Long Term Interest Rates

Typically bad economic news causes long term interest rates (like mortgages) to improve and we’ve seen bad economic news come in a flood.  Based on typical market fundamentals you’d expect mortgage rates to be lower than they are now.  Certainly interest rates are fantastic (hovering near 5%) but they’re not down near the 4.5% (with no upfront cost) that everyone is hoping for.  Let’s examine why that’s the case.There are at least three factors that are to blame for interest rates that refuse to improve below their current (albeit fantastically low) levels.

Capacity:

Over 70% of the people employed in the mortgage industry 3 years ago are now gone.  Reduced volume, and fewer overall employers have forced over 70% of the workforce out of the mortgage industry.  That means fewer Originators, Underwriters, Closers, Doc Preparers, etc..  Now we’re in another refinance boom, and lenders have all the business their reduced staff can accommodate.  So they’re paying less for loans in an attempt to stem the flood.  That means the premium they typically pay to me, or the Countrywide rep, has reduced.  And the larger the premium the lower the rates tend to go.  They’re doing that to not only make their loan originations more profitable, but also to keep volume at manageable levels.  Now if I was an Originator for a retail lender (like Countrywide) I would only be able to quote interest rates from Countrywide, and they may not be good right now as a result of Countrywide trying to stem their flood of volume.  However, as an independent mortgage company we can close loans through the wholesale channel of Countrywide, SunTrust, Chase, and many others.  Certainly now is not the time to be working with an Originator that can only represent one company.

Early Payoffs:

There was a huge refinance boom back in 2003.  Since that time we’ve seen small windows of opportunity where interest rates have been lower, and now here we are again with interest rates as low as they were in 2003.  Lenders have learned a few things about profitability during these booms.  When a lender originates a new mortgage loan, be it for a refinance or a purchase, they pay a commission to some type of Originator, including that Originator’s entire management structure where applicable.  They also pay for Underwriting, closing, and to set up the servicing of the loan after the closing.  In other words there are multiple cost centers included in every Origination.  In a time when loans are being refinanced at a rapid pace it is difficult to recoup the upfront costs and then begin making money before the loan is paid off through a refinance again.  Thus, lenders have learned they can get away with paying less per loan for any given interest rate.  This also contributes to interest rates not being lower than they are now.

Increased Risk:

Lenders have also discovered an increase risk of default in these days. Therefore paying out large commissions (which tend to drive down interest rates) becomes a more risky venture as there is a greater chance the loan will never move to a point of profitability.

As you can see there are several reasons interest rates have remained in the 5% range despite negative economic news that would typically drive rates down further.  If you’re waiting for the elusive 4.5% with no upfront origination cost, you may never see it; and you could be one of the many that miss the bottom and never benefit from these historically low rates.  Resist the urge to sit the fence.   Realize that what you’re hoping for may be unrealistic given what are proving to be the new market fundamentals.

If I can help you or your friends with mortgage finance please let me know.  We’re providing a professional approach to mortgage finance!

 

 

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