by Tim McLaughlin

Given economic question marks around the globe, most
economists don’t believe that our economy can handle higher
rates until 2011. In fact, the bond market has priced in slower
growth and lower inflation over the next 12 to 18 months, and
some believe that the Fed’s first overnight rate hike won’t be
until the 2nd half of 2011. And if you like the yield on the 10 yr
near 3%, you should be in luck since smarter minds than mine
think that we may sit here until the fall, and mortgage rates may
trend right along with it (77% of the economists polled by
Bloomberg project no change in the Fed Funds rate through the
remainder of 2010). And given the recent trend down in interest
rates, it is no surprise that refinances are up about 33% from
their low May levels, with the majority of those refinancing doing
so to reduce their payment and/or reduce their term structure.
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Congress appears to be tied up in knots and compromises
lately, so Federal Reserve officials may be taking matters into
their own hands towards improving the economy. The Fed has
a limited set of tools with which to work, especially with its
overnight Fed Funds target rate already near 0%. It would seem
unlikely that a massive infusion of cash is in the cards, and
there are risks of the recovery losing steam and possibly
reversing. There is little chance of the Fed selling off its
massive holdings of MBS anytime soon (much of which has
been going away with lower rates leading to some loans
refinancing) and there are rumors that discussions have
actually begun about the chances of the Fed buying more
MBS’s (believe it or not). Some other tools: The Fed could
change the wording of its statements to make sure that the
market knows that rates will stay low for a long period of time
(but I think we already get that). It could also cut the interest
rate paid to banks for extra money they keep on reserve at the
Fed from 0.25% to 0%, which would give banks more incentive
to lend money to customers rather than leave it with the Fed
(where it would make nada at 0%).
All are interesting points, but from the mortgage industry’s
view point, the Fed buying mortgage backed securities certainly
helped push home loan rates down, but few people at this point
seem to believe that rates are the big issue with housing. Just
ask anyone who has had a loan fall through due to the property
not qualifying, the borrower’s credit being an issue, or the
borrower’s debt loan being too great.
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Saw someone in a 25 year mortgage (23.5 years remaining)
refinance into a 10 year mortgage at the same payment this
week. True story. Could this be you? Ask us to research how.

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