Author: Jim McQuaig
Phone: 866-853-6335 x.140
Email: jim.mcquaig@churchillmortgage.com

Even though it’s nearly hunting season in most parts I’m not talking about getting that 12 point buck in your sights…I’m talking about making the decision to lock in your loan rate.  As I speak to customers around the country there seems to be some that are expecting rates to take a major dive for some reason.  To understand why I think that’s unrealistic it’s important for the average consumer to understand that loan rates are not made up by your bank or loan officer.

As with most things it’s best in this case to follow the money trail to get some answers.  Each step along this trail brings with it costs and limitations.  To understand this let’s start at the end of the money trail and work back to you the consumer or borrower.

Mortgage money ultimately comes from investors who purchase mortgage backed securities (MBS)…think of these as mutual funds made up of mortgage loans.   These securities are bought as investments by institutional investors like pension funds, mutual funds and insurance companies; individual investors like you and me; foreign investors like China and the biggest buyer lately….Uncle Sam. 

These investors have traditionally bought MBS’s because they represented a safe haven for their money with a dependable return at a low risk much like US Treasuries…for this reason the rates on mortgages tended to track with the long term treasury bonds....with the recent loss of confidence in the US mortgage market this is no longer the case and is one reason the government is aggressively buying MBS’s now to prop up the secondary mortgage market and keep rates low.

MBS’s have traditionally come from a variety of sources but today are almost totally limited to those issued by Fannie Mae (FNMA) and Freddie Mac (FHLMC).  Fannie and Freddie purchase loans in bundles or pools from banks and mortgage lenders. 

The banks and lenders get the loans from several sources including: other banks and lenders who have originated the loans directly with the borrowers, mortgage brokers and their own origination efforts with borrowers.

Each step along the way adds a layer of cost, regulation, time and manpower. 

Today we have an economic environment that would seem to be perfect for very low interest rates and, in fact, we do have low rates but the normal spread or difference we see between mortgage rates to borrowers and Treasury bond yield is larger than normal.  What I am saying is that it could be argued that mortgage rates should be lower and probably will be lower.

Here’s why they won’t.

The End Investors

On the back end of the money trail investors have not had their confidence fully restored in the safety of MBS’s and it could be argued that the aggressive government buying has contributed to this lack of confidence.  As much as the Wall Street smart guys would like us to think differently investing has a lot to do with emotions.  I think this aggressive government buying of MBS’s has had the opposite effect of what was intended and has scared many investors off…this program helped initially but may have begun to back fire.

I was recently in a conference and heard one of the country’s leading experts on the secondary mortgage market say that he did not expect this confidence to fully recover for 10 more years!  Ouch!

The Originators

On the front end the mortgage origination engine is understaffed and overburdened by increasingly onerous regulation and also suffers from a lack of confidence.  High profile legislators, in a transparent attempt to grab headlines, have all but eliminated the mortgage broker and they’re on their way to eliminating all non-bank mortgage lenders.  In the second quarter of this year the two largest banks originated 44% of new mortgages according to National Mortgage News.  That’s up from 28.6% the previous year.

The increased regulation and consolidation along with declines in business volume within the mortgage industry has decreased the ranks of mortgage originators by at least half and many claim much higher.  That said the industry only has so much capacity on the front end to get loans through.

The Logical Result

If you have capacity issues coupled with an increasing monopoly by a few large players what do you think that means for rates?   You guessed it.  Even if investors came flocking back to the MBS market (which isn’t likely any time soon) the rates offered to the borrowers would still not change much because the industry is already operating near capacity and will use pricing to control the demand.

If you are expecting anything different you may miss out on a once in a lifetime opportunity to lock in a low fixed rate loan and save money for many years to come.  I guess I’m saying….pull the trigger!