“March comes in like a lion and goes out like a lamb”.

I’m not sure what that means but it seems that lions should be bad and lambs good.  So far, March seems to me to be the opposite of this at least with respect to interest rates.  On March 1st interest rates were about the lowest they had been since mid December hovering just below 5% for most transactions.  By the end of March we’re looking at interest rates close to 5.25%.  So, why the increase?

First of all, you must remember that interest rates are cyclical which means they don’t always go up, or always go down; although they do trend in certain directions.  Imagine driving up a mountain, you’re not always going up as sometimes you go down, but overall you’re moving higher.  Of course the reverse it true when moving down the mountain.  Over the years about the most I’ve ever seen interest rates move in one direction is about a half percentage before rates begin to move the other way, at least for a while.

It’s important to know that mortgage interest rates are determined by the price of Mortgage Backed Securities (MBS’s – basically bonds backed by mortgages) on Wall Street; the higher the price, the lower the corresponding interest rate as the higher price means there is more money to lend.  Because the U.S. Government now owns almost all organizations that sell MBS’s, levels of confidence in the United States’ solvency is even more important.   There are a lot of dynamics that goes into mortgage rates and their fluctuations; much of the market is driven by fear, some by government intervention, and (at the local level) a little by competition.  I’ll attempt to simply explain each.

Fear drives people to do all kinds of things, including their decisions on how to invest.  If there is fear of something decreasing in value you’re not likely to purchase it, right?  That same fear is affecting the appetite for U.S. backed debt right now.  If you buy a government bond are you sure it will perform as promised?  Are you less confident today than you would have been back in 2004?  Mortgage rates are creeping up as the U.S. Government has been faced recently with losing it’s Triple AAA credit rating.  People are less likely to buy MBS’s right now, because they’re concerned that the U.S. may not be able to service it’s own debt.  As fewer people buy MBS’s, the price drops, and interest rates increase.  Is this likely to continue?  For a while probably, but not forever.  The U.S. is a resilient nation and despite it’s many recent hurdles (some self-inflicted) I’m confident our economic situation will improve.

The U.S. Government began purchasing Mortgage Backed Securities back in January of 2009 in an effort to bring down mortgage rates.  This was obviously very effective as mortgage rates dropped almost a full percentage point and have stayed low since then.  After spending close to 1.25 trillion dollars the government’s plan to buy MBS’s draws to a close at the end of March.  When any big buyer leaves the buying pool, the price drops.  Again, as prices of MBS’s drop mortgage rates go up.

Finally, local competition can also affect interest rates, although to a much lesser degree.  I can agree to work for less and provide financing for you for .125% below the competitor, but generally speaking all of our rates will trend in the same direction.  We can also strive for more productivity and/or efficiency from the people and systems we have so we can either drop our charges, or avoid increases.  Unfortunately due to increased government regulation and tightening lending guidelines, mortgage compliance and underwriting is more difficult and time consuming than ever so pressure to charge more is mounting.  At Baker Lindsey we are spending at least 40% more time and energy with every loan file than we did just a year ago.  We’ve added staff and are all working longer hours with more stress.  This has to result in increased cost which must eventually be passed on to the consumer.  This is true for small independent firms and even more so for large organizations.

What’s the forecast?  Jay Brinkman, chief economist for the Mortgage Bankers Association thinks rates will increase to about 5.8% by December.  Amy Crews Cutts, chief economist for Freddie Mac thinks interest rates will be about 5.75% by year end.   As a point of reference this would increase the payment on a $150,000 mortgage by about $70 per month.  It’s not a big enough difference to discourage anyone.  But if you can get a rate close to 5.25% now for a purchase or refinance you may as well do it.

So what should you do?  If you have a loan in process you should inquire about locking your interest rate if you’re not locked already.  And obviously, if you are considering a purchase or refinance but are waiting for just the right time to lock in?  Ummm, it’s now, if not last week!

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