The US Treasury Department has been supporting the mortgage bonds market, in order to keep mortgage rates under 5%. I cited two reasons why sub-5% rates might not happen:
1- Capacity: Lenders don’t have the horses to ride since they laid off so many workers in 2008.
2- Greed: Lenders typically made a loan at a rate and sold it for about a half a point profit. The improvement in mortgage bonds allowed lenders to fatten up their margins and make as much as 3% of the loan when they sold it.
I think the real reason was more in line with my first guess; capacity. What I didn’t realize was that the mortgage lenders were out of money. Well, sort of. To understand this concept you have to understand the “flow” of mortgage loans. The big banks, like B of A, Citi, and Wells, loan direct or buy loans from other lenders and brokers. We “commit” those loans to them and they sell the loans off to Wall Street. If my company loans you $300,000, we’ll sell it to a bigger bank for $303,000, and they sell it to Wall Street for $306,000…except…
They don’t really get paid but once a quarter. Loans made back in October have been COMMITTED to Wall Street, by those big lenders, but the transaction (sale of the loan) only happens every three months. While they wait for that transaction day, their funding line gets filled up. Imagine a funding line (sometimes called a warehouse line of credit) like a big credit card, Normally, a big bank needs, say $100 Billion for its line. The unexpected refinance volume filled up that line quickly.
Those big lenders were “at their credit limit”…until today.
Today was this past quarter’s settlement day, which means, the big lenders sold off all of the loans to Wall Street and paid off their “super-sized credit card”. From Mortgage News Daily:
Tomorrow brings us the final day of Class A settlement, in which sellers of MBS deliver the loans in pools to satisfy the executed sale trades made over the last 3 months. When this occurs, sellers will finally receive payment for the most action-packed month of originations in recent memory. Up until now, the cost to originate these loans has been borne by MBS sellers, aka originators. We have surmised that one of the several components that is causing a much-larger-than-welcome margin of MBS prices to lenders’ rate sheets is the funding constraint created by the gradual exhaustion of money to satisfy a rapidly increasing originationd demand. As this money has dried up, it stands to reason that lenders must artificially raise rates to deter incoming business in order to avoid exceeding their funding sources.
Lenders have lots of cash to lend again. NOW is when we should see the lenders start pricing in line with the mortgage bonds market. Mortgage rates should drop to 4.5% …IF the mortgage-backed securities market remains strong.
This is what the Treasury Department was waiting for. Expect the Government to support mortgage bonds, so that lenders can lend out all this cheap money they have and still make a healthy profit. It might take a few days and I don’t expect mortgage rates to stay this low for too long.
…take action now.