who are well positioned right now, there are some phenomenal opportunities. I hope you're in a position to seize them.

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 this week. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
40 yr fixed mortgage	8.000%	1	8.240%	$300,000.00	$ 2,086
30 yr fixed mortgage	4.875%	1	5.115%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.500%	1	4.700%	$300,000.00	$ 2,295
3/1 ARM	4.500%	1	4.690%	$300,000.00	$ 1,520
5/1 ARM	4.625%	1	4.835%	$300,000.00	$ 1,542
5/1 ARM Int Only	4.750%	1	5.010%	$300,000.00	$ 1,188
Jumbo (ask me about the new limit, per your zip code)
40yr fixed mortgage	n/a	1	#VALUE!	$550,000.00	#VALUE!
30 yr fixed mortgage	7.625%	2.25	8.885%	$550,000.00	$ 3,893
15 yr fixed mortgage	6.500%	1	6.755%	$550,000.00	$ 4,791
3/1 ARM	5.625%	1	5.805%	$550,000.00	$ 3,166
5/1 ARM	6.500%	1	6.720%	$550,000.00	$ 3,476
5/1 ARM Int Only	6.750%	1	7.000%	$550,000.00	$ 3,094
Rates subject to change without notice.
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.