The US Treasury Department has been supporting the mortgage bonds market, in order to keep mortgage rates under 5%. I cited two reasons why sub-5% rates might not happen:
1- Capacity: Lenders don’t have the horses to ride since they laid off so many workers in 2008.
2- Greed: Lenders typically made a loan at a rate and sold it for about a half a point profit. The improvement in mortgage bonds allowed lenders to fatten up their margins and make as much as 3% of the loan when they sold it.
I think the real reason was more in line with my first guess; capacity. What I didn’t realize was that the mortgage lenders were out of money. Well, sort of. To understand this concept you have to understand the “flow” of mortgage loans. The big banks, like B of A, Citi, and Wells, loan direct or buy loans from other lenders and brokers. We “commit” those loans to them and they sell the loans off to Wall Street. If my company loans you $300,000, we’ll sell it to a bigger bank for $303,000, and they sell it to Wall Street for $306,000…except…
They don’t really get paid but once a quarter. Loans made back in October have been COMMITTED to Wall Street, by those big lenders, but the transaction (sale of the loan) only happens every three months. While they wait for that transaction day, their funding line gets filled up. Imagine a funding line (sometimes called a warehouse line of credit) like a big credit card, Normally, a big bank needs, say $100 Billion for its line. The unexpected refinance volume filled up that line quickly.
Those big lenders were “at their credit limit”…until today.
Today was this past quarter’s settlement day, which means, the big lenders sold off all of the loans to Wall Street and paid off their “super-sized credit card”. From Mortgage News Daily:
Tomorrow brings us the final day of Class A settlement, in which sellers of MBS deliver the loans in pools to satisfy the executed sale trades made over the last 3 months. When this occurs, sellers will finally receive payment for the most action-packed month of originations in recent memory. Up until now, the cost to originate these loans has been borne by MBS sellers, aka originators. We have surmised that one of the several components that is causing a much-larger-than-welcome margin of MBS prices to lenders’ rate sheets is the funding constraint created by the gradual exhaustion of money to satisfy a rapidly increasing originationd demand. As this money has dried up, it stands to reason that lenders must artificially raise rates to deter incoming business in order to avoid exceeding their funding sources.
Lenders have lots of cash to lend again. NOW is when we should see the lenders start pricing in line with the mortgage bonds market. Mortgage rates should drop to 4.5% …IF the mortgage-backed securities market remains strong.
This is what the Treasury Department was waiting for. Expect the Government to support mortgage bonds, so that lenders can lend out all this cheap money they have and still make a healthy profit. It might take a 
few days and I don’t expect mortgage rates to stay this low for too long.
Listen to how this phenomenon might get you a mortgage rate as low as 4.5% on Radio Mortgage.
At the risk of sounding alarmist, you should be getting your ducks lined up and talking to a mortgage adviser….NOW…not later. I’m not selling you, I’m TELLING you to…
…take action now.
Sounds good. The only problem we have not is buyers waiting for the much lauded and predicted 4.5% 30yr. fixed rate. If it never comes. . . . .
Then, there is the buyer sitting on the fence waiting to lock thinking they'll lose out on a 1/8pt. sometime in the next 30 days. If they don't lock not and have to to close, they'll believe that they should have waiting to even buy a home.
No matter what the buyers need to do, they are being dragged kicking and screaming to commit.
I agree with your thoughts here and I do hope that the money is available soon!. I really see us rounding the corner toward stability here pretty soon. Volume is picking up with my agents - problem is offers are so low it is hard to make the numbers work - but hopefully buyers ideas on what to offer will come in line with what sellers can afford to sell for. Here in Boise we see prices settling out around 2004 - 2005 prices - which means all the equity created in the bubble...is gone. So it's like we are starting over which means a great opportunity!
Good information Brian. I've learned my one new item for the day.
Brian, This is a great explanation of how the banks get paid on MBSs. My market right now is CASH foreign investors. I have 8 pending transactions that are ALL cash. Out of those tranactions I have buyers from UK, France and Canada. I changed my marketing so I do not have to rely on lenders to get deals done, except for on the seller side(short sales and REOs).
Brian - I've always tried to understand the "whys" of the Mortgage industry. This really explained a lot. Let's hope it happens now!
That 4.5% looks good and I hope we see more buyers come out and play...I'm just wondering if they will still have the strict guidelines of qualifying the buyers or are they loosening them? Most of my deals are cash and small transactions. The ones that aren't are my listings. I see that if they arent putting down at least 20 %...they aren't getting approved. I currently have a short sale listing that was approved on the lenders side but the buyers loan is FHA...hopefully it will go through.
Good post...I sent this to my entire team. It makes sense. I still think that we may see lower b/c of the government's committment to stimulating real estate, but I do think that capacity is a huge issue here.
Brian, good post. Keep in mind the credit markets are still pretty darn cold and right now the only market for MBS is the FED. As long as they keep buying (they have stated up to a year) rates should remain low. The problem is that this phenom only creates 1 buyer and no competition for pricing. So, rates will be the same across the board?
Interesting times indeed!
Bo
Brian... some excellent information. And yes, rates should come down. But just as MBS's have been bought in most recent weeks and rates only coming down slightly, not as much as they did before... doesn't mean that they will come down more... even if they do have the money to lend now. Just so many unknowns out there and Wall Street can still control some of the fears and such. Just to many things tugging at rates right now, from all sides of the fence... and don't forget, that there were big loses last year and the year before... investors can hedge a little, not lowering the rates to where they should be. We have also seen that in the last week, when the 4.5% coupon was paying money back. Sure, we all can hope... but if people were going to buy now, they should just buy and not worry about the rates dipping even another 1/2%... just my .02.
Thank you for the information! I feel like I learned something - I honestly don't know how everyone keeps up with all of this! It's crazy!
Brian - very useful explanation. I always learn something new from your writing. Now to get those buyers moving who are seemingly waiting for that magical number.
Jeff
Great information Brian. I agree with the other comments about rounding the corner.
Thanks for such an informative post. Very insightful, and forward looking. Let's keep our fingers crossed.
Brian,
Are you saying you believe the bottom will be 4.5% and that will not last for long before they go up?
Brian,
You convinced me!
But, I'm unsure who you are writing to. I think the public is more likely to simply accept the proliferation of hate and believe the problem is greed. They have certainly had enough examples, none of which they can sight, but you know, that guy, that, well you know! The public and most mortgage people have never understood how it works and until recently that was ok, it's not anymore and learning is going to be expensive!
Let us pray your message gets through! "At the risk of sounding alarmist, you should be getting your ducks lined up and talking to a mortgage adviser....NOW...not later. I'm not selling you, I'm TELLING you to..."
History, alone would say were going to have about 6 months of low rates to be followed by 4 years of astronomically high cost. Jimmy Carter left us at 21.5%!
Bill
Well, that certainly clarifies, and gives insight to, the workings of the mortgage market. Perhaps, the 4.5% loans are on the way...
That's all great news. I have a client that just got 4.9%% no points.
Thanks for explaining things to me, Brian. Now I will reblog this baby after you off the feature board. Not that you care but I would rather folks read it hear. I know the lenders in my area, are saying they are very busy, and I'm sure even more so since so many got other jobs.
ducks or not, which I do agree that we should be getting our clients ducks in a row...but great example today... stocks down, losing .... 10 yr yield dropped in favor... MBS's flat... and we only picked up a 1/4 pt in points.... if that. Many investors or lenders were the same from yesterday. I feel that we will see some hedge, waiting for 1 investor to take the plunge and then others to follow. Brian...What would you think about that one? You had lots of experience on Wall Street.
My pipeline is full of people waiting.....
Frustrating.
I know I will lose a few to some big fat liars!!!
Great quotes - I love the 'I'm not selling you, I'm telling you" - I'm gonna write that down.
Tom - There are some crooks still around
Hi Brian, very interesting. I'm always smarter after I read your posts. Thanks very much. There's so much crap going on right now that it is hard to know what to do or what is going to help... at least in the short term.
Hi Brian, once again you have hit the mark with a great post. Do you really think this will move the real estate market. Because I just don't think so, I think the numbers point a lot further than that, it is not the money it is the stability in the markets around the world.
Brian, thanks for the explanation of the process. I kept hearing that banks didn't have a lot of money to lend and that's why they were being picky about who they gave loans to. Many people think the banks just kept the money from the bailout and used it to buy other banks...or is that another story?
The more I think I understand the mortgage industry, the less I feel I know at times. Sigh...it's mostly a mystery to me, no matter how much I try to keep up.
Thanks for all the nice comments. I'm floored that there were over 160 Radio Mortgage downloads in the past 24 hours. I think the most important question, in these comments, was:
Are you saying you believe the bottom will be 4.5% and that will not last for long before they go up?
ANSWER: Sure...within an eighth or so. When I talk about rates, I'm talking PAR rates (without yield spread premium). I chargr a 1% origination and $499 processing fee with those par rates.
Jeff Belonger's correct when he says that nothing happened today; I think a lender will break the mold, lower rates and the rest will follow. Banks are like OPEC. They all keep margins fat until someone acts like Hugo Chavez and gets greedy. Then, everyone else follows suit. Mortgage banking is such a monkey-see, monkey-do business; bankers have no real imagination.
I think the Treasury will support the 4.5% rate for another 3-4 weeks (then run out of money). Meanwhile, I think the margins will be reduced by that Chavez-like maverick banker, bringing rates down to the 4.5-ish level for a vrief period. The prepared will be rewarded.
Does this mean you should wait to buy a home? Lord, no but you might be prepared if you intend to refinance your mortgage.
Brian: This is very interesting information. Thank you for taking the time to share with everyone
Interesting mortgage information thanks.