Why interest rates are at record lows
Lower bond yields drive mortgage rates lower, so the weak economic data released by the Government this week has sent 10 year bond yields down below 2.50%. Freddie Mack reports 30 year mortgage rates, 15 year mortgage rates and 5 year adjustable mortgage rates all hit new record lows for the week ending September 2, 2010 in their most recent Primary Mortgage Market Survey.
Mortgage rates for September 2, 2010
30 year mortgage rates are averaging 4.32 percent.
15 year mortgage rates are averaging 3.83 percent.
5 year U.S. Treasury indexed adjustable mortgage rates are averaging 3.54
Impact on home refinancing mortgage
10 year jumbo home refinance interest rates are also down averaging 4.99 percent.
7 year adjustable refinance rate mortgages are lower averaging 3.76 percent.
Impact on other debt consolidation options
Current 10 year home equity loan rates are averaging 6.884 percent
15 year home equity rates today are averaging 7.175 percent
The current average home equity line of credit rate is averaging 4.763 percent
Sales of homes may be down by 19 percent compared with a year ago, but signed contracts between buyers and sellers have risen in July by 5.2 percent. Home buyers continue to be very wary of the housing market. Lenders have tightened qualifications for refinancing and the bank mortgage rates are not keeping pace with the drop in other interest rates. The housing market recovery continues to be slow and vulnerable.
The New York Times is pushing in their editorials for the government to investigate ways to facilitate more refinancing. The government has been backing Finnie Mae and Freddie Mack, who hold millions of mortgages from borrowers who are current but unable to refinance because their home equity or credit scores have declines since they first took out their mortgages. The editorial suggests that lower interest rates on mortgages reduce the risk of default, so it would make sense to push for better terms for home owners.
Economists at Morgan Stanley started this debate a month ago while pondering slowing U.S. growth. The economists suggested a “slam dunk stimulus” could be achieved if the government ignored credit checks and made a sweeping qualification of loans it already guarantees through agencies or Fannie Mae and Freddie Mac.
Investors who own securities issues by Fannie Mae, Freddie Mac and Ginnie Mae oppose government intervention in the refinancing market. When a loan is refinanced, it creates a “prepayment” of principal to investors, which will result in a steep loss for the investors.
Ajay Rajadhyaksha, head of U.S. fixed-income and securitized debt strategy at Barclays Capital in New York recently stated, “Policy risk and initiatives by the government are more likely to drive the secondary mortgage market than at virtually any point that I can remember in the last several years.”
This means that if you are a home owner hoping to take advantage of historically low interest rates for debt relief, your best hope is for a government change of policy.
JPMorgan feels that a government intervention is unlikely. Analysts for JPMorgan recently advised clients that congressional action would be required to trigger any significant refinancing in the market for bonds owned or guaranteed by mortgage financiers Fannie Mae and Freddie Mac. JPMorgan is encouraging investors to continue to buy mortgage bonds tied to U.S. home loans because JPMorgan feels the bonds are unlikely to suffer a wave of refinancing that would cut yields.