I guess that today was the True Minsky moment that we have all been looking for as the Federal Reserve Chairman Ben Bernanke issued a historic rate cut . Mortgage bond yields fell to an all-time low toda y too, and yes, the guy quoted in the article, Jacob Miller is a client . . . (Jan 2009 update: Jacob did close his purchase on Jan 20th, one of the last Fannie Mae condo closings in a new construction until at least next quarter).
Interest rates for the 30 year US Government T-bill have hit an all time low ahead of today’s Federal Reserve Bank meeting I have already seen swings of 100 bps (basis points) in mortgage loan pricing just within 20 minute spans this afternoon. These are truly abnormal movements in mortgages even today.
For those who are actively shopping for a mortgage loan, I think that we will see a leg down in rates this afternoon depending on the market’s reaction to the Fed announcement, OR a leg up (fill in ominous sounding background music here). The market’s reaction will probably be swift and violent, and likely to roil the markets for days, presenting some prime opportunities for those with skilled loan originators to lock in the Very Lowest Rates . . .
Most investors are familiar with the interest rate curve for treasuries, which shows how longer maturities (5 years to 30 years) increase in price (or decrease) relative to short maturities (1 month to 2 year). In mortgage lending, the yield curve is expressed in the distance between pricing in comparison to rates. It’s a relative curve, as opposed to absolute, it doesn’t come with any pretty charts, just lists of numbers in a grid. The curve is relative to 0 or “Par” pricing, and when you evaluate loans, discounts and points, everything is relative to the par price. This is starting to get complicated, but this is what a real mortgage broker deals with every day when seeking your loans.
Right now, the distance between pricing is 1:1, which means that buying down an interest rate on investment property makes a lot of sense. What it means for mortgage borrowers is that paying up front premiums make a lot of sense, but buying up the loan to pay your expenses only makes sense if the buyup is .25% or less.
For example, I have a client who wants to refinance for rate and terms, but doesn’t have much cash or equity to roll the costs into the loan. Because it is a streamline refinance, and since he did his original loan at 6.25% in July, I cut all of my up front fees and gave an estimate of $5000 with all expenses. For a 30 year fixed rate loan, the buyup from 4.875% to 5% will allow me, the broker, to pay $1200 towards his closing costs. Obviously, saving 1.25% on a loan’s interest payments at a cost of $3000 is a make sense proposition. Still, this wouldn’t be possible without the compression of the mortgage rate curve. If I go up to 5.125% the additional contribution to closing cost would only increase by $300 and the next increment is $250 additional. To give you an idea how unusual this is, just back in October , we were in a buy-down only environment, where a 6.75% loan was a “Par” loan and 1% bought a 5.5% rate.
Right now rates are posted at a floor of 4.75% with many lenders, but with 0% origination or discount fees (which is AMAZINGLY good). This rate cut is kind of like X-Mass for Mortgage brokers, though I tend to think of it more as Chanuka . . .