Low Rates Alone Are NOT Enough

Mortgage and Lending with Willamette Falls Financial

So you read that the Federal Reserve Board cut rates, lowering their "target" rate to between 0 and .25%. Normally, a Fed cut can be bad for mortgage rates, because Fed rates are overnight and mortgages are, well, longer.

But Mortgage Backed Securities (MBS) rallied. Why? Because in it's announcement, the Fed also signaled that it would buy even more MBS, particularly from newly government controlled Fannie Mae and Freddie Mac.

That has sent fixed rate mortgages dropping to as low as 4.75%. But...

Those rates, at least right now, are only available for borrowers willing to pay, or able to finance in, the thousands of dollars of costs involved in a refinance transaction, including a 1% loan fee.

Trust me when I tell you this, because I look at dozens of rate sheets from our lender partners every day. They are completely uninterested in allowing borrowers to choose other cost structures.

For years we have counseled our clients to look first at an option to lower their rate using a "No Cost" refinance. In these transactions, we use some of the money paid to us by the lender to pay all the associated costs (appraisal, title insurance, recording fees, escrow agent, etc.) on behalf of the borrower. In normal times, that typically meant that a borrower might forgo an extra .25% in interest rate, but would save upwards of $3000 in closing costs. These transactions were a wonderful deal for consumers. Maybe that's why the banks hate doing them.

And honestly, even given that, mortgage rates aren't nearly as low as they should be. At historical norms, mortgages tend to trade approximately 1.5% higher than the yield on 10 year US Treasuries. The yield on the 10 year as I type this is 2.09%. Does anyone see any 3.5% mortgage rates out there? No.

The other problem, and this is a big one, is that banks have tightened their guidelines SO much that it almost doesn't matter how low mortgage rates fall.


First of all, sliding values around the country mean there are a lot of consumers who now owe more on their home than it's worth. These low rates do them no good. But there's another class of borrowers that shouldn't be in trouble, but might be.

Let's take a fairly typical mortgage customer. I have a client (will call him Bob) who purchased a first home last year here in Portland, for $250,000. Bob, a very conservative type, put a full 20% down and chose a 30 year fixed rate mortgage we obtained for him at 6.25% with no points. Yea, lower costs for the consumer! Shortly after closing, Bob took out a small $25,000 Home Equity Line of Credit (HELOC) to finance some improvements to the house. Right now he has an $25000 balance on that HELOC.

He might be out of luck. It's all going to be on the bank holding his HELOC as to whether or not they'll be willing to re-subordinate. So Bob may be stuck on the sidelines, with what now looks like an exhorbitantly high interest rate, unable to avail himself of these historic low rates.

So here, in my tiny corner of the internets, is my plea. Mr. Banker, it is time, PAST TIME, for you to relax these ridiculous stone age lending restrictions. Am I asking you to go back to the wild west days of 2006, when someone could buy an investment property using an Option ARM, with a tiny down payment, bad credit and no documentation? NO. A thousand times no.

All I'm asking, on behalf of our clients, and millions more just like them, is to return to the sane and reasonable guidelines used in the mid 90s, when I started in the mortgage business. That's right, turn the clock back 10 years, not 50. Back then Fannie and Freddie required W2 forms, pay stubs and bank statements. Back then these fraudulent liar loans were NOT around. Yes, there were some stated income products, but they carried higher interest rates to protect the end investor from the additional risk.

These new restrictions make no sense. If Bob's payment goes down by $200 a month, doesn't that make him more likely to repay both is new 1st and his HELOC in a timely manner than less? Of course it does.

If creditworthy Americans are allowed in to this wonderful world, they'll use those savings. They will put more in to college funds, savings, and other investments. Bob might help out his wife by using that savings to replace their aging washer and dryer.

EVERYONE WINS! That's right. The bank originates a new first mortgage, making money for their shareholders. The holder of the existing HELOC now finds itself in a safer position because Bob's debt load on a monthly basis is down. Yes, we make money putting Bob's new lower rate loan together. Bob improves his financial situation. The guy working at the appliance store makes a sale. His boss rings up a sale and lowers his inventory. And if the owner of the appliance store is suddenly ringing up sales from Bob and others like him, maybe he'll decide it's time to trade in his old car and buy a new Chevy.

You see where I'm going with this?

But it can't happen until Fannie, Freddie and their bank partners pull their collective heads out of the sand. I'd say they need to pull their heads out of something else, but this is a family blog.



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