It was late December 2008/early January 2009 when the media first announced the talk of the government trying to drop mortgage interest rates as low as 4.5%.
We are now in early March and no one seems to be able to find the 4.5% 30 year fixed rate….unless you want to pay points or thousands of dollars in closing costs.
Why haven’t we seen the 4.5% rate yet? Well, without trying to confuse anyone, I’m going to explain in lehman’s terms the best way I can…
The FED announced that they would become active in buying mortgage backed securities, because they know these securities (a.k.a. mortgage bonds) have a direct effect on the mortgage rates. Without getting into to much detail, mortgage bonds are bought and sold by investors just like stocks in the stock market. When the price of mortgage bond start to increase, investors start to rally and buy, buy, buy before the price is to high to resell for a profit. The same goes when the price of mortgage bonds start to drop and investors sell, sell, sell.
Well, think about this, when the government steps up and starts to purchase these bonds (and we are talking billions of dollars a day sometimes), investors see the price of mortgage bond start to rise, so this would case them to buy, buy, buy. When the mortgage bonds prices rally in price, this causes mortgage rates to drop.
This happened the week following Thanksgiving in 2008, where, in one day, mortgage rate were about a whole point better than the day before. In the mortgage world here, that’s a huge difference in just one day!
Unfortunately, there are two negative things that have happened, since the FED started to purchase mortgage back securities and major drop in mortgage rates:
1. 2008 was a sad year, because many lenders either went out of business or laid off a lot of their employees just to stay in business. So, coming off a year where things were really slow, an overnight flood of mortgage refinance applications caused lenders to become overworked and understaffed. You would think the lenders would do what any business would do when you get to busy and hire more employees. Well, additional help was hired, but not much, because most lenders think that this sudden rush of business will only be temporary.
So, how do these lenders react to the sudden influx of business? They increases mortgage rates to control the amount of volume they can handle. As turnaround times and processes came back down to normal, they would adjust their rates back to where they should be. I know, call it unfair or call it what you think, but we are all at the mercy of these lenders. If the mortgage rates should be lower, they should give them to the consumer!
2. The rise in Treasury yields are poised to see their worse month since March of 2004. (source: bloomberg.com) This has caused an increase in mortgage rates as well. This seems to be offsetting the moves the FED is taking to lower the mortgage rates.
People are starting to either get worried or give up on waiting for this magical 4.5% mortgage rate. Some of my own customers have locked in their rates over the last few days and I don’t blame them. If you are happy with the current market rate and it helps reduce your mortgage payment, lock it. Don’t let greed blind you, because any mortgage rate below 6% is still considered historically low for mortgage rates.
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