Something very interesting happened this week that will have a HUGE impact on mortgage rates for the next three to six months.
Most consumers don’t know this, but Fannie Mae and Freddie Mac charge fees for loans that they buy from lenders. Presumably these fees help fund the GSEs (Government-sponsored entities) and help them pay for anticipated losses on loans. The two ways they build in revenue is through g-fees, upfront fees associated with each loan, and loan-level price adjustments (LLPAs) which are charged upfront for risk-related issues.
For instance, you might pay an LLPA premium if your credit score is lower than average, if you are pulling cash out of your home, or if you are borrowing money on a rental property instead of your primary residence, all elements that statistically increase the chances that you will default.
Prior to being taken over by the federal government (through the Treasury Department) in September of 2008, Fannie Mae and Freddie Mac were private companies, and these g-fees, accounted for most of their profit. After the take-over these g-fees became the property of the U.S. Treasury. In fact, the two companies are now quite profitable and are throwing off billions of dollars a year in profits to the Treasury.
Since then, even after the housing market stabilized, The Federal Housing Finance Agency (FHFA) which oversees Fannie and Freddie has raised g-fees several times. Their stated intention for doing this is to raise mortgage interest rates up to a point where private institutional lenders are interested in mortgage pools, since the U.S. Treasury (using the Federal Reserve) now purchases around 95% of all U.S. Mortgages. (This strategy can’t work, in my opinion; that’s the subject of another blog.)
The question is how does the government get out of the mortgage business gracefully and encourage private enterprise to take up the slack? They have already announced clear intentions that they are doing this with several tools, including reducing conforming loan limits and raising interest rates gradually over time by increasing fees. (In order to pay for the increased fees, the interest rates on the mortgages have to go up a little.)
In November, the current acting head of the FHFA, Edward DeMarco, announced a pretty significant increase in g-fees and loan-level price adjustments which would take effect as of March 1. It takes two to four months from the time a loan is locked until it is closed, packaged and sold to the GSEs, so lenders are already pricing this increase into conforming loans on today’s rate sheets. The move had its intended effect, since costs (and interest rates) have already increased at the consumer level.
OK, with me so far?
The FHFA is getting some push-back. From whom, you ask? I wrote a letter, and they decided to change course because of me.
You’re right, I made that up but it made me feel good.
A number of industry trade groups, including the National Association of Mortgage Brokers, our state group, the California Association of Mortgage Professionals, the Mortgage Bankers Association, and the National Association of Realtors have been lobbying hard to get the FHFA to back off on this decision. We have argued that private investors are obviously not yet willing to step up to buy mortgage-backed securities and support the demand for mortgages, so changes in current programs that are too rapid will hurt the housing recovery, and slow or derail the greater economic recovery.
Enter Representative Mel Watt, the incoming permanent director of the FHFA, who apparently has heard our concerns. He announced on December 20th that he was re-thinking the increases in g-fees and loan-level price adjustments, and in fact that the LLPAs at least are off the table for now. G-fees are very likely to follow.
What does this mean for you?
Lenders had already begun to price in the additional fees into their rate sheets, and they didn’t unwind them this week since we don’t have a definitive decision on the g-fees yet. As soon as Mr. Watt confirms that the g-fee increase is off the table, too, (for now) interest rates should improve a bit.
That’s one reason rates will improve in early January – what’s the other?
Ultimately what drives interest rates is the return on investment that the ultimate buyers of mortgages can get on alternative investments. The benchmark that isn’t exactly related to mortgage interest rates but tracks it pretty close is the 10-year Treasury bond, which measures the current yield investors earn on purchases of U.S. Treasury Certificates with a maturity of ten years. In April of 2013 the 10-year yield was hovering around 1.6% to 1.8%.
Today (12/27/2013) the yield hit 3.000% for the first time in over two years. Many analysts believe this threshold will trigger a round of buying in U.S. Treasuries. There are a lot of factors to be sure, but if buying is triggered in the New Year (for a couple of weeks) it would drive interest rates down a bit.
The bottom line is that we won’t see rates going back to the levels they were at this spring, or even back to where they were as recently as November. But if you are in the process of buying a home, look for a nice little dip in rates the first two weeks of January during which to lock your loan.
My name is Casey Fleming and I originate mortgage loans in California. I am based in Silicon Valley, and am currently unaffiliated with a lender. Watch for another announcement Monday.
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