Freddie Mac Says Rates to Hit 6.0% Before End of 2010
This past week one of the three titans of mortgages, Freddie Mac, announced they agree with my assessment that mortgage rates will be going up in 2010. Now I am only waiting for Fannie Mae and FHA to announce that they think I am right too. (If you didn’t notice my name in any of these announcements, I am sure it was merely a slight oversight or typographical error). Here’s a link to the Washington Post article about Freddie Mac’s announcement.
I have mentioned numerous times that I expect rates to be 0.5-1.0% higher by the middle of 2010. There are two main reasons rates will be higher.
First, the Government will have pumped about $1.25 Trillion dollars into buying up mortgages when it’s current program expires in March of 2010. They have already extended the program once (they did not increase the amount being purchased at that time) and have made it very clear they have no plans to extend it again. (I am using the term “Government” in this case to refer to the efforts of both the Federal Reserve and the Treasury Department).
The amount of money pushed in by the Government has been credited with reducing rates about 0.5% currently. Indeed, within days of originally announcing the program rates dropped this amount and have only drifted lower since. So, when that money is no longer in the market, it is only logical to assume rates will return to their normal place–higher.
Second, financial markets will continue to return to a more normal state. When that happens, investors will be looking to place their money where they feel it will get the best return instead of where they are least likely to lose money–which drove many of their decisions in the past fifteen months.
As the Government continues to sell Treasury debts to finance our deficit they will likely have to start paying out higher rates of return to attract the investors and their money. Treasury debts are the primary competition for mortgage backed securities. So, mortgages will also have to pay out higher rates to attract investors. The only way they can do this is to charge higher interest rates to the new mortgage borrowers.
What does this mean if you are considering buying a home in the Twin Cities or refinancing a home you already own? If you are looking to buy, you need to realize that every time rates increase by 0.5% your buying power goes down $10,000. By that I mean that if you kept the same monthly payment but used the higher interest rate the loan would be for about $10,000 less. So, if rates increase by a full 1%, then you would lose $20,000.
Losing $10-20k in buying power obviously makes a big difference in the types of homes you can consider buying and still stay in your price range. You would be forced to either buy a smaller home (less bedrooms or bathrooms) or switch cities or neighborhoods you are considering purchasing a home in throughout the Twin Cities.
If you are refinancing, that 0.50% can easily be the difference between whether or not you should refi your loan. Currently I am refinancing clients that have a FHA loan to 5.25% rate and being able to pay all of their closing costs for them. This allows them to drop their monthly payment without needing to pay any extra money to close the new loan and they do not need to increase the size of their mortgage in order to finance closing costs in.
If you hope to do something with a mortgage in the next four months, you should get started today. Shoot me an email and we’ll get you started. You can reach me at agrebis@bellmortgage.com
December 28th, 2009 at 10:21 pm
The Treasury announced a Christmas gift for Fannie and Freddie on Dec 24. The treasury will give unlimited support and remove portfolio caps for Fannie and Freddie for the next 3 years.
http://www.bloomberg.com/apps/news?pid=20601206&sid=ac5crHjyZbKo
This may help find a few more buyers for MBS if the Fed winds down it’s buying.