Sunday, August 31, 2008

Mortgage rates are expected to continue to rise

Good afternoon!

I gotta hand it to my local paper The Baltimore Sun. They kinda tell it like it is when it comes to real estate. I want to share a couple articles from them today.

The first article discusses why mortgage rates continue to rise even though the 10-year Treasury yields have been dropping. They do a nice job explaining why. Risk is back:

"Mortgage rates aren't what they used to be - and not just because they're higher.

You can normally predict the going rate for a 30-year fixed mortgage by looking at the yield on 10-year Treasury notes. If the yield is 3.8 percent, as it was in the middle of this month, you'd expect mortgage rates would be a bit less than 5 percent. Instead, they were hovering around 6 percent.

As Treasury yields dropped earlier in the summer, in fact, mortgage rates stayed steady or even rose. Joseph Bell, a Wonk reader who's thinking of buying a house, wonders: "Is there any reason for this?"


Keith T. Gumbinger, a vice president at financial publisher HSH Associates, sums it up like this: "Risk means higher rates."

Lots of people wanted to invest in mortgages back when home prices were rising faster than a helium balloon. Now, with prices falling and delinquencies multiplying, investors still willing to inject their money into the mortgage markets want a better return to make up for the risk.

Concerns about the health of Fannie Mae and Freddie Mac, the big buyers of mortgages, are also driving up rates. So are the additional fees Fannie and Freddie have been levying.

The difference between mortgage rates and the 10-year Treasuries isn't the biggest it has ever been. But "it is unusually wide," says Greg McBride, senior financial analyst at

Mortgage rates tend to move in concert with 10-year Treasury yields because "T-Notes" are a benchmark for the cost of borrowing, Gumbinger says. Treasuries, the government's primary method of borrowing, are guaranteed to be paid back, so mortgage rates are set higher to account for the added element of risk. (Most homeowners refi or sell long before 30 years, hence the use of the 10-year note.)

What about the Federal Reserve, which sets the rate banks charge each other for overnight loans? Well ... its effect on mortgages is complicated.

The Fed raises rates to combat inflation and lowers them to avoid recession, but it's now faced with rising inflation and a slow economy. Since April it's kept its rate steady - potentially adding to inflation. And when the cost of living rises, so do mortgage rates because investors don't want to lose ground, Gumbinger says.

All this means borrowers are more likely to see rates go up than down for the rest of the year, both Gumbinger and McBride say. Gumbinger thinks rates could go as high as a half-percentage point above where they are now.

But McBride says buyers shouldn't panic.

"With home prices still sliding, that removes some of the urgency for borrowers that would otherwise be laser-focused on the movements of mortgage rates," he says. "Buy a house when you're ready."

Quick Take:

Rates could end up being 1/2 a point higher from here according to Gumblinger. That would put rates on a 30 year fixed close to 7%. I think they could go higher depending on how the Fannie/Freddie debt disaster is handled.

Risk is back folks, and the banks refuse to lend like they have in the past. The conclusion here is obvious. Prices on houses will continue to drop as rates rise because buyers need to be able to qualify in order to buy. Higher rates mean the amount they can qualify to borrow is smaller.

Don't be fooled by the recent pull back in the 10-year Treasury yield. Rates are going up because of fear and risk not the 10-year. This will only further pressure the housing market. It also takes the Fed out of the equation. Lower Fed rates no longer push down lending rates.

Look at what mortgage rates have done since the Fed started slashing rates. They have gone up! The lower Fed rates have done two things: Increased inflation and helped the banks. When is the Fed going to start helping us instead of hurting us via inflation and a cheap dollar? Ahh I get infuriated everytime I think about this!

Mortgage Fraud:

I would have thought with all of the investigations around mortgage fraud would have forced lenders to clean up their act. Apparently this is not the case. In fact fraud is up 42% from last year.:

"Tough market spurs fraud

Kenneth Harney -- Nation's Housing
By Ken Harney
August 31, 2008

You might assume that, with home purchases and new mortgage volume off by 30 percent or more in many markets in the past year, loan fraud would also be down.

Wrong. A benchmark quarterly study released Aug. 25 by the mortgage industry's principal compiler of fraud reports, the Mortgage Asset Research Institute (MARI), found that the number of cases jumped by 42 percent between the second quarter of 2007 and the same period this year.

They ranged from hoked-up income verifications and credit reports to falsified employment records, financial assets illegally "rented" to buyers to beef up loan applications, inflated appraisals, straw-buyer scams and a wide variety of sellers' and purchasers' schemes designed to fool lenders. The highest second-quarter numbers of fraud reports were in Florida, California, Maryland, Illinois and Michigan"

Bottom Line:

My advice? Stay the hell away from buying a house and this industry as a whole until they clean this mess up. It appears the desperation following the ongoing housing collapse is forcing people to commit fraud on an unprecedented scale in order to try and survive.

Walking into a realtor or mortgage office is the equivalent to swimming into a shark tank IMO. Housing prices are doing nothing but dropping so sit back, relax, and watch the destruction.

Be afraid, be very afraid.


Tim Manni said...

I definitely agree with Jamie Smith Hopkins' article on risk. As an associate of Keith Gumbinger, we at understand what risk has done, and continues to do to the market. Take the rate increase that Fannie and Freddie recently enacted -- ( -- risk is pretty much dictating the tempo.

Jeff said...

Hi Tim

Thanks for stopping by. Yeah, Fannie and Freddie are going to have to lend like a bank instead of a hedge fund going forward.

I wouldn't be surprised if we got back to the early '80's lending of 20% down and 36% DTI.

Thats a nice blog. Thanks for sharing the info.