Friday, January 29, 2010

Mortgage Rates: Where are they headed?

I just received this email from our new in-house lender, who by the way, is getting rave reviews.  I've titled the post Mortgage rates:  where are they headed? because I believe that Faramarz is giving us a very insiteful vision into the future.  For those interested here is the message verbatim

"I've been having the big "What's happening with rates?" discussion with several agents and clients the past few days. The Federal Reserve met yesterday and announced that they were keeping the Discount Rate rate near zero for an "extended period of time." Many people have mistakenly taken this to mean that mortgage rates will also stay very low for this same extended period of time. Nobody can predict exactly what will happen because mortgage rates are not set by a committee but, rather, determined by open trading much like other bonds, stocks, and commodities. This is a huge deal for our borrowers because higher mortgage interest rates dampen the buying power of potential borrowers. Most borrowers are very cash flow sensitive and are usually not in a position to withstand a sudden increase in their affordable monthly payment. In order to keep their monthly payment the same, they must reduce their purchase price target as rates rise.
The Discount Rate is the interest rate the Federal Reserve Banks charge depository institutions on overnight loans. It is an administered rate, set by the Federal Reserve Banks, rather than a market rate of interest. The primary conventional mortgage rate is a market-determined interest rate for long-term residential mortgage loans. A change in the short-term discount rate may not affect interest rates on long-term mortgages.

While these two interest rates tend to move together, they also may follow different paths from time to time. For example, in 2001 stimulative Federal Reserve monetary policy reduced the discount rate to 1.25 percent, its lowest rate in more than 50 years. In contrast, mortgage rates fell only slightly during the same period.

The residential mortgage rate is the market-determined "contract interest rate on commitments for fixed-rate mortgages" published by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie MAC). It represents the long-term end of the interest rate spectrum. Lenders must incorporate into their long-term loan pricing decisions their expectations for future inflation and interest rates. Movements in the mortgage rate also reflect supply-and-demand conditions in the market for mortgage-backed securities. Over time, movements in the primary conventional mortgage rate are highly correlated with movements in other long-term interest rates, like the 10-year constant maturity Treasury bond rate.

The Federal Reserve has been keeping rates low by purchasing $1.25 Trillion of mortgage backed securities since December, 2008. This program is set to end in March and FHLMC will once again be looking to the general investment community for funds. The yield that the investment community will demand has a direct impact on rates. The Federal Reserve has been buying MBS at a much tighter spread and at a much lower yield than that generally demanded by the investment community so we will likely see an increase in mortgage rates, even if the Discount Rate stays near zero.

If you have any questions about any of this, please give me a call or send me an email.


■ ■ ■ Faramarz Moeen-Ziai
Bank of Commerce / Mortgage
3130 Crow Canyon Place, Suite 300
San Ramon, CA 94583
Ph: 925.627.2563
Fx: 925.476.0353

And I like you to visit my website  Please call  or email me for home valuations, BPO's or questions you might have about East bay real estate,neighborhoods, or other real estate related issues.

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