Santa Bernanke’s Got a Brand New Bag of Low Mortgage Rates
Posted on | December 21, 2008 | 2 Comments
With the Federal Reserve’s recent decision to drop overnight rates to (practically) zero, lenders are certain to be offering correspondingly low mortgage rates. Right? Maybe not. Here are three reasons that rates might NOT drop to rock bottom levels.
This past week Bernanke and Co. decided it was time to go all in to save the economy and decided to hand out money to lenders for practically nothing. It’s clear that previous attempts to increase liquidity in the credit markets have failed, and the Fed is willing to do almost anything to convince lenders to…well…lend. The drop immediately — albeit very temporarily — boosted the stock market as investors noted the likelihood of decreased long term rates on mortgages and other loans. The logic followed that since banks now could get cash for nothing, they would happily lend at decreased rates, thus easing rates on all manner of loans. The only problem is that overnight rates do not always lead to decreased long term rates, just as higher overnight rates did nothing to quell the fervor for insanely low teaser rates from the subprime lenders over the past few years. Remember that it was this very resistance from the Fed’s pull by the subprime lenders that helped lead us down the current economical meltdown we are all experiencing.
Just take a moment to consider that past insanity.
So, what does this mean? Well, that the “guaranteed lower rates” for mortgages that buyers are salivating for might not be as worthwhile as one might think. The market sometimes is unwilling to be tethered to the Fed’s overnight rate, especially with the current mitigating factors. These factors are legion. Consider:
Fear
Banks are terrified right now. They are afraid that even credit-worthy lendees won’t pony up. They are afraid that buyer’s homes might be worth less tomorrow than today. Even the ratcheting up of terms, such as higher down payment and fees cannot easily offset this sometimes irrational fear that the bank will be left with an empty home. For this reason, less loans are offered by fewer lenders, so those lenders expect a premium.
Greed
Banks are also in the catbird seat with respect to those lucky few to receive loans. Since there is much, much less competition to provide mortgages with subprime lenders tanking and mortgage brokers fleeing the business in droves, banks are in the position to really increase the fee portion of the mortgage lending
business. Expect higher nonsense fees on everything from documents to origination fees. Gone are the days of the no-fee loan. Buyers not willing to put money down on a mortgage will be expected to roll that cost into their principal.
Desperation
Banks need cash, and they need it now. The losses hitting balance sheets demand that the banks raise cash to offset them. One way is to take the free money being handed by Congress and still maintain higher long term rates, and pocketing the difference that rate provides long after one might assume the bank would drop that rate. With all these negative forces in play, how can one expect to find a deal on the mortgage market? Stay tuned for Part Two….
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December 21st, 2008 @ 7:49 pm
[...] Random Feed wrote an interesting post today onHere’s a quick excerptWith the Federal Reserve’s recent decision to drop overnight rates to (practically) zero, lenders are certain to be offering correspondingly low mortgage rates. Right? Maybe not. Here are three reasons that rates might NOT drop to rock bottom levels. This past week Bernanke and Co. decided it was time to go all in to save the economy and decided to hand out money to lenders for practically nothing. It’s clear that previous attempts to increase liquidity in the credit markets have failed, and [...]
December 22nd, 2008 @ 8:14 pm
Greed still prevails if the Fed is offering 0 percent and we are being charged 4.5%…..When the rates are 2 % to 3% then we will have a rush to refi…