Interest Rates Cut, Loan Rates Arent’ Falling
June 18, 2008
Saturday, June 14, 2008 -
Chicago Tribune
CHICAGO — The Federal Reserve has aggressively cut interest rates. Houses are sitting around unsold. The stage appears to be set for mortgage rates to fall as lenders compete for that scarce quarry: the well-qualified home buyer.
You wish.
Rates on 30-year fixed-rate mortgages have stayed stubbornly above 6 percent for months. Interest rates on those loans are averaging 6.32 percent, mortgage investor Freddie Mac reported Thursday, an increase from the 6.09 percent the previous week.
Rates on five-year adjustable-rate mortgages rose slightly to 5.58 percent, according to Bankrate.com
Rates on jumbo loans, those larger than $417,000, were considerably higher, averaging 7.33 percent nationally Thursday, according to Bankrate.com.
Several forces are conspiring to keep rates up, economists and mortgage experts say, and they aren’t going away anytime soon.
When the subprime-lending bubble burst last summer, many large mortgage brokers went under because they could no longer find investors to buy their loans.
That means the pool of mortgage lenders is much smaller than it has been in recent years, and billions of dollars in liquidity have disappeared.
Gun-shy lenders
Also, surviving lenders are still gun-shy about rising delinquencies and foreclosures, which have forced many to take large write-offs.
“Time heals all wounds, and we haven’t had enough time yet to heal this wound,” said Diane Swonk, chief economist with Mesirow Financial in Chicago. “Banks and other lenders are being more conservative. They’re saying, ‘I need to be compensated for this risk.’ ”
But there’s even a bigger-picture reason behind the buoyancy in mortgage rates — the expectation that rising inflation is the economy’s biggest challenge.
Many people think the economy has narrowly avoided a recession and that the worst may be over. If that’s true, the Federal Reserve is unlikely to lower interest rates further and, in fact, could start raising them again as soon as October.
With commodity prices climbing, especially for oil and food, the Fed may have little choice but to tighten credit to slow inflation.
When inflation goes on a tear, investors want higher premiums for lending money, which means higher long-term interest rates.
“If people are concerned about inflation, they don’t want to hold Treasury bonds,” said Orawin Velz, senior director of research at the Mortgage Bankers Association in Washington, D.C. “If there’s a decline in demand for bonds, the price will go down, and the yield will go up.”
That’s been happening recently with 10-year Treasury notes, the benchmark for mortgage rates. But investors are fickle and skittish, Velz said, and their expectations can change with the latest economic report.
For the downtrodden housing sector, the question is whether 6.5 percent interest rates will keep homebuyers on the sidelines.
Donna Schwan, a real-estate agent with MetroPro in Chicago, isn’t worried.
“Mortgage rates going up is the best thing that could happen,” she declared. “We have a lot of people who are buying now because they want to get in before the rates go higher.”
Still attractive
Buyers spoiled by years of rates below 6 percent need to remember 6 percent is a very attractive rate, she said. Plus, with home prices falling, a buyer’s monthly payment may be the same despite that higher rate.
Mike Sante, managing editor of personal-finance Web site Interest.com, agrees.
“Historically, any time you can get a rate below 6.5 percent, you’re doing very well. We’re not at the double-digit rates of the ’80s or even the 7 or 8 percents of the 1990s.”
The exception is jumbo loans, which are commanding a much-higher rate than smaller loans that meet the standards of Fannie Mae and Freddie Mac, government-sponsored investors in mortgage loans.
A year ago, a jumbo loan might have cost a borrower an extra half point in interest over a so-called conforming loan. Now the spread is more like a point to a point-and-a-half higher, which translates into a much-larger payment.
With home prices rising by double digits annually over the past five years in some markets, lots of prospective borrowers have been pushed into the jumbo bracket.
“The spread has doubled,” Sante said. “For those folks, they have trouble.”
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