|Fedís influence on county mortgage rates
In the latest Fed meeting, Ben Bernanke and the Federal Reserve Board announced it will purchase up to $40 billion per month in additional mortgage-backed securities in an effort to further facilitate quantitative easing until the economy begins to improve.
Financial markets on Sept. 13, rallied on the news of the government’s intervention to improve the economy. Bernanke offered “the program should increase downward pressure on mortgage rates.” Here in Sonoma County, we saw mortgage rates improve more than 50 basis points in mid-day mortgage bond trading. We had many happy clients locking in on these favorable rates.
A bigger question we have is what does this mortgage bond buy mean to consumers moving forward? As we know already, with a bleak financial outlook, the bond market will remain the investment vehicle choice for investors. As investors feel less optimistic about the economy, people pour their funds into mortgage bonds, especially now considering the fact the Fed is buying these mortgage-backed securities. In the end, consumers benefit, but the rates are artificial.
The irony in this situation is Sonoma County mortgage rates should already be pricing lower, but they’re not. What gives?
Well, mortgage lenders are seeing bond prices indicating 30-year fixed mortgage rates to be truly priced at around 3.375 or so without points for AAA grade loans. We’re about .375-.5 off that level of pricing. In other words, it’s our opinion Sonoma County mortgage rates are being hedged by the bond traders on Wall Street as a contingency plan in case the Fed reverses course or some economic event surfaces that would cause rates to rise substantially. Investors are keeping the extra margin of .375-.5 percent as their safety net in trading mortgage-backed securities. Even now the facts present a different story. Facts are:
• Inflation does not pose a threat presently;
• Unemployment rate remains 8.1 percent;
• Fed has no reason to tighten interest rates.
So what we have is lower mortgage rates coupled with tight underwriting standards creating a double-edged sword. On one hand, mortgage rates are tremendously favorable. On the other hand, it’s never been more challenging to secure financing.
So the question every homeowner and home buyer is faced with is this: Is that mortgage rate low enough to warrant the cost of having to provide financial documentation and go through the review process of those financials?
We unequivocally advocate “yes” because the discomfort of securing the mortgage loan will be offset for the next 360 months by the interest savings over time. Ultimately, consumers should work with the loan officer who can navigate them through the loan process to mitigate the back-and-forth borrowers and lenders go through.
These favorable Sonoma County mortgage rates will be beneficial to the following transaction types/scenarios:
• Home Buyers, including first-time home buyers, move up buyers, second-home transactions and investment property transactions, because lower mortgage rates create stronger purchasing power.
• Home Owners-including homeowners with 20 percent equity for primary residences, second homes and investment properties looking to refinance. Lower mortgage rates make refinancing much more attractive by being able to reduce debt or improve household cash flow.
• Home Owners-eligible for FHA Streamline refinances, VA IRRL refinances and HARP 2 refinances because each of the three programs have much more relaxed appraisal standards, some not even needing a home appraisal at all.
• Home Owners seeking mortgage loan modifications as mortgage investors are more likely to grant modifications when the overall market rates are quite low.
So bottom line?
Low mortgage rates are going to be with us for quite some time. If you stand to benefit by refinancing a mortgage you already have or buying a home, and it makes financial sense, do it.
Each month that goes by could be costing you thousands of extra dollars in mortgage interest. Moreover, when interest rates eventually do rise, rates will rise sharply and unexpectedly.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.