I Think Lower Mortgage Rates are on the Horizon

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: