I Think Lower Mortgage Rates are on the Horizon

Mortgage and Lending with Mortgage Banker

Many consumers,  savvy and otherwise are a little confused as to why mortgage rates are not lower than where they are.  Today you can get a 30 year fixed rate mortgage at 5.875% with no points and don't get me wrong that is a phenomenal rate historically.  But if you look at where banks are borrowing at you would expect that rate to be significantly lower.  This does have a lot to do with supply and demand and I don't mean the general public's demand for low mortgage rates.  I am referring to Wall St's appetite for mortgage backed securities.  But I will give you an easier example to consider:

Let's say you are a bank.  And you can now borrow money at a true historic low rate of 1.25% which is the Fed Funds rate.  You can then turn around and lend to borrowers at 5.875% so they can buy a house.  That seems like a pretty hefty profit margin right?  Well let's look at the other side of the coin.  We are currently seeing foreclosures and mortgage defaults happening more than ever before.  So if people aren't paying their mortgage, the 5.875% of nothing becomes....well....nothing.

Get to the point already Justin!  Moving forward.  Today the government announced a much needed bailout of mortgage giant Citi Financial.   The most important thing was how they did it.  The US government (in the form of your taxes) put a cap on how much Citi will lose in the future on the mortgages it holds.  To be exact,  Citi will lose no more than about $29 billion which was spelled out as follows:

Citigroup will assume the first $29 billion in losses. Beyond that, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent. (From this article)

This accomplishes several things.  But most notably it tells Citi to "go out and lend money to consumers and let the government worry about what happens if they don't pay."  Hopefully in the very near future we will see the spread between what banks borrow at and what they lend at begin to shrink.  Banks now have the confidence to lend again. 

I wish everyone the best in these tough times.  Keep working hard and we are going to see this gigantic ship finally start to turn around.  Contact me if there is anything I can do to help.

Take a look at where the fed funds rate stands today compared to years past:





Joe A
Cupertino, CA

Justin, a small bit of advise, don't try to predict what the market will do.  With an economy that is so unstable at the moment, there is no way of knowing what can happen tomorrow.  If price levels rise, causing inflation or stagflation, rates would rise.  I agree with you that we have to keep working hard and ride out the storm, but the ship won't be turning around anytime soon.  This economic crisis is much greater than simply the financial and real estate markets, and I predict the worst is yet to come.

Nov 24, 2008 07:26 PM
Justin Perry
Mortgage Banker - Portsmouth, NH

I agree with your concern on potentially misleading people to think they can bank on lower rates tomorrow.  My goal was just to give plain information on what is going on with mortgage rates and what could happen.  Personally I think AR has too many mortgage brokers who just cut and paste market news everyday and recite jobs numbers, PPI, CPI etc.  That is a waste of time for your average consumer and I just thought I would offer a differant spin.

But if we agree on one thing for sure it is the margin for error when predicting anything in this market and I hope anyone who reads this blog takes it for what it is and not as a crystal ball.

Nov 24, 2008 11:44 PM
Justin Perry
Mortgage Banker - Portsmouth, NH

Hey joe,  what happened to mortgage rates today?  Care to comment?

Nov 25, 2008 05:58 AM
Gerry Suarez Jr.
New American Funding NMLS 6606 - Orlando, FL
FL Mortgage Guru


I tried to post to you during the blackout... lost that whole thought!

but kudos on your great call. Keep providing you customers with the best info you can so thay can make the best decisions. Hopefully you and they have benefited from your advice.

Gerry Suarez, Jr.

Your FHA Loan Pro!

Nov 25, 2008 07:11 AM
Justin Perry
Mortgage Banker - Portsmouth, NH

Thank you for the kind words Gerry.  I'm glad somebody recognized the accuracy of my post.  I did get a little lucky because top be honest I didnt expect rates to drop 8 hours after my post.....but hey sometimes it's nice to be lucky.   Keep fighting the good fight.  I love how you seperate yourself as an FHA expert, smart move Gerry.

Nov 25, 2008 09:29 AM
Lewis Poretz
Apex Home Loans - Annapolis, MD
Business Development Manager

Justin - I saw 2 price changes for the worse this afternoon....  these dips come every few months   get em while you can

Nov 25, 2008 02:10 PM
Boston Condo Guy
Boston Condo Guy - Boston, MA

Your crystal ball predicted correctly, we saw a significant cut today :)

Nov 26, 2008 01:11 PM