If you’re a regular reader of my mortgage rates report, you’ll notice that I adopted a locking posture, late last month, for the rest of the year:
If the Fed’s thinking of cutting rates further, why aren’t mortgage rates going down?
I think it’s because the Fed has done all it can do. Future rate cuts
are like that eighth scotch. Drinking that eighth scotch isn’t going
to make you feel any better than the seven prior. It just might make
you feel worse.
I advised folks, right after the election, to lock loans with rates under 6% if they were closing within 30 days.
Today, I”m suggesting that you lock any loan that is closing this
year. Today, a 45-day lock for a 6.0% rate would costs 1.25%. While
you may see rates drop below 6% , in the next 45 days, the risk of them
moving higher is greater.
Take 6% and run.
That was a colossal screw up, huh? That eight
glass of scotch didn’t do anything but the injection of heroin did.
The eight glass of scotch I referred to was a rate cut. I feel that in
a zero interest rate environment, no further rate cuts would have a
marginal effect on Los Angeles mortgage rates; I was right. What I didn’t see is
the Fed-induced rumor mill (the shot of heroin) of buying
mortgage-backed securities so as to drive down mortgage rates to a 4.5%
level.
If you’re worried about the long-term affect on the economy, the Fed
action is a pretty dumb idea. The only way for them to really affect
mortgage rates is to buy up about $1 Trillion in mortgages. If you’re
a would be home buyer, that could really benefit you. Even if you’re
closing in December, lenders called off all bets and gave you another
chance to relock yesterday, at the lower rates. They want your
business so take that opportunity and lock that rate.
When the MBS traders see that this idea is probably NOT feasible,
mortgage rates could back up another .25-50%, putting us back in the
high 5.75%-6.0% range.
Let’s pretend, however, that the silly little market manipulation might work. How would we pay for this massive purchase? Remember when I said that mortgage-backed securities trade higher than their treasury bond cousins?
In banking we call that a “spread” and that spread was really fat last
week. Mortgages were trading at 5.75% while the 10-year Treasury bond
was trading below 3%. If the government was guaranteeing mortgages,
why would that paper yield so much more?
Traders still think there is risk in the mortgage market.
Homeowners continue to walk away from mortgages and that creates an
inherent risk to the principal. Since the explicit guarantee of MBS
didn’t work, the only option is to buy those mortgages to drive rates
lower; that’s what the rumor is all about.
Brother Can You Spare a Trillion or Two?
So, where are we going to get the money? If the Treasury can borrow
$1 Trillion, for 30 years, and they don’t drive the yields on that
paper above 4.49%, they can buy mortgages in the open market down to a
yield of 5.5%. That’s called arbitrage and it’s how banks make money.
They “buy” money cheaper than they sell it.
This is why you, as a home buyer looking for a mortgage, must NOT keep your eye on the wrong ball. Follow the mortgage-backed securities market here; ignore the 10-year Treasury bill, You could very well see yields rise on the Treasury bonds while Los Angeles mortgage rates decline…
…if they actually try to attempt this silly idea.
PS: I think the traders on Wall Street will catch on to this ruse
and sell of mortgage-backed securities, driving mortgage rates higher.
You have to ask yourself if you’d be more upset watching rates rise to
5.75%, and missing a 5.25% mortgage rate, or watching mortgage rates
drop to 4.75%, after you locked.
PPS: My guess is that you could renegotiate your rate lock if the
latter happens. If you’re working with a mortgage broker, that broker
will have the flexibility to re-lock you with another lender should
that happen.