Mortgage Interest Rates and Our Conundrum

I don’t talk too much about specific mortgage rates on here because quoting general rates doesn’t do you a whole lot of good.  You being a homeowner with an unique situation and financing need.  I’d rather you do what you’ve been doing; picking up the phone and talking to me (or shooting me an email).  But, I had to share this interest rate that came across my desk the other day because it highlights some of the many problems with the current market conundrum we’re in.

A Smoking Interest Rate

To fully disclose this rate is on a rate and term refinance transaction on a 3-year fixed adjustable rate mortgage under $417,000 for a single family residence home that is occupied by the borrower where the loan to value of the property is under 80%.  To qualify you would need to be able to fully document your income and have a credit score above 640.  There could be changes to the rate based on a variety of factors.

With that said, Countrywide’s base rate on a 3/1 ARM with the above qualifications is at a jaw-dropping 4.875%.  I have not seen ARM rates under 5% in the last couple of years.  The APR on this, assuming 1-point origination and $1,100 in title, escrow, appraisal and other fees is just north of 5% at 5.057 (assuming $100,000 loan amount).

4.875% is amazingly low.  It hearkens back to a scant few years ago in the middle of the boom with 2-year fixed ARM loans were flying out the door in the 4% range.

Why 4.875% Doesn’t Matter to Most Homeowners

A few years ago refinance activity was through the roof as rates dropped in to (and below) this neighborhood.  This time?  Housing Wire reports that mortgage applications have reached their lowest point in the last 4 years - falling 11.6%.  The problem?  It’s not the low rates?  It’s the lack of capacity.  It’s the lack of equity.  People are trapped in their loans.  They got loans with light or no documentation at or near 100% financing and are just plain stuck.  There is no room for them to borrow.

That’s the problem - it’s not that money costs too much; it’s that people are already tapped.  The pool of qualified borrowers is dwindling and will continue to do so as housing prices continue to come down and loans continue to reset.  So Countrywide (and the rest of them) can continue to shout in to the wind about sub-5% rates and guess what?  Business is still going to suck.

Bernanke’s Conundrum

This is Bernanke’s conundrum.  He can’t fix the problem by making the money cheaper.  It doesn’t matter if they’re giving it away at cost.  The capacity of the borrowing public is tapped.  As underwriting guidelines have tightened (appropriately in response to the defaults) the pool of borrowers has shrunk.  The people who still qualify are not big enough in quantity nor foolhardy enough in risk-taking to drive the housing market in any way, shape or form in comparison to recent years.

Bernanke can cut borrowing costs but borrowers can’t afford to borrow any more.  It doesn’t matter what the carrying costs of debt are when the ability to carry that debt is at or near zero.

Low Rates Can’t Solve Our Problems

The bottom line is that low rates alone can’t solve the problem of the current housing market.  Ironically, the best medicine for the housing market is the contraction it’s currently wrangling with.  A return to sustainable growth is the what everyone wants; but we need to get back to a rational baseline of house values before most of the economic engineering starts to matter.

If you want more information on current interest rates drop me an email.

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