Could mortgage rates hit 2%?
Now that that Federal Reserve is committed to keeping borrowing costs low, might mortgage rates drop even further?
This post comes from Marilyn Lewis of MSN Money.
Mortgage interest rates fell this week, back to the lowest they've ever been. Freddie Mac's weekly survey shows:
- 30-year, fixed-rate mortgages sold last week averaged 3.49% (borrowers paid an average 0.6 point).
- 15-year fixed rates averaged 2.77% -- a new all-time low (borrowers paid an average 0.6 point).
This month, the Federal Reserve made a move that should keep the cost of borrowing low for at least another year:
The Fed said last week it would buy $40 billion every month in mortgage-backed securities until the labor market improves substantially. The program, known on Wall Street as "QE3," will likely lower interest rates for mortgages and also help some people refinance their home loans.
So: lower rates, right?
In theory, rates for mortgage buyers and refinancers should drop. Homebuyers and owners are wondering how low rates might go. Could 30-year fixed rate mortgages drop down into 2% territory?
Sadly, you're not going to like the answer. It's looking like you can forget your hopes that the government's $2.75-trillion (so far, since 2008) bond buying spree might also create a little trickle-down for the average Jane and Joe. The anticipated mortgage interest rate drop isn’t happening.
To be fair, the government support is helping lower the price of subprime auto loans.
But even as government subsidies drive down the cost of borrowing for banks to new lows, "the cost of mortgages to borrowers hasn’t fallen anywhere near as much," says The New York Times' DealBook, in an article titled, "How Much Does the Fed’s Plan Really Help Main Street?" Credit card rates, for another example, are stuck.
HousingWire reaches the same conclusion, quoting Paul Diggle, an economist with Capital Economics, who "doesn't expect the 30-year fixed-rate mortgage to go lower than 3.25%."
The question is, why? There are a variety of explanations. HousingWire believes the cause is the federal government, which plans to soon raise the fees charged to lenders. The idea is to have loans from government mortgage programs reflect their true cost and allow private mortgages to become more competitive:
The stimulus announced this week might not make mortgages much cheaper. Any drop may be offset by an increase in guarantee fees Fannie Mae and Freddie Mac are set to charge in November. The lender passes those charges on to the homebuyer.
BankRate, too, blames the government fees for consumer mortgage rates' lack of downward momentum.
Mortgage rates reached new lows this week after the Federal Reserve started its bond-buying program. But they could have dropped lower if Fannie Mae and Freddie Mac had not raised mortgage fees.
Financial Times has a different theory. It says banks aren't passing on their lower rates because demand for mortgages has grown so fast that banks can't keep up. With demand so great, there's no need for banks to compete by lowering rates.
"Very little of that (federal stimulus) is likely to make it through immediately to consumers," he said. "There's nothing that will force mortgage originators themselves to lower the rates that they're offering to consumers. Right now they have their hands pretty full in terms of the pipeline and managing paperwork and making loans. These folks are busy. There’s not a bunch of people on long cigarette breaks."
FT continues, "Wells Fargo and JPMorgan, responsible for almost half new loans, are moving thousands of staff to the frontline of mortgage origination but are still struggling to cope, analysts say."
But DealBook counters that Wells Fargo has been well staffed for some time and is perfectly capable of handling the volume of mortgages. DealBook has another explanation: Banks like the new, fatter profit margins.
The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis.
In another article, DealBook concludes that consumer mortgage rates right now should be about 2.83%.
"Put another way, the banks aren’t fully passing on the low rates in the bond market to borrowers. Instead, they are taking bigger gains, and increasing the size of their cut."
Maybe, DealBook implies, the banks have just gotten used to pocketing fatter profits and there's no reason for them to change:
The banks don’t care because mortgage revenue is ballooning. But it all means that the 2.8% mortgage may never materialize.
More from MSN Money:
- Kill the mortgage tax deduction?
- Has $26B bank settlement really helped?
- 3 ways to avoid mortgage insurance
- Should you buy a house now?
- Banks accused of foreclosure bias
- Calculator: How much house can you afford?
VIDEO ON MSN MONEY
I read the headlines and wonder wow god news and the idiot tells me what I already know
another famous obama sleigh of hand deal to buy votes.........he will say see how I'm telling the fed to buy mortgage bonds to lower mortgage rates so more borrowers can refinance/buy houses, but I'm not telling you that at the same time I'm being sneaky by increasing gov't fees on the mortgage lenders that will effectively negate any rate reduction that might have occured by the bond buying....
While the interest rates continue to drop and the Gov't continues continues to print money, it only will lead to some radical inflation that will very quickly send the economy into the dumper. The country can't continue to represent an economy that is in good shape but in reality has absolutely no money. Our debt is now into the $100 trillion + mark between Gov't and private debt. And since the Gov't has no money, there is no more money for bailouts .... which will send the economy, employment, inflation, banking into the "BLACK" hole! The country is bancrupt ....
Can you say Greece or Spain? Can you speak chinese? Better learn quickly!! Thanks Barry .....
so, these trillions of funds the prez has thrown out to the banks are not for the consumer to enjoy but for the banks to continously harbor fat profits just like any other time during the real estate boom. in spite of the banks own stupidity and greed they get rewarded by the prez. how about that? great!
6 trillions fed into this economy and we, the american people are still jobless and unable to find jobs. the banks who took most of us to the cleaners are still profiting taking in fat profit from our own tax funds. how about that mr. prez?
I purchase, renovate and sell several homes a year and I help many buyers obtain loans. Although loans are harder to qualify for, there are programs available even at 600 if you have a down payment and other qualifiers. . You will need to jump through the aforementioned hoops mentioned in some of the other posts. However, the loans are available. Even though I am in the housing business and business would be better if the lending institutions would lend to anyone who submitted an application. I believe most of the qualifications now being enforced by lending institutions are needed and I support a stricter lending policy. It is needed to keep the housing market stable. The foreclosure rates are a testament to the loose lending policies of the past. Not only all of the fraudulent loans which were given on no doc loans, but lending to people who were not stable enough to be responsible for a 30 year loan to begin with. Although it is sad that people get divorced, loose their job or have other life problems. When those times come it is still those peoples responsibility to pay their home loans. In most cases their problems take precedence and they don't feel responsible to pay the commitment they signed up for. Many people will walk away or loose their home and then blame the banks, the government and everyone who is successful for their problems. Many people give up simply because it is easier and they don't want to take responsibility, it is hard to feel sorry for people in that situation. However, in some cases you can't blame folks, they have little choice. I may even do it myself in the right situation. However, responsibly, those in charge of the lending institutions need to take these possible scenarios into account in deciding a loan. This is why a large portion of your credit score is tied to your length of history, if you have moved recently or changed jobs. It should take several years to built up your credit score and prove you are reliable enough to pay for a long term commitment. That is not something that can be proven with a year track record. It is not good business for a lending institution to give a long term commitment loan to people who do not show enough fortitude and stability and then get stuck with a non performing loan when the customer gets divorced or looses a job or the value of their house goes down. What would your qualifications be if you were going to lend your personal money? Would you purposely want to set yourself up to loose money? A home loan is something you should need to work hard for to obtain. Being awarded one should be regarded as a privilege and an achievement. Not a god given right because you can sign your name on the application.
The consumer should be only paying 2%. This is another scheme for the banks to rip us off. The banks couldnt make it when
they were charging 17% plus 6 points in 1980, and 13% in the 1990's.
What is wrong with the screw balls in the government and the Banks. This is another plan to get the consumer.
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