December 15th, 2011 3:37 PM by Richard T. Cirelli
Mortgage Rates Hit All Time Lows (Again)!
It’s all about rates this week as they have retreated back to their all-time low point that was also touched in September. Another strong Treasury auction and lack of any real solution to the European debt crisis helped, among other things.
While mortgage rates are not based on US Treasuries, the Mortgage-Backed-Securities (MBS) that do influence rates are similar to Treasuries and tend to trade in the same direction. Read on for a better understanding.............
Can Rates Go Any Lower?
A huge factor in how low mortgage rates can go is the underlying Mortgage-Backed-Securities (MBS) market. Nearly all loan products offered by lenders are sold to Fannie Mae and Freddie Mac and end up as part of MBS pools or securities. These MBS securities are then purchased by institutional investors.
In general, the lender that services the loan will receive .375% of the rate on a 30-year fixed rate loan. The ultimate investor in the MBS will receive the rest, except for the remaining .125% that gets eaten up by a variety of fees. So, on a 4% loan, the servicing lender gets 0.375% and the investor receives 3.5% as their rate of return. Lenders can pool loans +/- .25 of the MBS rate. So, if the MBS security being sold into is at 4%, lenders can deliver loans with rates between 3.75% and 4.25% into that pool.
If rates go any lower, there will be a need to create a 3% MBS pool with a 3.5% interest rate. But, in order for lenders, Fannie and Freddie, to create MBS’s with a lower rate, there has to be investors willing to buy these MBS’s at a lower rate. With rates so low already, there likely isn’t much, if any, demand for lower rates on Mortgage-Backed Securities.
Therefore, the nature of supply and demand for Mortgage-Backed Securities will probably prevent rates from going lower. Unless economic factors force them down even more. And, any positive signs in the economy or in Europe can make rates pop back up again in no time.
The Fed, officially known as the Federal Reserve, had one of their regularly scheduled Federal Open Market Committee meetings this week too. Although their comments were generally non-committal, Many observers believe the Fed will step in to take steps to stimulate growth in 2012, first through communications measures that drive home their expectation that interest rates will not rise for a long time, and then through more bond buying. Some have said the central bank should resume purchases of mortgage-backed securities to help revive the depressed housing market; others would prefer to stick with purchases of U.S. government debt, i.e., Treasury securities.
In the meantime, ‘tis the season…………
To track the factors that influence mortgage rates on any given day or week, you can always click on the following link to my Daily Rate Lock Advisory: