Mortgage Rates Climb, As Expected…

April 8, 2010

But Not as Much as Feared…

Interest rates on the two classes of conforming home loans — the traditional conforming loan below $417,000 , and the “extended” conforming loan between $417,000 and $729,950 — jumped upward this week, as was widely expected by the market.   If you recall, March 31 marked the end of the Federal Reserve's program of purchasing mortgage-backed securities (MBS), the proceeds of which are used fund these loans.  The intent of the Fed's program was to keep interest rates low, and to help stabilize Fannie Mae and Freddie Mac as we navigated through the recession.  The program was successful on both counts, as we enjoyed historically low interest rates for the past few quarters.  With a 20% down payment, buyers were able to secure 30-year fixed loans on homes up to $912,000 — for less than 5%.   And many smart home buyers seized that opportunity.

When the Fed informed the market in late 2009 of their intent to stop purchasing these securities, there was widespread speculation that rates might jump as high as 0.5-0.6 points when the fed finally pulled out.   But a spot-check today with Bank of America revealed that rates have settled into about a 0.25 point increase since the beginning of the month.   Not ideal for the real estate market, but certainly not as bad as some feared.  But this isn't the end of the road…

Other Forces at Play.

According to this article in the San Jose Mercury News, the federal government has had to increase the yield it offers offers on its bonds to continue to attract investors.  And these bonds generally have a direct correlation with mortgage rates.   As one rises, so does the other.   Some feel that these combined forces could drive conforming-loan interest rates as high as 6% by the end of this year, which would have a detrimental impact on the slow recovery we're experiencing in the housing market.  Not only does this hurt buyers, but sellers will feel the pinch too, since a loss of buying power results in lower home prices.  Here's another article from the Merc that discusses the possibility of rates breaking the 6% barrier by 2011:  Mortgage Rates Jump

Note that the rates on Jumbo loans (those loans greater than $729,950) have remained essentially unchanged.  This is because the pool of money that's used to fund jumbo loans comes from a different source than that of conforming loans, so the Fed's recent actions have had no direct impact on jumbo loan rates.

Re-Connect With Your Loan Agent.

If you're in the market right now, it's a very good idea to re-connect with your loan agent to see how these recent changes have impacted your purchasing power.    A 0.25 point jump on a $729,000 loan is not pocket change to most people, and it may force some buyers to re-evaluate their strategy.   While it's not time to hit the panic button, it is important to realize that rates are more likely to rise than fall this year.  And that may just be the catalyst to get both buyers and sellers off the fence.

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