Home owners who intend to complete a mortgage refinance soon and people looking to purchase should move quickly to take advantage of low interest rates.
This is the message put forth by two Federal Reserve by economists Andreas Fuster and David Lucca, who work at the New York regional bank. The communication contradicts the dynamics of the relationship between mortgage rates and mortgage bonds.
Usually, mortgage interest rates have a direct correlation with mortgage bonds. For example, if the interest rates paid on bonds falls lower, a decrease in mortgage interest rates usually follows.
However, while the price of mortgage bonds have gone down, the interest rates for home mortgage have not dropped--current mired in the vicinity of 3.5% According to the economists, they calculate that mortgage interest rates should be closer to 2.6% as based on the level of bond prices.
Interest Rates Won’t Go Lower
According to the blog post by the two Fed researchers, they suggest the possibility that the average 30-year fixed rate mortgage will decrease to as low as 3 %, but only if some major policy changes take place.
Even if significant policies changes do occur, it does not mean that mortgage interest rates will fall to 3% or lower.
Fuster and Lucca writes about the “noise” in the industry about why rates won’t go lower. The rubbings include concerns about the new regulations initiated by the Dodd-Frank Act and financial reforms for international banks as mandated by Basel III.
The researchers acknowledge that higher reserve requirements for banks may have had a negative effect on mortgage servicing companies. Mortgage servicers contribute to the banks bottom line realized from home mortgage servicing segment, but it should not exert upward pressure on mortgage interest rates.
Fewer Mortgage Brokers
Fuster and Lucca concludes that the primary reason for mortgage interest rates being higher than what should be has to do with fewer mortgage brokers. The housing market collapsed and the financial crisis of late 2008 culled the number of mortgage brokers. Fewer mortgage brokers, according to the economists, means less competition among mortgage lenders to bring down mortgage interest rates.
Another reason for mortgage rates failing to go lower has to do with the consolidation that has taken place in the home mortgage industry since the financial problems of 2008. JP Morgan Chase and Wells Fargo completed approximately half of all home mortgage refinance applications.
However, the Internet-based mortgage shopping site MortgageMarvel conduct an informal comparison of mortgage interest rates and found that although JP Morgan Chase and Wells Fargo handle about 50% of the mortgage refinance market, on average, their mortgage interest rates was competitive with most other banks. Wells Fargo’s rates, according to MortgageMarvel, was even lower than the average community bank mortgage lender
Mortgage Market Reform Needed
The consensus among mortgage industry economist and consumer groups is that the industry still is in need of reform. Particularly, a decision has to be made about the role of the government-sponsored enterprise Fannie Mae and Freddie Mac. These governments –owned institutions have supplanted private mortgage lenders and dominate the mortgage market.
The space vacated by private banking has been filled by Real Estate Investment Trusts (REIT) that specializes in mortgage financing. These entities benefit from high home mortgage interest rates and have no incentive to see homeowners receive lower rates.
Move Now to Refinance Mortgage and Buy a Home
Most economists agree that mortgage interest rates will climb higher in 2013. Homeowners who plan to refinance their mortgages and potential home buyers need to understand that once the upward momentum in mortgage interest rates takes off, they will lose the advantages that lower mortgage rates provide. These benefits include the ability to buy more home and lower monthly mortgage payments.